Special Needs Trusts Explained: Protecting Benefits and Providing Support

ESTATE PLANNING ESSENTIALS

If you have a loved one with a disability—whether it’s your child, your grandchild, or someone else you care for deeply—you already know what it means to advocate. You’ve made appointments. You’ve filled out forms. You’ve stood in lines. You’ve done the work to make sure that person is supported, safe, and cared for.

And when you think about the future—especially a future where you’re not around—you probably feel a mix of hope and concern. You want to leave something behind that can make their life easier. But at the same time, you may have heard that receiving an inheritance could interfere with benefits like Medicaid or Supplemental Security Income (SSI).

Unfortunately, that’s true.

The good news is, you can plan around it. With the right tools, you can build an estate plan that provides real support without putting those essential benefits at risk. In this post, we’ll walk through how that works—and how a properly designed plan can help you care for a loved one with special needs today, tomorrow, and long after you’re gone.

Why Traditional Inheritance Doesn’t Work for Someone With a Disability

It’s one of the most painful ironies in estate planning: the very people who often need the most support are the ones who stand to lose the most if they receive it the wrong way.

That’s because many public benefit programs—like Medicaid and SSI—are means-tested. To qualify, the person has to have limited income and assets. And unfortunately, those limits are extremely low. In most cases, owning more than $2,000 in countable assets can disqualify someone from receiving benefits.

And here’s the part that catches families off guard: it doesn’t matter where the money comes from. If a parent or grandparent leaves money directly to a disabled beneficiary—whether through a will, a retirement account, or a life insurance policy—the government still counts it. And once it’s counted, eligibility for those essential programs is lost.

Even well-meaning gestures can have unintended consequences. I’ve seen grandparents list a disabled grandchild as a beneficiary on an insurance policy or investment account, thinking they were providing a loving gift to a dear family member in need. But instead of providing long-term support, that grandchild gets pushed out of the programs they depend on. And securing benefits again—once disqualified—is rarely quick or easy.

This is why traditional inheritance doesn’t work in these situations. You can’t treat a child with a disability the same way you would a financially independent adult child. You have to plan differently—and intentionally—if you want your gift to help rather than harm.

What Is a Special Needs Trust?

A special needs trust (or SNT) is a legal tool that allows you to set aside money or assets for the benefit of someone with a disability—without interfering with their access to needs-based government benefits.

Here’s how it works: instead of giving money directly to the person, you place it in a trust that’s managed by someone else (called a trustee). That trustee uses the money to pay for goods and services that improve the person’s quality of life—things that aren’t already covered by Medicaid or SSI. Think dental care, therapies, assistive technology, transportation, education, hobbies, clothing, and even trips and vacations.

Because the money is in a trust and not owned by the beneficiary, it doesn’t count against them for benefit purposes. That means they can continue to receive their vital public benefits while also enjoying meaningful support from the assets you leave behind.

This isn’t a loophole or a trick. A properly drafted and administered third-party special needs trust is recognized by Social Security and Medicaid. It’s not about hiding money or working around the rules—it’s about using the right legal tools to provide support without disrupting essential benefits. In fact, if the trust is done correctly, you could hand over the entire document and show every transaction to Social Security, and the beneficiary would still maintain benefits.

And the best part? You stay in control of how the money is used. You get to write the rules of the trust, and the trustee is legally obligated to follow them.

Third-Party Special Needs Trusts: The Right Tool for Estate Planning

There are different types of special needs trusts, but for most families doing proactive estate planning, the right tool is called a third-party special needs trust.

This is a trust that you create and fund with your own money—for example, by naming the trust as a beneficiary in your will, life insurance, or retirement plan. You can set it up during your lifetime or have it spring into action at your death. Other family members—like grandparents or siblings—can also contribute to the trust, which allows the whole family to coordinate support in a thoughtful, legally protected way.

The key benefit of a third-party SNT is that there’s no Medicaid payback requirement when the beneficiary dies. Unlike other types of trusts, the remaining funds can be directed wherever you choose—often to siblings or other loved ones.

That makes it not only a smart tool—but also a generous one.

Why It Matters to Plan Ahead

Here’s the difficult truth: if you don’t plan, the law has a default. And that default doesn’t work well for someone with special needs.

Without a trust in place, your child or grandchild could end up receiving an inheritance directly—whether from a will, a life insurance policy, or a retirement account. And as soon as those assets become theirs, they’re counted against the strict financial limits used to qualify for programs like Medicaid or Supplemental Security Income (SSI). That can cause benefits to stop immediately—or even retroactively, as of the date of death—regardless of your intentions.

Losing benefits isn’t just a temporary setback—it often comes with lasting financial consequences. To regain eligibility, the beneficiary usually has to go through a spend-down, meaning they must spend the inherited money until they fall back below the asset limit. Technically, that money can be used for anything—but in practice, it often goes toward food, rent, medication, or medical care, which were already covered by SSI or Medicaid. So instead of improving their quality of life, the inheritance largely replaces existing benefits—and once it’s gone, they’re an entire social security application away from getting back to where they started.

