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Structured Settlements

Special Needs Trusts:

What They Are and How They Can Help You

If you have a disability that prevents you from working, you may qualify for government benefits such as Supplemental Security Income (SSI) and Medicaid. However, these programs have strict income and asset limits that vary by state. To maintain eligibility, individuals must adhere to these financial restrictions.

A Special Needs Trust (SNT) is a valuable tool that allows individuals with disabilities who cannot work to safeguard their assets while preserving their eligibility for SSI and Medicaid. Without this type of trust, any direct financial gifts or income—such as cash from family or friends—could reduce or even eliminate these benefits.

What Is a Special Needs Trust?

A Special Needs Trust (SNT) is a legal arrangement designed to hold funds or assets for the benefit of a person with a disability. Under federal law (42 U.S.C. 1396), these trusts protect assets from being counted when determining eligibility for SSI and Medicaid.

An SNT can hold various types of assets, such as investment accounts, real estate, and personal property. There are two common types of Special Needs Trusts:

  • Individual Special Needs Trusts: These typically have their own Tax ID.
  • Pooled Special Needs Trusts: These are managed collectively by a nonprofit organization and are linked to the beneficiary’s Social Security number. Pooled trusts often offer lower tax rates than individual trusts.

The Role of a Trustee

For a Special Needs Trust to be valid, it must have a trustee - a person or organization responsible for managing and distributing trust assets without jeopardizing government benefit eligibility. Trustees are required to:

  • Oversee and invest trust assets.

  • Ensure distributions comply with benefit regulations.

  • Verify that all funds spent directly benefit the trust beneficiary.

A trustee can be:

  • A corporate trustee (e.g., a bank).

  • An individual trustee (e.g., a family member or professional fiduciary).

  • A nonprofit association (e.g., a Pooled Trust provider).

The Role of a Trustee

The cost of trustee services varies:

  • Corporate trustees typically charge at least $6,000 per year.

  • Pooled Trust providers usually charge 2-3% of assets under management.

  • Private fiduciaries may bill hourly or charge a percentage of assets.

  • The National Charities that we recommend have trustee fees range from $50 to $100 per month.

How Payments from a Trust Work

Trust disbursements are governed by regulations set by the Social Security Administration (SSA) and the Department of Healthcare Services (DHCS), and these rules vary by state.

Key Guidelines for Trust Disbursements:

  • The trustee cannot make direct payments to the beneficiary.

  • Disbursements must directly benefit the trust beneficiary.

  • Funds cannot be used for anything that could compromise eligibility, such as unrestricted cash payments.

  • Emergency distributions that may affect benefits are only permitted under strict circumstances.

Examples of Allowable Expenses:

  • Caregiver assistance

  • Personal care (e.g., haircuts, nail care)

  • Entertainment (e.g., movie tickets)

  • Clothing purchases

  • Phone bills and electronic devices (e.g., TVs)

  • Medical and insurance expenses

  • Pet care

  • Home modifications and furniture

Your trustee should be experienced in managing distributions to ensure compliance with benefit rules. If you are unsure whether a particular expense is permitted, always consult your trustee first.