Understanding the Different Types of Special Needs Trusts

Special needs trusts, ABLE Accounts, and finances, oh my!  While I typically cover topics geared toward high school and transition age students, getting finances in order is a topic that families with students and loved ones of all ages can learn from.

Estate planning (or financial planning) means getting all the legal documentation together to organize financial resources and plan for short-term and long-term financial needs, and special needs trusts are often a part of that conversation.  If you are curious if a special needs trust should be a part of your estate plan or special needs financial plan, keep reading! 

What is a Special Needs Trust?

A Special Needs Trust is a legal way to protect assets, like cash, real estate, and policy payouts, for a disabled person.  A special needs trust may be created so the individual can take advantage of other government benefits, like SSI, as special needs trusts are 'safe zones' to keep large sums of cash and other valuables that may otherwise disqualify them from accessing benefits.   In literal terms, it is a legal document that outlines the terms and plans for how the trustee (person in charge) will manage and use assets to benefit the disabled individual.

Special needs trusts may be seen by the abbreviation SNT or may be referred to as Supplemental Needs Trusts.   

To qualify for a special needs trust, the beneficiary (person benefiting from the trust) needs to be younger than 65 years old and have a disability that meets the criteria, according to the Social Security Administration.    

If assets include cash/money, then special needs trust funds can be used to help cover the cost associated with meeting basic needs, hence why it is sometimes referred to as a supplemental needs trust, as the trust would supplement other earned income or government benefits.  

While every parent, primary caregiver, and guardian wants to do what's in their loved one's best interest, choosing the 'best option' for a special needs trust often comes down to how the money or assets came to benefit the individual.   Hopefully, the following overview of the most common types of trusts will review the difference between first-party special needs trusts, third-party special needs trusts, and pooled trusts, and how there isn't always a trust that is 'better' than another.  

Different Types of Special Needs Trusts

The following explains the three most common types of trusts.  

First-Party Trust

First-party SNT are opened by the individual using their own money or assets.  The name ‘1st party’ comes from the individual, like using 1st person language when writing, creating their own trust.  This type of trust is also commonly referred to as a Self-Settled Trust, (d)(4)(A) Trust, or Pay-Back Trust.  While it can be created by the individual, other loved ones can create the trust on their behalf.  

First party trusts cannot be revoked and are subject to Medicaid Payback (LINK), similar to ABLE accounts Medicaid Recovery, when the individual passes away.

Third-Party Trust

A third-party SNT is opened by someone other than the individual who has money or assets they want to gift/pass to the individual.  The name ‘3rd party’ comes from the person, like using 3rd person language when writing, who creates the trust for the individual, like a family member.  This type of trust can be revoked and modified if necessary. Since the individual never ‘owned’ what is in their trust, a 3rd party trust isn’t subject to Medicaid payback when the individual passes away.   

Pooled Trust

A Pooled SNT is a First or Thirdy Party trust that is managed by a nonprofit organization along with other individuals trusts.  Meaning, a pooled special needs trust is not a type of trust, but rather how the trust is overseen.   This type of SNT is also referred to as (d)(4)(C) trusts and may come with special fees.

A pooled trust combines trust assets from a group of individuals, or a pool of people, to invest and be managed together.   A pooled trust may allow the individual to have access to experienced staff within the non-profit who can ensure it is well-managed and up to date with changes to federal and state law.  For individuals with no other option for a trustee, a pooled trust can provide the necessary management.  

A pooled trust cannot be revoked and when the individual passes away the non-profit organization who is managing their trust may keep a portion or all of the remaining trust assets.  

Free standing special needs trusts and testamentary special needs trusts are other options.  For more information about those options, consult a certified attorney.  

Common Terms:

Assets

Assets of the beneficiary are financial (like cash, stocks, bonds, inheritance, life insurance policy payouts, personal injury settlement payouts, and lawsuit settlement payouts), and property (like real estate, land, buildings or homes, vehicles, and stocks) goods.  Trust assets are the assets (listed above) that are included in the special needs trust.  

