Special Needs Trusts (SNTs): Preserving Benefits

A special needs trust allows a disabled individual to receive an inheritance, settlement, or other funds without losing eligibility for Medicaid and SSI benefits. The structure of the trust determines whether the state gets repaid after the beneficiary's death, whether the beneficiary can control any of the funds, and how distributions interact with means-tested benefit programs. Getting this wrong can cost a disabled person their health coverage and income support: sometimes irreversibly.

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Third-Party Special Needs Trusts

Established by another person (parent, grandparent, etc.) using their own assets for the benefit of a disabled beneficiary . Because the assets were never the beneficiary’s, no specific Medicaid exception is needed. Key advantage: no payback requirement . When the beneficiary dies, remaining trust assets pass to whoever the trust creator designated, not to the state.

This is the type of trust families should consider when doing estate planning for a loved one with disabilities. It allows you to leave an inheritance without disqualifying them from public benefits. Third-party SNTs can be created during the settlor’s lifetime (inter vivos) or through a will (testamentary). The testamentary approach is common because it avoids funding the trust until death, when the inheritance actually passes.

There is no age limit for creating or funding a third-party SNT: unlike self-settled trusts, which have an age-65 funding restriction. And because these trusts use someone else’s assets, they do not require court approval or DHS notification in most cases.

Self-Settled Special Needs Trusts (OBRA ‘93 Payback Trusts)

Established with the disabled individual’s own assets (from an inheritance received outright, a personal injury settlement, or their own savings). Authority: 42 U.S.C. § 1396p(d)(4)(A). Requirements:

• The beneficiary must be under 65 at the time the trust is funded
• The trust must be established by the individual, a parent, a grandparent, a legal guardian , or a court
• Must be approved by the Orphans’ Court : a petition is filed seeking judicial approval
• A copy must be provided to DHS legal counsel for review
• The trustee cannot have discretion to make distributions directly to the beneficiary that would affect benefit eligibility
• Payback requirement: Upon the beneficiary’s death, the state must be reimbursed for all Medicaid benefits paid during the beneficiary’s lifetime before any remaining assets pass to other beneficiaries

The payback requirement is the critical distinction. While a third-party SNT lets the family keep everything that remains after the beneficiary’s death, a self-settled SNT requires the state to be repaid first. In practice, the Medicaid estate recovery claim can consume most or all of the remaining trust assets, depending on how long the beneficiary received benefits and the level of care provided.

Pooled Trusts

An alternative for smaller amounts or beneficiaries over 65. A pooled trust is managed by a nonprofit organization that pools funds from multiple beneficiaries for investment purposes while maintaining separate accounts. Authority: 42 U.S.C. § 1396p(d)(4)(C). Upon the beneficiary’s death, up to 50% of the remaining corpus is retained by the pooled trust administrator (62 P.S. § 1414(b)(3)(iii)), with the remainder subject to Medicaid payback.

Pooled trusts are particularly useful when the amount being sheltered is too small to justify the cost of establishing and administering a standalone SNT (drafting, court approval, annual trustee fees, tax returns). Many pooled trust administrators accept initial deposits as low as a few thousand dollars. However, the beneficiary gives up individual control: the nonprofit manages the funds and processes distribution requests according to its policies.

What SNT Funds Can and Cannot Pay For

The fundamental rule is that SNT distributions must supplement, not supplant , public benefits. The trustee can pay for things that government programs do not cover, but distributions that duplicate benefit coverage will reduce or eliminate the beneficiary’s benefits.

Generally permissible distributions include entertainment and recreation (movies, concerts, vacations), electronics and technology (computers, phones, tablets), education and training beyond what public programs provide, personal care items and grooming, vehicle purchase and maintenance, home furnishings and modifications (wheelchair ramps, accessible bathrooms), insurance premiums (including burial insurance), legal fees, and professional services such as financial planning or care management.

Distributions that create problems include cash directly to the beneficiary (any cash distribution is treated as income by SSA), payments for food or shelter (these trigger the “in-kind support and maintenance” or ISM rule, which can reduce SSI by up to one-third plus $20: the “presumed maximum value” rule), and payments to the beneficiary that exceed their ability to spend in the month received.

How SNTs Interact with Benefit Programs

Different benefit programs have different rules, and a distribution that is safe for one program may be disqualifying for another:

SSI (Supplemental Security Income). The most restrictive program. SSI is means-tested: the beneficiary cannot have countable resources exceeding $2,000 ($3,000 for couples). A properly drafted and funded SNT is excluded from countable resources. But any distribution of cash or ISM items reduces the SSI payment. The trustee must understand SSI rules to avoid inadvertent reductions.

SSDI (Social Security Disability Insurance). Not means-tested: it is based on the disabled individual’s work history and earnings record. Trust assets and distributions generally do not affect SSDI eligibility or payment amounts. However, many SSDI recipients also qualify for SSI (concurrent beneficiaries), and the SSI portion is subject to the means-testing rules above.

