Supplemental Needs Trust for a Special Needs Child
A supplemental needs trust (also called a special needs trust) holds money for a person with a disability so they can benefit from it without losing means-tested benefits such as SSI and Medicaid. A trustee, not the beneficiary, controls the money and pays for things benefits do not cover. A trust funded by a parent is a third-party trust, and it generally needs no payback to the state at the beneficiary's death. A trust funded with the beneficiary's own money needs a payback provision.
Why leaving money outright can backfire
SSI and Medicaid have strict limits on income and countable resources. If a parent leaves a child with a disability an outright inheritance, the child can lose eligibility until the money is spent down. A trust that is properly written keeps the funds out of the beneficiary's name, so they are not counted as the beneficiary's resources, while still paying for supplemental needs.
Third-party vs first-party trusts
| Third-party | First-party (self-settled) | |
|---|---|---|
| Funded with | Parent or relative's money | Beneficiary's own money, such as a settlement or inheritance received outright |
| Medicaid payback at death | Not required | Required for the state's costs |
| Typical home | Part of a parent's estate plan | Created for the beneficiary, often by a parent, guardian or court |
This is why parents should write the trust into their own plan, so the inheritance flows into a third-party trust instead of to the child directly.
What the trust can pay for
- Therapies, equipment and services benefits do not cover
- Education, recreation, travel and technology
- Extra medical or dental care
- Companionship and advocacy
- Housing costs, with care, since paying for food or shelter directly can reduce SSI
The trustee has discretion and must understand how each type of payment affects benefits. Ask an attorney familiar with benefits rules before spending trust money in ways that may reduce SSI.
Choosing a trustee
The trustee needs patience, good judgment and a willingness to learn benefit rules. Some families name a sibling with a professional co-trustee, or a corporate trustee that works with special needs trusts. Add a letter of intent describing the beneficiary's routines, medical providers, preferences and long-term hopes, so a successor can step in with the full picture.
Other tools to consider
An ABLE account lets a person with a disability save a limited amount per year without affecting benefits, if the disability began before a certain age. Texas also has a management trust option for people who cannot manage their own property. Guardianship may be needed in some cases, which is why many parents explore guardianship and its alternatives as the child nears adulthood.
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Book Free ConsultationFrequently asked questions
Can the child be the trustee?
Generally no. The point is that the beneficiary does not control the funds, so a separate trustee manages them.
Does the trust pay at the beneficiary's death?
A third-party trust can name remainder beneficiaries, such as siblings, with no Medicaid payback required. A first-party trust must repay the state first.
Can grandparents leave money to a special needs trust?
Yes. Anyone can leave money to a properly drafted third-party trust instead of to the beneficiary directly.
Will the trust affect SSI?
A properly drafted and administered trust is designed not to. Some trust payments, such as for food or shelter, can reduce SSI, so trustees need care.