Special needs trusts — when and why

If you have a child, sibling, or other family member who relies on Supplemental Security Income (SSI) or Medicaid, leaving them money outright in your will is one of the most painful planning mistakes — because what feels generous becomes destructive. SSI and Medicaid have asset limits around $2,000. An inheritance over that disqualifies the beneficiary until they spend down the assets. The thing you tried to do for them ends up costing them the benefits that pay for their care.

The fix is a special needs trust. Plain English: you leave the money to a trust, the trustee can spend it on the beneficiary's behalf for things SSI/Medicaid don't cover, and the principal isn't the beneficiary's asset. Benefits stay intact. Quality of life improves.

What an SNT actually pays for

The trustee can pay for things SSI and Medicaid don't cover. Common examples:

• Education and tutoring
• Recreation, hobbies, and entertainment (gym membership, museum passes, streaming services)
• Travel and vacations, including a companion's travel costs
• A computer, phone, and internet
• Personal care attendants beyond what Medicaid covers
• Therapy not covered by insurance
• Professional services (financial advisor, attorney)
• Furniture and home improvements that benefit the beneficiary
• A pre-paid funeral plan

What an SNT typically doesn't pay for: cash to the beneficiary (counts as income), food and shelter (which can reduce SSI by up to one-third), or anything that would replace SSI's purpose. The rules are technical and the trustee needs to actually understand them — this isn't a "set it and forget it" trust.

Two flavors: first-party and third-party

The terms sound similar; the legal consequences are different.

Third-party SNT — funded with someone else's money. The most common scenario: parents leave money in trust for their disabled child. The funds were never the beneficiary's, so SSI/Medicaid don't reach them. At the beneficiary's death, the remaining trust assets go to whomever the parents named (often siblings, charities, or a memorial fund). No payback to the state.

First-party SNT (also called a self-settled SNT or d4A trust, after 42 U.S.C. § 1396p(d)(4)(A)) — funded with the disabled person's own money. Common scenarios: a personal-injury settlement, an inheritance that was wrongly left to them outright, accumulated savings from before disability. Same protective effect during life — the assets don't count for SSI/Medicaid eligibility — but at the beneficiary's death, Medicaid is paid back first for the benefits it provided. Whatever's left goes to the beneficiary's heirs.

A pooled SNT (d4C) is a variant of the first-party SNT managed by a nonprofit, where many beneficiaries' funds are pooled for investment but accounted for separately. Useful when funds are too small to justify a standalone trust.

How to set up a third-party SNT

A third-party SNT can be created two ways:

• Inter vivos (during life) — you create and fund the trust now. Helpful if you want to start contributing immediately, want grandparents to also contribute, or want the beneficiary's care plan running before you die.
• Testamentary (in the will) — your will creates the SNT at your death and directs assets into it. Simpler, no setup cost during life, but no flexibility to fund early.

Most families choose testamentary unless they have specific reasons to fund earlier. A standalone SNT during life requires a separate tax ID, annual tax returns, and trustee fees. A testamentary SNT defers all of that until the trust actually has assets.

Choosing a trustee

The trustee makes or breaks the SNT. The role requires three things:

1. Knowing the beneficiary — what they like, what helps them, what would feel demeaning if denied.
2. Understanding the rules — knowing when a payment will reduce SSI and when it won't, and how to apply for re-eligibility if benefits ever lapse.
3. Being available for decades — the SNT often runs for the beneficiary's whole life.

A family member who knows the beneficiary best may not understand the rules. A professional trustee (a bank trust department, a nonprofit pooled trust, or a private fiduciary) understands the rules but doesn't know the beneficiary. The common solution: name a co-trustee structure where a family member directs the spending decisions and a professional trustee handles the rules and paperwork. Or name a family member as trustee and require them to use a special-needs-trust attorney for any non-routine question.

ABLE accounts as a complement

ABLE accounts (created under the Achieving a Better Life Experience Act, 2014) are tax-advantaged accounts the disabled person owns directly. Up to $18k/year (2026, more if working), up to $100k total without affecting SSI eligibility. ABLE accounts complement SNTs — they let the beneficiary control day-to-day spending without losing benefits, while the SNT handles the bigger picture.

A common pattern for a child with disabilities:

• ABLE account in the child's name, contributed to by family members and the child themselves up to the annual limit
• Third-party SNT funded by the parents' will at death
• Testamentary letter of intent describing the child's preferences, needs, and "what would mom have wanted"

Why this isn't a generic-template situation

Standard wills don't include SNT provisions. The drafting needs to be precise — wrong language, and the trust might count as the beneficiary's asset. This is one of the few areas where DIY estate planning genuinely isn't enough; either your platform offers an SNT-included template (the way Trustwise's roadmap does) or you work with a special-needs attorney directly.

If you have a beneficiary who needs an SNT, do not rely on a generic will — even a well-drafted one. The cost of getting this wrong is the loss of benefits the beneficiary depends on for the rest of their life.