What is a Special Needs Trust? [The Complete Guide]

A special needs trust is a document you create to provide for a beneficiary who has a disability, chronic illness, or injury and relies on government assistance. The main purpose of a special needs trust is to preserve current and future eligibility for two important government benefits: Medicaid and/or Supplemental Security Income (SSI). When properly drafted and administered, a special needs trust will allow your beneficiary to receive funds from the trust while continuing to receive government benefits.

This article outlines some of the most important aspects of a special needs trust, the rules you need to follow when creating one, and the expenses for which a special needs trust can pay. You will also learn about how to set up a special needs trust and the costs associated with creating one.

Types of Special Needs Trusts

The goal of a special needs trust is to ensure the financial security of your loved ones who live with a disability by protecting eligibility for government benefits like Medicaid and Supplemental Security Income (SSI). A special needs trust helps to improve a disabled individual’s life by increasing the longevity of funds using government benefits. It also pays for expenses that are not otherwise covered by government assistance.

Individual vs. Pooled Special Needs Trust

When you create your special needs trust, you’ll need to consider whether you want an individual trust or a pooled trust. Knowing what these terms mean will help you understand the different types of special needs trusts.

An individual trust, also known as a D4A trust, gives an individual person the power of trustee. If Medicaid recovery is more than the trust, all of the remaining funds will go to Medicaid. An individual trust is typically a more expensive option than a pooled trust because it takes a longer amount of time to create. However, some cases require an individual special needs trust instead of a pooled trust.

A pooled trust, also known as a D4C trust, gives a 501(c)(3) or nonprofit association the power to act as a trustee, while an appointed trust beneficiary advocate of your choosing may act as a liaison. If Medicaid recovery is more than the trust, the charity retains the extra funds to serve future clients and fund its operation. One benefit to this is that a pooled trust may cost only a fifth of the fees needed to administer an individual special needs trust, and it is quicker to establish. Many cases can take advantage of a pooled trust, and charities like the CPT Institute can help you determine if this type of trust will fit your needs.

Main Types of Special Needs Trusts

Now that you understand the difference between a pooled and individual trust, there are three main types of special needs trusts you should consider:

First-Party Special Needs Trust

First-party special needs trusts preserve the financial security of a disabled person while using their funds. In other words, the person’s own “supplemental finances,” or “supplemental income,” are used to fund the trust and are exempt from Social Security and Medicaid’s eligibility criteria. This allows them to receive their supplemental income while still qualifying for government benefits such as Social Security Income (SSI) and Medicaid.

A person’s supplemental income that may be used to fund the trust include:

  • Workers’ compensation settlements
  • Inheritance
  • Personal injury settlements
  • Divorce settlements
  • Retirement plans or life insurance policies
  • Other sources of income from policies or investments

Without forming a trust with these funds, an individual may become ineligible to receive public or government benefits. Many government programs are means-tested and only allow the individual to own a maximum of $2,000 worth of assets or income (in California), and most states have lower thresholds. Thus, even a small amount of inheritance or financial support could mean that an individual will lose government benefits.

By placing these funds into a trust, the person can continue receiving government benefits while safely receiving their other finances. Although a first-party special needs trust is funded with the beneficiary’s supplemental income, it still requires the appointment of a “trustee.” Essentially, this person receives the property for the individual and has full discretion to make distributions that benefit the disabled individual. A trustee may be a family member or friend who the beneficiary trusts to make decisions and disbursements on their behalf.

Who is a First-Party Special Needs Trust For?

Who, exactly, is a first-party special needs trust for? There are two primary situations in which a first-party special needs trust would benefit an individual. They are:

  1. Accident or illness. Say an individual undergoes a disabling accident or illness and now qualifies for government benefits. However, they own too much property - which they had earned before their debilitating accident or illness - to qualify for the government benefits. A first-party special needs trust would help in this situation. The individual would put their income and assets  “in trust” to qualify for government benefits indefinitely or, alternatively, as long as they need them.
  2. Additional income or assets.  Suppose a person is already receiving government benefits like Medicaid and Supplemental Security Income but suddenly comes into additional income or assets, such as an inheritance or settlement. In that case, this “extra property” might exceed the limits for government benefits.

In other words, the person might be “too rich” to continue receiving benefits if they receive the property directly. By placing these supplemental assets in a first-party special needs trust, the individual can preserve their government benefits eligibility within the law and still utilize their income or assets above the state-set thresholds.

