What Is a Special Needs Trust?

Having a disabled family member and protecting their future without putting means-tested government benefits at risk takes planning to protect Medicaid, Supplemental Security Income (SSI), housing assistance and other publicly funded benefits. A recent article from The Street, “How to secure your child’s financial future with a special needs trust,” explains how a Special Needs Trust can provide financial support without jeopardizing eligibility.

Assets placed in a Special Needs Trust (SNT) are generally not counted in determining eligibility, while the beneficiary can still use the funds for qualifying expenses.

If assets are left outright to a family member, they can cause the loss of benefits, undoing years of planning and disrupting the programs and support services the child depends on.

There are two types of special needs trusts: the self-settled trust is funded with the beneficiary’s own assets. A parent or grandparent typically funds third-party trusts. The rules for the two SNTs are very different.

The third-party trust rules are fairly flexible. The trust assets may be used to benefit one person during their lifetime and then passed to other beneficiaries later. It can even benefit more than one person. The main rule is that the beneficiary may not serve as the trustee and must not manage the funds.

Distributions must be discretionary. If government benefits challenge the trust and argue that it is required to pay for certain expenses, such as health care or housing, the assets may become countable for benefits, putting them at risk. The trust must clearly state that the trustee has discretion over distributions.

An experienced estate planning attorney should be involved in creating the SNT to ensure that it follows federal and state laws.

A self-settled trust is funded with the individual’s own assets, which is permitted if the individual is under age 65 when the trust is established and the trust includes a Medicaid payback provision. When the beneficiary dies, any assets in the trust must be used to reimburse the state’s Medicaid agency for benefits provided. If the trustee doesn’t reimburse the assets, the state agency can claw them back.

There is a third option, known as a “pooled trust.” These were created to administer SNTs for multiple beneficiaries and are administered by nonprofit organizations. Each beneficiary has their own separate account, and the nonprofit organization serves as a trustee and administrator of the trust. These organizations have experience working with disabled individuals and their families and understand how the public benefits system works.

Many third-party special needs trusts are only funded after the death of the parents. This way, the parents can use their own assets during their lives, with the trust receiving the inheritance to benefit the disabled individual. This avoids disinheriting the family member and prevents assets from passing outright to the person and making them ineligible for benefits.

An experienced estate planning attorney should be consulted to create the SNT in conjunction with the parent’s own estate plan so the two work together.

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Reference: The Street (June 4, 2026) “How to secure your child’s financial future with a special needs trust”