Understanding Special Needs Trusts

Understanding Special Needs Trusts

June 12, 2019

Tanko Law Montana

When you have a loved one who suffers a physical or mental disability or is unable to manage their own finances, you may be tempted to bequeath a certain amount of funds to help them financially. However, Supplemental Security Income (SSI) and Medicaid benefits could be impacted if you opt to leave a lump sum to someone who is dependent on these government benefits. The better option is to create a special needs trust.


Types of Special Needs Trusts


There are three specific types of special needs trusts which are:


  • First-party special needs trust – when the assets placed into a trust belong to the beneficiary entirely, then a first-party trust is set up. The assets in the trust generally come from an inheritance, or from some type of settlement. For the purposes of determining government benefits, the assets are not considered in the calculation for the beneficiary. It is important to note that upon the death of the beneficiary, the government does have the right to demand reimbursement from the remaining assets for reimbursement of any expenses paid on behalf of the beneficiary.
  • Third-party special needs trust – when the assets in a trust belong to the donor to the trust, it is considered a third-party trust. The most significant difference with this type of special needs trust is upon the death of the beneficiary, the funds could then be bequeathed to other family members, donated to charity, or held in the trust for the benefit of other family members.
  • Pooled trust – the least commonly used since the funds are administered by a non-profit organization. These funds hold assets for multiple beneficiaries who all have their own “sub-accounts” but the assets are held and managed by one entity.


At Tanko Law, we focus on both first-party and third-party trusts which are the two most commonly used. Before establishing a special needs trust, it is important to understand what your goals are and how to avoid having the trust assets counted towards the criteria necessary for the beneficiary to collect government benefits.


Third-Party Trust Offers the Best Protections


Since a third-party trust does not interfere with government benefits, it is important to understand how they work and what language must be included in the documentation to make sure the assets are not counted towards the beneficiary’s assets.


The named trustee has full control over the assets in a third-party trust. Funds cannot be paid directly to the beneficiary. Instead, the trustee disburses funds based on specific needs, for example to pay rent, to pay for medical care not covered by Medicaid, or to made modifications to the beneficiary’s living quarters.


It is important to remember a special needs trust may be funded with various assets. In some instances, parents, grandparents, or other family members may place cash, or investments including stocks, bonds or real estate into the trust for the benefit of the beneficiary. Any assets remaining in the trust upon the death of the beneficiary may be directed to another family member, the beneficiary’s estate, or to a charity or organization of the donor’s choosing.


One of the most important parts of establishing a special needs trust is the language contained in the trust documents. To ensure the assets placed in the trust are not subject to being counted to determine the beneficiary’s eligibility for government benefits, the documents must specifically state “the trust is intended to provide “supplemental and extra care” beyond that which the government provides”. Additional language should also state the trust is not intended to be used for “basic support”.


Trusts an Important Tool for Tax and Estate Planning


When you are creating an estate plan, trusts can be one way to help preserve your assets by protecting them from creditors. Using a trust may also help reduce your tax liability. When you have a loved one who has special needs, a trust can help provide you with the assurance their quality of life will not be diminished upon your passing.


While there are several types of trusts which you may want to consider, ensuring your loved one still qualifies for government benefits is important since you want to provide them with a source of stable income. You should also be aware that a special needs trust, like other trusts, may be revocable or non-revocable.


Revocable Trusts vs. Non-Revocable Trusts


You should be fully aware of the long-term ramifications of setting up both revocable and non-revocable trusts. First, if your interest is in obtaining tax advantages by setting up a trust, the trust should be non-revocable. Primarily this is because until the date of the grantor’s death, the trust may be amended or revoked at any time. This makes the trust subject to estate taxes among other problems including being subject to liens or seizure by creditors.


A non-revocable trust is one that may not be altered or changed during the lifetime of the beneficiary. Once an asset is in the trust, it may not be transferred out of the trust without the permission of the beneficiary. Should an asset be removed from the trust with the permission of the beneficiary, the asset immediately becomes part of a taxable estate.


Hire a Knowledgeable Estate Planning Attorney


The best way to deal with a special needs trust, or any other type of trust is to make sure you are working with a knowledgeable lawyer who understands all aspects of estate planning. Trusts are a vital tool that can be used to avoid the probate process and preserve your assets and wealth during your lifetime. A special needs trust should be used to help ensure a loved one who is unable to manage money on their own or depends on you for a portion of their support will continue to have the same level of support after your death.



While many people do not believe estate planning is something they need to concern themselves with, this simply is not true. Estate planning is even more important when you have loved ones you wish to protect after your passing. Contact Tanko Law today and let us help you determine the type of trust which best meets your estate planning goals and helps meet the needs of your loved ones.

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Brian Tanko brings over 20 years of experience as an attorney, CPA, and Certified Fraud Examiner to every estate plan. Schedule a consultation to discuss your situation.

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