How Special Needs Trusts Protect Benefits While Providing Financial Security
- Elder Care Law Blogger
- 2 hours ago
- 3 min read
Many families are surprised to learn that giving money directly to a loved one with a disability—no matter how well-intentioned—can jeopardize their eligibility for critical government benefits such as Medicaid or Supplemental Security Income (SSI). This is one of the most common planning mistakes we see in elder law and special needs planning.
At Johnson McGinnis, we work with families across Tennessee to help protect both financial resources and essential benefits for loved ones with disabilities. One of the most effective tools for accomplishing this goal is a special needs trust, sometimes referred to as a supplemental needs trust.
What Is a Special Needs Trust?
A special needs trust is a legal planning tool that allows assets to be set aside for a person with a disability without counting against eligibility limits for means-tested government benefits, including Medicaid and SSI.
For example, if a loved one were to receive a $50,000 inheritance outright, that money could disqualify them from Medicaid coverage. However, if those funds are placed into a properly structured special needs trust, the assets are not treated as available resources, allowing the beneficiary to continue receiving benefits.
These trusts are commonly used as part of a broader elder law and estate planning strategy, especially when long-term care or government benefits are involved.
Learn more about how these tools fit into comprehensive planning on our Elder Law services page.
How a Special Needs Trust Works
Once established, the trust can pay for expenses that enhance the beneficiary’s quality of life without replacing or interfering with government benefits. This may include:
Medical equipment and therapies
Personal care services
Educational programs
Assistive technology
Recreational or social activities
By supplementing—not replacing—public benefits, a special needs trust helps ensure long-term financial security while maintaining access to essential programs.
The Role of the Trustee
Managing a special needs trust involves more than simply holding funds. The trustee, who may be a family member or a professional fiduciary, has significant responsibilities, including:
Managing and investing trust assets
Making allowable distributions
Paying taxes and maintaining records
Ensuring compliance with Medicaid and SSI rules
Most importantly, the trustee must understand the unique needs of the beneficiary and use trust funds in a way that truly improves their quality of life while protecting benefits.
The Two Main Types of Special Needs Trusts
First-Party Special Needs Trusts
A first-party special needs trust is funded with the beneficiary’s own assets, such as proceeds from a personal injury settlement or an inheritance received directly. Under federal law, any funds remaining at the beneficiary’s death must first be used to reimburse Medicaid for services provided during their lifetime.
Third-Party Special Needs Trusts
A third-party special needs trust is funded by parents, grandparents, or other family members. These trusts can be created during life or through a will as part of an estate plan. Unlike first-party trusts, there is no Medicaid payback requirement, and remaining assets can pass to other family members or designated beneficiaries.
This distinction makes third-party trusts a powerful planning option for families looking to preserve generational wealth while supporting a loved one with disabilities. These trusts are often coordinated with broader estate planning strategies.
When Should You Consider a Special Needs Trust?
A special needs trust should be considered any time a loved one with a disability may receive money that could affect eligibility for means-tested benefits, including:
Legal settlements
Inheritances
Monetary gifts
Insurance proceeds
Even a large sum can be quickly depleted by medical or personal care costs if not properly protected. A carefully drafted special needs trust helps preserve long-term security while maintaining access to Medicaid, SSI, and other critical programs.
Helping Families Plan With Confidence
Planning for the future of a loved one with disabilities can feel overwhelming, but you do not have to navigate it alone. At Johnson McGinnis, we help families create and manage customized special needs trusts designed to protect assets, preserve benefits, and provide peace of mind.
If you are considering special needs planning for your family, we encourage you to contact our office to discuss your options and develop a plan tailored to your unique situation.
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