If you leave an inheritance directly to a disabled child who relies on means-tested government benefits (like SSI or Medicaid), you will instantly disqualify them from those programs. They will be forced to spend down the inheritance on medical care until they are impoverished again. A Special Needs Trust (SNT) prevents this tragedy.
The Third-Party SNT (The Parent's Trust)
This is the most common SNT. It is funded with money from someone other than the disabled beneficiary (usually parents or grandparents). The trust owns the assets, not the beneficiary, so it doesn't count against their $2,000 SSI asset limit.
Best Practice
The Medicaid Payback Exemption
Because the money in a Third-Party SNT never belonged to the disabled beneficiary, when they die, the remaining funds can go to other family members. The state cannot claim the money to reimburse Medicaid.
The First-Party SNT (The Beneficiary's Trust)
This trust is funded with money that already belongs to the disabled person (e.g., a personal injury settlement or an accidental direct inheritance). It must be established under strict federal guidelines (42 U.S.C. § 1396p(d)(4)(A)).
Warning
The Medicaid Payback Requirement
A First-Party SNT must include a 'Medicaid Payback' provision. When the disabled beneficiary dies, the state has the first right to claim any remaining funds in the trust to reimburse itself for Medicaid expenses.