Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Jun 19, 2018

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If you have a disabled relative or close friend, there is some important information you should have regarding special needs trusts (SNT). A special needs trust (sometimes called supplemental needs trusts) is a legal document created for a person who, because of physical or mental disability, or chronic or acquired illness, at under age 65, is receiving federal and state government benefits for medical care and daily living needs, such as Supplemental Security Income (SSI), Medicaid, vocational rehabilitation, subsidized housing and others. The purpose of this type of trust is to provide a source of funds, such as those that are inherited, without disqualifying the beneficiary from receiving these government benefits. The trust funds are used for supplemental care, over and above what the government benefits provide.

Who can set up a special needs trust for a disabled individual depends on the type of special needs trust. There are three main types: Family Trust, Pooled Trust and Court-Ordered Trust.

Family-Type Special Needs Trust

By far, this is the most common SNT you will find. The parents provide the money to set up the trust either during their lifetime in a living or inter vivos trust, providing in the trust that the disabled son or daughter is the beneficiary; or, after they die, by directing its creation in their will. If it’s a living trust, it becomes effective immediately, and anyone, including grandparents, aunts, uncles, and even friends, can give money to the trust by either writing a check or including the trust as a beneficiary in their will. Parents often purchase a life insurance policy payable to the trust, as well. The only person who cannot place money into this type of trust is the disabled person.

The key to a family special needs trust is that the money cannot be used for housing, food, or clothing. Those are considered basic needs under SSI laws. If the disabled person is receiving free housing, food or clothing from someone else, including a family member or a trust, then the government benefits will be reduced or eliminated.

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Pooled Trust

Although anyone can put money into a pooled trust—parents, grandparents, friends, or even the individual with the disability (the beneficiary)—this type of trust must be established by a non-profit-association. The trust pools the funds of many beneficiaries, manages and invests them. The funds are pooled, but each beneficiary has his or her own account. An advantage of pooled trusts is that they are willing to handle much smaller accounts than a bank or trust company, so people of modest means can have access to sophisticated trust services. A disadvantage of pooled trusts is that the non-profit has control of the disbursements. Like a family-type trust, the pooled trust is there to pay only expenses outside of the basic care provided by government benefits. Any money left in the trust after the beneficiary dies stays in the trust to help others with disabilities.

Court-Ordered Special Needs Trust

A court-ordered trust, also referred to as a Type A special needs trust, is used only for special circumstances, such as where the disabled person has inherited money or received a court settlement and that money would otherwise disqualify them from receiving government benefits. A court-ordered trust can be set up by the parents, grandparents, legal guardian, or the court itself. To qualify, the disabled person has to be under 65 years old and meet the medical standards of Social Security, in terms of the disability. The trust has to specify that after the disabled person has died, any funds remaining will be used to pay back the state of residence for whatever medical assistance the government provided to the individual after the trust was set up.

Special needs trusts are very complicated, legally binding documents. If you have questions about creating this type of trust, it would be wise to consult a qualified trust attorney who has experience establishing special needs trusts.

For more information about special needs trusts, refer to the following articles: