Also known as a Supplemental Needs Trust, a third-party Special Needs Trust is a valuable estate planning option for parents who have a child with a social, mental or physical disability that may prevent him or her from becoming financially independent.

This type of trust holds and manages assets on a child’s behalf, providing him or her with a source of income after the parents’ or other benefactors’ death.

1. Why create a special needs trust?

One of the biggest advantages of an SNT is preserving the child’s eligibility for Medicaid and Supplemental Security Income. These programs have strict income and resource limits when determining eligibility. However, assets in a special needs trust do not count toward a child’s total income for purposes of SSI or Medicaid qualification.

2. How can family members fund a special needs trust?

A special needs trust may hold many different types of assets, including cash, real estate, securities and other investments.

Families with fewer assets may also opt for a second-to-die life insurance policy, allowing parents to fund the trust without depleting their own resources. Choosing a lump-sum payout may also enable benefactors to predict how much the trust will ultimately receive from the insurer.

3. What happens to assets in the trust after the beneficiary dies?

When the beneficiary of a special needs trust dies, the trustee is responsible for fulfilling the trust’s instructions and dissolving the fund.

Unlike under a first-party SNT, a third-party special needs trust does not require reimbursement to the government for Medicaid benefits received during the beneficiary’s lifetime. Any remaining funds may pass to whomever the trust designates.