What Is a Special Needs Trust?

A special needs trust, sometimes called a supplemental needs trust or SNT, is designed to provide funds for a loved one without affecting eligibility for government assistance programs, such as Supplemental Security Income (SSI) and Medicaid. If you have a loved one with special needs, setting up this type of trust lets you leave money to sustain their quality of life.

How Special Needs Trusts Work

Leaving assets to a loved one with special needs requires careful planning. Without it, your loved one’s government benefits could be at risk. The benefit of a special needs trust is that it avoids these problems because you leave money or property to the trust rather than giving it directly to your loved one.

If you set up a special needs trust fund, sometimes referred to as a disability trust fund, your gift won’t be counted as your loved one’s personal income. Instead, you will appoint a trustee to manage the funds on behalf of your loved one, the trust beneficiary. You can create a special needs trust within your will (a testamentary trust) or in a separate document. While a will is the simplest way, this approach may be more limited and involve the delays and expenses of probate court proceedings. A stand-alone special needs trust usually offers greater flexibility and more immediate access to funds.

Types of Special Needs Trust

There are several types of special needs trusts available to support people with disabilities. Each type works differently, depending on who provides the funds and who manages them. This section covers the three main types of special needs trusts: third-party, first-party, and pooled trusts.

Third-Party Special Needs Trust

A third-party special needs trust is the most common type of trust created to support someone with disabilities. It’s called a third-party trust because the property in the trust comes from someone other than the trust beneficiary—the “third party.” Typically, a family member creates this type of trust and funds it through their estate planning tools, such as a will, trust, life insurance policy, or other beneficiary designations.

When you set up a third-party trust, you name a trustee to manage the trust’s assets to benefit the person with special needs. The trustee must take care to follow specific rules that protect eligibility for government benefits. While certain expenditures, like direct cash gifts, are prohibited, the trustee can use the trust funds for a wide range of expenses, such as education, hobbies, household needs, technology, pet care, transportation, and vacations. The beneficiary does not directly control or own the assets in the trust.

First-Party Special Needs Trust

Unlike third-party trusts, a first-party special needs trust holds assets that belong to the person with special needs. This property may come from sources like a personal injury settlement, retirement plan, divorce settlement, life insurance payout, or inheritance.

As discussed, a person with special needs who owns substantial assets may lose eligibility for government benefits. By placing these assets into a properly structured first-party trust, the individual can retain access to the funds while remaining eligible for assistance programs.

There are different types of first-party trusts, such as payback trusts, litigation trusts, Miller Trusts, pooled trusts, and those established under federal law, like (d)(4)(A) or (d)(4)(C) trusts. All are strictly regulated to prevent misuse and usually require repayment to the state for medical expenses after the beneficiary’s death. Because requirements vary by state and change frequently, it’s essential to work with an experienced local attorney when setting up a first-party special needs trust.

Pooled Special Needs Trust

If you don’t have a suitable trustee or are leaving a modest amount, a pooled trust is another option. Pooled trusts are managed by nonprofit organizations that combine funds from multiple families for investment purposes. Each beneficiary has an individual account, and the nonprofit’s trustee manages and distributes funds for their benefit. Pooled trusts, also known as community trusts, are available in many regions.

Pooled special needs trusts vary widely in their structure and offerings. Each trust has its own set of fees, available services, and contract terms. Some are complex, with multiple options and detailed fee schedules, while others are more straightforward. The level of care provided can also differ, with some trusts offering comprehensive support for beneficiaries and others focusing solely on money management.

People of any age can join a pooled trust, which is a key difference from many first-party special needs trusts. However, those over age 65 should be aware that transferring assets to a pooled trust might trigger transfer penalties, depending on state regulations.

When considering whether a pooled special needs trust is appropriate for your family, it’s important to weigh the advantages and disadvantages. On the good side, pooled trusts are managed by knowledgeable nonprofit organizations familiar with SSI and Medicaid rules, and are often run by individuals who understand the needs of people with disabilities. Even with modest funds, these trusts can provide your loved one with the benefits and protections of a special needs trust.

However, pooled trusts have some significant drawbacks. The quality of management depends on the stability and practices of the nonprofit, and poor management can negatively impact beneficiaries. Fees can be high, and distributions may be infrequent or rigid. Pooled trusts are typically inflexible, making it difficult to move assets elsewhere, and many will not accept real estate or other nontraditional investments, which may make an individual special needs trust preferable in certain situations.