Beneficiary

The beneficiary of the trust is the person who is benefiting from the trust.  For example, if Jamar's family created a special needs trust to protect the cash savings that are in his name, then Jamar is the beneficiary because he will directly benefit from the goods and services that are paid for by that cash.    

Grantor

The grantor of the trust is the person who creates and contributes to it.  For example, if Clay creates a First Party Trust because he received a lawsuit settlement in his name, then he would be grantor because he is using funds in his name to establish the trust.    A grantor may also be referred to as a settler or trustor.  

Revocable

Revocable means that a trust can be changed, altered, or canceled.  

Trustee

A trustee is someone who manages the assets included in the trust and follows the terms outlined in the trust.  This may be a person familiar with the beneficiary or a professional trustee/organization.   A trustee may be someone other than the disabled individual's legal guardian.  Serving as a trustee is a serious role and should not be taken lightly.  

Things to Know about Special Needs Trusts

Social Security Administration 

Supplemental Security Income, or SSI, is an example of a needs-based government benefit.  There is an asset limit an individual must be below to be approved for government assistance programs like SSI benefits. A special needs trust can help disabled individuals meet the needs-based criteria.  If the individual has property, like real estate, in their name, and it is above the maximum value amount according to SSA, then a special needs trust can be established to safeguard that asset from the asset limit, thus allowing them to qualify for SSI.  If the individual has money in a savings account that is in their name that is over $2,000, then they may want to deposit some of that money into an ABLE Account to meet the asset limits.  A special needs trust and an ABLE Account are SSA-approved 'places' to safely keep assets or deposit money that can be used to pay for things that benefit the disabled individual.  

Beneficiary's Death

If a SNT beneficiary passes away, certain special needs trusts have Medicaid payback provisions.  What is a Medicaid payback provision?  After the beneficiary passes, Medicaid can request to receive part of the funds left in first-party trusts.   If the deceased disabled individual was a recipient of Medicaid benefits, Medicaid can request that part of the individual's remaining trust funds be used as back pay for previously covered medical expenses.  

A special needs trust is drafted to protect for the lifetime of the person, unless it is drafted to be revocable (LINK to definitions above).  If the individual was part of a Pooled Trust, then the non-profit organization who is managing their trust may keep a portion or all of the remaining trust assets.  

Certified, Experienced Attorney

Consulting with a certified attorney who is experienced and familiar with existing laws regarding trusts can ensure that the special needs trust is drafted right the first time.  And, if new laws/regulations are passed that would impact your special needs trust, your attorney should know how to update or handle the change.  

ABLE vs Special Needs Trusts

Thankfully, an individual can have both an ABLE account and a special needs trust.    If the disabled individual is looking to safeguard cash before applying for benefits like SSI or Medicaid, then it may make sense to pursue an ABLE account rather than a special needs trust.  Since a special needs trust should be drafted by an attorney (as I mentioned above), one should expect to pay legal fees.  Therefore, for individuals who are looking to move between $1,000-$18,000 (as of 2024) in cash, then an ABLE account could be set up quicker than a special needs trust, be far cheaper, and provide the financial protection that the disabled individual may be looking for.  Why $18,000?  That's the max that can be deposited into an ABLE account in one year, unless the individual earns income from a job, then it could be more.  

Other Disability Benefits Besides Special Needs Trusts

If you are special needs planning for an individual with autism, check out my Disability Benefits for Adults with Autism, where I review the various autism definitions and list the different benefits that an autistic individual may consider check out as options to further support them. 

To learn more about SSI, a monthly cash payment benefit, check out the Five Things to Know Before Applying for SSI blog post.  

Disclaimer:

This blog post should not replace the legal advice of a certified lawyer. Heather, the blog author, is not a lawyer and does not give legal advice.