Special needs trusts, also called supplemental needs trusts, are a solution for adults with disabilities who want to protect access to public benefits like Supplemental Security Income (SSI) and Medicaid. These benefits are needs-based, which means they are only available to people with very low income and resources. Generally speaking, to qualify for SSI financially, a beneficiary must have less than $2,000 in cash or other assets, except they may own one home and one car of any value, that do not count as resources. Disabled people who qualify for SSI financially automatically receive Medicaid. The SSI benefit is a set amount nationwide, $943 per month in 2024, which most people find is not enough to live on. What happens when an individual has significant resources, such as from a legal settlement, or their family wants to provide for them? Social Security’s rules would count any funds provided as income and/or resources, and the individual would not be eligible for benefits. Special needs trusts are a way of setting aside assets for the benefit of the individual. A trust creates a situation where money or property are not owned or controlled by the individual, but can be used for their benefit. Thus, the disabled person can receive financial help while still qualifying for public benefits. Another solution, ABLE accounts, can also help address this problem. Here’s how these solutions can work for your family.
It’s important to understand the different benefits available to people with disabilities, and the requirements for each.
Supplemental Security Income: Supplemental Security Income (SSI) is one of the types of benefits available to people with disabilities. Unlike Social Security Disability Insurance (SSDI), there is no requirement that the individual has worked or paid taxes into the Social Security system. The benefit is a set amount, $943 per month in 2024. This program is needs-based and is only available to people with very limited income and resources.
Medicaid: Medicaid is health insurance provided by the government for people with limited income and resources. People who receive SSI, because they are disabled under Social Security’s rules and meet the financial need requirements, also receive Medicaid automatically.
Social Security Disability Insurance: Social Security Disability Insurance (SSDI) is the other major type of disability benefit available from Social Security for people with disabilities. Unlike SSI, people earn their entitlement to SSDI through the taxes they pay into the Social Security system, just as with Social Security retirement benefits. The monthly benefit amount is different for each person, depending on how much they paid in. SSDI is not a needs-based program, so people can receive this benefit regardless of their other income and resources.
Childhood Disability Benefits: Childhood disability benefits (CDB), also called disabled adult child (DAC) benefits, are a third type of benefit available for many adults with disabilities. These are referred to as child benefits because they are based on the Social Security earnings of the parents of the disabled adult. To receive this type of benefit, a parent of the disabled adult must be receiving Social Security retirement or disability benefits, or be deceased, and the individual must have become disabled before the age of 22. Many people who have been disabled since childhood will receive SSI for a large part of their adulthood, and then will qualify for CDB when their parent retires, becomes disabled, or passes away; in this case the person will not lose their SSI-linked Medicaid, as long as they continue to meet the applicable income and resource limits. CDB benefits are based on the earnings of the parent, and the adult child can receive up to one-half of the parent’s benefit if the parent is retired or disabled, and up to three-quarters of the parent’s benefit if the parent is deceased. Because CDB is based on the parent’s Social Security earnings, this program is not needs-based and there are no income or resource limits.
Medicare: Medicare is government health insurance provided to people who are age 65 or older, or disabled. People who receive SSDI or CDB benefits qualify for Medicare automatically, two years after they become eligible for SSDI or CDB benefits. Medicare is not needs-based and there are no income or resource limits.
A special needs trust is a way to help people with disabilities qualify for needs-based benefits like SSI and Medicaid, while still being able to receive help from family members, or from funds that were their own but have been placed in trust. Any trust will have three roles: the grantor, the trustee, and the beneficiary.
Grantor: The grantor is the person who provides the money or property that will be held in trust. This may be the disabled individual, in the case of a first-party trust, or a family member or other person, in the case of a third-party trust.
