What is a special needs trust?
A special needs trust is a legal arrangement designed to set aside money and assets for a person with a disability. It can help cover expenses that government programs don't, while also helping protect the person's eligibility for benefits like Supplemental Security Income (SSI) and Medicaid. This article covers how special needs trusts work, the types available, what they can pay for and how to set one up.
For many families, caring for a loved one with a disability includes thinking about what happens when you're no longer there to help. A special needs trust is one way to plan ahead.
A special needs trust (SNT) is a legal arrangement that sets aside money and assets to support a person with a disability or special needs. Sometimes called a supplemental needs trust, it's designed to help pay for certain expenses while also helping the beneficiary maintain eligibility for needs-based government programs such as Supplemental Security Income (SSI) and Medicaid.
Special needs trust rules can vary by state and by individual situation. Working with an estate planning attorney who has experience in special needs planning is a recommended part of the process.
How a special needs trust works
A special needs trust involves three key roles:
- Grantor: The person who creates and funds the trust, such as a parent or grandparent.
- Trustee: The person or organization responsible for managing the trust and making distributions on the beneficiary's behalf.
- Beneficiary: The person with a disability or special needs who benefits from the trust.
The beneficiary generally doesn't receive direct control of the funds. Instead, the trustee uses trust funds to pay for approved goods or services on the beneficiary's behalf. For example, rather than giving cash to the beneficiary for transportation, the trustee might pay a transportation provider directly. This structure may help avoid direct payments that could affect the beneficiary's eligibility for needs-based benefits.
Types of special needs trusts
The right type of trust often depends on where the money comes from and the beneficiary's situation. One concept that comes up across trust types is Medicaid payback. For certain trusts, federal law may require remaining trust funds to reimburse the state Medicaid program for benefits paid during the beneficiary's lifetime, before any assets can pass to heirs. Whether this applies depends on the type of trust and how it's funded.
Here's a quick overview:
Here's a closer look at each:
- First-party special needs trust: Funded with assets that belong to the beneficiary, such as an inheritance, legal settlement or personal savings. Because the funds come from the beneficiary, these trusts may be subject to Medicaid payback requirements and other eligibility rules. A qualified estate planning attorney can help determine whether this type of trust is the right fit.
- Third-party special needs trust: Funded by someone other than the beneficiary, such as a parent, grandparent or other family member. No Medicaid payback is required, meaning remaining assets can pass to other heirs. This is a common option for families planning ahead as part of broader estate planning.
- Pooled special needs trust: Managed by a nonprofit organization that pools funds from multiple beneficiaries for investment and administrative purposes while keeping each individual's account separate. This can be a practical option when the trust amount is smaller or a private trustee isn't available.
Special needs trusts can be created during someone's lifetime (called an inter vivos trust) or through a will, taking effect at death (called a testamentary trust).
How to set up and fund a special needs trust
Setting up a special needs trust benefits from careful planning and the right team of professionals. Here's a general roadmap:
- Identify the beneficiary's current and future needs: Consider ongoing care, medical needs, housing, transportation and quality of life goals.
- Consult a qualified estate planning attorney: An attorney with experience in special needs planning can help determine the right type of trust, draft the document and help navigate filing requirements.
- Choose the type of trust: Based on the funding source and the beneficiary's situation, determine whether a first-party, third-party or pooled trust makes sense.
- Select a trustee: A trustee can be a family member, a professional such as an attorney or financial institution, or a nonprofit in the case of a pooled trust. Consider someone who understands the rules governing distributions and can carry out the role responsibly over time.
- Draft and sign the trust document: The attorney prepares a document outlining who benefits from the trust, who manages it and what it can be used for.
- Fund the trust: Funding options vary depending on the type of trust and your family's situation. A few common approaches are covered below.
- Review the trust over time: Family circumstances, benefit rules and financial situations can change. Revisiting the trust periodically may help keep it aligned with the beneficiary's needs.
Funding options for a special needs trust
Once established, anyone can contribute money or assets to the trust. Common sources of funding include:
- Gifts from family members or friends
- Life insurance proceeds
- An inheritance
- A legal settlement
- Savings or other assets, depending on the type of trust
Life insurance is one way families may plan to provide future funds for a special needs trust. Over time, a life insurance policy can provide a larger sum than making the same premium payments directly to the trust. When parents are the primary caregivers, Survivorship Universal Life (SUL) insurance is often used. It covers two lives, typically a married couple, and pays out after both have passed.
A State Farm agent can help you consider how life insurance may fit into your broader planning goals.
One thing worth noting: naming the beneficiary directly on a life insurance policy or account, rather than naming the trust, could affect their eligibility for needs-based benefits. Consult an estate planning attorney and tax professional about how to structure beneficiary designations appropriately.
