Estate planning attorneys often use two different names for what appears to be the same thing: “special needs trust” and “supplemental needs trust.” Both terms describe trusts designed to help individuals with disabilities maintain their eligibility for government benefits while receiving additional financial support. However, the subtle distinctions between these terms can make a significant difference in your planning strategy.
In Massachusetts, where MassHealth and federal programs like Supplemental Security Income (SSI) provide vital support for people with disabilities, choosing the right type of trust structure is important. Getting it wrong could mean losing thousands of dollars in benefits or facing unexpected complications down the road.
What Are Special Needs and Supplemental Needs Trusts
Both special needs trusts and supplemental needs trusts serve the same fundamental purpose: they allow individuals with disabilities to receive additional resources without jeopardizing their eligibility for means-tested government benefits like MassHealth (Massachusetts Medicaid) and Supplemental Security Income (SSI).
These trusts work by holding assets for the benefit of someone with disabilities while ensuring those assets don’t count as “available resources” under benefit program rules. Instead of giving money directly to your loved one, you place the funds in a trust where a trustee can use them to pay for supplemental needs that government benefits don’t cover.
Government benefits typically cover basic necessities like housing, food, and medical care. These trusts provide the “supplemental” support for extras that make life enjoyable and meaningful: entertainment, vacation travel, special equipment, or educational opportunities.
A person must meet the Social Security definition of disability, which requires a condition that is severe, prevents substantial gainful activity, and is expected to last at least 12 months or result in death. These trusts are used for long-term conditions such as autism, cerebral palsy, mental illness, or intellectual disabilities, not for temporary disabilities.
The Terminology Question Why Two Names
Many attorneys use “special needs trust” and “supplemental needs trust” interchangeably, but there’s a subtle distinction that reflects different perspectives on disability and trust planning.
“Special needs trust” focuses on the beneficiary: someone with “special needs” who requires additional support. “Supplemental needs trust” emphasizes what the trust does: it supplements existing benefit programs, acknowledging that government benefits alone aren’t sufficient for a decent quality of life.
In Massachusetts legal practice, you’ll encounter both terms. The important distinction isn’t in the name but in how the trust is funded and structured.
First-Party vs Third-Party The Real Distinction That Matters
When Massachusetts attorneys talk about the meaningful differences in trust planning for people with disabilities, they’re usually referring to the distinction between first-party and third-party trusts, not the special needs versus supplemental needs terminology.
Self-Settled (First-Party) Special Needs Trusts
A first-party special needs trust, also called a self-settled trust, is funded with assets that belong to the person with disabilities. Common funding sources include:
- Personal injury settlements
- Inheritance received directly by the disabled person
- Back payments from Social Security
- Workers’ compensation awards
- Assets accumulated before becoming disabled
These trusts come with significant restrictions under federal law. First-party special needs trusts may only accept the assets of a beneficiary who is under the age of 65. If someone over 65 receives a large sum of money (like an inheritance or settlement), they generally cannot use a first-party special needs trust to preserve their benefits.
The most significant limitation of first-party trusts is the payback provision. When the beneficiary dies, any remaining funds in the trust must first be used to reimburse the state for MassHealth benefits paid on behalf of the beneficiary during their lifetime. Only after this payback is satisfied can any remaining assets go to other family members or beneficiaries.
Third-Party Supplemental Needs Trusts
A third-party trust (often called a supplemental needs trust) is funded with assets that never belonged to the person with disabilities. These assets typically come from:
- Parents or grandparents setting aside money
- Life insurance proceeds payable to the trust
- Gifts from family members
- Inheritances left directly to the trust (not to the disabled person)
Unlike a First-Party SNT, a Supplemental Needs Trust does not require a payback provision to Medicaid, making it an attractive option for families wishing to leave an inheritance to their loved one. This is the key advantage of third-party trusts: when the beneficiary dies, remaining trust assets can go to whomever the trust creators designated, with no obligation to repay the government.
Third-party trusts also have no age restrictions and can be established for beneficiaries of any age. They offer more flexibility in terms of creation and funding over time.
