A special needs trust, sometimes called a supplemental needs trust, is a legal arrangement that holds assets for the benefit of a person with a disability without disqualifying them from means-tested government benefits such as Supplemental Security Income (SSI) and Medicaid. Those programs cap how much a recipient can own, often around $2,000 in countable assets for SSI, so leaving money to a disabled loved one directly, through a will or as an outright gift, can unintentionally cut off the benefits and services they rely on. A special needs trust solves this: the trust, not the individual, owns the assets, and a trustee uses them to pay for things that improve the person's life beyond what public benefits cover. The two main types are third-party trusts, funded with someone else's money such as a parent's inheritance, and first-party trusts, funded with the beneficiary's own assets; the distinction drives very different rules, especially at the beneficiary's death.
Why does a special needs trust exist?
The core problem is the asset limit on means-tested benefits. SSI and Medicaid are not based on need for medical care alone; they are based on financial need, and they impose strict limits on how much a recipient can own. A person who exceeds the limit loses eligibility until they spend down. For many people with disabilities, those benefits provide not just income but access to Medicaid-funded health care, therapies, and long-term support services that private resources often cannot fully replace.
This creates a painful trap for families. A well-meaning grandparent who leaves $200,000 outright to a disabled grandchild can disqualify that grandchild from benefits, forcing a spend-down and the loss of services, the opposite of what was intended. The special needs trust is the tool designed to avoid this. Because the trust owns the assets and the beneficiary cannot demand them at will, the funds are not "countable" for benefit purposes, yet they remain available to enhance the beneficiary's life.
What can a special needs trust pay for?
The guiding idea is that the trust supplements, rather than replaces, what government benefits provide. Trust funds are typically used for goods and services that improve quality of life beyond basic support: education and tutoring, therapies not covered by Medicaid, medical and dental care beyond what benefits pay, personal care attendants, adapted vehicles and transportation, computers and electronics, travel and recreation, and other comforts.
Historically, trustees avoided paying directly for food and shelter because such payments could reduce SSI, though the rules in this area have been evolving. The trustee's discretion is central: the beneficiary generally cannot compel distributions, which is precisely what keeps the assets from being counted. Because administration is technical, the choice of trustee matters, a topic we address in corporate trustee or family member.
First-party vs. third-party: what is the difference?
This is the most important distinction, because it changes the rules dramatically, especially what happens when the beneficiary dies.
A third-party special needs trust is funded with assets that never belonged to the beneficiary, typically a parent's or grandparent's money, often created within an estate plan and funded at death through a will or living trust. Because the beneficiary never owned the assets, there is no Medicaid "payback" requirement: when the beneficiary dies, whatever remains can pass to other family members or beneficiaries the grantor named. This is the trust families use to leave an inheritance to a disabled loved one, and it is the one most relevant to estate planning.
A first-party special needs trust is funded with the beneficiary's own assets, for example a personal injury settlement, an inheritance received outright, or accumulated savings. Federal law permits these (often called d4A trusts) for individuals who meet disability criteria, but they carry a critical condition: at the beneficiary's death, the state must be repaid for Medicaid benefits provided, up to the amount remaining, before anything passes to other heirs. This "payback" rule is the defining feature of first-party trusts and the main reason third-party planning is preferred when the family has the option to use its own funds.
| Feature | Third-party SNT | First-party SNT |
|---|---|---|
| Funded with | Someone else's assets (parent, grandparent) | The beneficiary's own assets |
| Common source | Inheritance, gifts | Settlement, inheritance received outright, savings |
| Medicaid payback at death | None | Required, up to amount remaining |
| Typical use | Leaving an inheritance to a disabled person | Sheltering assets the person already owns |
How do ABLE accounts fit alongside a special needs trust?
ABLE accounts are a complementary tool, not a replacement. Created under federal law, an ABLE account lets an eligible person with a disability save in a tax-advantaged account without losing benefits, similar in spirit to a 529 plan. For 2026, the annual contribution limit is $20,000, and balances up to $100,000 are excluded from the SSI asset limit. Beginning January 1, 2026, eligibility expanded to people whose disability began before age 46, up from age 26, under the SECURE 2.0 Act, which significantly broadens who can use one.
ABLE accounts are simpler and cheaper to administer than a trust and give the beneficiary more direct control over modest sums, which is useful for everyday expenses. But they have contribution and balance limits and, for first-party-type funding, can carry a Medicaid payback. A common approach pairs the two: an ABLE account for accessible day-to-day spending and a third-party special needs trust for larger assets and long-term security. The right combination depends on the amounts involved and the family's goals.
A worked example: leaving an inheritance the right way
The following is a hypothetical illustration. Parents want to leave $500,000 to their adult son, who has a disability and receives SSI and Medicaid-funded services. If they name him directly in their will, the inheritance disqualifies him from benefits until he spends down to the asset limit, and he loses access to services in the meantime. Instead, their estate plan directs the $500,000 into a third-party special needs trust for his benefit, naming a trustee to manage it and his sister as the remainder beneficiary. He keeps his benefits, the trust pays for therapies, travel, and comforts the programs do not cover, and because the trust is third-party, no Medicaid payback applies; whatever remains at his death passes to his sister. The same $500,000 produced an entirely different outcome based solely on how it was structured. The example is hypothetical, but the structural lesson is the heart of special needs planning.
Frequently asked questions
What is the main purpose of a special needs trust?To provide financial support to a person with a disability without disqualifying them from means-tested benefits like SSI and Medicaid. The trust owns the assets so they are not counted against the beneficiary's eligibility, while still funding a better quality of life.
What is the difference between a first-party and third-party special needs trust?A third-party trust holds someone else's money (such as a parent's inheritance) and has no Medicaid payback at the beneficiary's death. A first-party trust holds the beneficiary's own assets and must repay the state for Medicaid benefits at death before remaining funds pass to others.
Can a special needs trust pay for anything?It is meant to supplement, not replace, public benefits, funding things like therapies, education, care attendants, transportation, and recreation. Direct payments for food and shelter have historically required caution because they can affect SSI, though those rules have been changing.
Is an ABLE account a substitute for a special needs trust?Not fully. ABLE accounts are simpler and good for modest, accessible savings (up to $20,000 contributed per year in 2026, with up to $100,000 excluded from SSI), but they have limits. Larger sums and long-term planning usually still call for a trust; the two are often used together.
Who should serve as trustee of a special needs trust?Someone who can handle the technical benefit rules and ongoing administration. Families often use a professional or corporate trustee, alone or alongside a family member, because mistakes can jeopardize benefits. See corporate trustee or family member.
How Atlatl Advisers can help
Atlatl Advisers is a boutique multi-family office in Madison, Wisconsin, serving accomplished families as an independent, fee-only, SEC-registered fiduciary. We act as your personal CFO: one coordinated team for investments, financial planning, tax strategy, and estate coordination, organized around our Liquidity, Lifetime, and Legacy framework.
This article is provided by Atlatl Advisers LLC for informational and educational purposes only. It is not investment, legal, tax, or insurance advice, and it does not consider the particular circumstances of any reader. Consult your own advisers before acting. Atlatl Advisers is an SEC-registered investment adviser; registration does not imply a certain level of skill or training. Information is believed accurate as of June 2026 and may change.
