How does a Special Needs Trust work?

Jump to Section

Need help with a legal contract?

CREATE A FREE PROJECT POSTING
Post Project Now

What Is a Special Needs Trust?

A special needs trust, also known as a supplemental needs trust or SNT trust, is a legal structure set up for a person with a disability. These trust funds can include current assets or be set up to receive funds the beneficiary will receive in the future. They are designed to hold and protect assets for the benefit of a beneficiary with special needs.

This legal structure is used in order to collect and manage assets, and it can receive contributions from sources including:

  • Assets gifted from family members during their lifetime
  • An estate plan, when parents or other relatives wish to provide life insurance proceeds or assets at their death as an inheritance
  • Assets from a legal settlement

The trust will end when it is no longer needed. Typically, this occurs at either the death of the beneficiary or when funds have been spent.

Special Needs Trust Law: Preserving Government Benefits

Careful planning is essential if you want to leave property or money to a loved one with special needs. By leaving a loved one with a disability a gift like this, you could inadvertently jeopardize their ability to receive both Medicaid and Supplemental Security Income, or SSI, benefits that your loved one needs. Setting up a special needs trust can help avoid some of these issues.

A few things will not disqualify a person from receiving Medicaid or SSI, such as the following:

  • Owning a car
  • Owning a house
  • Owning furnishings
  • Owning other personal effects

However, other assets such as cash in the bank will disqualify someone from receiving these benefits. For instance, leaving a loved one $10,000 will disqualify them from getting SSI or Medicaid if you make that gift in cash.

That's where special needs trusts come in. Rather than leaving a loved one cash or property directly, you will instead leave those assets to their special needs trust.

When creating a special needs trust, you must also choose a person to serve as a trustee. That person will have the total discretion of the property in the trust, and they will also be in charge of spending money on behalf of your loved one. Because your loved one then has no control over the assets in the fund, administrators for SSI and Medicaid will ignore their trust assets when determining program eligibility.


Get Free Bids to Compare

Leverage our network of lawyers, request free bids, and find the right lawyer for the job.

Get Bids Now

Other Reasons to Create a Special Needs Trust

Not everyone with special needs qualifies for government programs, including SSI. However, there are still other reasons you may want to set up a special needs trust, such as to protect assets from creditors or to provide assets in a divorce.

Special needs trusts may even be required as a part of a divorce agreement. This can happen for a few reasons, including:

  • Using a trust structure to receive child support payments to benefit a child with a disability so that the child support payments are not considered to determine government aid eligibility
  • Using the trust to accumulate assets that are earmarked for the child to use in the future
  • Using a trust when life insurance coverage is revised for either parent

Types of Special Needs Trusts

There are three main kinds of special needs trusts. The source of funding governs the kind of trust needed as well as the rules that apply to that trust.

First-Party Trusts

You would use a first-party special needs trust when the assets contributed to the trust belong to the trust beneficiary, such as when the individual receives a legal settlement or an inheritance. As the beneficiary is considered the owner of these assets, paying the assets into a special needs trust excludes them from calculations for government aid.

While first-party trusts allow the beneficiary to maintain government aid even though they may have substantial wealth in the trust, there is a trade-off: The government can claim any assets remaining for reimbursement for medical and other costs that were paid using government programs when the beneficiary dies.

Third-Party Trusts

You would use a third-party special needs trust when assets that fund the trust come from someone besides the beneficiary. One significant advantage to these types of trusts is that family members have the ability to contribute various assets, including property such as a home and investment assets.

Third-party trusts also allow beneficiaries to qualify for government aid. As the funding assets belong to someone other than the beneficiary, there is no government reach-back with this kind of trust when a beneficiary dies. That means a family may direct a successor beneficiary and either keep the wealth within the family or direct it to a desired charity.

Pooled Trusts

You may consider a pooled trust either if you cannot find a good candidate to serve as trustee or you plan to leave only a relatively modest amount of money. Pooled trusts, also known as community trusts, are special needs trusts that nonprofit organizations run. These types of trusts are available in many areas of the United States.