In summary, a first-party special needs trust helps individuals who are receiving other assets or income as well as government benefits. Placing the “extras” into a first-party special needs trust will allow the beneficiary to take advantage of both their funds and government benefits.

First-Party Pooled Special Needs Trust

Now that you know more about a first-party special needs trust, you may be curious about a first-party pooled special needs trust. Recall that any first-party special needs trust benefits individuals who have income or resources over the state-set limits required for government benefit eligibility.

The first-party pooled special needs trust offers all the same statutory protections as a first-party individual special needs trust. However, this type of trust is administered by a nonprofit organization, or 501(c)(3) tax-exempt charity like CPT Institute.  The investments are pooled or linked together to lower the cost of investing. Since these trusts are designed to supplement the client’s life while they are living, Medicaid reserves the first right to recover on trust funds at the time of the client’s passing to recoup some of the cost to the taxpayer for their medical costs paid by Medicaid throughout their life.

While it might sound scary to be part of pooled investment models, a first-party pooled special needs trust is completely secure and managed by professionals.  It’s important to know that no two first-party pooled special needs trusts are alike. The beneficiary will be able to take advantage of customized services, contracts, and fee schedules. These are all created to meet your specific needs.

An added bonus of a first-party pooled special needs trust is that it allows you to take advantage of the organization’s expertise and network of professionals who understand the legal nuances of trusts. CPT Institute is a 501(c)(3) charity that provides first-party pooled special needs trusts to clients. We set up these trusts right away and manage them to ensure proper disbursements and allocations.

Who is a First-Party Pooled Special Needs Trust For?

Who does a first-party pooled special needs trust benefit? Here are some situations in which you might consider creating a first-party pooled special needs trust:

  • Avoid appointing an individual trustee. Working with an experienced nonprofit Trustee like CPT Institute helps avoid conflicts when appointing a family member. We efficiently administer the trust according to the beneficiary’s needs.
  • Save money. First-party pooled special needs trusts are much more cost-effective than an individually drafted first-party special needs trust. They cut down on having to pay a legal professional to draft and create a trust, and the administration fees are lower than an individual trust. A first-party pooled special needs trust also requires less money up front to provide for your loved one.
  • Take advantage of professional knowledge. If you choose to work with a qualified charity such as CPT Institute, the people managing your trust and its assets will be knowledgeable and experienced. For example, CPT Institute knows the agency rules regarding income, resources, and government benefit programs like SSI or Medicaid. Most organizations are also directly involved in the disability community and attuned to their needs.

To learn more about a first-party pooled special needs trust, feel free to reach out to CPT Institute for more information.

Third-Party Special Needs Trust

Third-party special needs trusts help those who live with special needs and cannot live on their own or earn a viable income. This type of trust is funded by the person’s relative or another party rather than the person themselves.

A third-party special needs trust is a legal way for relatives or friends to provide financial support for the beneficiary without affecting their government benefits. In other words, if a family member places funds in trust for the beneficiary, the beneficiary will continue receiving benefits since this income will not count toward the state-set asset and income limits. Additionally, Medicaid has no right to recovery on these funds since they are owned by a third-party.

Often, a third-party special needs trust is provided for in a person’s estate plan or will. The language for a third person special needs trust might look something like this: “Funds for [client name] are to be placed into a Third-Party Special Needs Trust FBO [client name] with [trustee name] to preserve his/her ongoing eligibility for means-tested government benefits.” This language will appoint a trustee to make decisions on behalf of the trust.

Charities can serve as administrators of third-party special needs trusts as well. Working with an organization like CPT Institute can help ensure the proper setup and administration of third-party special needs trusts.

Who is a Third-Party Special Needs Trust For?

The short answer to who a third-party special needs trust is for is anyone who has a family member or friend willing to place funds in trust for their benefit. Commonly, parents will hold funds in trust for disabled children to help preserve eligibility for government benefits. Still,  there are many other circumstances in which family members decide to create a third-party special needs trust. For example, relatives or friends may decide to fund a trust for someone they know with special needs. The funds can alternatively be stored for future use or anticipated needs as well.

Most third parties who decide to fund a third-party special needs trust use it to help them manage inheritance or other income for the person with special needs. The other advantage is that funds are not subject to Medicaid’s quick recovery at the time of their passing, as would be the case in a first-party special needs trust.

Schedule a Consultation

Involving the client. Understand how the trust operates and create a plan of action to achieve it. Spanish Translator is available.