Trustee: The trustee is the person who controls the funds or property held in trust, and uses or distributes them for the benefit of the beneficiary. Often in the case of a third-party trust, the grantor and the trustee are the same person, as when parents want to set aside money or property for their disabled adult child. A trust will provide for a successor trustee, perhaps a sibling of the disabled adult child. In the case of a first-party trust, where the funds are provided by the disabled individual, the trustee will be someone else, because the beneficiary cannot also be the trustee in any case.
Beneficiary: The beneficiary is the disabled individual who the trust is intended to help. Although the money or property in the trust is not owned or controlled by the beneficiary, it must be used for their benefit.
A special needs trust can own money or other property. Two important ways an SNT can help someone with a disability are by funding their supplemental needs, and by owning the home they live in.
Funding Supplemental Needs: A special needs trust can provide for some of a disabled individual’s needs, as long as certain rules are followed. The most important thing to be aware of is that Social Security considers that SSI benefits are provided to assist with a person’s basic needs, like food and shelter. So if these needs are being met by someone else, including by a special needs trust, Social Security determines that the person does not needs their full SSI benefit. Money provided for basic needs will reduce or eliminate the SSI benefit. Therefore, the special needs trust should only fund the individual’s supplemental needs, which can include things like clothing, household goods, electronics, vacations, entertainment, education, and vehicle maintenance. Internet, cable, and phone services can also be paid with special needs trust funds, as they are not defined as shelter expenses. It’s important to note that if a special needs trust provides money directly to the beneficiary for these services, or reimburses them, this will be considered income to the beneficiary, which will reduce their SSI benefit. Instead, the special needs trust needs to pay the vendor directly, or the individual can pay with a credit card and the special needs trust can pay the bill. Since family members can also provide for supplemental needs in this way while they are alive, often a special needs trust is set up primarily for the purpose of receiving an inheritance when the parents of a disabled individual pass away. A special needs trust can be an ideal way to provide supplemental needs for a person with a disability, but if this is the only goal, an ABLE account may be an adequate solution, and ABLE accounts are much easier to create and administer than special needs trusts (see below).
Providing a Home: Many people find it impossible to live on the very low SSI benefit, which is $943 per month in 2024. Often the family of a disabled individual will want to provide them with a home to live in, either by having the person live with them, or allowing them to live in another home they purchase. However, this can create problems for their benefits. If the disabled individual does not pay rent, or pays less than fair market rent, Social Security will determine that they are receiving “in-kind support and maintenance,” and reduce their benefit. This is often the case, as the cost of housing is such that fair market rent is unaffordable on the very low SSI benefit. Social Security applies its “presumed maximum value” rule, and reduces the individual’s SSI benefit by one-third. In many cases, this is actually a generous rule, as the fair market rent for the home would be much higher than one-third of the SSI benefit, and because the person is still receiving some amount of SSI, their SSI-linked Medicaid benefit is not affected. But eliminating one-third of the SSI benefit, over the course of a lifetime, can be a significant loss. Families may want to solve this problem by giving the disabled individual ownership of the home. This would seem to solve the problem, since SSI beneficiaries can own one home and one vehicle of any value, which are not counted as resources for SSI financial eligibility. But this creates another problem: the Medicaid “claw-back” provision, which allows the Medicaid program to be reimbursed from a disabled person’s estate when they die. This can significantly affect a family’s wealth. Instead, the property can be titled in the name of the special needs trust. This solution addresses both issues: Medicaid cannot be reimbursed from the disabled person’s estate when they die, because they were never the legal owner of the property, but Social Security considers them to be a beneficial owner of the property while they are alive, so they are living in their own home, which does not count as a resource for SSI financial eligibility.
There are two main types of special needs trusts, defined by who provides the initial money or other property to fund the trust. A first-party trust is funded by the disabled individual’s own funds, and a third-party trust is funded by someone else, such as the individual’s family. Although the terms special needs trust and supplemental needs trust can be used interchangeably, here I will follow the convention of referring to first-party special needs trusts and third-party supplemental needs trusts, which helps to distinguish the two types. Either type of trust can be part of a pooled trust, also discussed below.
