Families caring for loved ones with disabilities often face difficult questions about the future. One of the most important steps is planning how to protect their financial well-being without affecting their eligibility for government benefits. A special needs trust is one way to provide long-term support while preserving access to vital assistance programs.
These trusts are structured to hold assets for a person with special needs without disqualifying them from needs-based aid such as Supplemental Security Income or Medicaid. Choosing the right type of trust depends on the source of the funds and the goals for the trust’s use.
1. First-party special needs trust
This type of trust is funded using the assets of the person with disabilities, such as a personal injury settlement or inheritance. It must be established by a parent, grandparent, guardian or the court. The beneficiary must be under age 65 at the time the trust is created. Upon the death of the beneficiary, any remaining funds may be used to repay the cost of public medical assistance received during their lifetime.
2. Third-party special needs trust
A third-party special needs trust is created and funded by someone other than the beneficiary. This could include a parent, grandparent or other relative. The assets in this trust were never owned by the person with disabilities. These funds can be used for supplemental needs beyond what government benefits cover. When the beneficiary passes away, the remaining assets may be distributed according to the donor’s instructions without reimbursement requirements.
3. Pooled special needs trust
A pooled trust is managed by a nonprofit organization. Each beneficiary has a separate account, but the funds are combined for investment purposes. This type of trust is open to individuals of any age and is often a good option when the available funds are more limited. Like the first-party trust, it may also require repayment to Medicaid for services used during the beneficiary’s life.
When considering how to support a loved one through estate planning, it is important to seek legal guidance. The structure and purpose of each type of special needs trust must align with your goals for future care and financial security.