Which Type of Special Needs Trust is Right for My Child?

Families caring for a child with a disability often worry about how to provide financial support without jeopardizing crucial benefits such as SSI (Supplemental Security Income) and Medicaid. These programs impose a strict $2,000 asset limit, meaning that if a child has more than $2,000 in their name, they may lose eligibility for these essential benefits.

A Special Needs Trust (SNT) is one of the most effective estate-planning tools for protecting these benefits, while also preserving assets for a child’s long-term care. When drafted and administered properly, the assets held in a Special Needs Trust do not count toward SSI and Medicaid’s asset limit. As a result, a Special Needs Trust can hold well over $2,000 for the child (sometimes hundreds of thousands of dollars or more) without affecting their eligibility for disability-based public benefits.

However, not all SNTs function the same way. Choosing the wrong structure can lead to a loss of benefits or unnecessary administrative burdens. This article outlines the three primary types of special needs trusts and how to determine which is right for your child.

1) First Party Special Needs Trust

What is It?

A First Party SNT holds assets belonging to the child.

For example:

·      Personal injury settlements

·      Inheritances received outright

·      Accumulated savings or assets put in the child’s name

These trusts are authorized under federal law: 42 U.S.C. §1396p(d)(4)(A).

Who Creates it?

A First Party SNT must be created by the person with a disability (if they are legally and mentally competent). If they are unable, then a parent, grandparent, tutor (legal guardian), or a court can help set up the trust.

Is There an Age Limit?

Yes. The person with a disability (the beneficiary) must be under age 65 when the trust is established. After age 65, the beneficiary cannot create a new First Party SNT or add any additional assets into an existing First Party SNT without risking disqualification of public benefits. (These laws were created to encourage families to plan for disabilities early, and they also help prevent abuse of a different set of Medicaid rules - the Elder Care Medicaid Rules.)

Is There a Medicaid Payback for a First Party SNT?

Yes. Upon the beneficiary’s death, any remaining funds must be used to reimburse the state for Medicaid benefits paid during the child’s lifetime. However, the trust is only required to pay what is left in it. If there isn’t enough money in the trust to fully reimburse Medicaid, the trust is not responsible for paying more. No Medicaid reimbursement debt is passed on to the family, the trustee, or the beneficiary’s estate.

Whenever possible, families should plan to use a Third Party SNT, which avoids the Medicaid Payback.

Who Should Use a First Party SNT?

A First Party SNT is best for those who are eligible for SSI and Medicaid and already own assets or are expecting assets that will cause them to be disqualified.

Example: Using a First Party SNT

Caleb has a disability and receives SSI and Medicaid. Caleb is expecting a large personal injury settlement of $100,000. If Caleb receives the settlement in his own name, then he will be disqualified from SSI and Medicaid because the settlement exceeds the $2,000 asset limit. Caleb will have to “spend down” his settlement to below $2,000 to receive SSI and Medicaid again. This would be a terrible result.

Instead, Caleb should set up a First Party SNT to receive the settlement. By doing this, the settlement money will not count against the $2,000 asset limit. This is a win-win for Caleb. He can receive his settlement and keep his SSI and Medicaid benefits at the same time.

2) Third Party Special Needs Trust

What is It?

A Third Party SNT holds assets belonging to someone other than the child, usually parents, grandparents, or other relatives. These assets can include things like cash, stocks, investments, real estate, personal property, gifts, inheritances, life insurance proceeds, and retirement account beneficiary designations.

All assets go into the name of the trust, not the name of the child with a disability. This keeps the child eligible for SSI and Medicaid, while also ensuring their long-term care.

It can be funded either immediately (with as little as $10) or at the parent’s death (through a will or a living trust).

Who Creates It?

A Third Party SNT is created by someone other than the person with a disability. Most often, this person is the parent or grandparent, but it can be anyone, such as another relative or a friend.

There is no limit to the number of Third Party SNTs that can be created for a child. This makes it a flexible tool for parents who are divorced, as they can each create their own separate SNT for their child.  

Is There an Age Limit?