First-Party Special Needs Trusts: A first-party special needs trust, also called a self-settled special needs trust, is funded by the beneficiary’s own property, or property they will become legally entitled to, often from an inheritance or a legal settlement. This type of trust is authorized by federal law, 42 U.S.C. § 1396p(d)(4)(A) for individual first-party special needs trusts, and 42 U.S.C. § 1396p(d)(4)(C) for pooled first-party special needs trusts; thus they may be referred to as d4A or d4C trusts. A first-party special needs trust must be for the beneficiary’s sole benefit, and can be established by the beneficiary’s parent, grandparent, legal guardian, or a court, or by the beneficiary themselves, if they are mentally and legally competent. This type of trust can only be established if the beneficiary meets the governments’ definition of being disabled (which they will generally meet if they are receiving SSI benefits or Medicaid based on their disability), and is under 65 years old. An important aspect of this type of trust is that after the beneficiary’s death, Medicaid is entitled to be repaid up to the total amount spent by Medicaid for the beneficiary during their lifetime, and the trust language must specify this. This is a drawback for first-party SNTs, but it is unavoidable when the trust is funded with assets that are the property of the beneficiary.
Third-Party Supplemental Needs Trusts: A third-party supplemental needs trust is funded by people other than the beneficiary, usually family members, and often as part of the family members’ estate plans. This type of trust may be designed to only come into existence upon the death of the grantors, or it may be created independently, as a stand-alone SNT, while the grantors are alive. A stand-alone SNT allows other people, such as grandparents, to contribute to the trust. A third-party SNT may be revocable by the grantors, but the beneficiary cannot have the power to revoke it, or the funds will be considered a resource for eligibility for benefits. Upon the beneficiary’s death, this type of trust is not required to reimburse Medicaid for benefits received. Thus it is a good way for the grantors to provide for the beneficiary during their lifetime, while designating where the assets will go after the beneficiary’s death.
Pooled Special Needs Trusts: A pooled special needs trust can be either first-party or third-party, and can be used when the trust does not need to hold title to real property, and the funds to be contributed are less substantial, usually less than $250,000. This type of trust is established and administered by a non-profit organization, such as the Colorado Fund for People with Disabilities. The organization pools the money of many beneficiaries for investment purposes, and maintains sub-accounts for each individual beneficiary.
ABLE accounts are a relatively new, flexible tool for providing for the basic and supplemental needs of individuals with disabilities without jeopardizing eligibility for benefits. Authorized by the Achieving a Better Life Experience (ABLE) Act in 2014, ABLE accounts are available to individuals who became disabled before the age of 26. It is not necessary for account holders to have been receiving disability benefits before they turned 26, but they must have had a diagnosis from a doctor and similarly severe impairments at that time. An ABLE account may hold a balance of up to $100,000, which does not count as a resource for the purposes of SSI and Medicaid. Anyone, including the account holder or family members, may contribute funds to their ABLE account, but the total contributions from all sources annually cannot total more than the IRS gift tax exclusion amount, which is $18,000 in 2024. Distributions to the account holder do not count as income for SSI and Medicaid purposes, if they are for “qualified disability expenses.” This is a very broad standard that includes any expenses that result from living with a disability and that improve the account holder’s quality of life. Importantly, this may include basic needs like food and housing, as well as supplemental needs like personal and household goods, vacations, entertainment, and education.
ABLE accounts are federally tax-advantaged. They work like Roth IRAs or 529 education savings plans: contributions are not federally tax-deductible, but earnings and withdrawals are tax-free. (Contributions are deductible from Colorado state income taxes.) ABLE accounts can include investments in stock and bond funds, and a checking account with a debit card. In Colorado, ABLE accounts are managed by Colorado ABLE, and checking accounts are provided by Fifth Third Bank.