Benefits of a Special Needs Trust

What are the benefits of a special needs trust, and why should you create one? As mentioned above, you create a trust to ensure that you or your beneficiary will continue receiving government funds while also being able to use your – or their own – resources. There are two main government benefits that putting money in a trust can preserve:

  1. Medicaid. This program helps individuals and families with disabilities pay for health costs and is the principal source of long-term coverage for many.  This includes skilled nursing facilities and in-home caregiving support (depending on the state).
  2. Supplemental Security Income (SSI). This taxpayer-funded program is allotted to those with disabilities to help them pay for basic needs such as food, clothing, and shelter.

Perhaps the easiest way to understand how a special needs trust works to benefit you is by an example. Say a disabled individual who is eligible to receive SSI suddenly receives funds that exceed $2,000. There is a $2,000 resource limit for SSI, which means that when the individual receives their outside funds, they will no longer maintain eligibility for SSI. In most states, this means the individual or household will also lose Medicaid eligibility.

However, the individual can place that extra income in a trust and still retain their SSI and Medicaid eligibility. This is the true power of special needs trusts and one of the primary benefits to you and your family. Everything within the special needs trust or income irrevocably assigned is excluded from the strict asset and income limits set by state Medicaid programs and Social Security.

Another benefit of a special needs trust with a trustee like CPT Institute is that you can appoint the 501(c)(3) charity to provide for your loved one rather than appointing an individual, especially a loved one, which can often cause friction in a family. The trustee will disburse funds as needed and in adherence to the rules in the state of residence. They will also oversee spending decisions and administration of the trust, so if your loved one has special care needs, the funds will be preserved well into the future.

This does not mean you will lose control of a loved one’s special needs trust. Instead, you or a trust beneficiary advocate of your choosing can act as a liaison between the trustee charity and the beneficiary. This gives you the ability to still be the primary contact for care as an individual special needs trust, but with the added benefit of the charity’s trustee expertise - in CPT Institute’s case, more than 25 years of experience.

In a pooled special needs trust, a nonprofit organization or 501(c)(3) charity like CPT Institute will take the place of your individual trustee. This, too, has added benefits. It cuts down your costs to establish, lowers administration costs overall, and eliminates the potential conflicts of appointing an individual.

How to Set Up a Special Needs Trust

How do you set up a special needs trust?

It’s important to select an experienced nonprofit organization or charity, like CPT Institute, or an attorney with specific experience with Special Needs Planning.  This isn’t an area of policy or law to take lightly, which is why CPT Institute belongs to and often refers to attorneys in professional organizations like the Academy of Special Needs Planners (ASNP) when a client’s needs extend beyond our services. Groups like ASNP provide training annually, if not monthly, to ensure the attorney and organization have the appropriate level of knowledge and experience.

In general, there are five steps to establishing your special needs trust with CPT Institute. These steps are designed with efficiency and thoroughness in mind, exposing clients to a great deal of resources and information to ensure they feel comfortable and positive about joining our program.

  1. Identify the Appropriate Solution: A short questionnaire will help you identify appropriate solutions for your scenario. In the end, you’ll be provided with resources to learn more and a link to book a consultation.
  2. No-Cost Consultation: During this meeting, the CPT Institute team will help you identify solutions for your situation. If a trust is the best option, the consultants will help you understand how a trust operates and email you trust instructions to help you resolve a pending case.  If court approval is required for your trust, the CPT Institute team can also provide support and resources.
  3. Signing: To ensure a smooth transition into the CPT Institute program, a case manager will go through all your trust documents to ensure appropriate expectations are set. The case manager will work directly with your attorney, if necessary.
  4. Funding and Notice: All parties will be notified once the funds are available for the client’s use. This process can take 2-10 days to clear.
  5. Supporting a Successful Transition: CPT Institute provides many resources and information about what to expect next. Your team will be available to answer any questions, inquiries, or issues you run into while transitioning into your special needs trust.

A good first step in creating any special needs trust is to schedule a consultation with a professional to learn more about your options. For example, CPT Institute offers free consultations to any clients interested in forming a special needs trust.

Special Needs Trust Rules

What rules will govern your special needs trust? While the rules governing your special needs trust will depend on your circumstances and the amount of funds you have available, there are some general special needs trust rules you should know. Learning these will help you preserve your or your loved one’s Supplemental Security Income (SSI) and/or Medicaid, as well as create and administer your trust properly.