No. There is no age limit for the beneficiary of a Third Party SNT. A beneficiary can be any age. Parents or loved ones may create a Third Party SNT at any point. It can be created early in the child’s life for those with developmental disabilities, for an adult with mental or physical disabilities, or even for individuals who develop a disabling condition later in life. Regardless of when the disability began or the age of the beneficiary, a Third Party SNT remains a flexible and effective planning tool.

Is There a Medicaid Payback for a Third Party SNT?

No. A properly drafted and administered Third Party SNT does not require a Medicaid Payback when the beneficiary passes away. This means that any remaining assets in the trust, upon the beneficiary’s death, can be passed on to another family member, rather than being distributed to the federal government.

Third Party SNTs are a powerful tool for protecting family assets and passing them on to future generations.

Who Should Use a Third Party SNT?

A Third Party SNT is best for parents (and grandparents) who want to plan for their child’s long-term support. Families who want maximum flexibility and to preserve assets for other family members will seek to establish a Third Party SNT.

Example - Using a Third Party SNT

Maggie has a disability and receives SSI and Medicaid benefits. Maggie’s grandmother, Gigi, created a will. Under the will, Maggie will receive $25,000 at Gigi’s death. The $25,000 gift exceeds the $2,000 asset limit for SSI and Medicaid. When Maggie receives the $25,000 gift, she will be disqualified from SSI and Medicaid. To re-qualify, Maggie will have to spend her inheritance down to below $2,000. This is a terrible result.

Instead, Gigi should create a Third Party SNT for Maggie. The $25,000 can be directed into the trust at Gigi’s death. The trust will not be counted as Maggie’s assets and Maggie will continue to receive her SSI and Medicaid benefits. Additionally, the trust can continue to invest the $25,000, allowing the $25,000 to grow so that Maggie can maximize the use of the $25,000.

3) Pooled Special Needs Trust

What is It?

A Pooled Special Needs Trust is a type of trust that is managed by a nonprofit group that combines assets from many beneficiaries for investment and management purposes, while maintaining separate sub-accounts for each child.

A Pooled SNT can be either a First Party SNT or a Third Party SNT, depending on how it is set up by the nonprofit organization.

A Pooled SNT can only accept cash contributions. It cannot accept or manage other types of assets, such as real estate or personal property.

Who Creates It?

A Pooled SNT is already created by the nonprofit organization. To set up a sub-account, there are different rules depending on whether it is a First Party or Third Party trust.

If it is a First Party SNT, the person with a disability will need to sign up to create their sub-account. If the person is not legally or mentally competent, a legal representative can help set up the sub-account. Like all First Party SNTs, it must be funded with the beneficiary’s own assets.

If it is a Third Party SNT, then someone other than the person with a disability will create the sub-account, such as a parent or grandparent. Like all Third Party SNTs, it must be funded with assets that do not belong to the beneficiary.

Is There an Age Limit?

In general, there is no age limit, to join a Pooled SNT. However, the rules can be a bit nuanced depending on the type of trust.

For a First Party Pooled Trust, there is no age restriction for joining a Pooled Special Needs Trust. However, Medicaid may impose a transfer penalty on funds contributed after age 65.

For a Third Party Pooled Trust, there is no age restriction and no penalty.

Is There a Medicaid Payback for a Pooled SNT?

It depends on whether it is a First Party or a Third Party Pooled SNT.

If it is a First Party Pooled SNT, then yes, there is a Medicaid Payback requirement. When the beneficiary passes away, any remaining funds in the sub-account must be used to reimburse Medicaid for services provided during their lifetime. This means any remaining assets might not be passed on to other family members.

If it is a Third Party Pooled SNT, then there is no Medicaid Payback requirement. However, many pooled trusts require that any remaining funds at the beneficiary’s death remain in the pooled trust to support other individuals with disabilities.

Who Should Use a Pooled SNT?

If there is no one available, such as a family member or friend, to serve as the trustee, or if the trust is small and it is not efficient to hire a professional trustee, then a Pooled SNT may be a good option. The nonprofit organization serves as the trustee, and its staff are trained to manage these kinds of trusts. However, some people prefer someone who knows and loves the individual with a disability to serve as the trustee, in which case, a Pooled SNT may not be the best option.