Massachusetts Legal Framework
Massachusetts trust law operates under the Massachusetts Uniform Trust Code in Chapter 203E of the Massachusetts General Laws. While this provides the general framework for trust creation and administration, special rules apply to trusts designed to preserve government benefits.
For MassHealth purposes, the trust must meet specific criteria: it must be irrevocable, the beneficiary cannot have power to revoke it, distributions must be at the trustee’s sole discretion, and the beneficiary cannot have the right to demand distributions.
Federal law, particularly the Social Security Act, imposes additional requirements for trusts that affect SSI and Medicaid eligibility. These federal rules often override state law, so your trust must satisfy both Massachusetts trust law and federal benefit requirements.
Key Differences in Practice
Understanding the practical differences between first-party and third-party trusts helps families make informed decisions about their planning approach.
Payback Provisions
The payback requirement represents the most significant practical difference between trust types. Assets that remain in trusts that are funded by someone other than the disabled individual are not required to be used to pay back the government. Instead, these funds can be dispersed to other beneficiaries as specified in the trust document.
For families, this means third-party trusts preserve wealth for future generations, while first-party trusts primarily benefit the person with disabilities during their lifetime. If your primary goal is providing for your disabled loved one while also preserving assets for other family members, third-party planning offers clear advantages.
Age Restrictions
First-party trusts cannot be established for individuals over 65, but third-party trusts have no age limitations. This restriction reflects federal policy decisions about when self-settled trusts should be allowed to preserve benefit eligibility.
If your adult child becomes disabled after age 65, you can still establish a third-party trust for their benefit, but they cannot create a first-party trust with their own assets.
Court Approval Requirements
These trusts generally must be set up by a guardian, conservator, or court order. This refers to first-party trusts, which often require court involvement because they involve a disabled person’s own assets and must meet strict federal requirements.
Third-party trusts typically don’t require court approval and can be established by parents, grandparents, or other family members as part of routine estate planning. This makes them more accessible and less expensive to create.
Distribution Flexibility
Both types of trusts require that distributions be made at the trustee’s sole discretion to preserve benefit eligibility. However, third-party trusts often provide more flexibility in terms of what can be purchased and how funds can be used.
The key limitation for both trust types is that distributions should generally avoid paying for basic food and shelter. Doing so can reduce SSI benefits dollar-for-dollar under in-kind support and maintenance rules. Importantly, such payments do not disqualify a person from MassHealth, though they may still affect SSI cash benefits.
When to Use Each Type
The choice between first-party and third-party trusts depends on the source of funding and your family’s specific circumstances. Understanding common scenarios helps determine which trust structure works best for your situation.
Family Planning Scenarios
Most families planning for a child with disabilities will use third-party trusts. Parents can establish these trusts as part of their estate planning, fund them through life insurance, or make gifts to them during their lifetimes.
A typical scenario involves parents who want to leave an inheritance to their disabled child without affecting benefit eligibility. Instead of leaving assets directly to the child in their will, they leave them to a supplemental needs trust for the child’s benefit.
Inheritance Situations
Sometimes a beneficiary can disclaim an inheritance so the assets pass into a third-party trust. The disclaimer must be in writing, irrevocable, and completed within nine months. This strategy works only if the estate plan or intestacy laws direct assets to the trust.
Settlement Proceeds
Personal injury settlements, workers’ compensation awards, and similar lump-sum payments typically require first-party trust planning. The settlement money belongs to the injured person, so it cannot go into a third-party trust.
However, skilled attorneys sometimes structure settlements to minimize the need for first-party trusts. For example, a settlement might provide for ongoing payments to a third-party trust rather than a lump sum to the injured person.
Gift Planning
Families who want to make gifts to disabled relatives should almost always use third-party trusts rather than giving assets directly. This preserves the gift-giver’s control over how the money is used and ensures benefit eligibility is maintained.
Grandparents, in particular, should be cautious about leaving money directly to grandchildren with disabilities. Working with an estate planning attorney to structure gifts properly can prevent unintended benefit loss.
What Can Trust Funds Be Used For
Understanding appropriate trust distributions helps families maximize the benefit of these planning tools. Special needs trusts do not have a limit on the amount of money that can be placed within them. The absence of a limit means that you can have peace of mind knowing that your loved one will be financially cared for over the long term.
