Generational Wealth: What’s a Special Needs Trust?

Serious senior widow worried about home finances stock photo
SDI Productions /

A special needs trust is a legal way to help provide for a person with a disability without disqualifying them for governmental benefits. One of the main financial risks of having a disability is that you lose your benefits because your asset or income levels exceed very strict governmental limits. A special needs trust can be the answer in this situation because it keeps assets and income out of the hands of a disabled beneficiary in favor of a trustee who retains control of trust assets. Here’s a look at what a special needs trust is, how it works and how it’s legally able to provide for the needs of a disabled beneficiary without impairing their governmental benefits.

What Is a Special Needs Trust?

A special needs trust keeps assets and income out of the name of the beneficiary so that they may remain under governmental limits and still receive benefits. The trust is managed by an independent trustee who distributes funds on behalf of the beneficiary at appropriate times. 

There are two essential things to note about a special needs trust. The first is that assets from the trust can only be used for supplemental needs of the beneficiary that are not covered by governmental benefits. For example, if a beneficiary wants to go to college but can’t afford the payments — and the government is not distributing money to make this happen — money from the special needs trust can be used.

Investing for Everyone

The other essential thing to note about a special needs trust is that a trustee must make payments directly to a service provider. For example, if a beneficiary needs $10,000 to go to college, the trustee must pay that money directly to the educational institution, not to the beneficiary. As soon as any distributions become the property of the beneficiary, asset laws may kick in, preventing a beneficiary from receiving any benefits. 

What Are the Governmental Limits on Assets and Income for Disabled Recipients?

To qualify for Social Security Disability Insurance (SSDI) and/or Supplemental Security Income (SSI), you must meet certain work and documentation requirements. But on top of those, the U.S. government imposes limits on income and assets as well. Specifically, for 2023, you cannot earn more than $1,470 on average per month, or $2,460 if you’re blind. To qualify for SSI benefits, you cannot have more than $2,000 in resources as an individual, or $3,000 as a couple. Some assets are excluded from the determination of resources, including your home, one car, household goods and certain others. But part of the reason for having a special needs trust is to prevent a beneficiary from showing too much income and/or assets, thereby disqualifying them from eligibility.

What Are the Types of Special Needs Trusts?

You can create various types of special needs trusts depending on your personal situation. But two of the most common special needs trusts are called first-party and third-party. As the names imply, a first-party special needs trust keeps assets under the control of the beneficiary. For this type of trust, the beneficiary must be disabled and under 65 at the time the trust is created. The trust must also be irrevocable. A first-party trust can help a disabled person with substantial assets still qualify for governmental benefits.

Investing for Everyone

A third-party special needs trust includes money that belongs to anyone other than the beneficiary. Disability is not a requirement with a third-party trust, which can also be used as a spendthrift trust to avoid an irresponsible beneficiary from blowing through all of the assets. 

What Happens After a Beneficiary Dies?

The disposition of a special needs trust after a beneficiary dies depends on the type of trust. A first-party trust usually requires payback of any state Medicaid payments the beneficiary received before the rest of the trust may be dispersed. A third-party trust has no such requirement and can even have secondary beneficiaries attached to it, meaning the assets don’t necessarily have to be distributed upon death of the primary beneficiary.

The Bottom Line

Special needs trusts are complex instruments that can come in a variety of forms. You’ll want to consult with an attorney who specializes in this type of law to help you draft the legal document that best serves the needs of the beneficiary, without disqualifying them from additional government benefits. 

More From GOBankingRates

Investing for Everyone


See Today's Best
Banking Offers