• John J. Diak, CFP®

Understanding Special Needs Trusts


Understanding Special Needs Trusts

Does your family include a loved one who is mentally or physically disabled and qualifies for government benefits? If so, you may want to consider setting up a special needs trust (SNT). People with disabilities deserve access to the best possible life, resources, and care available. Special needs trusts are tools to help make that possible.


We are fortunate to live in a country that provides for the basic needs of disabled individuals through government programs. But many families are surprised to find that these public benefits programs put restrictions in place that make it challenging for their loved one’s needs to be adequately covered beyond the bare minimum.


While the restrictions are intended to prevent fraud by unscrupulous actors, they also pose an obstacle for people who are already facing challenges. Special needs trusts serve to overcome some of the red tape.


Benefits of a Special Needs Trust?


Government programs, such as Supplemental Security Income (SSI) and Medicaid, are available to support people who are unable to sufficiently support themselves. However, this support is limited to maintaining essential needs at or below the poverty line. It covers basic housing, food, medical care, and necessary services. The funds and services do not cover other needs, such as dental, vision, or recreation.


Many families and other interested parties want to step up and supplement the person’s lifestyle, ensuring they have what’s required to live with comfort and dignity. But disability programs are means-tested, meaning the government assesses the person’s available means—income, assets, and resources—to determine eligibility.


Federal and state guidelines dictate that people receiving disability benefits must stay below established income thresholds, and they are limited to owning no more than $2,000 total in assets. Extra funds could disqualify someone from receiving benefits. Giving a person that receives disability benefits financial support, a gift, or inheritance could lead to a suspension of their public benefits. A small gift of a few thousand dollars, intended to be helpful, could mean losing health insurance, housing, or access to food.


An SNT enables families and other parties to give extra funds without putting the person’s benefits in jeopardy while also protecting the person from financial abuse or mismanagement. The funds in the trust are managed by a trustee, so caretakers are not able to use the money without a layer of protection. Moreover, if the person is unable to manage the funds responsibly due to maturity level or mental capacity, the trust ensures funds are managed appropriately.


Types of Special Needs Trusts


Different types of special needs trusts are available to meet different needs and circumstances.


Third-Party Special Needs Trusts


A third-party SNT is the most common type. Typically, a family member will set up the trust as part of their estate planning to pass an inheritance of money or property to a beneficiary with a benefits-qualifying disability. The beneficiary never owns the property in the trust, nor do they have direct access to the funds.


The trustee of the third-party SNT is able to use the funds in the trust to cover expenses such as the cost of hobbies, classes, vacations, and professional services for the beneficiary.


First-Party Special Needs Trust


Sometimes, a person with a disability receives a windfall of money or property from a personal injury award, inheritance, divorce settlement, life insurance policy, or retirement plan. Or, perhaps the individual owned significant assets prior to becoming disabled. In these cases, a first-party special needs trust can prevent a person from being disqualified from receiving benefits.


With a first-party SNT, instead of owning property directly, the person with special needs puts the property into a trust, following strict federal and state rules for how those assets can be used and managed. In the past, the government required a guardian to establish a first-party SNT, but since 2016, a legally competent disabled person has the right to establish their own trust.


Alternative Needs Trusts


Families and individuals with more limited means can benefit from alternative forms of special needs trusts.


A pooled SNT is a charitable program established and administered by a non-profit organization to support multiple beneficiaries. It relieves the family of the financial and administrative burden of managing a trust and ensures professional management of funds.


Another alternative is a state-managed ABLE account, which is similar to a 529 college savings plan. It enables families to contribute to a fund that can help cover the disabled person’s needs without affecting means-tested benefits and without the cost and complexity associated with trusts.


How to Set Up a Special Needs Trust


Start by involving the person, if they are mentally competent of age, and able, as well as the whole family and all interested parties.


Get a clear picture of the person’s assets, means, living situation, needs, and desires. What is the state of this person’s health and ability? Will they need long-term care? Will their needs decrease or increase over time? Might they become gainfully employed in the future?


It’s also important to have everyone on the same page and be aware of all gifts, plans for any bequeathal, insurance policies, and other transfers.


If you want to set up an SNT, you’ll need to keep in mind that the rules are complex and strict. Enlisting expert help is a must. Work with an attorney who specializes in trusts and elder law, as well as a CERTIFIED FINANCIAL PLANNER™ professional and accountant. Strategies for funding the trust might include ongoing contributions, taking gift tax exclusions into consideration, life insurance policies, or other approaches. With so much at stake, it’s best to turn to reputable, experienced professionals for advice.


Meeting Your Loved One’s Special Needs


When considering someone’s special needs, it’s always important to remember the best interest of the person and their supporting community. When someone is unable to fully attend to their own interests, they are relying on others to look out for them.


A special needs trust is one helpful piece of the puzzle, but it’s not a ‘set it and forget it’ solution. Fortunately, the special needs community is tight-knit, with a multitude of non-profit associations and professionals committed to serving people and families who need support.




John J. Diak, CFP® is the Principal & Client Wealth Manager at Oatley & Diak, LLC in Parker, Colorado. He assists clients through many difficult lifestyle changes such as business downturns, retirement planning, divorce, the death of a spouse, and family estate issues among others. Oatley & Diak, LLC is a family-run registered investment advisory (RIA) firm that provides clients with investment management and financial planning services in a hands-on, intimate environment. Learn more about them at oatleydiak.com.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.


This information is not intended to be a substitute for specific individualized legal advice. Please consult your legal advisor regarding your specific situation.


This material was prepared by Crystal Marketing Solutions, LLC, and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate and is intended merely for educational purposes, not as advice.