Special Needs Planning

A first-party special needs trust holds assets that belong to the individual with disabilities, often from a personal injury settlement or inheritance received directly. These trusts must include a Medicaid payback provision. A third-party special needs trust holds assets from someone else, like parents or grandparents, and does not require payback to Medicaid.

You can, but doing so may disqualify them from SSI and Medicaid until they spend down the inheritance to allowable resource limits. A properly structured special needs trust allows you to provide financial support without affecting benefit eligibility.

The trust can pay for supplemental needs beyond what government benefits cover. Things like additional therapy, recreational activities, travel, hobbies, electronics, personal care attendants, and quality-of-life enhancements. The trust generally cannot pay for food or shelter directly, as these are considered “in-kind support” that can reduce SSI benefits.

The trustee should understand government benefit rules and your loved one’s needs. Options include a trusted family member, a professional trustee with special needs experience, or a corporate trustee. Some families use a co-trustee arrangement combining family involvement with professional administration.

In a third-party special needs trust (created by parents or others), remaining funds typically go to other beneficiaries you name, often siblings or other family members. In a first-party trust (funded with the beneficiary’s own assets), Medicaid may be entitled to reimbursement for benefits provided during the beneficiary’s lifetime.

It depends on whether your child is receiving Medicaid through SSI (which is means-tested) or through other programs. If Medicaid eligibility depends on income and asset limits, a special needs trust may still be necessary. We help you evaluate your child’s specific benefit structure.

You can establish a special needs trust in your will (called a testamentary trust), which takes effect after your death. Some families prefer to create and fund the trust during their lifetime, which allows them to see how it operates and make adjustments if needed. Either approach can work depending on your situation.

This is one of the questions families think about most and ask about least. It deserves a direct answer.

What happens to the remaining funds in a special needs trust at a beneficiary’s death depends on the type of trust involved.

For a third-party special needs trust, meaning one funded with assets belonging to the parents or other family members, not the beneficiary, the family has flexibility. The trust document can direct remaining funds to siblings, other family members, a charity, or wherever the family chooses. There is no government payback requirement for third-party trusts.

For a first-party special needs trust, meaning one funded with assets that belonged to the beneficiary, such as a personal injury settlement or an inheritance received directly, federal law requires that Medicaid be reimbursed for benefits paid during the beneficiary’s lifetime before any remaining funds pass to other beneficiaries. This is called the Medicaid payback provision.

Most parents doing proactive estate planning are creating third-party trusts, which means the payback provision typically doesn’t apply to their situation. However, the distinction matters, and it’s one reason how a trust gets funded, and with whose assets, is a decision that shapes the entire structure.

If there are funds remaining after any applicable obligations are satisfied, those assets can continue to benefit the people and causes your family cares about most.

This is a common concern. Many parents choose to leave additional assets to the child with special needs through the trust because that child may have lifelong care needs. Other parents equalize distributions and explain the reasoning to all children. Communication while you’re alive can prevent misunderstandings later.