A pooled trust combines and invests funds from many families. Each beneficiary of the trust still has a separate account, but funds are administered together in order to simplify administration and reduce costs. The nonprofit determines the trustee, and then the trustee spends money on behalf of all beneficiaries.

As with first-party trusts, pooled trusts have a requirement for government reimbursement. Additionally, pooled special needs trusts have a provision requiring some remaining assets to be passed to the nonprofit in exchange for trust management.

Here is an article about how to set up special needs trusts.

Designating a Trustee

The ability to appoint a trustee who will manage investment decisions as well as oversee asset distribution offers a big benefit when it comes to special needs trusts. A trustee will fill a key role in watching and administrating assets and spending decisions if the beneficiary cannot independently manage their finances. Trustees are required to make sure that assets are used following the initial intentions as well.

A trustee may be a sibling or another family member; at the same time, families sometimes decide another trustee may be a better fit for this role. As selecting a trustee may be difficult, many people choose to get the advice of a lawyer to discuss who would be the most prepared to carry out duties expected of the trustee. Here is an article about considerations when choosing a trustee for a special needs trust.

Further, you will typically name a successor trustee after designating an initial trustee. You would do this in the event your first choice cannot serve for whatever reason.

How Can Special Needs Trust Funds Be Spent?

A special needs trust fund can be used in a variety of ways. While the trustee cannot give money to your loved one directly as that would interfere with Medicaid and SSI eligibility, they can spend trust assets to obtain a range of services and goods.

Special needs trust funds often are used to pay for:

  • Education
  • Home furnishings
  • Out-of-pocket dental and medical expenses
  • Personal care attendants
  • Physical rehabilitation
  • Recreation
  • Vacations
  • Vehicles

Families often choose to set up a special needs trust with the help of a lawyer who can advise on details about taxes and estate planning, as well as make sure the recipient of the trust can continue to receive government benefits. Working with an experienced lawyer can help ensure the details of the trust are properly in place.

Explore Our Network of Lawyers

We recruit and onboard great lawyers so you can find and hire them easily.

Browse Lawyers Now

Meet some of our Lawyers

ContractsCounsel verified
Attorney
18 years practicing
Free Consultation

I am a New Jersey licensed attorney and I have been in practice for over seventeen years. My practice mainly consists of representing public entities (municipalities, school boards, etc) and businesses, both small and large. In that capacity, much of work consists of drafting, reviewing and revising contracts.

ContractsCounsel verified
Lead Attorney
9 years practicing
Free Consultation

Jennifer is an experienced business law attorney who has worked with many startups as well as established corporations. With a strong background in contract creation and review, she will be able to ensure you and your business interests are always protected.

ContractsCounsel verified
Partner
21 years practicing
Free Consultation

I am a corporate lawyer with expertise working with small businesses, venture capital and healthcare. Previously, I worked at large law firms, as well as head attorney for companies. I graduated from Harvard College and University of Pennsylvania Law School. I speak 5 languages (Spanish, French, Italian and Russian, plus English), visited over 60 countries, and used to compete in salsa dancing!

ContractsCounsel verified
Founder, Branch Legal LLC
9 years practicing
Free Consultation

Legal services cost too much, and are often of low quality. I have devoted my law practice to providing the best work at the most affordable price—in everything from defending small businesses against patent trolls to advising multinational corporations on regulatory compliance to steering couples through a divorce.

ContractsCounsel verified
Attorney
3 years practicing
Free Consultation

I am a licensed attorney and a member of the California Bar. I graduated from the University of Dayton School of Law's Program in Law and Technology. I love IP, tech transfers, licensing, and how the internet and developing technology is changing the legal landscape. I've interned at both corporations and boutique firms, and I've taken extensive specialized classes in intellectual property and technology law.

