If you have a loved one with a disability, one of your greatest concerns may be their financial future. You want to provide support, but you also know that government programs like Medicaid and Supplemental Security Income (SSI) have strict financial limits.
Leaving money to them outright could disqualify them from benefits. A special needs trust solves this problem by holding assets in a way that protects eligibility while improving quality of life.
Benefit Eligibility
Medicaid provides health coverage that many people with disabilities cannot afford on their own. SSI helps cover basic living expenses, but eligibility for both programs depends on having very limited income and resources. A beneficiary cannot own more than $2,000 in countable assets.
If you leave property directly to your loved one, those assets count against the limit. They may lose benefits until the inheritance is spent down, leaving them financially vulnerable again.
A special needs trust avoids this outcome by holding property under the control of a trustee, rather than the beneficiary.
What a Special Needs Trust Does
A special needs trust is a legal arrangement designed to supplement, not replace, public benefits. The trustee manages assets and uses them for approved expenses, such as medical care, education, travel, and recreation.
Because the beneficiary cannot demand distributions, the assets are not counted for Medicaid or SSI purposes.
This means your loved one can continue receiving vital benefits while also enjoying additional support that improves comfort, independence, and opportunities.
Types of Special Needs Trusts
There are two main types of special needs trusts:
- First-party trust: Funded with the beneficiary’s own assets, such as a personal injury settlement. Federal law requires repayment to the state for Medicaid benefits upon the beneficiary’s death.
- Third-party trust: Funded with assets from someone else, such as parents or grandparents. No repayment to the state is required, so the remaining funds can pass to other heirs or charities.
Obviously, a third-party trust is the preferred option when planning for the future.
Role of the Trustee
The trustee carries a great deal of responsibility. They decide when and how to spend trust funds and must follow strict rules to preserve benefits.
Choosing the right trustee is critical. Some people select a relative, while others appoint a professional trustee with experience in administering special needs trusts.
You can also provide guidance in a letter of intent, explaining your loved one’s preferences, routines, and values. While not legally binding, it helps the trustee make decisions that reflect your wishes.
What the Trust Can Pay For
A special needs trust cannot provide cash directly for food or shelter without affecting benefits, but it can pay for many other needs. Common expenses include:
- Medical care not covered by Medicaid
- Therapy and personal care services
- Educational programs
- Computers, phones, and internet access
- Travel and transportation
- Recreational activities
By paying for these extras, the trust enhances the quality of life without disqualifying the beneficiary from essential programs.
Avoiding Mistakes
One mistake families make is leaving property to another relative “for the benefit” of the person with a disability. This approach is risky, since the funds legally belong to that relative and may be lost to divorce, creditors, or poor money management.
A special needs trust provides legal protection and guarantees that funds are used for their intended purpose.
Another mistake is failing to fund the trust. Drafting the document is only the first step—you must also update beneficiary designations and transfer assets into the trust. Without proper funding, the trust cannot serve its role.
Let’s Get Started!
When you work with us, we will guide you toward the right tools to use in light of your situation. Ultimately, you will go forward with a tailor-made plan ideal for you and your family.
To set the wheels in motion, call our Oklahoma City estate planning office at 405-843-6100. Our Tulsa location can be reached at 918-615-2700, and you can use our contact form to send us a message.
Since founding Parman & Easterday in 1985, Larry has led over 1,000 free, community-service education programs and helped more than 10,000 Oklahoma families go from putting off their estate plan to getting it done. His goal for every client is the same: to become the person their family calls "the one who took care of everything."
Larry is the author of three books: The Straight Shooter's Guide to Estate Planning; Estate Planning Basics; and Guiding Those Left Behind in Oklahoma. He served as Oklahoma's Secretary of State and Secretary of Commerce, and his firm is the only member of the American Academy of Estate Planning Attorneys in the state.
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