All parents worry about helping their children grow into happy, independent adults. But parents of a child with special needs have an added concern: Ensuring their child is protected financially after they’re gone.

For many, a special needs trust is a key part of a long-term financial plan for a child who has physical or intellectual disabilities. So, what is a special needs trust?


A special needs trust enables parents and other family members or friends to set aside money for a child’s future needs without impacting his or her ability to qualify for Medicaid and Supplemental Security Income (SSI) benefits later on.

There are two reasons to create a special needs trust. The first is to help ensure money set aside is used to support your loved one. Typically, that includes funds to pay for non-covered medical and dental needs, special classes and education, travel and entertainment, and other items and experiences that can enhance your child’s quality of life.

The second reason is to protect your child’s ability to qualify for government programs such as Medicaid and/or Supplemental Security Income (SSI) once he or she reaches adulthood (typically age 18). This is significant because both Medicaid and SSI limit the amount of assets a person with special needs can have in his or her name at any one time to $2,000. Currently, assets transferred to a special needs trust aren’t counted toward that threshold.

To support different needs, there are two main types of special needs trusts. Both are designed to provide financial management and protection for a person with disabilities. The key difference between the two types of special needs trusts is the source of their funding.

1. First-Party Special Needs Trusts are funded with the beneficiary’s own assets. For example, let’s say the individual with special needs receives a significant personal injury award, money from a divorce settlement or an inheritance — those assets can be transferred to a first-party special needs trust. The person with special needs can use that money without jeopardizing his or her eligibility for ongoing Medicaid or SSI benefits. However, first-party special needs trusts include a payback provision. Basically, when the beneficiary dies, the government is entitled to receive reimbursement for any federal dollars paid to the person over his or her lifetime.

2. Third-Party Special Needs Trusts are funded with assets from parents, grandparents or other family members and can include proceeds from life insurance on the parents or other family members. A trustee is named when the trust is created, and instructions are provided by the trust creator (typically parents or grandparents) for how the money should be used. Because the assets go straight from the trust creator to the trust, third-party special needs trusts don’t have a payback provision; any assets left after the individual with special needs dies can be distributed according to the terms of the trust to siblings or other relatives.

An important thing to keep in mind: Each type of special needs trust has different rules. For example, a first-party special needs trust can hold only assets that belonged to the person with special needs. No one else can add to the account. Conversely, anyone can contribute to a third-party special needs trust — anyone, that is, except the person with special needs.

If you’d like to put a financial plan in place to help ensure your loved one is cared for, a financial advisor can help you with your individual situation.

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