Before you settle on a type of special needs trust, be sure to research your options carefully, consulting an experienced lawyer if possible.

How to Leave Property in a Special Needs Trust

When you set up a special needs trust, it’s almost always best to fund it at death. As mentioned above, at that time, the funds will usually come through a will, trust, or other beneficiary designation. This section discusses each method in turn.

Funding a Special Needs Trust Through Your Will

Creating a will is straightforward and allows you to identify which assets should be placed in a special needs trust. You can use your will to leave most kinds of property to a trust, including bank accounts, real estate, businesses, personal belongings, intellectual property like patents or copyrights, and more. However, property left through a will usually goes through probate, which can take months and involve significant costs. This process may delay funding for the special needs trust and reduce the amount ultimately available to your loved one. To bypass probate and its drawbacks, you might consider a revocable living trust instead.

Funding a Special Needs Trust Through Your Revocable Living Trust

A living trust, like a will, can direct assets to a special needs trust that takes effect upon your death. The trust document specifies which property should go to the special needs trust instead of directly to the beneficiary. A significant advantage of a living trust is that it avoids the probate court.

Keep in mind, however, that any assets not included in your living trust or passed by other means (such as the beneficiary designations discussed below) will be distributed under your will. This is why most people with a living trust also create a will to cover property not transferred into the trust or addressed by other means.

Funding a Special Needs Trust Through Beneficiary Designations

Another option for leaving assets to a special needs trust is to use beneficiary designations. Many financial accounts—such as bank accounts, investment accounts, retirement plans, and life insurance—allow you to name a beneficiary. By completing a form provided by the company that holds your account or policy, you can ensure that assets pass directly to the special needs trust upon your death, avoiding probate.

Some states also let you transfer real estate or vehicles outside of probate with a "transfer on death deed."

Always designate the special needs trust—not the person with special needs—as the beneficiary. Otherwise, you risk disqualifying them from government assistance.

The Beneficiary's Property: Don’t Include It

If your loved one acquires assets—such as from a personal injury settlement or an inheritance—it might seem logical to add those funds to their existing special needs trust. However, this strategy can make them ineligible for SSI and Medicaid. When the beneficiary’s own property is mixed with assets in a third-party special needs trust, all the funds may be treated as the beneficiary’s resource. If the combined amount exceeds the SSI resource limit ($2,000 in 2025), your loved one could lose eligibility for crucial benefits.

A better solution is to create a separate first-party special needs trust for any assets your loved one receives. This keeps the original trust’s assets excluded from resource calculations and preserves eligibility for government benefits.

How to Create a Special Needs Trust

To establish a special needs trust, you start by preparing the trust document. You can create a simple special needs trust on your own using self-help resources, and this is often preferable to having no trust at all. But many families benefit from a trust tailored to their unique needs. For a customized trust, it’s best to consult an experienced lawyer.

Special Needs Trust Roles

Within the trust document, the person creating the trust (called the grantor or settlor) transfers property to a designated manager (the trustee). Often, the grantor initially acts as the special needs trust trustee and names a successor trustee to step in if the grantor dies, becomes incapacitated, or resigns. Every trustee is legally required to follow the instructions in the trust to use the assets for the benefit of the individual with special needs (called the beneficiary).

Finalizing a Special Needs Trust

The trust becomes effective once it is signed and notarized. Shortly afterward, you can obtain a tax identification number from the IRS and open a bank account for the trust with a small initial deposit. At this stage, the trust is ready to receive funds from wills, living trusts, beneficiary designations, or other estate planning methods as discussed above.

Learn More About Estate Planning

A special needs trust is a powerful way to protect your loved one’s financial future while preserving their eligibility for government benefits. By understanding the different types of trusts, funding options, and legal requirements, you can create a plan tailored to your family’s needs, provide lasting support, and gain peace of mind.

The following articles can help you learn more about wills and estate planning:

• Why Do You Need a Will?
• What Happens If You Die Without a Will?
• Naming a Child’s Guardian
• Naming a Pet Guardian in a Will or Trust

You can find out more about making WillMaker’s will and living trust in WillMaker’s Legal Manual.