Planning for a family member with a disability often raises a difficult question: how do you provide financial support without putting their government benefits at risk? A special needs trust may offer one way to address that concern.
The role of a special needs trust
A special needs trust is an estate planning tool that people with disabilities can use to hold their assets. It allows that person to receive added financial support without losing access to public benefits such as Supplemental Security Income or Medicaid.
The key idea is that the trust plays a supplemental role. It is not meant to replace government aid but to cover costs that public programs do not. These might include out-of-pocket medical bills, personal care items, leisure activities or updates to the home.
Pennsylvania’s trust requirements
Pennsylvania recognizes two main types of special needs trusts: first-party and third-party. The type you need depends on where the money comes from.
The first-party option holds assets that the person with the disability owns, such as a personal injury settlement or a direct inheritance. This trust must also include a Medicaid payback clause, meaning any remaining funds after the person’s death must first repay Medicaid for those benefits.
A third-party trust draws on funds from someone else, such as a parent or grandparent. This type does not require a Medicaid payback clause, which gives families more control over how they pass on the remaining resources.
Pennsylvania also permits pooled trusts, which nonprofit organizations manage and allow multiple beneficiaries to combine resources for investment purposes. Each person keeps a separate account within the larger trust. This option can be especially helpful for families with fewer resources.
The assets eligible for the trust
A special needs trust can hold the following assets:
- Cash and savings accounts
- Real estate or interests in property
- Life insurance proceeds or annuities
- Investment accounts and stocks
The document can then use these resources to pay for goods and services that benefit the individual without counting as income or resources for benefits purposes.
The trustee’s responsibilities
The person or entity you choose as trustee carries significant responsibility. A trustee must manage investments, maintain detailed records, file tax returns and coordinate distributions in a way that does not interfere with the beneficiary’s public benefits.
Many families consider appointing a close relative, which can work well when that person has the time, financial knowledge and willingness to take on a long-term obligation. However, serving as trustee can also strain family relationships, particularly when other relatives disagree with spending decisions.
Professional trustees, such as trust companies or financial institutions, offer experience and objectivity but may charge fees that reduce the trust’s overall value over time. Some families choose a combination approach, naming a family member and a professional co-trustee to balance personal familiarity with financial expertise.