An SNT is a special needs trust, a legal arrangement that holds money or property for a person with a disability without disqualifying them from government benefits like Supplemental Security Income (SSI) and Medicaid. The trust pays for things those programs don’t cover, such as education, transportation, electronics, and personal care items, while the beneficiary continues receiving public assistance for basic needs.
How a Special Needs Trust Works
Government benefit programs like SSI and Medicaid have strict limits on how much money or property a person can own. If someone with a disability receives an inheritance, a legal settlement, or a large gift, that money could push them over the limit and cut off their benefits. A special needs trust solves this problem by holding those assets in a separate legal entity. The money in the trust doesn’t count as the beneficiary’s personal resources, so their eligibility stays intact.
A trustee manages the trust and decides how to spend the funds on behalf of the beneficiary. The key rule is that trust money should supplement government benefits, not replace them. The trust pays for extras that SSI and Medicaid won’t provide, while those programs continue covering basic medical care and living expenses. If the trustee pays for something the government programs already cover, it can trigger a reduction or loss of benefits.
Three Types of Special Needs Trusts
First-Party Trust
A first-party SNT holds money that belongs to the person with a disability. This commonly happens when someone receives a personal injury settlement, an inheritance paid directly to them, or a retroactive disability payment. Under Social Security rules, the beneficiary must be under age 65 when the trust is established, and the trust must be set up by the individual, a parent, grandparent, legal guardian, or a court. The tradeoff for preserving benefits is a Medicaid payback requirement: when the beneficiary dies, any money left in the trust must first repay the state for Medicaid expenses it covered during the person’s lifetime. Only after that payback can remaining funds go to other heirs.
Third-Party Trust
A third-party SNT holds money that comes from someone other than the beneficiary, typically parents or grandparents who want to leave an inheritance or make a gift. Because these funds never belonged to the person with a disability, the government has no claim to them. There is no Medicaid payback requirement when the beneficiary dies, so any remaining money can pass to other family members or heirs. Parents often set up third-party trusts as part of their estate plan to provide for a child with a disability long after they’re gone.
Pooled Trust
Pooled trusts are run by nonprofit organizations that combine contributions from many beneficiaries into one large investment pool. Each beneficiary has their own sub-account, but the funds are managed together, which reduces costs. These trusts work well for people with smaller amounts of money who can’t justify the legal fees of creating an individual trust. They offer the same benefit protection at a fraction of the setup cost.
What an SNT Can and Cannot Pay For
The whole point of a special needs trust is to cover things the beneficiary’s government benefits don’t provide. Allowable expenses typically include:
- Education and training (tuition, tutoring, specialized programs)
- Transportation (vehicle purchase, maintenance, rideshare costs)
- Medical expenses not covered by Medicaid (dental work, therapy, specialized equipment)
- Technology (computers, tablets, adaptive devices)
- Recreation and entertainment (vacations, hobbies, event tickets)
- Personal care items (clothing, furniture, household goods)
The trust generally should not pay for food or basic shelter costs for SSI recipients, because those payments can reduce the monthly SSI check. It also shouldn’t cover medical expenses that Medicaid already pays for. Money should never be handed directly to the beneficiary as cash, since that could count as income and jeopardize their benefits. Instead, the trustee pays vendors or service providers directly on the beneficiary’s behalf.
Before making any distribution, a good trustee considers whether the expense clearly benefits the beneficiary, whether public benefits already cover it, and whether the trust can afford it without jeopardizing the beneficiary’s long-term financial security.
What the Trustee Does
The trustee is the person or organization that manages the trust’s money and makes spending decisions. This is a fiduciary role, meaning the trustee is legally required to act in the beneficiary’s best interest at all times. The job involves several ongoing responsibilities.
First, the trustee must understand both the trust’s terms and the rules of the benefit programs the beneficiary receives. One wrong distribution can cause a loss of SSI or Medicaid coverage. The trustee handles all payments from the trust, ensures funds go directly to benefit the beneficiary, oversees how the trust’s assets are invested, and keeps detailed records of every transaction. They’re also expected to communicate regularly with the beneficiary and their caregivers to stay informed about changing needs.
You can name a family member, a friend, or a professional trustee such as a bank trust department or a specialty trust company. A family member may know the beneficiary’s needs better, but they take on significant legal responsibility and must learn the benefits rules. A professional trustee charges fees but brings experience with compliance and investment management. Some families use both: a professional trustee handles the finances while a family member serves as a trust advisor who communicates the beneficiary’s personal needs.
Tax Rules for Special Needs Trusts
A special needs trust is its own tax entity and needs its own Employer Identification Number (EIN) from the IRS. The trustee files an annual tax return (Form 1041) and may need to make quarterly estimated tax payments if the trust expects to owe $1,000 or more in a given year.
Trusts hit higher tax rates much faster than individuals do. For 2026, trust income is taxed at 10% on the first $3,300, then jumps to 24% on income between $3,300 and $11,700, 35% on income between $11,700 and $16,000, and 37% on anything above $16,000. By comparison, an individual wouldn’t reach the 37% bracket until their income exceeded several hundred thousand dollars. This compressed bracket structure means trustees need to be strategic about when and how they distribute income.
One advantage for first-party trusts: if the trust qualifies as a “qualified disability trust,” it receives a $5,300 exemption for 2026 rather than the much smaller exemption most trusts get. To qualify, the trust must be established solely for a beneficiary under 65 who meets the Social Security definition of disabled.
Setting Up a Special Needs Trust
Creating an SNT involves drafting a legal document that spells out the trust’s terms, names the trustee, identifies the beneficiary, and includes the required legal language. For a first-party trust, that language must include the Medicaid payback provision, with the state listed as the first payee ahead of other debts or heirs. The trust must also state that it exists for the “sole benefit” of the beneficiary, meaning no one else can receive distributions from it during the beneficiary’s lifetime.
After the trust document is signed, you apply for an EIN, open a bank or investment account in the trust’s name, and fund it by transferring assets. For a pooled trust, the nonprofit organization handles most of the setup. You simply open a sub-account and make your deposit.
The cost of establishing an individual SNT varies widely depending on complexity, but legal fees for drafting the trust document typically run from a few thousand dollars for a straightforward trust to significantly more for complex situations involving large assets or multiple funding sources. Pooled trusts usually charge lower setup fees plus an ongoing management fee, making them practical for smaller amounts of money.