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G.64.1 Special Needs Trusts

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1 A. Professional Conduct and Regulation

A.1 Code of Ethics and Standards of Conduct A.1.1 The Six Ethical Principles A.2 Procedural Rules and Discipline A.2.1 Fitness Standards for Candidates A.3 Financial Institutions Overview A.3.1 Broker-Dealers vs. RIAs A.4 SEC and Securities Regulation A.4.1 FINRA and Broker-Dealer Regulation A.4.2 State Securities Regulation A.5 Consumer Protection Laws A.5.1 Privacy and Confidentiality Requirements A.6 Fiduciary Duty and Application

2 B. General Principles of Financial Planning

B.7 The Financial Planning Process B.7.1 Establishing the Client Relationship B.7.2 Gathering Client Data and Goals B.8 Personal Financial Statements B.8.1 Key Financial Ratios B.9 Cash Flow Management B.9.1 Emergency Fund Planning B.10 Debt Management Strategies B.10.1 Mortgage and Home Financing B.11 Economic Concepts B.11.1 Planning for Inflation B.12 Time Value of Money Concepts B.12.1 TVM Calculations and Applications B.12.2 Loan Amortization B.13 Education Needs Analysis B.14 Education Savings Vehicles B.14.1 529 Plans In-Depth B.15 Education Funding Strategies B.16 Gift/Income Tax Strategies

3 C. Risk Management and Insurance Planning

C.17 Principles of Risk and Insurance C.17.1 Risk Management Process C.18 Analysis of Risk Exposures C.19 Health Insurance Fundamentals C.19.1 Types of Health Insurance Plans C.20 Disability Income Insurance C.20.1 Disability Policy Features C.21 Long-Term Care Insurance C.22 Annuities Overview C.22.1 Fixed vs. Variable Annuities C.23 Life Insurance Fundamentals C.23.1 Types of Life Insurance C.24 Business Owner Insurance Solutions C.25 Insurance Needs Analysis C.26 Insurance Policy and Company Selection

4 D. Investment Planning

D.27 Equity Securities D.27.1 Fixed Income Securities D.27.2 Mutual Funds and ETFs D.27.3 Taxation of Investment Vehicles D.28 Systematic Risk D.28.1 Unsystematic Risk D.29 Economic and Market Cycles D.30 Measures of Risk and Return D.30.1 Investment Performance Measures D.31 Asset Allocation Strategies D.31.1 Portfolio Diversification D.32 Bond and Stock Valuation D.32.1 Stock Valuation Models D.33 Investment Policy Statement D.33.1 Modern Portfolio Theory D.34 Active vs. Passive Investing D.34.1 Common Investment Strategies D.35 Alternative Investments D.35.1 Options and Derivatives

5 E. Tax Planning

E.36 Income Tax Fundamentals E.36.1 Filing Status and Tax Brackets E.37 Types of Income E.37.1 Deductions and Credits E.37.2 Capital Gains and Losses E.38 Business Entity Taxation E.38.1 Self-Employment Tax E.39 Taxation of Trusts and Estates E.40 Tax Reduction Strategies E.40.1 Retirement Account Tax Strategies E.41 Property Transactions E.41.1 Basis Rules for Acquired Property E.42 AMT and NIIT E.42.1 Special Tax Situations E.43 Charitable Giving Strategies

6 F. Retirement Savings and Income Planning

F.44 Retirement Needs Analysis F.44.1 Sources of Retirement Income F.45 Social Security Benefits F.45.1 Social Security Claiming Strategies F.45.2 Medicare Planning F.46 Eldercare and Special Needs Planning F.47 Qualified Plan Overview F.47.1 Defined Benefit Pension Plans F.47.2 Defined Contribution Plans F.48 Eligibility and Vesting F.48.1 Coverage and Discrimination Testing F.48.2 Contribution and Benefit Limits F.48.3 401(k) Plan Features F.49 Non-Qualified Deferred Compensation F.49.1 Executive Compensation Plans F.50 Retirement Plan Selection for Businesses F.50.1 Individual Retirement Accounts F.51 Distribution Rules F.51.1 Required Minimum Distributions F.52 Retirement Income Strategies F.52.1 Tax-Efficient Withdrawal Strategies F.53 Business Succession Planning

7 G. Estate Planning

G.54 Property Titling and Beneficiary Designations G.54.1 Beneficiary Designations G.55 Strategies to Transfer Property G.55.1 Lifetime Gifting Strategies G.56 Wills and Estate Documents G.56.1 Powers of Attorney G.56.2 Advance Directives and Healthcare Documents G.57 Federal Gift Tax G.57.1 Federal Estate Tax G.57.2 Generation-Skipping Transfer Tax G.58 Sources for Estate Liquidity G.58.1 Life Insurance for Estate Liquidity G.59 Trust Fundamentals G.59.1 Revocable Living Trusts G.59.2 Irrevocable Trusts G.59.3 Trust Income Taxation G.60 Marital Deduction Planning G.60.1 QTIP Trusts G.60.2 Portability of Estate Tax Exemption G.61 Intra-family and Business Transfer Techniques G.61.1 Family Limited Partnerships G.61.2 GRATs and IDGTs G.62 Postmortem Estate Planning Techniques G.62.1 Disclaimer Planning G.62.2 Estate Tax Elections G.63 Planning for Divorce and Unmarried Couples G.63.1 Estate Planning for Unmarried Couples G.63.2 Planning for Blended Families G.64 Planning for Special Needs and Circumstances G.64.1 Special Needs Trusts G.64.2 ABLE Accounts

