Nearly 60% of Americans rely on Medicaid at some point in their lives, and roughly 15% of non-institutionalized adults between the ages of 21-64 receive Supplemental Security Income (SSI) at any given moment. These programs form the last line of defense between many of our most vulnerable neighbors and severe financial hardship. Because both Medicaid and SSI are "means-tested," a beneficiary must keep countable assets below very modest limits, generally no more than $2,000 to remain eligible.
For families who wish to leave an inheritance to a loved one with disabilities, this rule can create an uncomfortable dilemma: disinherit the beneficiary, give the beneficiary an outsized share of the estate or divide assets equally and hope the inheritance will not jeopardize critical public benefits. Fortunately, federal and state laws permit a fourth, far more effective solution: the special needs trust (SNT).
An SNT is a legal arrangement that holds and manages assets for a beneficiary with disabilities without treating those assets as "countable" for Medicaid or SSI purposes. Properly drafted, the trust permits distributions only for goods and services that will not reduce or eliminate public benefits. Basic necessities, such as shelter and routine medical care, continue to be covered by Medicaid and SSI, while the SNT "supplements" those benefits by paying for items and experiences that enrich the beneficiary's quality of life.
Special needs trusts fall into two broad categories. A first-party SNT is funded with the beneficiary's own assets. It is typically used when a person with disabilities receives money outright. Common examples include when an individual receives a direct inheritance or a personal-injury settlement, or they accumulate savings that exceed the $2,000 limit. By transferring the excess assets into a first-party SNT, the beneficiary can preserve or regain eligibility for public benefits. Federal law, however, requires any funds remaining in a first-party SNT at the beneficiary's death be used to reimburse the state for Medicaid benefits previously provided.
A third-party SNT is funded with someone else's money, most often a parent, grandparent, sibling or other relative. The third-party SNT is created either during the benefactor's lifetime or under a will or revocable trust. Because the assets never belong to the beneficiary, they are not counted for Medicaid or SSI eligibility. Unlike a first-party SNT, there is no mandatory "payback" to the state when the beneficiary dies. The person establishing the trust retains full control over who will receive any remaining property.
Trustees of either type of SNT must understand which expenditures are permissible. Distributions of cash directly to the beneficiary or payments for rent, mortgage, utilities or other "shelter" expenses will generally reduce SSI benefits and may create Medicaid complications. By contrast, trust funds can usually pay for non-essential utilities such as food; internet or cell phone service; home furnishings and renovations that improve accessibility; out-of-pocket medical or dental care; adaptive equipment; education; entertainment; clothing; therapeutic companions or personal-care aides; travel (including travel costs for a companion); vehicles and related expenses; and other goods and services that enhance the beneficiary's daily life.
Although the legal landscape of special needs planning is complex, families need not face it alone. An attorney who concentrates in elder law and special needs law can design a tailored plan that protects crucial public benefits while providing the extras that allow a loved one with disabilities to live with dignity, comfort and independence long after the primary caregivers are gone.
If you have beneficiaries with special needs, contact your Warner estate planning attorney or Catherine Jacobs at cjacobs@wnj.com.
For additional perspective on Medicaid planning and long-term care considerations, Catherine shares clear, practical guidance in Warner Medicaid Moments.
This article is featured in Warner's Estate Planning Focus — Spring 2026 newsletter, which highlights key developments, planning strategies and insights for individuals, families and advisors.
Read the full newsletter to explore additional updates and practice guidance.
