What is a Special Needs Trust and who needs one?

A Special Needs Trust (SNT) — also called a Supplemental Needs Trust — is a trust designed to hold assets for the benefit of a person with a disability without disqualifying them from means-tested government benefits such as Medicaid (Apple Health in Washington) and Supplemental Security Income (SSI). Without an SNT, an inheritance or personal injury settlement received by a person with a disability can disqualify them from Medicaid and SSI — which often provide essential healthcare and income support that cannot be replaced by the inheritance alone. An SNT is appropriate when: • A beneficiary receives SSI, Medicaid, or other means-tested government benefits • A beneficiary has a physical or mental disability that affects their ability to manage finances • A parent or grandparent wants to leave assets to a disabled child or grandchild without disrupting their benefits The trust pays for 'supplemental' needs — things government benefits do not cover, such as education, recreation, transportation, and personal care items — without replacing the government benefits themselves.

What is a Sub-Trust for a beneficiary with special needs?

When a Revocable Living Trust includes a beneficiary with a disability, the trust should include a Special Needs Sub-Trust provision that automatically converts the beneficiary's share into an SNT at the time of distribution — rather than making an outright distribution that could disqualify the beneficiary from benefits. The Successor Trustee has the power to: • Obtain legal advice before making any distribution to a beneficiary receiving disability benefits • Create a Special Needs Trust or similar arrangement • Make distributions only in ways that do not interfere with the beneficiary's government benefits • Consult with a disability benefits specialist before taking any action This provision protects both the beneficiary and the Trustee from inadvertently causing a loss of benefits through a well-intentioned but poorly structured distribution.

What is the difference between a first-party and third-party Special Needs Trust?

There are two main types of Special Needs Trusts: First-Party SNT (also called a Self-Settled or (d)(4)(A) Trust): • Funded with the disabled person's own assets — such as a personal injury settlement or inheritance already received • Must be established by a parent, grandparent, legal guardian, or court • The beneficiary must be under age 65 • At the beneficiary's death, Medicaid must be reimbursed for benefits paid during the beneficiary's lifetime before any remaining assets pass to other beneficiaries Third-Party SNT: • Funded with assets belonging to someone other than the disabled person — such as a parent's estate plan • No Medicaid payback requirement at the beneficiary's death • Can be established by any third party — most commonly a parent or grandparent through their Revocable Living Trust • No age restriction For estate planning purposes, the third-party SNT — built into a parent's Revocable Living Trust — is the most common and most flexible option.

What can a Special Needs Trust pay for?

A Special Needs Trust can pay for goods and services that supplement — but do not replace — government benefits. The key is that distributions must not count as 'income' or 'resources' under SSI and Medicaid rules. Generally permissible distributions: • Education and vocational training • Recreation, entertainment, and travel • Personal care items not covered by Medicaid • Transportation (including a vehicle) • Technology — computers, tablets, smartphones • Home furnishings and appliances • Legal fees • Prepaid funeral and burial expenses Generally impermissible distributions (may reduce benefits): • Cash payments directly to the beneficiary • Food and shelter (may reduce SSI benefits dollar-for-dollar) • Medical care covered by Medicaid The Successor Trustee should consult a disability benefits specialist before making any distribution that might affect the beneficiary's eligibility.

What happens to Special Needs Trust assets when the beneficiary dies?

For a third-party Special Needs Trust (the most common type in estate planning), there is no Medicaid payback requirement. When the beneficiary dies, the remaining trust assets pass to the remainder beneficiaries named in the trust — typically siblings or other family members. For a first-party Special Needs Trust (funded with the disabled person's own assets), Medicaid must be reimbursed for all benefits paid during the beneficiary's lifetime before any remaining assets pass to other beneficiaries. This is called the Medicaid payback provision. Washington State note: The Successor Trustee has the power to create a Special Needs Trust or similar arrangement if a beneficiary's disability would cause an outright distribution to interfere with their government benefits.

Christopher S. Mulvaney, Esq. — Attorney-and-Counselor-at-Law — Professionalism with Integrity — WSBA#33595 — Licensed Only in Washington State

[email protected]Bellevue, WA

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A Special Needs Trust allows a beneficiary with a disability to receive an inheritance without losing eligibility for government benefits such as Medicaid (Apple Health in Washington) and Supplemental Security Income (SSI). Without this planning, an inheritance can disqualify a disabled beneficiary from the very benefits they depend on most.

Reference Links

Social Security Administration — SSI Program
Washington Apple Health (Medicaid)
RCW 11.98 — Washington Trust Law

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