What Are Special Needs Trusts?

Special needs trusts (sometimes known as supplemental needs trusts) make available assets of a disabled or mentally ill person, for certain limited purposes, to that disabled or mentally ill person, through the assistance of a trustee, which assets that might otherwise disqualify the disabled or mentally ill person from receiving government benefits such as health care, long term care, Supplemental Security Income, or Medicaid eligibility.  Common sources of funding for special needs trusts are inheritance or personal injury settlement proceeds or insurance payments.

The language of a special needs trust must authorize the trustee to pay only for support needs of the disabled or mentally ill beneficiary that the government aid programs do not pay.

Self-settled trusts (trusts funded by the beneficiary himself) will not be treated as special needs trusts under federal law, except when they qualify pursuant to 42 U.S.C. §1396 (d)(4)(A), which requires that the beneficiary be under age sixty-five at the time the trust was created and funded, as well as disabled under the Social Security definition of disability.  The trust must exist for the “sole benefit” of the disabled person, and be created by a parent, grandparent, guardian, or the court (the trust cannot be self-created).  Upon the beneficiary’s death, Medicaid must be reimbursed for the costs of medical assistance, if such assistance was provided by Medicaid.  This requirement is called the “payback provision.”

Third party trusts, which are technically not special needs trusts, will not be counted as the beneficiary’s assets if created by someone other than the beneficiary, and if the trust contains no assets of the beneficiary.  None of the income or assets of the trust can be controlled by the beneficiary, none of the income from the trust should be given directly to the recipient, and the appropriate language for these results differs among states.  There is no payback provision for third party trusts benefiting a disabled or mentally ill person.