If you have a child or family member with a disability, receiving public benefits from the federal and/or state government can be crucial. These programs provide funds to help cover essentials such as housing and medical care. Problem: Only individuals living at poverty levels with almost no income or assets qualify for some of these benefits. Family members and friends who want to help a disabled individual financially may endanger his/her status for government assistance. Some parents have gone so far as to disinherit children with disabilities just so they can get benefits.
Better solution: A “special needs” trust (SNT) can provide supplemental money to the disabled without disqualifying them from government aid. SNTs can pay for things not covered by government benefits, strengthen the financial security of a disabled person and enhance his/her quality of life.
Bottom Line Personal spoke to estate-planning attorney Ellen Cookman, JD, who has worked with hundreds of special-needs families and has a special-needs child of her own, to find out why SNTs can be effective and how to best utilize them…
Stringent Government Requirements
Two major types of public benefits cover a wide range of qualifying disabilities from physical and developmental conditions to mental illness…
Supplemental Security Income (SSI) is a federal program administered by the Social Security Administration that offers monthly payments for food and shelter/housing.
Medicaid is a joint federal and state program that provides health insurance and long-term-care support.
Eligibility for these programs differs from state to state, but in general, a disabled individual cannot have more than $2,000 in total assets or earn more than $2,000 to $2,500 a month. For a child under 18, parental assets and income are taken into consideration when determining disability eligibility. What’s more, SSI discourages family members and/or friends from contributing to housing expenses for the disabled individual. The government monitors recipients’ financial accounts on a regular basis. If the disabled person runs afoul of these criteria, he/she could lose SSI and Medicaid benefits or see them reduced.
What Is a Special Needs Trust?
SNTs are legal arrangements in which the grantor (the person creating the trust) funds the SNT with assets, stipulates when and how those assets can be distributed to the trust’s beneficiary, and appoints a trustee to oversee the process. Since the assets are technically owned by the trust, not the beneficiary, his ability to meet SSI and Medicaid requirements remains intact.
Typical cost to create a special needs trust
A few thousand dollars, although SNTs often are part of a family’s comprehensive estate plan, which can cost $5,000 to $10,000. There is no maximum limit on the amount that can be put into an SNT, and it can be funded with anything, including cash, stocks and bonds, real estate, IRAs and life insurance policies.
Special needs trust spending rules
An SNT must follow specific rules. The beneficiary cannot be the trustee of an SNT. The trust must purchase necessities directly for the beneficiary. It cannot provide cash or cash-like instruments including gift cards that can be converted into cash. Also, SSI benefits will be reduced if distributions are made to pay for the basic shelter expenses that SSI covers (e.g., water, electricity, mortgage, property taxes, condo association fees), and trust assets shouldn’t pay for medical expenses covered by Medicaid.
What an SNT can pay for: Most other items such as food and clothing…furniture and furnishings…a car…caregivers…education… recreation, entertainment and travel…telephone, Internet and computers…care and supplies for pets.
Different Types of Trusts
The two most common types of SNTs are third-party and first-party. They differ in who establishes the trust, whose assets fund the trust and what happens to any leftover assets after the beneficiary’s death…
Third-party SNT. Who establishes it: Generally, a parent, grandparent or family member. Who can contribute to the SNT: Anyone but the beneficiary. Funding often comes from ongoing family gifts, an inheritance from parents or grandparents, and/or the proceeds of life insurance policies and retirement accounts.
Caveats…
Revocable or testamentary. A third-party SNT can be set up as a standalone trust (meaning that the grantor is still alive and can make changes to it)…or a testamentary trust (the SNT is created within a grantor’s will and takes effect upon the grantor’s death). Either way, upon the grantor’s death, the trust becomes irrevocable, which means the grantor’s instructions cannot be altered or revoked.
Leftover funds. When the beneficiary dies, any assets still in the SNT are distributed according to the grantor’s wishes. Example: The assets might be left to the deceased person’s siblings or to a charity.
Elderly protection against long-term-care (LTC) costs. When a spouse is in a nursing home or faces the need for long-term care, the healthy spouse should revise his/her will to include a testamentary SNT that names the disabled spouse as beneficiary. Otherwise, if the healthy spouse dies first and the surviving spouse inherits the assets in a traditional way, he could wind up disqualified from receiving public benefits.
