A Special Needs Trust (SNT) is a legal tool that solves a specific problem: how to hold significant assets for someone with a disability without disqualifying them from SSI (Supplemental Security Income) or Medicaid.
Without an SNT, receiving a large sum of money — through a personal injury settlement, inheritance, or life insurance payout — can push a person’s resources over the SSI limit and suspend their benefits. An SNT holds that money in a way that SSI and Medicaid don’t count against eligibility.
There are three types of Special Needs Trusts. Which one to use depends on where the money comes from.
First-party Special Needs Trusts (d(4)(A) trusts)
A first-party SNT is funded with money that belongs to the person with the disability. Common situations where this comes up: a personal injury lawsuit settlement, an inheritance received directly, a large gift, or savings accumulated before a person knew they would qualify for benefits.
Because the beneficiary’s own money funds the trust, there are strict rules:
The trust must be established by a specific person. Under federal law (42 U.S.C. § 1396p(d)(4)(A)), a first-party SNT can only be created by the person with the disability, a parent, grandparent, legal guardian, or a court. It cannot be created by siblings or other relatives without going through the courts.
The beneficiary must be under 65 when the trust is established. A person 65 or older cannot establish a new first-party SNT to protect resources.
Medicaid payback is required. When the beneficiary dies, whatever remains in the trust must first be used to reimburse state Medicaid programs for costs paid during the beneficiary’s lifetime. Only after Medicaid is repaid can remaining funds go to heirs or other named beneficiaries.
Despite the payback requirement, a first-party SNT is often essential when there’s no other option. A $300,000 settlement that would eliminate SSI and Medicaid benefits if received directly can be preserved inside an SNT while the beneficiary continues to receive healthcare and income support.
Third-party Special Needs Trusts
A third-party SNT is funded with money from someone other than the person with the disability. This is the type most families create through estate planning.
The most common scenario: parents who want to leave assets to a disabled child without disrupting that child’s SSI and Medicaid benefits. Instead of leaving a direct inheritance in a will (which would create a resource counting problem), they establish a third-party SNT that receives the assets and holds them for the beneficiary’s benefit.
Third-party trusts have some significant advantages over first-party trusts:
No Medicaid payback. Because the money never belonged to the beneficiary, the state cannot require repayment from the trust. When the beneficiary dies, whatever remains in the trust goes to whoever the trust document names as remainder beneficiaries.
No age restriction. Third-party SNTs can be established for beneficiaries of any age.
Flexibility in trust design. The family funding the trust has significant latitude in how it’s drafted, what the trustee can and cannot do, and how remaining assets are distributed after the beneficiary’s death.
For families doing estate planning, a third-party SNT is the standard tool for protecting a disabled family member’s benefits while still being able to pass assets to them. Leaving money directly without this structure is a planning mistake that often can’t be fixed after the fact.
Pooled Special Needs Trusts
A pooled SNT is managed by a nonprofit organization that combines the assets of multiple beneficiaries for investment purposes while maintaining separate sub-accounts for each person. The nonprofit acts as trustee.
Pooled trusts exist because standalone SNTs have real setup costs. An individually drafted SNT might cost $2,000 to $5,000 or more in attorney fees to create, plus ongoing trustee fees. For families with modest assets, that cost can be prohibitive.
Pooled trusts offer several advantages:
- Lower setup costs than a standalone trust
- Professional trustee management without finding and paying a private trustee
- Available for both first-party and third-party funding
- Accessible for people who have already been told a trust would be too expensive
The tradeoff is that pooled trusts are less customizable than individually drafted trusts. The nonprofit’s rules and distribution policies govern how the trust operates, and those may not align perfectly with every beneficiary’s needs.
What an SNT can and cannot pay for
SNTs are designed to supplement public benefits, not replace them. The trustee should generally avoid using trust funds to pay for things that SSI or Medicaid already covers, because doing so just substitutes trust assets for benefits without any gain.
Trust funds are typically used for things benefits don’t cover:
- Supplemental education, tutoring, or vocational training
- Recreation, travel, and social activities
- Personal electronics, appliances, and furniture
- Clothing and personal items
- Dental and vision care not covered by Medicaid
- Transportation for non-medical purposes
- Legal fees and financial planning
Cash distributions directly to the beneficiary create problems. Cash received from a trust counts as income under SSI rules and reduces the monthly SSI payment. Trustees generally pay vendors and service providers directly rather than giving cash to the beneficiary.
Housing and food are handled carefully. Trust payments for housing and food are counted as In-Kind Support and Maintenance (ISM) under SSI rules, which can reduce the SSI payment. Trustees navigate this with care, especially when the trust is paying rent or mortgage costs.
The trustee’s role
The trustee manages the trust and makes all distribution decisions. The trustee is bound by a fiduciary duty to act in the beneficiary’s best interest, and they must follow the trust document’s terms and applicable law.
A trustee can be a family member, a professional corporate trustee (such as a bank trust department or a trust company), or a nonprofit in the case of a pooled trust. Each has trade-offs.
Family member trustees often know the beneficiary best but may lack expertise in trust administration, benefit rules, and investment management. Professional trustees have expertise but charge ongoing fees, typically 0.5% to 1.5% of trust assets per year. Some families use a family member co-trustee alongside a professional trustee.
What this means for you
- If someone with a disability is about to receive a large sum of money directly, a first-party SNT can protect that money without eliminating SSI and Medicaid. Act before the money is received if possible.
- If you’re a parent or grandparent doing estate planning, a third-party SNT is how you leave assets to a disabled family member without harming their benefits. Update your will and beneficiary designations to fund the trust rather than giving directly.
- Pooled trusts are a legitimate and accessible option for families with modest assets who can’t justify the cost of a standalone trust.
- Medicaid payback is required for first-party SNTs but not third-party trusts. That distinction matters for families thinking about intergenerational transfer.
- The trustee role is significant. Choose carefully, and consider what happens if the original trustee can no longer serve.
Last updated: May 2026
This content is for educational purposes only and does not constitute legal, tax, or financial advice. Consult a qualified professional for your specific situation.