In some cases, the money is spent hastily—sometimes even irresponsibly—just to get back under the eligibility threshold.

In more complex cases, the money may even be tied up in a court-supervised guardianship or conservatorship proceeding. That’s not the kind of legacy most parents or grandparents intend to leave behind. It’s a mess—and one that’s entirely avoidable.

There is a legal fix if someone inherits unexpectedly: a first-party special needs trust. This type of trust allows the beneficiary to shelter the inherited funds and requalify for benefits. It’s a valid solution—and one I help clients implement when necessary—but it comes with significant drawbacks. First-party trusts are more expensive, more rigid, and must include a Medicaid payback provision, meaning anything left when the beneficiary dies may go to the state instead of your family.

That’s why planning in advance with a third-party special needs trust is so important. It’s simpler to manage, offers greater flexibility, and avoids the state payback altogether. Best of all, it allows your loved one to keep their benefits while also enjoying real, lasting support—just as you intended.

Choosing the Right Trustee: Family or Professional?

Of course, setting up the trust is just one piece of the puzzle. Once the legal structure is in place, someone still has to manage it—making distributions, keeping records, and following the rules that keep your loved one’s benefits safe. That responsibility falls to the trustee. And choosing the right person for that role can make all the difference in how well your plan actually works.

This can feel like a big responsibility, and it is. But it’s also a role that can be shaped to fit your family’s needs and dynamics.

Unlike other planning situations—like managing an inheritance for a child with addiction—special needs planning often has a spirit of cooperation. The beneficiary understands that the trustee is there to help them, not control them. And since the trust can be used freely for all kinds of support (as long as it follows benefit rules), there tends to be less tension and resentment between the disabled beneficiary and their trustee.

In fact, in many families, it works very well to name a sibling or close relative as trustee. That person knows your child, cares deeply, and can work closely with them to understand what they need.

That said, the trustee must be careful. Using the trust improperly—like giving cash directly to the beneficiary, or paying for expenses the wrong way—can put public benefits at risk. And while the rules aren’t impossible to follow, they do require attention to detail.

Because of that, some families choose to name a professional trustee—like an attorney, fiduciary, or trust company. These professionals bring experience, neutrality, and peace of mind. They know how to manage distributions in a way that keeps benefits intact. And for families who want to keep the emotional and financial roles separate, that can be a huge relief.

In some cases, you can even pair the two: have a professional manage the legal side of things, while a trusted family member serves as a co-trustee or informal advisor. That way, you get the best of both worlds.

In many cases, it also makes sense to include your loved one in the conversation—especially if they’re able to understand and express preferences about who they trust. Giving them a voice in selecting a trustee (or even just sharing your thinking with them) can help build confidence and reduce anxiety about the future. It reinforces that the plan isn’t just being made for them—it’s being made with them. That sense of inclusion can go a long way in making the transition smoother for everyone involved.

Coordinating With the Rest of Your Plan

Setting up a special needs trust is a major step—but it’s not the only one. To make the plan work smoothly, you’ll need to coordinate a few other parts of your estate plan.

First, make sure your beneficiary designations are correct. Do not name your loved one with special needs directly on your life insurance, retirement accounts, or bank accounts. Instead, name the special needs trust as the beneficiary.

Second, make sure your will and/or trust documents clearly direct assets to the special needs trust—not to the individual.

Third, include a pour-over will in your plan. This ensures that any forgotten assets (like an old account or a car title) get moved into the trust after you pass away—even if they weren’t properly retitled during life.

Finally, be sure your financial power of attorney allows your agent to create, fund, or amend a special needs trust on your behalf if something happens to you. This can be a critical safety net if the trust needs to be funded before your death.

Planning for the Long-Term

Caring for someone with special needs is a lifelong journey. And while the special needs trust provides the legal structure, you may also want to provide guidance—the emotional blueprint for how you want your loved one to be cared for.

Many families write a letter of intent—a document that lives outside the trust but provides essential context. It can include things like daily routines, medical needs, preferred providers, values, goals, hobbies, and anything else you’d want future caregivers or trustees to know.

You should also name backup trustees—people or professionals who can step in if your first choice can’t serve. And you may want to build in regular review points to update the trust if your loved one’s needs change.

An effective special needs plan doesn’t just pass on money. It passes on clarity, support, and peace of mind.

Final Thoughts

Creating an estate plan for someone with special needs is an act of love—and of courage. It means acknowledging that you won’t always be there, and choosing to act now so your child or grandchild will be protected later.

The good news is, you don’t have to do it alone. With the right guidance, you can create a plan that provides not just financial security, but dignity, opportunity, and a lasting expression of care.

Your family deserves a plan that works—not just in theory, but in real life. And your loved one with special needs deserves to be protected, supported, and included in that plan, every step of the way.

Need Help with a Special Needs Trust? If you’re ready to create a plan—or just want to understand your options—we’d be honored to help. Reach out to schedule a consultation, and let’s make sure your plan truly reflects the love you have for your family.

By Justin J. Wall, Esq.

Trusts & Estates Attorney

Utah and Arizona