How gifts and inheritances interact with the trust
Even well-intended gifts can affect a beneficiary's government benefit eligibility if they aren't handled carefully. Here's a hypothetical example.
Kate plans to gift each of her grandchildren $15,000 when they turn 21. One of her granddaughters has Down syndrome. If her granddaughter receives the gift directly, the added assets could push her over the resource limits for SSI, potentially affecting her eligibility for SSI and related medical benefits.
What could Kate do differently? She could direct the gift to the special needs trust instead. Or she could purchase a single premium life insurance policy with the trust as owner and beneficiary. Over time, the cash value and dividends (when payable) can be used for the trust's immediate needs, or the dividends could purchase additional insurance to increase the death benefit payable to the trust.
What a special needs trust can pay for
A special needs trust is generally intended to supplement government benefits, not replace them. It's designed to help cover expenses that programs like SSI and Medicaid typically don't.
The trust may be used to pay for:
- Education and job training: tuition, books, classes or vocational programs
- Transportation: a vehicle, ride services or public transit costs
- Medical and therapy expenses: out-of-pocket costs not covered by Medicaid or other programs
- Personal care: haircuts, clothing and grooming products
- Recreation and travel: outings, hobbies, gym memberships, vacations or visits to family
- Technology and home items: a computer, phone, assistive devices or furniture
Some payments require extra care because they may affect needs-based benefits. Review these with a qualified attorney:
- Direct cash payments: If paid to the beneficiary, they may count as income and could affect SSI eligibility.
- Gift cards or cash equivalents: These may be treated similarly to cash under benefit rules.
- Housing costs: Rent, mortgage payments, utilities or the like may reduce SSI benefits if paid from the trust.
- Food or groceries: These may affect benefit amounts depending on how they're handled.
As a general practice, trustees pay vendors and service providers directly rather than giving cash to the beneficiary. Trustees should also follow the trust document closely and keep clear records of all distributions.
Frequently asked questions about special needs trusts
Q: Is a special needs trust revocable or irrevocable?
A: Most special needs trusts are irrevocable, meaning they generally can't be changed or ended once they're established. This structure is typically required to help preserve the beneficiary's eligibility for government benefits. A qualified estate planning attorney can help you understand what options may be available in your situation.
Q: Can I set up a special needs trust for myself?
A: In some cases, yes. A first-party special needs trust can be established by the individual with a disability, a parent, grandparent, legal guardian or a court. This type of trust is often used when the individual has received an inheritance or legal settlement. A qualified attorney can provide guidance specific to your situation.
Q: Can you add money to a special needs trust after it is established?
A: Yes. Once a special needs trust is set up, anyone can contribute to it, including family members, friends and others. Life insurance is a common funding vehicle because a policy can provide a significant sum at a future point in time.
Q: Who can be a trustee of a special needs trust?
A: A trustee can be a family member, a professional such as an attorney or financial institution or a nonprofit organization in the case of a pooled trust. Choosing someone who understands the rules governing distributions is worth careful consideration. Some families choose a professional trustee to help reduce the burden on family members.
Q: What happens to a special needs trust when the beneficiary dies?
A: For third-party trusts, remaining assets can generally pass to other heirs as outlined in the trust document. For first-party trusts, most states require that remaining funds be used to repay Medicaid before assets pass to heirs. Rules can vary by state, so consulting a qualified attorney is recommended.
Q: How much does a special needs trust cost to set up?
A: Costs can vary depending on the type of trust, the complexity of the situation and attorney fees. Ongoing costs such as trustee fees may also apply. A qualified special needs attorney can give you a clearer picture of what to expect.
Planning next steps
Establishing a special needs trust is one part of a broader estate planning process. Before meeting with an attorney, it may help to gather some information:
- Current benefits the beneficiary receives
- Expected future care or support needs
- Assets or income that may be used to fund the trust
- Potential trustee options
- Existing beneficiary designations and life insurance policies
It's also worth coordinating with family members. Well-intended gifts and inheritances can affect a beneficiary's government benefit eligibility if they aren't directed to the trust. Reviewing wills, beneficiary designations and life insurance as part of a broader estate plan may help keep everything aligned.
A State Farm agent can help you explore how life insurance may fit into your family's planning goals. For help with the legal and tax aspects of establishing a trust, consult a qualified estate planning attorney and tax professional.
This content was developed with the help of AI and reviewed by State Farm editors.
The information in this article was obtained from various sources not associated with State Farm® (including State Farm Mutual Automobile Insurance Company and its subsidiaries and affiliates). While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. State Farm is not responsible for, and does not endorse or approve, either implicitly or explicitly, the content of any third-party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. State Farm makes no guarantees of results from use of this information.
State Farm Life Insurance Company (Not licensed in MA, NY or WI)
State Farm Life and Accident Assurance Company (Licensed in NY and WI)
Bloomington, IL
