Note: this article is not intended to provide investment, legal, tax, or accounting advice. Before making decisions with investing, legal, tax, or accounting ramifications, you should consult appropriate professionals for advice that is specific to your situation.

For families and fiduciaries supporting a person with a disability, public benefits like Medicaid and Supplemental Security Income (SSI) are more than just paperwork — they’re what make everyday care possible. But because these programs are “needs-based,” even small financial changes can have significant consequences.

A well-meaning gift, an inheritance, or a settlement can unintentionally put someone over eligibility limits and trigger a loss of essential coverage. Special needs trusts (SNTs) exist to help avoid that kind of disruption, allowing people with disabilities to maintain access to critical benefits while still receiving financial support that improves their quality of life.

Qualifying for Medicaid and SSI

In most cases, Medicaid and SSI limit recipients to no more than $2,000 in countable resources for an individual (although some states apply different resource limits for Medicaid.) And SSI recipients must also meet specific disability or age requirements.
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In many states, qualifying for SSI automatically qualifies a person for Medicaid. Other states expanded Medicaid eligibility under the Affordable Care Act, allowing individuals to qualify based on income alone.

However, if the person needs long-term care services or home- or community-based services (HCBS) waivers, they often must still meet strict resource limits. In these situations, a SNT can be essential.

Because Medicaid and SSI are highly sensitive to changes in income and assets, even well-intentioned financial support can cause problems. For example:

• A direct inheritance left to an adult with a disability could push them over eligibility limits
• A personal injury settlement deposited into the individual’s bank account may count as a disqualifying resource

Without proper planning, these events can result in a sudden loss of benefits.

How Special Needs Trusts Help Protect Benefits

A special needs trust is designed to prevent these unintended consequences. When assets are placed in a properly structured SNT, they are generally not counted for purposes of Medicaid or SSI eligibility because the funds are held by the trust — not directly by the beneficiary — and the trust meets specific legal requirements.

The trustee manages the funds and uses them to pay for goods and services that supplement, rather than supplant, public benefits. This distinction is critical. Improper distributions — especially cash given directly to the beneficiary — can count as income and reduce or jeopardize benefits.Trustees must follow strict distribution rules and may need to provide regular reports to state Medicaid agencies.Common supplemental expenses paid by an SNT may include:

• Education or vocational training
• Recreation and enrichment activities
• Medical or dental care not covered by Medicaid
• Personal services that improve daily quality of life

Trustees play a central role in protecting eligibility. Their responsibilities typically include:

• Exercising full discretion over distributions
• Ensuring all payments comply with SSI and Medicaid rules
• Keeping detailed records of trust activity
• Providing required reports to state Medicaid agencies

Careful administration is just as important as proper trust setup.

Types of Special Needs Trusts

The three common types of special needs trusts are first-party, third-party, and pooled SNTs.

• First-party special needs trust. This type of trust is funded with the beneficiary’s own assets, such as an inheritance or lawsuit settlement. It must include a Medicaid payback provision.
• Third-party SNT. Third-party SNTs are funded with assets belonging to someone other than the beneficiary (such as a parent). It does not require a Medicaid payback and is often used as a key part of a loved one’s estate plan.
• Pooled trusts. These trusts are managed by a nonprofit organization that manages assets in a common fund for many beneficiaries.

With a first-party SNT, federal law requires that upon the death of the beneficiary, remaining funds must first be used to repay any state Medicaid program for benefits paid during the beneficiary’s lifetime. This Medicaid payback requirement is the biggest difference between first- and third-party SNTs. If assets remain after payback, then they can be distributed to secondary beneficiaries.

A Tool for Protection and Stability

Special needs trusts allow people with disabilities to receive supplemental financial support while maintaining access to vital public programs. For those who rely on Medicaid and SSI, receiving an inheritance or settlement doesn’t have to mean losing benefits. A properly drafted and administered SNT can protect their eligibility while improving their quality of life.

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