Medicaid. In Pennsylvania, Medicaid eligibility for disabled individuals generally follows SSI resource limits. A properly structured SNT is excluded from Medicaid countable resources under the same federal exceptions that protect it from SSI. However, distributions that increase the beneficiary’s countable resources above $2,000 at any point during the month can create an eligibility problem.

Section 8 / Housing Choice Voucher. HUD programs count trust distributions differently than SSA does. Some housing authorities treat all distributions as income regardless of whether they are for food, shelter, or supplemental items. The trustee must coordinate carefully with the beneficiary’s housing authority before making significant distributions.

ABLE Accounts: A Complement to SNTs

ABLE (Achieving a Better Life Experience) accounts, authorized under the ABLE Act of 2014 and available in Pennsylvania through PA ABLE , offer a simpler alternative or complement to special needs trusts for qualifying individuals. Key features:

Eligibility. The individual must have a disability with onset before age 46 (raised from 26 by SECURE 2.0 Act of 2022, effective 2026). The individual must be eligible for SSI or SSDI, or be able to self-certify that they meet the SSA disability criteria.

Contribution limits. Annual contributions are limited to the federal gift tax exclusion amount ($19,000 for 2025; $20,000 for 2026). ABLE-eligible individuals who work may contribute an additional amount up to the lesser of their compensation or the federal poverty level for a one-person household. Total account balance is subject to state limits (Pennsylvania’s is currently $511,758: the same as the 529 plan limit).

SSI treatment. The first $100,000 in an ABLE account is excluded from the $2,000 SSI resource limit. This is significant: it means a disabled individual can accumulate savings without losing SSI, something that is impossible with a regular bank account. If the account exceeds $100,000, SSI payments are suspended (not terminated) until the balance drops below $100,000.

Tax advantages. Contributions are not tax-deductible federally, but Pennsylvania offers a state income tax deduction for contributions (up to $19,000 per contributor per year). Earnings grow tax-free, and qualified distributions are tax-free.

Qualified expenses. ABLE accounts can pay for a broader range of expenses than many people realize, including education, housing, transportation, employment training, assistive technology, health and wellness, financial management, legal fees, funeral and burial expenses, and basic living expenses. Unlike SNTs, ABLE accounts can pay for food and housing without triggering the ISM reduction to SSI (as long as the account balance stays under $100,000).

Choosing a Trustee for an SNT

Trustee selection for a special needs trust is more consequential than for a typical trust because the trustee must understand public benefits rules, not just investment management and tax compliance. A distribution that seems reasonable (buying the beneficiary groceries, paying their rent, handing them cash for incidentals) can reduce or eliminate benefits if made incorrectly.

Family member as trustee. Advantages: they know the beneficiary’s needs, preferences, and daily life. Disadvantages: they may not understand SSI/Medicaid rules, they may face pressure from the beneficiary or other family members, and they take on significant personal liability. Family trustees should work with an attorney who understands benefits law and consider engaging a benefits consultant or care manager.

Professional or corporate trustee. Advantages: expertise in benefits rules, investment management, and trust administration ; continuity if the trust spans decades. Disadvantages: fees (typically 1 to 1.5% of trust assets annually, with minimums), and they may not know the beneficiary personally. A professional trustee makes sense for larger trusts (generally $500,000+) or when no suitable family member is available.

Co-trustees. One common arrangement pairs a family member (who knows the beneficiary) with a professional trustee (who knows the rules). This can work well but requires clear delineation of responsibilities in the trust document to avoid conflicts and delays.

Regardless of who serves, the trust document should include a clear trust protector or advisory committee provision, a mechanism for removing and replacing the trustee, and a letter of intent from the family describing the beneficiary’s needs, preferences, routines, and goals. The letter of intent is not legally binding, but it gives the trustee critical context that no legal document can capture.

Inherited Retirement Accounts and SNTs

When a disabled beneficiary inherits a retirement account (IRA, 401(k)), the intersection of trust law, tax law, and benefits law becomes especially complex. Under the SECURE Act, a disabled individual qualifies as an eligible designated beneficiary (EDB) and can stretch distributions over their life expectancy rather than being subject to the 10-year rule: but only if the beneficiary designation is structured correctly.

If the retirement account names the individual directly, the stretch is available but the account balance counts as a resource for SSI/Medicaid purposes: potentially disqualifying the beneficiary. If the account names a properly drafted SNT as beneficiary, the trust can receive the distributions while keeping them out of the beneficiary’s countable resources. But the trust must qualify as a “see-through trust” under IRS regulations to preserve the EDB stretch treatment. This requires meeting specific conditions: see our conduit vs. accumulation trust article for the technical requirements.

Statutory content on this page was last verified against Pennsylvania statutes (20 Pa.C.S.) and DHS regulations (55 Pa. Code): February 2026 . If you are reading this significantly after that date, confirm key provisions with current statute text or contact our office.