‘There’s No Deadline’: How a Special Needs Trust Protects Your Loved One’s Future
Plus discover the little-known account that safeguards smaller funds without losing benefits
Key Takeaways
- A special needs trust (SNT) can protect your loved one’s future without risking benefits
- The trust covers a wide array of surprising expenses from travel to technology
- It's never too late to set up an SNT for older children or adults
Nothing compares to the peace of mind we feel when we know we’re protecting the health and financial security of our loved ones. Here, a top advocate for people with disabilities explains everything you need to know about setting up a special needs trust (SNT) for a loved one with a disability, including the keys to making it work and a little-known alternative fund that can help with modest or smaller estates.
What is a special needs trust (SNT)?
A special needs trust is an estate planning tool that allows families, typically parents or grandparents, to set aside assets for a person with a disability without jeopardizing that person’s eligibility for government benefits like Medicaid or Supplemental Security Income (SSI), explains Patricia E. Kefalas Dudek, elder law attorney and former chair of the State Bar of Michigan’s Elder Law & Disability Rights Section.
Why is this trust so useful? “If you give money directly to a person with a disability, it can disqualify them from benefits like SSI or Medicaid,” she explains. “But if you put the money in a special needs trust, it’s still used for them and it doesn’t count against eligibility.”
Who qualifies for a special needs trust (SNT)?
These trusts come in two forms. A third-party special needs trust is funded by family members like parents or grandparents, while a first-party special needs trust is funded with the disabled person’s own money—however, when the person dies, remaining funds must reimburse Medicaid or be used by a charity to help others with disabilities.
The eligibility is quite broad and inclusive. Dudek shares who can benefit from a special needs trust:
- People with developmental disabilities
- People with mental illness (especially those with fluctuating capacity)
- Anyone receiving disability benefits
- Individuals of any age (there’s no age limit for most of these trusts)
Is it ever too late to set one up?
In a word, no. You can set it up when children are young, later in life or even when you’re a grandparent who wants to provide for a grandchild but may be facing your own long-term care needs down the road.
“There’s no deadline and no penalty,” assures Dudek. “You can even set up the trust the day before entering a nursing home, which isn’t possible in most situations. You can leave an unlimited amount of money to a loved one through a special needs trust and still qualify for Medicaid yourself as soon as the next day. It’s virtually unheard of.”
What can a special needs trust pay for?
“This trust is very flexible in terms of what the funds can be used for, but for me, the most important issue is housing,” Dudek points out. “There’s a real shortage in most states, with long waiting lists for group homes and other options for people with disabilities. Many of my clients worked hard to keep their children out of institutions, and they don’t want them forced into highly regulated settings later in life.”
Beyond housing, the trust can cover a wide range of expenses that Medicaid doesn’t, such as:
- Transportation (including Uber or Lyft accounts)
- Additional medical care (like massages or acupuncture)
- Hearing aids, glasses or specialized equipment
- Phone, cable or internet
- Vacations (for the beneficiary)
- Social activities and community programs
- Technology (like iPads for communication)
One important detail: To maintain eligibility for government benefits, payments should go directly from the trust to the service provider rather than as cash to the beneficiary, notes Dudek.
3 keys to an effective special needs trust
To ensure your loved one is truly protected, Dudek says these three elements are essential:
Discretionary trustee powers
“The trustee must be able to say ‘no’ to protect the funds,” explains Dudek. In other words, the trustee has the authority to make decisions about how to use the funds in ways that truly serve the beneficiary’s best interest, even if that sometimes means declining a request.
Creditor protection
This means if the beneficiary isn’t responsible with their spending, creditors can’t access the trust’s funds. Such protection is especially important for those receiving Medicaid long-term care, since the state is concerned about preserving the assets for the individual’s benefit.
Multiple trustee options
With a third-party special needs trust, it’s important to have multiple options for trustees, Dudek emphasizes. “Parents often want to name siblings, but not all siblings are willing to take on the role. There can also be underlying resentment if they feel a child with a disability received too much attention. For this reason, the trust should include a clear succession plan: if the first trustee can’t serve, an alternate trustee steps in, and so on.”
Insider tip: Dudek recommends working with The Arc, a national organization dedicated to protecting the rights of people with disabilities. “Today, almost every local chapter can serve as a backup or co-trustee, either with a family member or a financial institution, because these people know the system better than anyone,” she says.
Need to manage a smaller fund? Consider this alternative
If you’re working with a smaller amount of money, there’s another helpful option to consider: an ABLE account, which stands for Achieving a Better Life Experience. It’s specifically designed for saving smaller amounts without putting disability benefits at risk.
“If a relative leaves someone $10,000, for example, they may be able to use an ABLE account instead of a special needs trust—as long as the person’s disability began before age 46,” explains Dudek. “The money grows tax-free, and they can typically save up to about $100,000 without losing SSI.”
There is a catch, however. “If funds remain in the account at death, they may have to be used to reimburse the state for Medicaid,” she adds.
“For that reason, I generally don’t recommend ABLE accounts for parents or grandparents as a primary planning tool,” cautions Dudek. They’re better suited for situations when it’s too late to set up a third-party trust and the individual has already received the funds, for example, after a legal settlement or unexpected inheritance.”
The bottom line on special needs trusts
Special needs trusts offer remarkable flexibility for families facing complex care needs across generations. “Let’s say Grandma has $100,000 in cash and a house,” Dudek explains. “She can place the $100,000 into a special needs trust for her grandchild with disabilities. By doing this, Grandma becomes eligible for Medicaid—the house is exempt in every state—and she can access in-home services to help care for herself. Meanwhile, her grandchild’s future is protected.” It’s a compassionate solution that honors both generations’ needs.
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