More than one in three people with disabilities rely on Medicaid, according to the Kaiser Family Foundation. Jointly funded by states and the federal government, Medicaid provides health insurance to people with limited income and resources. Because Medicaid is needs-based, exceeding asset limits — even by a small amount — can mean losing essential medical coverage.

A special needs trust (SNT) can help people with disabilities maintain eligibility for Medicaid and SSI while still receiving financial support.

Qualifying for Medicaid and SSI

The Medicaid and SSI programs generally limit recipients to no more than $2,000 in countable resources for an individual. In most states, qualifying for SSI automatically qualifies a person for Medicaid.

A well-meaning gift or inheritance can unintentionally disqualify someone. For example, if a family member leaves a direct inheritance to a disabled adult receiving SSI, that windfall could push them over the eligibility limit. Similarly, a personal injury settlement deposited directly into a disabled person’s bank account could cause them to lose their benefits.

How Special Needs Trusts Protect Benefits

When assets are placed in an SNT, they are generally not counted for Medicaid or SSI eligibility — because the funds are held by the trust, not directly by the beneficiary. The trustee manages the funds and uses them to pay for goods and services that supplement, rather than replace, public benefits.

An SNT can pay for private education, recreation, medical and dental care not covered by Medicaid, assistive technology, transportation, and other supplemental needs that improve quality of life.

Types of Special Needs Trusts

  • First-party SNT: Funded with the beneficiary’s own assets (an inheritance received directly, a lawsuit settlement, SSA back pay). Requires a Medicaid payback provision.
  • Third-party SNT: Funded by family members or others — never the beneficiary. No Medicaid payback required. This is the primary tool in parents’ estate plans.
  • Pooled SNT: Managed by a nonprofit organization, with the beneficiary’s assets held in a sub-account. Useful when a private trustee is not available or practical.

The trustee plays a critical role in ensuring distributions do not jeopardize benefits. Trustees must exercise full discretion, ensure distributions comply with SSI and Medicaid rules, keep accurate records, and provide required reports to state agencies.