Stretch benefits. A 2019 tax law eliminated the “stretch IRA”—that means non-spousal beneficiaries are required to withdraw all inherited IRA funds within 10 years of the original account owner’s death. But if a stretch IRA is left to an SNT, the trust beneficiary is allowed to take required minimum distributions (RMDs) based on his/her life expectancy, so the IRA can potentially grow tax-deferred for decades.
First-party SNT, also known as a “self-settled” or “payback” trust. Who establishes it: The beneficiary himself if he is mentally competent…or a parent, grandparent or legal guardian. Who can contribute to the trust: The disabled person must use his own assets. Funding often comes from a personal-injury settlement or an inheritance that the disabled person received directly.
Caveats…
The SNT must be irrevocable.
Age requirement. The beneficiary must be under age 65 at the time the trust is established
Medicaid Payback Provision. Upon the death of the beneficiary, any remaining assets must be first used to reimburse the state dollar-for-dollar for all Medicaid expenses incurred throughout the beneficiary’s lifetime. Any trust assets that remain after the payback usually pass to the beneficiary’s estate.
Choosing a Trustee for the SNT
Don’t appoint a sibling or family member as trustee. Reasons: SNTs are more complicated, time-consuming and detail-oriented to oversee than other types of trusts due to SSI and Medicaid regulations. Plus, putting a sibling in charge of a disabled sibling’s money can create enormous family tension and conflicts of interest.
Better: Appoint a professional trustee, perhaps an individual with experience in SNTs…a trust company…or a bank’s trust department. Professional SNT trustees typically charge $150 to $250 per hour…banks acting as trustees may charge a percentage of assets (1% to 2%) and have a minimum annual fee ($2,000 to $5,000). If you have a very complex trust with assets that need to be invested, a trustee might charge 1.5% of the total trust value annually. Note: The trustee is paid from the trust.
Put a provision in the trust appointing a sibling or family member as a “trust protector.” His role is to act as an extra set of eyes and ears to safeguard the integrity of the trust…to keep the trustee informed of the beneficiary’s unique needs and circumstances…and to make sure the trustee acts in the beneficiary’s best interests. Trust protectors even can be given the authority to remove and replace the trustee.
Consider an “ABLE” Account
The Achieving a Better Life Experience (ABLE) Act authorizes states to establish programs with special financial accounts for individuals with disabilities. A disabled person can open and control one of these tax-advantaged savings accounts in addition to his SNT without interfering with eligibility for means-tested government benefits. Anyone can contribute to the account.
How ABLE accounts work
To be eligible, an individual must have suffered his disability before age 26 (the limit increases to age 46 in 2026). There is a total maximum contribution amount per year equivalent to the federal gift-tax exclusion ($19,000 in 2025). ABLE account contributions are not tax-deductible at the federal level, but the income earned grows tax-free and withdrawals are not taxed as long as they are used for qualified disability expenses. These expenses typically include housing, education, transportation, health, employment training and personal-support services. If the ABLE account owner is employed and does not participate in an employer-sponsored retirement plan, he may be able to contribute an additional amount up to $15,060 this year of his total earnings. This could potentially raise the total annual contribution to an ABLE account to $34,060 in 2025. In most states, upon the ABLE account owner’s death, the state is reimbursed any remaining funds for all Medicaid expenses incurred.
Why ABLE accounts are useful
They allow a disabled person to save unspent work earnings or Social Security benefits for future purchases without violating the general rule that SSI and Medicaid recipients generally cannot accumulate more than $2,000 in their financial accounts, depending on the state. Also, ABLE accounts can be used for housing-related expenses without causing an elimination or reduction in the beneficiary’s monthly SSI payment.
Important limit
If the total amount in an ABLE account exceeds $100,000, SSI benefits are suspended until the amount drops below that limit. Medicaid benefits are suspended only if the amount in the ABLE account goes above the state limit where the disabled person resides. These state limits are the same as for 529 plans and currently range from $235,000 to $621,000, depending on the state.
