Planning for the financial future of a loved one with disabilities requires thoughtful decisions,
especially when it comes to ensuring they remain eligible for essential government benefits. Using a special needs trust is one of the most effective ways to protect assets while maintaining access to programs such as Medicaid and Supplemental Security Income (SSI). Without proper planning, even a modest inheritance or financial gift could disqualify a disabled individual from the benefits they rely on. A well-structured special needs trust (SNT) helps avoid this problem by holding assets in a way that does not interfere with eligibility for these critical programs.
What Is a Special Needs Trust?
A special needs trust, sometimes called a supplemental needs trust, is a legal tool that allows funds to be set aside for the benefit of an individual with disabilities without affecting their ability to qualify for means-tested government benefits. Since Medicaid and SSI have strict income and asset limits, receiving money directly, whether from an inheritance, a legal settlement, or another source, could result in the loss of these essential services. By placing these assets into a special needs trust, the beneficiary can continue receiving government assistance while the trust provides for additional needs that improve their quality of life.
For example, a person with disabilities who inherits $50,000 outright may suddenly find themselves over Medicaid’s asset limit and lose their healthcare coverage. However, if that inheritance is placed into a special needs trust, it does not count against Medicaid’s eligibility requirements, allowing the beneficiary to keep their benefits while also having financial resources available for supplementary expenses like medical equipment, education, or personal care services.
The Responsibilities of a Trustee
Managing a special needs trust requires more than simply overseeing funds. The trustee ensures the assets are used appropriately, complying with government regulations, and maintaining the beneficiary’s eligibility for benefits. Trustees are responsible for investing funds wisely, making disbursements that comply with Medicaid and SSI guidelines, filing tax returns, and keeping detailed financial records.
Beyond financial management, a trustee should also understand the beneficiary’s personal needs and lifestyle. The trust exists to enhance the individual's well-being, so spending decisions should align with what improves their quality of life without jeopardizing their public assistance. Mismanaging the funds, such as giving cash directly to the beneficiary, could result in the loss of Medicaid or SSI, making proper administration essential.
Different Types of Special Needs Trusts
Not all special needs trusts are the same, and the way they are funded determines their structure and legal requirements. The two most common types are first-party (self-settled) trusts and third-party trusts.
Let's start with first-party special needs trust. A first-party special needs trust is monetarily funded with the beneficiary's own assets, such as proceeds from a personal injury settlement or an inheritance. Because these funds originally belonged to the individual with disabilities, Medicaid requires that any remaining money in the trust after the beneficiary’s death be used to reimburse the state for medical expenses paid during their lifetime. To qualify, the trust must be established and funded before the beneficiary reaches the age of 65.
Unlike a first-party trust, a third-party special needs trust is created and funded by parents, grandparents, or other relatives to provide long-term financial security for a loved one with disabilities. Since the funds in a third-party trust never belonged to the beneficiary, there is no Medicaid payback requirement after their passing. Any remaining funds can be left to other family members or designated beneficiaries, making this a preferred option for parents planning for the future care of a disabled child.
When Should a Special Needs Trust Be Used for a Legal Settlement?
If a person with disabilities receives a financial settlement from a personal injury case, placing the funds into a special needs trust can be a smart decision. Many people assume a large payout will provide long-term financial security, but medical and personal care costs can quickly deplete even a significant settlement. Additionally, a sudden increase in assets can disqualify the individual from Medicaid, SSI, and other assistance programs.
For example, if a disabled individual receives a $500,000 settlement from a lawsuit, they could immediately lose their Medicaid coverage and other benefits. Placing the settlement in a special needs trust allows the funds to be used for housing, therapy, transportation, and other non-covered expenses without affecting eligibility for government assistance. This ensures that the individual’s long-term care needs are met without sacrificing necessary medical and financial support.
Get Professional Guidance on Setting Up a Special Needs Trust
Properly structuring and managing a special needs trust requires legal expertise to ensure compliance with government regulations while meeting the unique needs of the beneficiary. Mistakes in trust creation or administration can have serious consequences, including loss of benefits or unnecessary Medicaid payback requirements. Johnson McGinnis Elder Care Law & Estate Planning has extensive experience helping families protect their loved ones with disabilities by establishing and managing special needs trusts tailored to their circumstances.
If you are considering using a special needs trust to provide long-term financial security for a disabled family member, contact Johnson McGinnis Elder Care Law & Estate Planning. Our team can guide you through the process, ensuring that your loved one remains eligible for essential benefits while receiving the financial support they need for a secure and fulfilling future.
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