To take advantage of the benefits a special needs trust, keep these three rules in mind:

  1. Disbursements must be made for the benefit of the individual. All disbursements from your special needs trust must be for the special needs individual’s primary benefit. That is, payments should be on behalf of or to the benefit of the individual. This doesn’t mean every disbursement from your special needs trust needs to go toward an individual’s medical healthcare or items related to their disability. Rather, they can help to provide for the individual’s general needs not covered by government assistance. For example, payments made for the beneficiary’s purchase of personal items, automobile expenses, or household goods may count, as well as medical or personal assistant expenses.
  2. Disbursements must be payable to a third party. This means that funds cannot be made payable directly to the special needs trust beneficiary. In other words, all payments for goods or services should go directly to the vendor or provider rather than directly to the beneficiary. If such payment to the beneficiary does occur, this money is considered “unearned income.” This income will likely reduce the individual’s SSI benefit - sometimes substantially.
  3. Good recordkeeping is a must. Administering a trust requires thorough recordkeeping. This means keeping all receipts and/or invoices as well as any other evidence of accurate disbursement and transaction records. Note that this rule, like the others, is required by law. The Social Security Administration Office (SSA) or Medicaid office may request copies of these records. They often do this to verify that disbursements from the special needs trust are proper.

All Trustees of Special Needs Trusts have to follow these rules, but the approval of Secured Debit Cards have given clients of Special Needs Trusts the autonomy they desire.  In short, the client and Trustee create a monthly spending plan, and that amount is placed on the card.  The client turns in the receipts from their purchases at the end of the month and we replenish their card to the previously agreed-upon amount. Payments must be made to any third-party to ensure it doesn’t impact the individual’s eligibility for means-tested benefits, which include loved-ones, paying service providers directly, or paying a credit card with applicable receipts.

Schedule a Consultation

Involving the client. Understand how the trust operates and create a plan of action to achieve it. Spanish Translator is available.


How You Can Spend a Special Needs Trust

So, how can you spend a special needs trust? Remember, a special needs trust helps to pay for expenses that your government assistance doesn’t automatically cover - that is, those expenses that will help improve an individual’s quality of life. The trust helps an individual pay for these expenses without losing their government assistance because trust disbursements are not considered unearned income.

However, there are limits on what your special needs trust can cover. Your special needs trust, as mentioned above, must be administered by your Trustee. In order for your trustee to grant your request for any funds, you must meet certain legal requirements - what CPT Institute calls the “3 Golden Gates.”

The Golden Gates: Special Needs Trust Guide

The 3 Golden Gates are your guide to disbursement requests from your special needs trust. You need to be able to pass through each one to ensure your government benefits are protected and your disbursement request is legal. Considering these gates will help to ensure you keep your government benefits while enjoying an improved quality of life.

Here are the 3 Golden Gates, your special needs trust guide. Simply ask yourself:

  1. Does my distribution request harm my physical or mental safety? It likely goes without saying that you cannot use your trust for activities which could compromise your physical or mental safety. For example, your trust funds will not cover a skydiving lesson or deep-sea cave exploration!
  2. Is my request in my long-term interest? The person who administers your trust has a fiduciary duty to you, which means they have to work in your best interest. If you want an expensive sports car that is going to drain your trust assets, for example, your trustee or administrator may require you to buy a more affordable car to preserve the funds.
  3. Will this expense jeopardize my eligibility for government benefits? The primary function of a trust is to allow you to spend money on general needs without losing your government benefits. What these general needs entail will depend upon your state and the specific regulations that govern your situation. Overall, the goal is to work toward your long-term interests so you can continue receiving government benefits while living the life you want to live.

If you keep those 3 Golden Gates in mind, you’ll make sure to future-proof your special needs trust and retain your all-important government benefits. This special needs trust guide is also helpful to have in case you don’t have immediate access to your trustee or organization. If you choose to work with CPT Institute, we can provide you with more information about this and determine if your disbursement request is proper.

Allowable Expenses for a Special Needs Trust

Passing through the first two Golden Gates might sound simple, but how will you know if your expense will jeopardize your eligibility for government benefits? For this third gate, you need to consider whether your expense is allowable under the terms of your special needs trust. Your special needs trust covers two types of allowable expenses: general and supplemental medical costs.

