Financial Planning

Medicaid Planning and Special Needs Trusts

A special needs trust, also known as a supplemental needs trust, is established to provide a source of financial support to a beneficiary with a disability without the beneficiary losing eligibility for specific government-sponsored programs such as Medicaid.

How Does a Special Needs Trust Work?

A special needs trust can be established by the beneficiary or the beneficiary’s family. A trust established by a beneficiary, also known as a self-settled trust or a first-party trust, is often set up by someone who receives proceeds from a personal injury award resulting from an accident or medical malpractice. The trust receives the settlement, and distributions from the trust are used to pay for additional needs or comforts not available from public assistance, including education or recreation.

Payments for basic needs to the beneficiary of a self-settled trust are typically very restricted to guard against a loss or reduction in public assistance. Additionally, under federal law, a self-settled trust must include a “pay-back” provision. After the beneficiary dies, the provision allows the state’s Medicaid agency to recover benefit amounts paid to the beneficiary from the remaining assets in the trust. A special needs trust may also be established through specific provisions in a last will and testament or another trust. Sometimes called a third-party trust, it allows assets to supplement, but not supplant, benefits received through Medicaid. It does not need to include a Medicaid pay-back provision; assets remaining in the trust upon the beneficiary’s death may be distributed to remainder beneficiaries.

Each state has rules governing how the trust may be set up and what the trust assets may be used to pay for without jeopardizing Medicaid eligibility. Although regulations vary from state to state and depend on the type of trust established, in general, they include the following:

  • The trust must be irrevocable.
  • The beneficiary must be “permanently and totally” disabled under state and federal criteria.
  • Trust assets are paid at the trustee’s discretion; the beneficiary cannot have control of trust assets.
  • Payments from the trust must be restricted to prevent the beneficiary from becoming ineligible for Medicaid assistance.
  • Court approval may be required in some circumstances.



  • Choose the trustee carefully. The trustee may be a family member, an unrelated party, or a professional trustee. A family member is often chosen for those uncomfortable with an outsider managing a family member’s affairs. Before selecting a family member, careful consideration should be paid to whether the individual can manage trust assets within the state’s strict rules.
  • Seek legal advice. Medicaid planning with special needs trusts is a very complex area. Seek legal advice to ensure that Medicaid benefits will not be interrupted.
  • Engage family members. It is essential to have discussions with family members to help them understand how trust assets should be spent. For example, if you establish a trust for another family member’s support upon your death, consider leaving instructions for how you want the assets to be spent. Although not legally binding, you can at least describe what you would like to be done.


This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to ensure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.


About Christopher Walsh, CFP®

I’m a Wealth Manager with Keystone Financial Partners, who has created a financial planning platform dedicated to helping young professionals make better decisions with their money. I was born and raised in the Hudson Valley region of New York, just north of New York City. I moved to Raleigh in 2010 with my wife, Lauren, our daughters, Aubrey and Ella, and our golden retriever, Duncan. When I’m not keeping up on financial news or meeting with clients, you’ll find me checking out local breweries with friends, hitting the golf course, taking trips to the beach, or spending time with my family. I started my financial planning career in 2006. I became a CERTIFIED FINANCIAL PLANNER™ professional in 2012. I chose this career because I absolutely love it – I truly enjoy taking complex issues and helping clients understand them. We help our clients reduce taxes, invest smarter, and retire on their terms.