Special Needs Trust (SNT): What It Is and How to Start One
Special needs trusts can ensure financial security for loved ones with disabilities or functional needs.
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A special needs trust is an estate planning tool that enables a person with a disability or functional needs to receive financial support without negatively affecting any means-tested government benefits they’re receiving like Medicaid or Supplemental Security Income (SSI).
Setting up a special needs trust for someone can help you enhance their quality of life and give you peace of mind. These trusts ensure that a person with functional needs will receive the financial support they need throughout their lifetime, whether you’re here or not.
Pros and cons of a special needs trust
Pros
Beneficiary can still receive needs-based government benefits.
May protect assets from creditors or lawsuits.
Funds can be invested.
Protection against financial abuse.
Cons
Time and expense to set up.
Requires detailed expense tracking.
State may claim remaining assets after beneficiary dies.
How does a special needs trust work?
Because needs-based government benefits have income and asset limits, receiving financial gifts or assets could reduce or eliminate eligibility. This includes any inheritance that exceeds the asset limit.
Money in a special needs trust is meant to be a supplemental resource, meaning it should cover expenses that aren’t already covered by government benefits — specifically, expenses other than food and shelter . You must ensure money is spent in accordance with IRS guidelines, so hold on to receipts or make a spreadsheet to keep track.
“You do have to account for how the money is spent any time in a year that you draw money out of it,” says Lisa Bamburg, a registered investment advisor and a founder and co-owner of Insurance Advantage and LMA Financial Services in Jacksonville, Arkansas.
Types of special needs trusts
There are different types of special needs trusts, but third-party special needs trusts are typically more common. How you plan to fund the trust will determine which type is most suitable for your loved one.
Third-party special needs trust or supplemental needs trust
This type of special needs trust is funded by someone other than the beneficiary — usually a parent or guardian — and it can be revocable or irrevocable. With this type of trust, you can appoint secondary beneficiaries to inherit the remaining funds when the original beneficiary dies. There are two ways to set one up :
- Standalone trusts can be effective immediately, and the beneficiary can access funds before your death. This type of trust is best if you plan to financially support your loved one throughout your lifetime and allow other family members to contribute.
- Testamentary trusts are created as a part of your will or trust and aren’t funded until you die. This may be more suitable if you’re estate planning and want to leave the trust as an inheritance but don’t want to give the beneficiary access to the trust immediately.
First-party special needs trust or self-settled trust
The difference between a first-party special needs trust and a third-party special needs trust is that the first-party version is funded with the beneficiary's own assets. If a person with functional needs is mentally capable, they can set up and fund their own first-party trust, due to a section in the 21st Century Cures Act, as of December 2016 .
Alternatively, a relative, guardian or court can set up the trust and fund it with the beneficiary's assets. A person with functional needs might choose this type of trust if they’ve received a windfall, or if they become disabled with existing assets and need to qualify for means-tested benefits.
Here’s what to know about a first-party special needs trust:
- The beneficiary must have a disability, be under age 65 when the trust is established, and the trust must be irrevocable.
- The trust must have a Medicaid repayment provision. This means when a beneficiary dies, any remaining money goes to repaying Medicaid and if anything is left, it goes to the other listed beneficiaries.
- In some states, the assets in the trust aren’t protected from creditors.
- If the beneficiary is over age 65, they can create a Miller trust to qualify for Medicaid nursing home benefits .
Pooled trust
Pooled trusts combine trusts for multiple beneficiaries and can be either first-party or third-party trusts. Pooled trusts are typically managed and invested as one, with subaccounts for each beneficiary.
Pooled trusts must be set up and managed by a nonprofit organization. The nonprofit acts as the trustee, administering funds, making investment decisions and meeting tax obligations. Depending on the type of trust, this is what can happen when a beneficiary dies:
- First-party pooled trust: Depending on the state, the trust may keep some or all of the funds. Any remaining funds are required to go to Medicaid to reimburse costs. If there is anything left after that, it typically goes to designated beneficiaries.
- Third-party pooled trust: Beneficiaries typically aren’t required to repay Medicaid. However, a portion of the remaining funds may still go to the nonprofit .
How to set up a special needs trust
1. Think about your wishes for your loved one
This is one of the most important steps, as it determines how funds will be distributed. Consider:
- How much money they need and how long it should last.
- How frequently you want them to receive money.
- How much you want them to receive.
- What needs can be met with the money.
- What will happen to any remaining money in the trust once they die.
- Whether they will have control of assets.
2. Choose trustees
A trustee will help manage, invest and disburse funds for your loved one. You can choose contingent trustees, so you have a backup in case something happens to one. A financial advisor, lawyer or bank can serve as trustee, but be sure to understand what the fees will be.
3. Create your trust
The wording in the trust documents is important; wrong wording can create issues that disqualify beneficiaries from receiving benefits. Be sure to consult a lawyer or advisor who specializes in special needs trusts to help you set it up.
Once you’ve drafted the trust based on your wishes for your loved one, all parties need to sign and typically it must be notarized. Be sure to check the rules in your state. Don’t forget to register it with the IRS for tax purposes.
4. Fund it
You can usually fund a special needs trust with assets such as cash, investments and life insurance policies that pay out when the policy owner dies.
You can also designate property you want to hold in a special needs trust through your will, beneficiary designations on bank or brokerage accounts, or retirement plans.
5. Invest your funds
Bamburg suggests investing funds held in a special needs trust moderately, so your loved one can access funds when the need arises. “For example, you don’t want to use something like real estate that could be volatile.”
Some trust fund account providers have rules on what investments you can fund your trust with, Bamburg says, so check before choosing a provider.
Frequently Asked Questions
How much does a special needs trust cost?
Generally speaking, it could cost several thousand dollars to set up a special needs trust — Bamburg says she paid around $4,000 to set up one for her son — and there may be ongoing fees as well, which will vary by financial institution.
If the cost of opening a special needs trust is prohibitive, consider an alternative like an ABLE account. You may want to speak to a financial advisor or lawyer for advice on how to minimize the costs.
How are special needs trusts taxed?
Trust tax rates are usually higher than income tax rates, but first-party (grantor) trusts are an exception. Because the funds are both from and for the beneficiary, the trust is taxed at the personal tax rate of the person who set up the trust as if the beneficiary received the income directly — even the funds that remain in the trust.
However, the trustee must pay taxes on any income that’s not given to the beneficiary, and any funds that are invested will be subject to income taxes.
Third-party special needs trusts are taxed differently; the trust must pay income tax directly, which can be pricey. The trust can deduct the funds given to the beneficiary, but the beneficiary must pay income tax on those funds as well.
The tax implications of any trust can be complex, so it may be helpful to work with a tax advisor to create a strategy to reduce taxes if possible.
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- 1. Special Needs Alliance. Administering a Special Needs Trust. Accessed Nov 29, 2025.
- 2. Special Needs Alliance. Your Special Needs Trust (“SNT”) Defined. Accessed Nov 29, 2025.
- 3. Centers for Medicare & Medicaid Services. Implications of the Cures Act for Special Needs Trusts . Accessed Nov 29, 2025.
- 4. American College of Trust and Estate Counsel. Understanding Special Needs Trusts. Accessed Nov 29, 2025.
- 5. SSA.gov. Program Operations Manual System (POMS) Introduction to Medicaid trust exceptions. Accessed Nov 29, 2025.
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