Special Needs Trusts: Planning for Individuals with Disabilities

Attorney RJ Connelly III

"For families and caregivers of individuals with disabilities, financial planning is a critical aspect of ensuring long-term security and quality of life. Special Needs Trusts (SNTs), also known as Supplemental Needs Trusts, are powerful legal tools designed to protect the assets and future of those with special needs," said professional fiduciary and certified elder law Attorney RJ Connelly III. "By establishing an SNT, families can provide for a loved one without jeopardizing essential government benefits like Medicaid and Supplemental Security Income (SSI)."

Today's blog aims to clarify the process of establishing a Special Needs Trust. It will outline the regulations governing such trusts, including the treatment of In-Kind Support and Maintenance (ISMs), as well as the modifications made in 2025 and potential future changes. Additionally, the post will provide valuable guidance on trust administration for individuals navigating this vital decision.

What Is a Special Needs Trust?

A Special Needs Trust is a legal arrangement that enables individuals with disabilities to receive financial support without losing eligibility for means-tested government programs. Unlike traditional trusts, SNTs are specifically structured to supplement, not replace, the benefits provided by programs such as Medicaid and SSI.

The assets in an SNT can be used for a wide range of expenses—including education, therapy, transportation, and personal care—that enhance the beneficiary’s quality of life but are not covered by public assistance.

The key distinction between SNTs and other trusts lies in their compliance with federal and state regulations designed to protect access to public benefits. SNTs ensure that funds are used appropriately and do not count as income or resources that would disqualify the beneficiary from receiving aid.

Developing a Special Needs Trust

When developing a special needs trust, it is important to follow several key steps. These include:

Assess the Beneficiary’s Needs: Begin by evaluating the individual's current and future needs, including medical care, living arrangements, and personal support.

Consult with Professionals: Work with an experienced attorney who specializes in special needs planning. Legal and financial professionals can help ensure regulatory compliance and tailor the trust to the beneficiary’s unique circumstances.

Choose the Type of Trust: Determine whether a first-party, third-party, or pooled trust is most appropriate.

Draft the Trust Document: The attorney will prepare a legal document outlining the terms, the trustee’s powers and responsibilities, and instructions for distributing funds.

Fund the Trust: Transfer assets into the trust. This could include cash, investments, or other property, depending on the family’s resources.

Select a Trustee: Carefully choose who will administer the trust—either a family member, a professional fiduciary, or a non-profit organization.

Maintain and Monitor: Regularly review the trust to ensure it continues to meet the beneficiary’s needs and complies with changing laws.

Throughout this process, communication among family members, caregivers, and professionals is key to creating a trust that genuinely supports the individual’s best interests.

Rules and Regulations Governing Special Needs Trusts

Special Needs Trusts are subject to both federal and state laws. At the federal level, SNTs are primarily authorized under Section 1917(d)(4)(A) and (C) of the Social Security Act (42 U.S.C. 1396p(d)(4)(A) & (C)), allowing disabled individuals (under 65) to have assets held in trust without losing crucial government benefits like SSI and Medicaid. Key rules include:

Funding Sources: Trusts may be funded by the beneficiary (first-party) or by third parties such as parents, relatives, or friends (third-party).

Allowable Expenses: Funds must be used to supplement government benefits and cover items not provided by Medicaid or SSI. Examples include personal care attendants, medical equipment, education, recreation, and travel.

No Direct Cash Payments: Direct payments to the beneficiary may reduce SSI benefits, so trustees must pay vendors or service providers directly.

Payback Provision (First-Party Trusts): Upon the beneficiary’s death, any remaining funds in a first-party SNT must be used to reimburse the state for Medicaid benefits provided.

State laws may impose additional requirements, so it is crucial to consult with a local attorney who understands the specific regulations in your jurisdiction.

Rules on In-Kind Support and Maintenance (ISMs)

When administering a Special Needs Trust, trustees must be aware of the rules regarding In-Kind Support and Maintenance (ISMs). ISMs refer to non-cash support provided to the beneficiary, such as payment for food or shelter. Under SSI rules, if a trust pays for or provides food or shelter directly to the beneficiary, the value of those items may be considered ISM. It can reduce the beneficiary's monthly SSI benefit.

Shelter: If the trust pays for the beneficiary’s housing (such as rent, mortgage, utilities, property taxes), the Social Security Administration (SSA) will treat this as ISM. The reduction in SSI is calculated using the "Presumed Maximum Value" (PMV) rule, which is typically one-third of the federal SSI benefit rate plus $20. 

Food: A significant change occurred in September 2024, when the SSA changed its policy and no longer counted food expenses paid by a third party, including an SNT, as ISM for SSI purposes. Before this change, they were countable.

Other Expenses: Payments for goods and services that are not food or shelter—such as medical care, education, transportation, recreation, or personal items—are generally not treated as ISM and do not affect SSI benefits.

Best Practices: Trustees often avoid paying for shelter directly from the trust to preserve the full SSI benefit. Instead, they may use trust funds for supplemental needs that do not trigger ISM reductions.

Understanding and carefully managing ISMs is crucial to maximizing the beneficiary’s government benefits while enhancing their quality of life. Trustees should keep detailed records and consult knowledgeable professionals to ensure compliance with SSI rules regarding ISM.