Permissible Uses
Trust funds can typically pay for:
- Entertainment and recreation (movies, concerts, sporting events)
- Electronic equipment (computers, tablets, smartphones)
- Travel and vacation expenses
- Vehicle purchase and maintenance
- Home furnishings and decorations
- Educational expenses and tutoring
- Medical and dental costs not covered by insurance
- Therapy and rehabilitation services
- Personal care attendants beyond what benefits provide
- Legal fees and advocacy services
- Burial expenses and funeral costs
Restricted Uses
Trust funds generally cannot pay for:
- Basic food and shelter (rent, groceries for home consumption)
- Utility bills for the beneficiary’s primary residence
- Cash gifts directly to the beneficiary
- Anything that would count as income under SSI rules
The rules around food and shelter are complex and have exceptions. For example, the trust might be able to pay for restaurant meals, special dietary foods, or temporary housing that doesn’t constitute the beneficiary’s primary residence.
Common Mistakes to Avoid
Even well-intentioned families can make errors that jeopardize benefits or undermine their trust planning goals. Being aware of these common pitfalls helps ensure your trust works as intended.
Terminology Confusion
Don’t get hung up on whether your attorney calls it a “special needs” or “supplemental needs” trust. Focus on whether it’s first-party or third-party and whether it meets your family’s specific goals.
Improper Funding
The biggest mistake families make is putting the wrong assets into the wrong type of trust. Money that belongs to the disabled person must go into a first-party trust, while family assets should go into third-party trusts. Mixing these up can cause benefit problems and unnecessary payback obligations.
Trustee Selection Issues
Choosing the wrong trustee can undermine the entire purpose of the trust. The trustee needs to understand benefit rules, be willing to make appropriate distributions, and handle the administrative responsibilities properly.
Many families choose a corporate trustee (like a bank trust department) for objectivity and experience, especially if the trust will be large or long-lasting. Others prefer family members who know the beneficiary well but provide them with professional guidance.
Distribution Errors
Even well-intentioned trustees can make distribution mistakes that affect benefits. Common errors include paying for housing costs, giving cash directly to the beneficiary, or making distributions that count as income under benefit rules.
Proper trustee education and ongoing professional guidance help prevent these costly mistakes.
Funding Strategies Over Time
Families often use multiple strategies to build up trust resources over time.
- Life Insurance. Parents purchase life insurance policies with the trust as beneficiary. This ensures substantial funding upon the parents’ death without affecting current family finances.
- Annual Gifts. Family members can make tax-free annual gifts to the trust, gradually building up resources while taking advantage of federal gift tax exclusions.
- Testamentary Funding. Parents’ wills leave assets to the trust rather than directly to the disabled beneficiary. This approach doesn’t provide immediate benefits but ensures future protection.
- Family Coordination. Extended family members coordinate their estate planning to direct inheritances toward the trust rather than directly to the disabled person.
Administrative Considerations
Running a special needs or supplemental needs trust involves ongoing responsibilities that families should anticipate.
- Annual Accountings. First-party trusts created by court order often require annual accountings to the Probate and Family Court. Third-party trusts usually do not, but trustees must still provide reports as required by the trust.
- Tax Filings. Trusts must file annual income tax returns (Form 1041) and may owe income taxes on investment earnings.
- Benefit Coordination. Trustees must understand how distributions affect various benefit programs and coordinate with benefit agencies when necessary.
- Investment Management. Trust assets need appropriate investment management to preserve and grow value over time.
- Record Keeping. Detailed records of all distributions and their purposes help demonstrate compliance with benefit rules if questions arise.
Working with Multiple Professionals
Successful trust planning often requires coordination among several professionals.
- Estate Planning Attorneys. Draft the trust documents and provide ongoing legal guidance about trust administration and benefit compliance.
- Disability Benefits Attorneys. Advise on how trust distributions affect specific benefit programs and help resolve any benefit issues that arise.
- Financial Advisors. Manage trust investments and provide guidance on distribution timing and amounts.
- Tax Professionals. Handle trust tax returns and advise on tax-efficient distribution strategies.
- Care Coordinators. Help identify appropriate uses for trust funds and coordinate with service providers.