Because family members can contribute to an individual’s ABLE account, and the funds can be spent on basic needs as well as supplemental needs, an ABLE account can be more flexible than a special needs trust when family members want to help someone with a disability. The limitations of ABLE accounts are the annual contribution and total balance limits mentioned above, and the fact that ABLE accounts are only for money, so they cannot be used to hold title to real estate. For parents who want to provide a home or leave a substantial inheritance to a child with a disability, a special needs trust will still be necessary to ensure continued eligibility for SSI and Medicaid.
When a minor child with a disability is approaching adulthood, changes are in store. When a disabled minor child’s parents are financially eligible for the child to receive SSI and Medicaid, when the child becomes an adult, Social Security will determine whether the child is disabled under the disability rules for adults. If the parents did not meet the income and resource limits for the child to receive SSI while they were a minor, then the individual may need to apply for SSI and Medicaid for the first time upon reaching adulthood, because at that point the parents’ income and resources will no longer be “deemed” to the child. Social Security’s disability rules for adults include determining whether the individual is capable of working, but a young adult can engage in some work activities and still be found to be disabled. Decisions about housing will need to be made. If the disabled young adult will continue to live with their parents, then a rental agreement should be put in place that will avoid having the SSI benefit reduced due to in-kind support and maintenance. If they will live independently or in a group home, then a special needs trust and/or an ABLE account can be established to provide for their needs that will not be covered by their SSI benefit.
If the disabled young adult will not be capable of making personal or financial decisions for themselves, then the parents should consider ways of establishing their authority to make those decisions. Parents are used to making decisions for their children as a matter of course, but that ends when the child reaches adulthood. For SSI and other Social Security benefits, when a beneficiary is not able to handle their own benefit, Social Security requires that a representative payee be appointed. This is a fairly simple process, but it is required. Other arrangements such as a power of attorney or guardianship do not automatically make someone a representative payee. For matters other than Social Security, guardianship or conservatorship may be appropriate. If the disabled young adult will be able to make some decisions on their own, then guardianship may not be the right solution, but the parents may want for documents such as a power of attorney, health care proxy, and living will to be in place to ensure that they can access medical records and help with major decisions. See our page on guardianship and alternatives for more information.
Another type of transition may occur during the disabled individual’s adult life. Adults who receive SSI and Medicaid will often become eligible for childhood disability benefits (CDB), also known as disabled adult child (DAC) benefits, when their parent begins receiving Social Security disability or retirement benefits, or passes away. Just as SSI disability benefits automatically come with Medicaid, CDB benefits automatically come with Medicare, but Medicare eligibility occurs two years after the individual becomes eligible for CDB benefits. Because CDB benefits are based on the parent’s Social Security earnings record, they are an entitlement, not needs-based. Medicare is also an entitlement benefit. What this means is that for many adults who have been disabled their whole lives, at some point they will shift from receiving SSI and Medicaid to receiving CDB and Medicare, and the limits on income and resources for SSI and Medicaid will no longer apply. While this is a good thing, and involves fewer restrictions, not more, it is still something that is important to be aware of and that should be considered as part of the parents’ overall estate plan.
To learn more about how a Colorado special needs trust can help protect access to benefits for your disabled family member, call attorney Brendan Conley at (720) 738-1733.
The information on this website does not constitute legal advice. Use of this website, including the contact form or comments form, does not establish an attorney-client relationship. In Florida, Brendan Conley practices Social Security disability law exclusively. Attorney charges no fee unless your case is successful; clients may be responsible for their own costs, such as medical costs. Copyright Brendan Conley 2013-2023. Colorado: 1400 16th St. Ste. 400, Denver, CO 80202. Phone: 720-213-5334. Fax: 720-513-9654. D.C./Virginia: 4250 Fairfax Dr. Ste. 600, Arlington, Virginia 22203. Phone: 703-485-4094. Fax: 703-343-9208. Florida: 7320 E. Fletcher Ave. Tampa, FL 33637. Phone: 813-444-2889. Fax: 813-492-2926.