The Advantages of a Special Needs Trust

Most people with disabilities depend on government-provided medical care and assistance programs. But eligibility for those benefit programs has strict limitations on the amount of a recipient’s income and resources. So what is a family member or loved one to do, should they wish to provide them with additional funds? Or, what if they receive an award from a personal injury settlement? Both would likely result in benefits being reduced or cut off. 

Special Needs Trusts are a way around this dilemma. 

A trust document is a vehicle established by a grantor to hold assets for the benefit of someone else (the trust beneficiary), and to be administered by a third party (the trustee). A Special Needs Trust (SNT) is a type of trust used for the limited purpose of providing for certain expenditures on behalf of a person who receives Medicaid and/or Supplemental Security Income (SSI) benefits from the Social Security . 

The trust itself is irrevocable, meaning any money placed into it cannot be taken back out. The money belongs to the trust and the trustee, and is not available to the beneficiary, so is not considered a resource for SSI purposes. In addition, the language of the SNT establishes that the trust funds are to be used only for specific purposes to improve the beneficiary’s quality of life. Funds can be used for:

• Services or items such as a caretaker services, phone, yard care, fitness equipment, a pet, gas, clothes or theater tickets (but not food or shelter)

• “Non-countable assets” for SSI purposes, including a primary residence, a car, home furnishings and personal effects, property necessary for work or a vocational goal (with some limits), life insurance and burial policies

• Some additional uses, which are assessed by applying complicated SSI rules and formulas. An estate planning lawyer can help you figure out if a particular use would be allowed.

Upon the death of the beneficiary, any remaining funds in a SNT must be paid to the state up to the amount of medical expenses or medicaid benefits the beneficiary received.

There are a couple of ways to establish and maintain a SNT for the benefit of a family member with autism, or other special needs. You may want to set up an individual, or (d)(4)(A) trust, in which you name someone to manage the funds and provide for the beneficiary according to your direction. This type allows for a high degree of personalization, but can be costly both to establish and to manage, and may be established only for the benefit of someone under age 65. In addition, it can be difficult to find an appropriate trustee who is familiar with federal and state benefits eligibility rules, particularly if the trust assets are less than $100,000.

A second option is the Pooled Special Needs Trust (sometimes referred to as a “(d)(4)(C) trust,” from the federal authorizing statute code section). A pooled trust is established and managed by a nonprofit organization. Each beneficiary has their own account, but the trusts are joined for purposes of investment, allowing for greater return at a lower cost. Setting up a pooled trust account can be much easier and less costly than an individual trust, and you don’t have to find your own trustee. Additionally, a person with special needs may transfer funds into a pooled trust themselves, and do not need to rely on a family member to do so. Upon the beneficiary’s death, remaining funds may be retained by the trust for the benefit of other beneficiaries in the pool. Every state has at least one nonprofit organization operating a pooled special needs trust. 

Establishing a Special Needs Trust or supplemental needs trust can be complicated. The consequences of drafting errors make it important that you consult an estate planning attorney with experience in this arena. A law firm or an elder law lawyer can offer legal advice about government programs, Medicaid or life insurance policies. For more information on this area of law, see our overviews of estate planning, wills, trusts, and probate and estate administration.