Planning for Trust Termination
Most trusts for people with disabilities are designed to last for the beneficiary’s lifetime, but families should still plan for what happens when the trust ends.
- Third-Party Trust Termination. When the beneficiary dies, assets go to whomever the trust creators designated, often other family members, charities, or a combination of both.
- First-Party Trust Termination. Remaining assets must first reimburse the state for MassHealth benefits paid during the beneficiary’s lifetime. Only after this payback can remaining funds go to other beneficiaries.
- Trust Administration Costs. Both types of trusts can deduct reasonable administration expenses before calculating payback amounts or final distributions.
Planning for termination helps families set realistic expectations and make informed decisions about trust structure and funding levels.
Key Takeaways
- The terms “special needs trust” and “supplemental needs trust” are often used interchangeably, but the meaningful distinction is between first-party (self-settled) and third-party trusts.
- First-party trusts are funded with the disabled person’s own assets and require payback to the state upon death, while third-party trusts are funded with family assets and have no payback requirement.
- Massachusetts follows the Massachusetts Uniform Trust Code (Chapter 203E) for trust administration, but special needs trusts must also comply with federal benefit program requirements.
- Third-party trusts offer more flexibility and better wealth preservation for families, while first-party trusts primarily benefit the disabled person during their lifetime.
- Both types of trusts must be irrevocable and give the trustee sole discretion over distributions to preserve benefit eligibility.
- Proper funding, trustee selection, and ongoing administration are essential for trust success.
- Professional guidance from attorneys, financial advisors, and other professionals helps families avoid costly mistakes and maximize trust benefits.
Frequently Asked Questions
Can I change my mind after setting up a special needs trust?
No, the trust must be irrevocable to protect benefits. But under Massachusetts law, certain small changes are allowed, like replacing a trustee or updating administrative rules, sometimes with court approval.
How much money should I put in a special needs trust?
There’s no legal limit on trust funding amounts. The right amount depends on your family’s resources, the beneficiary’s needs, and your other planning goals. Many families start with modest amounts and build up the trust over time through life insurance, annual gifts, and estate planning.
Can my disabled child be their own trustee?
No, the beneficiary cannot serve as trustee because this would give them too much control over the trust assets, potentially affecting benefit eligibility. You’ll need to choose a different family member, friend, or professional trustee.
What happens if my child’s disability improves and they no longer need benefits?
If your child recovers and no longer needs government benefits, they might be able to receive distributions more freely from a third-party trust, depending on how it’s written. First-party trusts have more restrictions even if benefits are no longer needed.
Can I use a special needs trust for multiple children with disabilities?
It’s generally better to create separate trusts for each beneficiary to avoid complications with benefit rules and to allow for individualized planning. However, some families use master trusts with separate shares for each child.
Do I need court approval to make distributions from the trust?
No, properly structured trusts give the trustee discretion to make distributions without court approval. However, trustees should document their decisions and ensure distributions comply with benefit rules.
Can the trust pay for my child’s housing costs?
This is complicated and depends on the specific situation. Generally, paying for basic housing costs can reduce SSI benefits, but there are exceptions for temporary housing, home modifications, and certain types of housing arrangements.
What happens if I die without setting up a trust but want to leave money to my disabled child?
Your child would inherit the assets directly, which could disqualify them from benefits. However, Massachusetts law allows a nine-month period after inheritance during which the assets can be disclaimed and redirected to a properly structured trust.
Contact Us
Planning for a loved one with disabilities requires careful attention to both current needs and future security. The choice between different trust structures can significantly impact your family’s financial well-being and your loved one’s quality of life.
At Cote Law Group, PLLC, we help Marshfield families create estate plans that protect vulnerable family members while preserving government benefits. Whether you’re dealing with a recent disability diagnosis, planning for the future, or trying to correct past planning mistakes, we can help you through the complex intersection of estate planning and disability law.
Don’t let confusion about trust terminology prevent you from getting the protection your family needs. Contact us today to schedule a free consultation and learn how proper trust planning can provide security and peace of mind for your entire family. We’ll work with you to create a plan that fits your specific situation and helps your loved one thrive both now and in the years to come.