Overall, general needs include expenses like:

  • Payments to caregivers
  • Attorney fees
  • Care manager, guardian, or personal aid services
  • Clothing and hygiene items
  • Motor vehicles, if applicable
  • Entertainment, possibly including legal gambling debt
  • Some recreational activities
  • Hair, nail, or personal care
  • Special needs sports
  • Special needs clubs or community involvement
  • Burial spaces (prepaid)
  • Insurance premiums
  • Electronics such as phones, television, Internet, satellite, and wi-fi

Even vacations might be covered under general needs, as well as visitation costs and fees. Likewise, some credit card debt may also fall under your special needs trust. Some other, lesser-known, needs might include guns - if the beneficiary passes the required background checks and does not have a condition that would preclude them from bearing arms - alcohol, pets and pet-related expenses, some plastic surgery, and renovations to a home.

Keep in mind that basic needs payments for things like food, rent, mortgage, or other shelter (i.e., rent, mortgage, electricity, gas and water, heating, etc.) expenses may result in a reduction of government benefits. This is because the SSI regulations consider these on a dollar-per-dollar income basis. Again, your trust covers expenses that your government benefits do not cover; trust disbursements are not intended to replace the benefits altogether.

The special needs trust also covers supplemental medical and medical-related needs, or those medical costs not covered already by government assistance. Depending on your plan, this could include:

  • Medications, prescription, or over-the-counter
  • Non-vital medical care, services, and procedures
  • Dietary supplements
  • Equipment such as wheelchairs, electric scooters, or other mobility equipment
  • Clothing
  • Nursing care or physical therapy
  • Medical implants
  • Artificial limbs
  • Special beds
  • Dental, vision, or auditory care
  • Cosmetic surgery
  • Home improvements that make living more accessible
  • Trial treatments
  • Alternative medical treatment, including medical marijuana (if legal in your state)

In summary, a special needs trust can be a versatile piece of financial security. If used properly, it can provide lasting benefit to the individual. CPT Institute can help you learn more about which type of disbursements are allowed and how you can spend your trust.

How Much a Special Needs Trust Costs

How much will your special needs trust cost? The average cost to set up a trust is about $3,000 dollars, but working with an organization or expert could actually decrease the amount you pay for the formation of your trust. It is important to note that prices can vary depending on the amount of funds placed into the trust, the needs of the beneficiary, the frequency of payments, and other factors.

At CPT Institute, for example, the pricing model looks like this:

  1. Set-up price to establish the trust. Unlike individual trusts, which can cost upward of $3,000, CPT Institute provides setup services for first-party and other trusts for around $2,000, with third-party trusts costing around $1,000 or less.
  2. Annual or monthly administration price. This is your recurring fee for the administration of your trust. CPT Institute does not charge you a percentage of trust corpus like many other trustees do, because the process can cause conflicts of interest. Instead, CPT Institute charges you based on an annual flat rate, around $600 a year, for lump sum cases. Alternatively, you might owe monthly payments ranging from $50 to $100 for structured cases. Court supervised cases only cost about $125 more, on average.
  3. Money management fee. This is a fee-based on a portion of Assets Under Management (AUM). It essentially pays for the bank to invest your funds and release checks. CPT Institute is proud to avoid proprietary investments as well as front load and trail fees.
  4. Other fees. CPT Institute offers tax preparation services for CA PSNT trust beneficiaries at a rate of $30. Mutual funds, money market funds, and exchange-traded funds (ETFs) also charge internal management fees, which are disclosed in the fund’s prospectus and deducted from the net asset value of the funds.

CPT Institute makes sure that your special needs trust set up includes follow-up, open communication, and flexible funding strategies. We also focus on eliminating conflicts of interest to ensure your trust administration is fair and transparent. If you choose to work with us, you’ll be able to customize your trust to fit your unique needs, and your trustee or administrator will work in your best interests to fulfill their fiduciary duty. Working with someone who knows the ins and outs of trust funds from CPT Institute can help you avoid costly mistakes down the road.

Contact CPT Institute for Your Special Needs Trust

If you’re looking for a 501(c)(3) charity to help you administer your trust, you can trust CPT Institute for your needs. We can set up a consultation with you to discover your options and offer you several flexible funding strategies to fit your exact needs. We also have years of experience in helping clients allocate their trust funds and can help you make a trust within a week from our initial consultation. It’s truly a win-win.

To get in touch and set up your first, fully confidential consultation, contact CPT Institute today. You can reach us at 877.695.6444. We look forward to speaking with you.