A special needs trust (SNT) is a legal arrangement designed to provide financial support to individuals with disabilities without affecting their eligibility for government benefits. There are two types of SNTs, first-party SNTs and third-party SNTs.1  When planning for the future of a loved one with a disability, understanding the distinctions between first-party and third-party special needs trusts is crucial. Both types of trusts are designed to help protect the beneficiary’s eligibility for government benefits while providing for their needs, but they differ significantly in their funding sources and wealth transfer possibilities. 

First-Party SNTs 

First-party SNTs are funded with the beneficiary’s own assets. This can include personal injury settlements, inheritances, or other funds that belong directly to the individual with special needs. The primary purpose of these trusts is to allow the beneficiary to maintain eligibility for essential government benefits such as Medicaid and Supplemental Security Income (SSI) while using their own funds for their benefit. However, a key aspect of first-party SNTs is the Medicaid payback requirement. Upon the beneficiary’s death, any remaining assets in the trust must be used to reimburse the state for Medicaid benefits received during the beneficiary’s lifetime. 

Third-Party SNTs 

In contrast, third-party special needs trusts are funded by assets from someone other than the beneficiary, typically parents, grandparents, or other family members. These trusts are designed to provide for the needs of the individual with disabilities without affecting their eligibility for government benefits. Third-party SNTs are not required to reimburse the state for Medicaid benefits upon the beneficiary’s death. Instead, the remaining assets can be distributed to other beneficiaries as specified in the trust. 

Use of SNT Funds  

Funds in an SNT can be used for a variety of expenses without disqualifying the beneficiary from government benefits depending on the state-specific rules and terms of the trust. The key is that these distributions should be for “supplemental” needs, which means they should enhance the quality of life of the beneficiary without replacing the benefits provided by government programs like Medicaid and SSI. Here are some examples of allowable distributions: 

  • Medical and dental care: Expenses not covered by Medicaid, including specialist visits, therapies, and dental work 
  • Personal care: Services such as in-home care, personal assistance, and nursing care 
  • Education: Tuition, books, supplies, and other educational expenses 
  • Transportation: Costs related to purchasing and maintaining a vehicle, public transportation, and travel expenses 
  • Recreation: Hobbies, vacations, and entertainment activities 
  • Household items: Furniture, appliances, and home modifications to accommodate the beneficiary’s needs 
  • Technology: Computers, software, and internet services 
  • Miscellaneous: Clothing, personal hygiene products, and other nonfood items 

It is important to note that distributions for basic needs such as food and shelter can affect SSI benefits, so these should be handled carefully.22 The trustee should always ensure that distributions comply with the rules of the specific government benefits program the beneficiary is receiving.   

Considerations 

Special needs trusts are complex financial planning vehicles. The requirements for certain special needs government benefits are governed by state law. Each state may have its own specific rules and regulations regarding the establishment, administration, and permissible distributions of SNTs. Knowledge of the law applicable to whatever type of SNT is being utilized, including what constitutes a permissible trust distribution, is imperative when administering an SNT. Understanding these differences is essential for families planning for the long-term care and financial security of their loved ones with special needs. By understanding the law applicable to SNTs, families can ensure that their loved ones receive necessary support without jeopardizing access to vital government benefits.

  1. 1There are also pooled special needs trusts which are managed by nonprofit organizations. These are often used for smaller SNT accounts because it allows the resources of multiple beneficiaries to be pooled for investment purposes while maintaining separate subaccounts for each SNT beneficiary. Regardless, the underlying subaccounts are either first-party or third-party SNTs.  ↩︎
  2. 2Effective September 30, 2024, SNTs are now allowed to make distributions for food without affecting eligibility for SSI benefits. Some state Medicaid agencies are following this change. ↩︎

Cerity Partners LLC (“Cerity Partners”) is an SEC-registered investment adviser with multiple offices throughout the United States. Registration of an Investment Adviser does not imply any level of skill or training. This material is for educational purposes only and is not intended to be personalized investment, tax, or legal advice. The information provided herein is general in nature and may not reflect the laws or regulations specific to your state. Special needs trusts are governed by federal and state law, and their establishment and administration should comply with applicable rules. Families should consult qualified legal or financial professionals familiar with state-specific requirements to determine how the information may apply to their specific circumstances. The information presented is subject to change without notice and is deemed reliable but is not guaranteed. For information pertaining to the registration status of Cerity Partners, please contact us or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). For additional information about Cerity Partners, including fees, conflicts of interest, and services, please request our disclosure statement as set forth on Form CRS and ADV Part 2 using the contact information herein. Please read the disclosure statement carefully before you invest or send money.

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