What Is a Special Needs Trust (SNT)?

A special needs trust (SNT) is an irrevocable trust designed to hold assets for a person with a disability without disqualifying them from means-tested government benefit programs — primarily Supplemental Security Income (SSI) and Medicaid. Assets held inside a properly structured SNT are not counted toward the beneficiary's personal asset limits for these programs. The trust can pay for things government benefits do not cover — travel, education, technology, recreation, therapy — while SSI continues to cover basic living expenses and Medicaid continues to cover healthcare. Without a special needs trust, leaving money directly to a child with a disability — through a will, a beneficiary designation, or a regular account — typically disqualifies them from SSI and Medicaid the moment the inheritance is received.

For tech workers who have accumulated significant IRA, 401(k), and brokerage balances, the SNT is not optional planning — it is the foundational document around which all other estate and retirement planning for a family with a child who has a disability must be structured.

Why Government Benefit Eligibility Is the Central Problem

SSI is a federal program administered by the Social Security Administration that provides monthly income to individuals with disabilities who have limited income and resources. The asset limit is strict: an individual receiving SSI cannot own more than $2,000 in countable assets. Medicaid, which provides healthcare coverage for people with disabilities, uses similar resource limits in most states — though the exact rules vary by state and Medicaid program.

These limits have not been meaningfully adjusted for inflation in decades. A person with a disability who inherits $50,000 from a parent's estate — or is named as a direct beneficiary on a $200,000 IRA — is disqualified from SSI and Medicaid immediately. They must spend down the inheritance on their own care before benefits resume. For a person who depends on SSI for daily living expenses and Medicaid for healthcare that can cost tens or hundreds of thousands of dollars per year, this is not a minor inconvenience — it is a catastrophic disruption.

A special needs trust solves this problem because the assets inside the trust are owned by the trust, not by the beneficiary. As long as the trust is properly drafted to restrict distributions to supplemental expenses — not basic support that SSI and Medicaid are designed to cover — the trust assets do not count as the beneficiary's resources.

First-Party vs. Third-Party Special Needs Trusts

The two main categories of special needs trusts are distinguished by where the funding comes from.

A third-party special needs trust is funded with assets belonging to someone other than the beneficiary — most commonly a parent, grandparent, or other family member. This is the trust a tech worker creates as part of their estate plan to hold assets they intend to leave to a child with a disability. It is established during the parent's lifetime or through a will. The key feature: when the beneficiary dies, any remaining assets can pass to other heirs or charities. There is no Medicaid payback requirement. For parents planning their estates, a third-party SNT is almost always the right structure.

A first-party special needs trust (also called a self-settled trust or payback trust) is funded with assets that already belong to the person with a disability — for example, a personal injury settlement, an inheritance received directly, or assets accumulated before disability planning was in place. Because the assets originated with the beneficiary, federal law requires that any assets remaining in the trust at the beneficiary's death be used first to reimburse the state for Medicaid benefits paid during their lifetime. This Medicaid payback requirement significantly limits the usefulness of first-party trusts for wealth transfer and is one of the primary reasons parents should establish a third-party SNT before any assets are transferred to a child with a disability.

How an SNT Differs from a Regular Trust or UTMA Account

A standard revocable living trust or irrevocable trust is designed to hold and distribute assets for beneficiaries with full legal capacity. Distributions from a regular trust to a beneficiary with a disability typically count as the beneficiary's resources for SSI and Medicaid purposes — defeating the benefit preservation goal entirely.

A UTMA account transfers to the child outright at age 18 or 21 (depending on state law). For a child with a disability receiving SSI and Medicaid, receiving a large UTMA balance at majority would disqualify them from both programs. UTMA accounts should never be used as the primary vehicle for transferring wealth to a child who has a disability and relies on means-tested government benefits.

A special needs trust is drafted with specific language that limits the trustee's authority to make distributions only for supplemental needs — things not already provided by government programs. Basic food and shelter payments from an SNT can reduce SSI benefits dollar-for-dollar under SSI's in-kind support and maintenance rules. A well-drafted trust instructs the trustee to avoid distributions that duplicate SSI-covered benefits, preserving the full monthly SSI payment.

What an SNT Can and Cannot Pay For

The trustee of a special needs trust has discretion to make distributions for the beneficiary's supplemental needs. Common permissible expenses include:

Permitted: Education and tutoring, technology and computers, transportation and vehicle costs, travel and recreation, personal care items not covered by Medicaid, therapy and treatments not covered by insurance, entertainment and cultural experiences, household furnishings, attorney and financial advisor fees related to the trust, contributions to an ABLE account.

Requires care: Direct cash payments to the beneficiary count as income for SSI purposes and may reduce the monthly SSI payment. Payments for food and shelter (rent, utilities, groceries) are treated as in-kind support and maintenance and reduce SSI by up to one-third of the federal benefit rate. A skilled trustee structures distributions to avoid or minimize these reductions.

Not permitted: Distributions that substitute for government benefits the beneficiary is entitled to receive — the trust is supplemental, not primary. A trustee who routinely pays for housing and food from the SNT may inadvertently reduce SSI payments significantly or trigger redetermination of benefit eligibility.

When to Establish a Special Needs Trust

The short answer: before any assets are transferred to or for the benefit of a child with a disability. A third-party SNT should be established — and named as the beneficiary on relevant accounts — as part of the parent's core estate plan, alongside the revocable living trust, will, and healthcare directives.

Specific triggers that make establishing an SNT urgent:

Any beneficiary designation update. If you have a traditional IRA, Roth IRA, 401(k), or life insurance policy and a child with a disability is or might be a beneficiary, the SNT — not the child directly — should be the named beneficiary. Naming a child with a disability directly on a retirement account is one of the most common and costly estate planning mistakes in this situation.

Drafting or updating a will. Any direct bequest to a child with a disability in a will should be redirected to the SNT.

SECURE Act considerations for retirement accounts. The SECURE Act of 2019 eliminated the stretch IRA for most beneficiaries, requiring inherited IRA distributions within 10 years. However, a narrow exception exists for certain trusts for beneficiaries with disabilities — but the trust must meet specific IRS requirements to qualify. This is one of the most technically complex intersections in this area of planning and is covered in detail at Special Needs Trust as IRA Beneficiary.

Finding an Attorney and the Letter of Intent

A special needs trust must be drafted by a qualified attorney — ideally one who is a member of the Special Needs Alliance (specialneedsalliance.org) or who practices elder law with specific SNT experience. SNT rules involve interactions between federal SSI rules, state Medicaid rules, and federal tax law. Generic estate planning attorneys who do not specialize in this area regularly produce trusts that are technically valid but functionally flawed in ways that jeopardize benefit eligibility.

Beyond the legal document, most special needs planning attorneys recommend that parents create a letter of intent — a non-binding but detailed document that describes the beneficiary's daily routines, medical needs, communication preferences, relationships, and wishes for their future. The letter of intent is not legally enforceable, but it provides the successor trustee — who may be managing the trust after the parents are gone — with essential guidance about how to support the beneficiary's life. It is one of the most personal and important documents a parent can write.