This month is Special Needs Law Month, so we are highlighting one of the most important tools for families caring for a loved one with a disability: the special needs trust, also called a supplemental needs trust.
For individuals with disabilities, finances often carry an extra layer of complexity. Parents, grandparents, and other loved ones may want to financially support the individual, but an inheritance or direct gift could impact their eligibility for government benefits like Medicaid or Supplemental Security Income (SSI).
That’s where a special needs trust can help. These trusts are designed to hold assets for a person with a disability without affecting their eligibility for benefits that cover basic needs such as food and shelter. A special needs trust can then be used to enhance the person’s quality of life by paying for things like dental care, specialized therapy, a computer, or recreational activities.
There are two basic types of special needs trusts — first-party trusts, which are funded by the disabled individual’s own assets, and third-party trusts, which are funded with someone else’s assets.
First-party special needs trusts
A first-party special needs trust is funded with the beneficiary’s own assets, whether those assets come from savings or other assets titled in their own name, a personal injury settlement, or an inheritance received outside of a trust.
Because it is funded with the beneficiary’s assets, a first-party trust may require approval from the court and the state Medicaid office. In addition, the trust includes a Medicaid payback provision, meaning any funds left in the trust when the beneficiary passes away must first be used to reimburse the state for Medicaid benefits provided during the beneficiary’s lifetime.
Third-party special needs trusts
A third-party special needs trust is funded with assets belonging to someone else, often the beneficiary’s parents or grandparents. For example, the parents of a child with a disability may want to leave an inheritance to that child but not disqualify them from benefits. By creating a third-party special needs trust as part of their estate plan, they can provide long-term support without putting the beneficiary’s eligibility for government assistance at risk.
A third-party special needs trust does not include a Medicaid payback provision because the assets used to fund the trust are never considered the beneficiary’s assets which would make them subject to recovery by Medicaid. The trust will include instructions on how any remaining funds will be distributed when the beneficiary passes away.
Other trust options
In some cases, families may consider a pooled trust. Pooled trusts are managed by nonprofit organizations that combine and control funds from multiple beneficiaries under one trust document, while still maintaining separate accounts for each individual.
Pooled trusts can sometimes be a cost-effective solution, especially if the amount being placed in trust is smaller or if a trust needs to be established quickly. While not the right fit for every family, it is an option available.
Planning ahead matters
As with all things related to estate planning and trusts, planning ahead gives families more flexibility in how their assets are handled.
If a person with a disability receives assets directly, their only option may be a first-party special needs trust with Medicaid payback. But if loved ones plan in advance with a third-party special needs trust, those assets can provide for the individual during their lifetime with remaining assets directed according to the family’s wishes instead of being subject to Medicaid recovery.
Special needs trusts are about more than money — they are about protection, dignity, and peace of mind. They allow families to provide ongoing support while maintaining access to essential support programs. With thoughtful planning, it’s possible to protect their benefits while also meeting their supplemental needs.
Your trusted firm for special needs planning
Wright Law Firm offers special needs planning, including helping families make decisions about the best strategy for their assets. If you or someone you know needs help in this area, reach out to our team.