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Parents of a child with a disability face a cruel arithmetic: leaving the child money can take away the benefits the money was meant to supplement. The special needs trust is the answer the law built for exactly this problem, and drafting it correctly is the difference between a lifetime of support and a lost eligibility.
In short: A special needs trust holds assets for a person with a disability so that the assets are not counted against SSI or Medicaid eligibility. The trustee pays for things benefits do not cover, such as therapy, education, travel, equipment, and quality of life, without handing the beneficiary money directly.
Two kinds: A third-party trust holds money that was never the beneficiary’s, typically an inheritance or gift from parents, and passes what remains to family at the beneficiary’s death. A first-party trust holds money that already belongs to the beneficiary, such as a settlement or a direct inheritance, and must repay Medicaid at death.
The federal framework: First-party trusts are authorized by 42 U.S.C. § 1396p(d)(4)(A) and must be irrevocable, for the sole benefit of a beneficiary under 65, and contain the Medicaid payback provision. Third-party trusts have no payback requirement, which is why the two must never be confused.
The biggest mistake: Leaving the money to a sibling with instructions to take care of the beneficiary. The sibling’s creditors, divorce, or death can take it, and nothing legally requires the care. A trust does what a promise cannot.
How a Special Needs Trust Preserves Benefits
SSI and Medicaid count what a person owns and can access. Money in a properly drafted special needs trust is not owned by the beneficiary and cannot be demanded by them, so it is not counted. The trustee decides what to pay for, and the rules reward a trustee who pays for goods and services directly rather than giving the beneficiary cash, because cash and payments for food or shelter can reduce SSI.
What the trust can pay for is nearly everything that makes life better and that benefits do not cover: a wheelchair van, a computer, therapies beyond what Medicaid provides, education, recreation, travel with a companion, furniture, a phone, and personal care. It can own a home for the beneficiary to live in. It cannot simply hand over money or pay rent without consequences, which is why the trustee needs clear guidance and, often, a letter of intent from the parents describing the beneficiary’s routines and preferences.
The trustee can be a family member, a professional, or a pooled trust run by a nonprofit that manages many beneficiaries’ accounts. For families without an obvious trustee, the pooled option is worth knowing about. Where the beneficiary also needs a decision-maker for personal matters, a guardianship runs alongside the trust.
Third-Party vs. First-Party Special Needs Trusts
Third-Party Trust
- Holds assets that never belonged to the beneficiary: parents’ inheritance, grandparents’ gifts, life insurance.
- No Medicaid payback at the beneficiary’s death; what remains passes to family or others you name.
- Can be created now and funded at your death, or funded during life.
- Often built into a parent’s will or revocable trust so the inheritance flows into it automatically.
- The right structure for nearly every parent planning for a child.
First-Party (d)(4)(A) Trust
- Holds assets that already belong to the beneficiary: a personal injury settlement, a direct inheritance, back benefits.
- Must repay Medicaid for lifetime benefits at the beneficiary’s death before anything passes to family.
- Must be irrevocable and established for a beneficiary under 65.
- The fix when money has already landed in the beneficiary’s name and eligibility is at risk.
- Time-sensitive: benefits can be lost while the money sits uncovered.
Putting a parent’s inheritance into a first-party trust needlessly subjects it to Medicaid payback. Putting a settlement into a third-party trust does not work at all. Which trust you need is the first question we answer.
Creating a Special Needs Trust
For a third-party trust built into your plan, a few weeks. For a first-party trust protecting money already received, faster, because benefits are at risk while you wait.
Free Phone Consultation
We identify whose money the trust will hold, which trust that requires, what benefits the beneficiary receives, and the trustee options. Flat-fee quote before drafting.
Design
Trustee and successor, distribution standards, coordination with SSI and Medicaid rules, a letter of intent, and how the trust connects to your will or revocable trust.
Drafting and Signing
The trust drafted to the federal and Alabama requirements for its type, including the payback provision where the law requires it and its absence where it does not.
Funding and Coordination
Beneficiary designations, your will or trust, and any settlement paperwork redirected to the trust. For a first-party trust, notice to the benefit agencies so eligibility is preserved.
Special Needs Trusts — Frequently Asked Questions
1.Will an inheritance cause my child to lose SSI or Medicaid?
If it is left to them outright, very likely yes: both programs have strict asset limits. If it is left to a properly drafted special needs trust instead, no. The trust owns the assets, the beneficiary does not, and eligibility is preserved while the trust pays for what improves their life.
2.What is the difference between a third-party and a first-party special needs trust?
Whose money it is. A third-party trust holds money from parents or others and has no Medicaid payback at death. A first-party trust holds money that already belonged to the beneficiary, such as a settlement, and must repay Medicaid at death. Using the wrong one either wastes an inheritance on payback or fails to protect eligibility at all.
3.What can the trustee pay for?
Almost anything that benefits the beneficiary and that SSI or Medicaid does not cover: therapy, education, equipment, a vehicle, travel, recreation, technology, furniture, and personal care. Paying cash directly, or paying for food and shelter, can reduce SSI, so the trustee is guided on how to pay rather than whether.
4.Can I just leave the money to my other child to take care of their sibling?
We strongly advise against it. The money becomes the sibling’s, exposed to their creditors, divorce, or death, and nothing legally requires them to use it as intended. A third-party special needs trust does what a promise cannot, and can name that same sibling as trustee.
5.Is an ABLE account enough?
Usually not by itself. ABLE accounts have low annual contribution limits, a Medicaid payback at death, and cannot hold an inheritance of any size. They pair well with a special needs trust: the ABLE account for day-to-day funds the beneficiary controls, the trust for everything larger.
6.What does a special needs trust cost at The Harris Firm LLC?
Special needs trusts are flat-fee, quoted at your free phone consultation based on the type of trust and how it connects to the rest of your estate plan. You will know the full price before committing.
Protect Their Future and Their Benefits. Free Phone Consultation.
One free call identifies which special needs trust your family needs, how it fits your estate plan, and the flat fee. If money has already landed in the beneficiary’s name, call today; eligibility does not wait.
Our Special Needs Trust Service Includes
✓ Third-party or first-party trust, correctly chosen
✓ Drafting to 42 U.S.C. § 1396p(d)(4)(A) where required
✓ Trustee guidance and distribution standards
✓ Letter of intent template for the beneficiary’s care
✓ Coordination with your will, trust, and beneficiary designations
✓ ABLE account and pooled trust guidance
Call the Office Nearest You
Birmingham — (205) 201-1789
Chelsea — (205) 677-5490
Huntsville — (256) 665-9473
Montgomery — (334) 782-9938
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