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What is a special needs trust?

If you’re caring for a loved one with special needs or disabilities, planning for their future care and support can feel overwhelming, especially when thinking about what happens after you’ve passed away. It’s important to remember that many needs-based government disability programs have income and asset limits. So, something like an inheritance or financial gift could increase your loved one’s total asset value above the limits and harm their eligibility for assistance. 
Learn how a special needs trust can help pay for your loved one’s long-term care while helping bring you peace of mind. 

What is a special needs trust?

A special needs trust is a legal financial entity set up to hold assets for the future care of your loved one with disabilities or special needs, while preserving their benefits. This type of trust is highly specialized and must conform with very specific requirements. 
It’s also important to know any earnings don’t grow tax-deferred, and the assets may be subject to taxation. 

Special needs trust spending rules

In general, you can use distributions from a special needs trust to pay for a variety of supplemental needs as established in the terms of the trust. A few things to note: 
  • You can’t use the assets to provide the beneficiary with cash or cash-like instruments, like gift cards or prepaid credit and debit cards. 
  • You may want to consider using the trust assets on things other than basic living expenses, like housing and food, since the beneficiary's Supplemental Security Income (SSI) or other public assistance programs typically cover these expenses. 
  • When drafted and used correctly, assets in a special needs trust typically don’t affect Medicaid or SSI benefits.  
Consider consulting an estate planning attorney about your specific circumstances and to determine the best trust option for your situation. 

Types of special needs trusts

There are 3 main types of special needs trusts, and the type of trust usually depends on who’s funding it. The most common types include: 
First-party special needs trust 
First-party special needs trusts are an irrevocable trust that must be established by a parent, grandparent, or guardian of the person with disabilities (disabled beneficiary), or by the court.  
The trust must be funded with the disabled beneficiary's assets (for example an inheritance or settlement), and the disabled beneficiary must be under age 65 when the trust is set up.  
It’s also important to know, upon the death of the disabled beneficiary any remaining assets in the trust are potentially subject to the repayment of medical assistance benefits received by the disabled beneficiary during their lifetime. 
Third-party special needs trust 
Third-party special needs trusts are established and funded by a donor, the person who contributes money to the trust using assets that were never owned by the person with disabilities (disabled beneficiary). 
In general, the trust assets may be used for most supplemental needs of the disabled beneficiary. Additionally, upon the death of the disabled beneficiary the donor has control over the distribution of any remaining trust assets. 
Pooled special needs trust 
Pooled special needs trusts are established and managed by a nonprofit organization, and the person with disabilities (disabled beneficiary) creates an account within the pooled special needs trust. Within the trust, the funds are pooled and the disabled beneficiary is entitled to a proportionate share of the assets.  
Individuals of any age may participate in a pooled special needs trust, unlike a first-party special needs trust. Consider consulting with an estate planning attorney to determine if there are any asset transfer restrictions in your state. 
Like a first-party special needs trust, upon the death of the disabled beneficiary any remaining assets in the trust are potentially subject to the repayment of medical assistance benefits received by the disabled beneficiary during their lifetime. 

How to set up a special needs trust

There are some very important considerations, including tax, estate, and special needs planning consequences, to keep in mind when selecting and establishing the most appropriate special needs trust for your loved one. Consider consulting with a qualified estate planning professional regarding your specific circumstances. 

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Planning for loved ones with disabilities

Your family's challenges are unique, so you need strategies that can help meet your needs. Learn about strategies for long-term planning and how to avoid some common mistakes that could impact government benefits.

This information is general in nature and provided for educational purposes only.

Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.