What is a Special Needs Trust?

A Special Needs Trust is a very beneficial tool (or vehicle, we might say) that can dramatically improve the quality of life for someone who receives one or more public benefit programs like Medicaid or Supplemental Security Income (SSI).

A Special Needs Trust is a very specific kind of trust that offers the option of keeping someone eligible for public benefit programs while also receiving the benefit of a supplemental fund.  This supplemental fund can pay for an entire range of services and goods that are not covered by public programs.

Special Needs Trusts can be established with funds that belong to the person who is receiving public benefit programs or with funds that belong to someone else such as one or more family members.

Different rules apply depending on whose funds are used to establish the Trust, the person benefitting from the Trust or a third party (parents, friends, community).  There are several kinds of Special Needs Trusts with different names, but they all share the common trait of maintaining the beneficiary’s eligibility for asset-tested public benefit programs.  Just keep in mind that there are only three different kinds of Special Needs Trusts.

Trusts that are funded by family members of the Trust beneficiary are normally called Third Party Special Needs Trusts to indicate that the assets funding the Trust originally belonged to someone other than the Trust beneficiary.  This might be a Special Needs Trust established by parents (the grantors) for a special needs child or adult. The third party trust can be created via a trust or will (testamentary) or during the lifetime of the grantor.

By contrast, Trusts that are funded by the Trust beneficiary are often referred to as Self-Settled Special Needs Trusts to indicate that the assets funding the Trust originally belonged to the Trust beneficiary. Self-settled trusts, at least currently for now, use money that belongs to the special needs adult, but only a parent, grandparent, guardian, or court can establish the trust. There is currently legislation under consideration to correct this and allow a special needs adult to establish his or her own trust.

Self-Settled Special Needs Trusts come in two varieties, non-Pooled and Pooled.  A non-Pooled Special Needs Trust is established for one Trust beneficiary, and the Trustee can be anyone who is qualified to act as Trustee.  This is the kind of Trust most people refer to when they use the term Special Needs Trust.  However, a lot of the confusion about Special Needs Trusts comes from the fact that many people use the term generically without a clear understanding of the differences between Trusts.  It is ok to use the term generically, but it is also important to have a good understanding so you do not perpetuate any confusion.

A Pooled Special Needs Trust is also established for one Trust beneficiary, but the Trustee cannot just be anyone who is qualified to act as Trustee.  By contrast, Pooled Trusts must be established and administered by a non-profit association, such as a community foundation.

Now to summarize for clarity, here are the three basic types:

Third Party Special Needs Trusts, which are funded with the assets of someone other than the Trust Beneficiary;

Non-Pooled Special Needs Trusts, which are funded with assets belonging to the Trust beneficiary; and,

Pooled Special Needs Trusts, which are also funded with assets belonging to the Trust beneficiary.