Families often want to leave money or property to a loved one with a disability. The goal is generous and understandable. But if the plan is not structured correctly, an inheritance, settlement, or gift can accidentally cause the person to lose important public benefits.
A special needs trust can help avoid that problem. It allows assets to be held and managed for a person with a disability while preserving eligibility for programs such as Supplemental Security Income, Medicaid, housing assistance, and other needs-based benefits. The purpose is not only to protect eligibility. The purpose is to improve the person’s quality of life.
Why Special Needs Planning Matters
Many public benefit programs have strict income and resource rules. For example, SSI generally has a very low resource limit. In 2026, the federal SSI benefit rate is $994 per month for an eligible individual and $1,491 per month for an eligible couple.
Medicaid can be even more important than the monthly cash benefit. For individuals with disabilities, Medicaid may help cover long-term care, home and community-based services, therapy, prescription medications, and other medical needs. Losing Medicaid can create serious financial and care-related problems for the beneficiary and the family.
What Is a Special Needs Trust?
A special needs trust, often called an SNT, is a legal arrangement that allows a trustee to hold and use funds for the benefit of a person with a disability. The trustee must follow the terms of the trust and should generally use the funds to supplement public benefits rather than replace them.
Common trust expenses may include education, recreation, technology, transportation, adaptive equipment, supplemental therapies, travel, furniture, and other items that improve daily life. A key rule is that the trustee should usually pay vendors directly rather than giving cash to the beneficiary.
First-Party Special Needs Trusts
A first-party special needs trust is funded with assets that belong to the person with a disability. This may include a personal injury settlement, an inheritance that was received outright, or accumulated savings.
These trusts have specific requirements. The beneficiary must generally be under age 65 when the trust is funded and must meet the Social Security Administration’s definition of disability. The trust must also be irrevocable and must include a Medicaid payback provision. That means that after the beneficiary dies, the state Medicaid agency may be reimbursed from remaining trust assets for Medicaid benefits paid during the beneficiary’s lifetime.
Third-Party Special Needs Trusts
A third-party special needs trust is funded with assets that never belonged to the beneficiary. These trusts are often created by parents, grandparents, or other family members as part of an estate plan.
This type of trust is often preferable when planning ahead. Because the assets belonged to someone other than the beneficiary, a third-party special needs trust generally does not require Medicaid payback. Remaining assets can pass to other family members or beneficiaries named in the trust. In Illinois, third-party supplemental needs trusts are addressed under 760 ILCS 3/509.
A third-party trust may be created in a will, inside a revocable living trust, or as a standalone trust during the creator’s lifetime. A standalone trust can be especially useful because other family members can name the trust as the recipient of gifts, inheritances, or life insurance proceeds.
Pooled Special Needs Trusts
A pooled special needs trust is managed by a nonprofit organization. Each beneficiary has a separate account, but the funds are pooled for investment and administration. This can be a practical option when the amount involved is modest or when there is no suitable family member available to serve as trustee.
ABLE Accounts Can Also Help
An ABLE account is another planning tool for eligible individuals with disabilities. In Illinois, an IL ABLE account may be available to a U.S. citizen or legal resident, regardless of what state they live in, if the onset of the person’s disability occurred before age 46 and the person meets one of several disability-related requirements. Those requirements may include receiving SSI, receiving SSDI, having a condition on the Social Security Administration’s Compassionate Allowances list, or having a qualifying written diagnosis from a physician.
Funds in an IL ABLE account can be used for qualified disability expenses. These expenses are broadly defined and may include education, health and wellness, housing, transportation, legal fees, financial management, employment training, assistive technology, personal support services, oversight and monitoring, and funeral and burial expenses.
IL ABLE accounts can also help protect public benefits. Account balances up to $100,000 generally do not affect SSI benefits. If the account balance exceeds $100,000, SSI payments may be temporarily suspended until the balance falls back below that amount. Medicaid and SSDI are not lost simply because the IL ABLE account exceeds $100,000. However, housing withdrawals must generally be spent in the same month they are withdrawn, or SSI may be affected.
ABLE accounts are helpful, but they do not replace a special needs trust. In many cases, the best plan uses multiple tools together, including an ABLE account, a special needs trust, coordinated beneficiary designations, and careful trustee guidance. An ABLE account can be especially useful for flexible day-to-day spending, while a special needs trust may be better suited for larger inheritances, settlements, or long-term family wealth planning.
Do Not Rely on Informal Family Arrangements
Families sometimes assume they can leave money to a sibling or another relative who will “do the right thing” for the person with a disability. That approach is risky.
An informal arrangement does not legally require the person holding the money to use it for the beneficiary. The funds may also be exposed to that person’s creditors, divorce, lawsuits, or financial problems. A properly drafted trust is usually much safer and clearer.
The Letter of Intent
A letter of intent is not a substitute for a trust, but it can be extremely valuable. This document gives future trustees and caregivers practical information about the beneficiary’s daily life.
It may include medical history, medications, routines, communication preferences, religious practices, social relationships, living preferences, favorite activities, and long-term goals. This can be especially important when parents or primary caregivers are no longer able to provide direct support.
Choosing the Right Trustee
The trustee’s role is important. A trustee must understand the beneficiary’s needs, keep accurate records, coordinate with benefits agencies, file tax returns when required, and make distributions in a way that protects public benefits.
A family member may know the beneficiary well. A professional or corporate trustee may bring financial and legal experience. In some cases, a combination works best. Families may also consider a trust protector or advisory committee to help respond to changes in the law or changes in the beneficiary’s circumstances.
Common Mistakes to Avoid
Special needs planning requires careful coordination. Families should avoid:
- Leaving assets directly to the person with a disability
- Assuming that a sibling or relative can safely hold funds informally
- Creating a trust with overly restrictive distribution language
- Forgetting to update beneficiary designations
- Failing to tell grandparents, aunts, uncles, and other relatives how gifts should be directed
- Choosing a trustee without considering public benefit rules
- Ignoring ABLE accounts, tax issues, or Medicaid payback rules
Planning Ahead Protects More Than Money
A good special needs plan is not just about preserving benefits. It is about dignity, stability, and quality of life. It helps make sure that family resources are used wisely and that a loved one can continue receiving important public benefits while also enjoying supplemental support.
If your family includes a loved one with a disability, Black, Black & Brown can help you review your estate plan, create a special needs trust, coordinate beneficiary designations, and plan for long-term care needs.
Contact Black, Black & Brown in Washington, Illinois to schedule a consultation about special needs trust planning, estate planning, wills, trusts, and probate matters.
This article is for informational purposes only and is not legal advice. Every family’s situation is different. Speak with an attorney about your specific circumstances.