New Rules for 2025 and Upcoming Changes

New rules for 2025 have been established, and it is important to stay informed about any upcoming changes. This year, these have included:

Increased Reporting Requirements: Trustees must now provide more detailed annual reports to government agencies, including itemized expenses and trust activities. This aims to improve transparency and ensure funds are used appropriately.

Expanded Definition of Eligible Expenses: The list of allowable expenditures has broadened to include specific technology devices, mental health services, and remote learning tools—reflecting the evolving needs of individuals with disabilities.

Digital Filing and Monitoring: Many states now require trusts to be registered and managed through secure online portals, streamlining compliance and oversight.

Updated Medicaid Regulations: Some states have adjusted their Medicaid eligibility thresholds and asset limits, making it even more important to structure trusts carefully.

Families and trustees should stay informed about these changes and seek professional guidance to ensure their trust remains compliant and effective.

Eligibility Criteria for Special Needs Trusts

Eligibility for an SNT includes the following:

1. The beneficiary must be under age 65 at the time the trust is established (for first-party trusts).

2. The individual must be eligible for programs such as SSI or Medicaid, which have strict income and asset limits.

3. Trust funds must be used for supplemental, not basic, support expenses.

Typical scenarios include children with developmental disabilities, adults who have acquired disabilities later in life, and seniors transitioning from work to government assistance.

Popular Types of Special Needs Trusts

The most widely recognized and utilized types of Special Needs Trusts encompass a variety of structures designed to support individuals with disabilities. These include:

First-Party SNT: Funded with the beneficiary’s own assets (such as an inheritance or legal settlement). Includes a Medicaid payback provision.

Third-Party SNT: Funded by someone other than the beneficiary (usually family members). No Medicaid payback is required, and these trusts are often used in estate planning.

Pooled Trust: Pooled trusts are managed by nonprofit organizations and combine the resources of multiple beneficiaries for more efficient investment. Each beneficiary has a separate account, while the nonprofit serves as the trustee. However, there are some drawbacks to using a pooled special needs trust (SNT). These include a loss of control over investments and spending, associated fees, potentially less personalized service, and the requirement that any remaining funds typically go to the nonprofit as part of the Medicaid payback provision.

Choosing the correct type of trust depends on the source of funds, the beneficiary’s needs, and long-term goals.

Administering the Trust

Selecting a trustee is one of the most important decisions in establishing an SNT. The trustee is responsible for managing assets, making distributions, and ensuring compliance with all rules—including those governing ISMs. Qualities of a good trustee include financial expertise, integrity, attention to detail, and a deep understanding of the beneficiary’s needs.

Professional Trustees: Financial institutions, trust companies, or experienced elder law attorneys specializing in special needs planning bring invaluable expertise and impartial guidance to the table. This is especially crucial in circumstances where a Special Needs Trust (SNT) is necessary for individuals struggling with substance abuse disorders or facing serious behavioral and mental health challenges. Their knowledge ensures that the unique needs of these individuals are met while safeguarding their financial security and overall well-being.

Family Members: Parents, siblings, or other close relatives who are intimately familiar with the beneficiary may offer a unique perspective and a deep emotional investment in their well-being. However, this personal connection comes with the critical responsibility of understanding and navigating the intricate web of regulations that govern trust administration. Moreover, if the beneficiary has exhibited troubling behavior in the past, a family member serving as the trust administrator could be susceptible to manipulation or undue influence. This dynamic could pressure them into making hasty decisions regarding fund disbursement that might not align with the beneficiary’s best interests, ultimately sparking tension and discord within the family.

Nonprofit Organizations: Pooled trusts, managed by nonprofit organizations, offer lower minimum funding requirements for Special Needs Trusts (SNTs), making them accessible to families. However, they may lack personalized care due to a generalized management approach, and governance issues can lead to diluted decision-making. Nonprofits often pursue conservative investment strategies, which might limit growth opportunities for beneficiaries. The nonprofit’s guidelines may also restrict control, and management fees can reduce available funds. Therefore, it’s essential to assess the nonprofit’s competence and oversight.

A Final Thought

"Special Needs Trusts represent a critical component of financial and life planning for individuals with disabilities. A comprehensive understanding of the relevant regulations, including those about ISMs, recent legislative changes, and best practices for trust administration, is essential for families and caregivers," said Attorney Connelly. "This knowledge enables them to provide support for their loved ones while preserving essential government benefits. Connelly Law has extensive experience establishing Special Needs Trusts, and our team has deep expertise in both creating and administering such trusts. By collaborating with professionals well-versed in the specific requirements and regulations governing these matters, families can be assured that their loved ones' long-term interests are adequately protected."

The information presented within this blog is intended exclusively for general informational purposes and should not be construed as legal, financial, or healthcare advice. The content, materials, and insights provided may not reflect the most recent developments in these fields and, therefore, should not be relied upon for personal or professional decisions. Further, this blog may contain links to third-party websites, which are included solely for the convenience of our readers. It is essential to note that Connelly Law Offices, Ltd. does not automatically endorse or recommend the contents of these external sites. Given the complexities and nuances of legal, financial, or healthcare matters, we strongly encourage individuals to consult a qualified attorney, a professional fiduciary advisor, or a healthcare provider regarding any specific issues or concerns. Your well-being and informed decision-making are of paramount importance to us.