ContractsCounsel verified
Partner
25 years practicing
Free Consultation

Jo Ann has been practicing for over 20 years, working primarily with high growth companies from inception through exit and all points in between. She is skilled in Mergers & Acquisitions, Contractual Agreements (including founders agreements, voting agreements, licensing agreements, terms of service, privacy policies, stockholder agreements, operating agreements, equity incentive plans, employment agreements, vendor agreements and other commercial agreements), Corporate Governance and Due Diligence.

ContractsCounsel verified
Attorney and Contract Guru
16 years practicing
Free Consultation

I am an unabashed contract law geek with a passion for delivering contracts that protect your business within your risk tolerance. Contracts should be clear, concise, and able to be understood by the end user. I promote Plain English contract drafting. I also pay close attention to the boilerplate traps that trip up many agreements. Some of my most frequent drafting projects are entity operating and shareholder agreements, bylaws, asset purchase agreements, commercial leases, EULA, Terms of Service, Privacy Policies, Confidentiality agreements, employment agreements, and more.

ContractsCounsel verified
Self-Employed Legal Consultant
7 years practicing
Free Consultation

I hold a B.S. in Accounting and a B.A. in Philosophy from Virginia Tech (2009). I received my J.D. from the University of Virginia School of Law in 2012. I am an associate member of the Virginia Bar and an active member of the DC bar. Currently, I am working as a self-employed legal consultant and attorney. Primarily my clients are start-up companies for which I perform various types of legal work, including negotiating and drafting settlement, preparing operating agreements and partnership agreements, assisting in moving companies to incorporate in new states and setting up companies to become registered in a state, assisting with employment matters, drafting non-disclosure agreements, assisting with private placement offerings, and researching issues on intellectual property, local regulations, privacy laws, corporate governance, and many other facets of the law, as the need arises. I have previously practiced as an attorney at a small DC securities law firm and worked at Deloitte Financial Advisory Services LLC. My work experience is dynamic and includes many short-term and long term experience that span across areas such as maintaining my own blog, freelance writing, and dog walking. My diverse background has provided me with a stong skill set that can be easily adapted for new areas of work and indicates my ability to quickly learn for a wide array of clients.

ContractsCounsel verified
Attorney at law
20 years practicing
Free Consultation

Texas licensed attorney specializing for 20 years in Business Law, Contract Drafting, and Risk Analysis. My services include: Corporate Risk Consulting; Contract Review and Drafting; Legal Research and Writing; Business Formation; Article or Instructive Writing; and more. For more insight into my skills and experience, please feel free to visit my LinkedIn profile or contact me with any questions.

ContractsCounsel verified
Partner / Attorney at Law
13 years practicing
Free Consultation

Creative, results driven business & technology executive with 24 years of experience (13+ as a business/corporate lawyer). A problem solver with a passion for business, technology, and law. I bring a thorough understanding of the intersection of the law and business needs to any endeavor, having founded multiple startups myself with successful exits. I provide professional business and legal consulting. Throughout my career I've represented a number large corporations (including some of the top Fortune 500 companies) but the vast majority of my clients these days are startups and small businesses. Having represented hundreds of successful crowdfunded startups, I'm one of the most well known attorneys for startups seeking CF funds. My engagements often include legal consultation & advisory roles, drafting of NDAs, TOS & Privacy Policies, contracts and corporate law, business strategy advice & consulting, in-house counsel, Founder & entrepreneur guidance and other roles as needed by my clients. I hold a Juris Doctor degree with a focus on Business/Corporate Law, a Master of Business Administration degree in Entrepreneurship, A Master of Education degree and dual Bachelor of Science degrees. I look forward to working with any parties that have a need for my skill sets.

ContractsCounsel verified
Managing Partner
23 years practicing
Free Consultation

Seasoned technology lawyer with 22+ years of experience working with the hottest start-ups through IPO and Fortune 50. My focus is primarily technology transactions with an emphasis on SaaS and Privacy, but I also provide GC services for more active clients.

Find the best lawyer for your project

Browse Lawyers Now

Want to speak to someone?

Get in touch below and we will schedule a time to connect!

Request a call