The following artical was submitted by Penny Forward Benefits Specialist Jenny Holcomb, J.D., WIP-C

What is a Special Needs Trust

A Special Needs Trust (SNT) is a legal arrangement designed to provide financial support for a person with disabilities without jeopardizing their eligibility for government benefits like Medicaid or Supplemental Security Income (SSI). It allows assets to be held and managed by a trustee for the benefit of the individual, covering expenses such as medical care, education, or personal needs, while ensuring the person remains qualified for means-tested programs. There are three main types:

1.  First-Party SNT: Funded with the beneficiary’s own assets (e.g., inheritance or settlement).

2.  Third-Party SNT: Funded with assets from someone else, like a parent or relative, often created through a will.

3.  Pooled SNT: Managed by a nonprofit, pooling assets from multiple beneficiaries for investment while maintaining separate accounts.

Key features include strict rules on distributions to avoid direct cash payments to the beneficiary and compliance with federal and state laws to protect benefit eligibility. Consulting an attorney specializing in disability law is crucial to set one up properly.

What type of Special Needs Trust is best For Me?

Choosing the right Special Needs Trust (SNT) depends on your specific circumstances, including your financial situation, the needs of the beneficiary (you or someone else), and your goals for the trust.

Types of Special Needs Trusts

1.  First-Party Special Needs Trust – Purpose: Holds assets that belong to the beneficiary (you, if you’re the person with special needs), such as an inheritance, settlement, or savings. 

Key Features: 

1. Funded with the beneficiary’s own money.
2. Must be established by a parent, grandparent, guardian, court, or the beneficiary (if competent).
3. Preserves eligibility for means-tested benefits like Medicaid and Supplemental Security Income (SSI) by keeping assets out of the beneficiary’s name.
4. Requires a payback provision: After the beneficiary’s death, any remaining funds must repay Medicaid for benefits received.
5. Best For: Someone with a disability who has received or expects to receive assets (e.g., a personal injury settlement or inheritance) and wants to maintain public benefits.

Example:

If you receive a $100,000 settlement and rely on Medicaid, a first-party SNT can hold those funds without disqualifying you from benefits.

2.  Third-Party Special Needs Trust – Purpose: Holds assets contributed by someone other than the beneficiary, such as parents, relatives, or friends. 

Key Features:   

1.  Funded with gifts, inheritances, or life insurance proceeds from family or others.
2.  No payback provision; after the beneficiary’s death, remaining funds can go to other heirs or charities as designated.
3. Preserves eligibility for Medicaid and SSI.
4. Can be created by anyone (usually parents or family) for the beneficiary’s benefit.
5. Best For: Families planning for a loved one’s future (e.g., parents setting up a trust for a child with disabilities). If you’re a parent or relative planning for someone else, this is likely the best option. 

Example: Your parents want to leave you $200,000 in their will without jeopardizing your SSI; they set up a third-party SNT.

3.  Pooled Special Needs Trust – Purpose: A trust managed by a nonprofit organization that pools assets from multiple beneficiaries for investment and management, while keeping individual accounts. 

Key Features: 

1.  Can be first-party (beneficiary’s assets) or third-party (others’ assets).
2. Professional management by a nonprofit, which may be more affordable than a private trustee.
3. First-party pooled trusts have a payback provision, but remaining funds in third-party pooled trusts can go to other beneficiaries or causes.
4. Good for smaller estates or when no trusted family member is available to act as trustee.
5. Best For: Individuals or families with limited assets (e.g., under $100,000) or those who prefer professional management and lower costs.

Example: If you have $50,000 and no family to manage a trust, a pooled trust lets a nonprofit handle it while preserving your benefits.

Factors to Consider

• Your Role: Are you the beneficiary (person with special needs) or someone setting up the trust for another? If you’re the beneficiary, do you have assets in your name (first-party) or are others funding it (third-party)?
• Asset Amount: Larger estates (e.g., over $100,000) may justify a standalone first- or third-party SNT with a private trustee. Smaller amounts may be better suited for a pooled trust due to lower fees.
• Public Benefits: Do you rely on means-tested benefits like SSI or Medicaid? All SNTs preserve these, but first-party trusts have the payback requirement.
• Trustee Availability: Do you have a trusted family member or professional to manage the trust? If not, a pooled trust or professional trustee may be better.
• State Laws: SNT rules vary by state (e.g., Medicaid payback rules or trust administration).
• Future Needs: Consider the beneficiary’s long-term needs (e.g., medical care, housing, or personal expenses). Third-party trusts offer more flexibility for family planning, while first-party trusts are reactive to assets already received.

Recommendations

Without specific details, here’s a general guide:

• If you’re the beneficiary with assets (e.g., from a settlement or inheritance), a First-Party SNT is likely best to protect those funds while maintaining benefits. If the amount is small or you lack a trustee, consider a Pooled SNT.
• If you’re setting up a trust for someone else (e.g., a child or sibling with disabilities), aa Third-party SNT is typically ideal because it avoids the payback provision and allows flexible estate planning.
• If cost or simplicity is a concern, a Pooled SNT is often the most accessible, especially for smaller trusts or when professional management is needed.

Next Steps

1.  Consult a Special Needs Attorney: SNTs are complex and must comply with federal and state laws. An attorney specializing in disability planning can tailor the trust to your needs. Costs for setting up an SNT typically range from $2,000–$5,000, depending on complexity.

2.  Gather Details: Clarify the beneficiary’s assets, benefits, and needs. For example, list current income sources (SSI, SSDI), expected inheritances, or medical expenses.

3.  Research Pooled Trusts: If interested, search for reputable nonprofit pooled trusts in your state.

In conclusion, Special Needs Trusts serve as vital tools for ensuring the financial security and well-being of individuals with disabilities, offering tailored solutions like First-Party, Third-Party, and Pooled Trusts to meet diverse needs. Special Needs Trusts allows them to maintain eligibility for essential government benefits while accessing supplemental resources for their care and to maintain their quality of life.

Resources

Click here to find an attorney in your area.

Special Needs Trusts: Protect Your Child’s Financial Future, by Kevin Urbatsch and Jessica Farinas 2023

***While we strive to ensure the accuracy of the information, we make no warranties or representations about the completeness, reliability, or accuracy of this information.

***The information in this article is for general informational purposes only and does not constitute legal advice. You should not act or refrain from acting on the basis of any content without seeking the advice of a qualified attorney.