8 H. Psychology of Financial Planning

H.65 Client and Planner Attitudes, Values, Biases H.65.1 Money Scripts and Money Attitudes H.65.2 Planner Self-Awareness H.66 Behavioral Finance H.66.1 Cognitive Biases H.66.2 Emotional Biases H.66.3 Heuristics and Mental Accounting H.67 Sources of Money Conflict H.67.1 Couples and Money Conflict H.67.2 Family and Intergenerational Money Conflict H.68 Principles of Counseling H.68.1 Therapeutic Techniques in Financial Planning H.68.2 Professional Boundaries and Referrals H.69 General Principles of Effective Communication H.69.1 Listening and Questioning Skills H.69.2 Managing Difficult Conversations H.69.3 Non-Verbal Communication H.70 Crisis Events with Severe Consequences H.70.1 Death and Divorce H.70.2 Job Loss and Health Crisis H.70.3 Sudden Wealth and Sudden Loss H.70.4 Natural Disasters and Traumatic Events

G.64.1 Special Needs Trusts

Key Takeaways Explain This Topic AI

First-party (d)(4)(A) trusts funded with beneficiary's assets require Medicaid payback

Third-party trusts funded by others have no payback requirement

Pooled trusts (d)(4)(C) managed by nonprofits available for those over 65

  • SNTs can pay for quality-of-life expenses but should avoid direct cash to beneficiary
  • Last updated: January 2026

Special Needs Trusts (SNTs)

Special needs trusts--also called supplemental needs trusts--are the cornerstone of disability planning. These trusts hold assets for beneficiaries with disabilities without disqualifying them from means-tested government benefits. Understanding the three primary types of SNTs and their distinct rules is essential for CFP candidates.

First-Party Special Needs Trust (d)(4)(A) Trust

A first-party SNT, also called a "self-settled" or "(d)(4)(A)" trust (referencing 42 U.S.C. Section 1396p(d)(4)(A)), is funded with assets that belong to the beneficiary with disabilities.

  • Common Funding Sources
  • Personal injury lawsuit settlements
  • Inheritance received directly (before proper planning)
  • Divorce settlements or property divisions
  • Accumulated work earnings
  • Back payments of Social Security benefits
  • Key Requirements
  • Requirement Detail
  • Beneficiary age Must be under age 65 when the trust is established and funded
  • Irrevocability Must be irrevocable once funded
  • Sole benefit Must be for the "sole benefit" of the beneficiary with disabilities
  • Medicaid payback Upon beneficiary's death, state Medicaid must be reimbursed for benefits paid
  • Establishment Can be established by parent, grandparent, legal guardian, or court

2016 Amendment Beneficiary can now establish their own first-party SNT if mentally competent (previously required parent, grandparent, guardian, or court)

Medicaid Payback Provision

The defining characteristic of first-party SNTs is the Medicaid payback requirement . When the beneficiary dies:

  • The state(s) that provided Medicaid benefits must be notified
  • The trust must reimburse Medicaid for all medical assistance paid on behalf of the beneficiary
  • Only remaining funds (if any) pass to remainder beneficiaries named in the trust

Example: A beneficiary receives a $500,000 personal injury settlement placed in a first-party SNT. Over 30 years, the trust grows and is spent down, with $150,000 remaining at death. If the state Medicaid program paid $200,000 in benefits during the beneficiary's lifetime, the entire $150,000 goes to the state, and nothing passes to family.

Court Involvement

First-party SNTs often require court approval when:

  • Funds come from a lawsuit settlement (especially for minors)
  • The beneficiary lacks mental capacity to approve the trust
  • State law requires court oversight of trust establishment
  • Third-Party Special Needs Trust

A third-party SNT is funded with assets belonging to someone other than the beneficiary --typically parents, grandparents, or other family members.

Key Features

  • Feature Third-Party SNT
  • Funding source Assets of parents, grandparents, other relatives, or anyone except the beneficiary
  • Payback requirement None --remaining funds pass to remainder beneficiaries chosen by the grantor
  • Age restrictions None--can be established at any age
  • Revocability Can be revocable (during grantor's lifetime) or irrevocable
  • Flexibility More flexible distribution standards; can include sprinkle provisions for other beneficiaries
  • Advantages Over First-Party SNT
  • No Medicaid payback : Family wealth stays in the family
  • No age restriction : Can benefit individuals who become disabled after age 65
  • Greater flexibility : Can be part of a revocable living trust, testamentary trust, or standalone document
  • Multiple beneficiaries : Can serve as "pot trust" for several family members with disabilities
  • Integration with Estate Plans

Third-party SNTs are commonly established as:

Standalone inter vivos trust : Created during grantor's lifetime, can receive lifetime gifts and life insurance proceeds

  • Testamentary trust : Created within the grantor's will, funded at death
  • Subtrust of revocable living trust : Part of comprehensive estate plan, avoids probate
  • Naming the SNT as Beneficiary

Life insurance, retirement accounts, and other beneficiary-designated assets can name the third-party SNT as beneficiary. This ensures funds bypass probate and flow directly into the protected trust structure.

Critical Warning: Never name the individual with disabilities as a direct beneficiary of life insurance or retirement accounts. Always name the SNT.

Pooled Trusts (d)(4)(C)

Pooled trusts, authorized under 42 U.S.C. Section 1396p(d)(4)(C), are managed by nonprofit organizations and serve multiple beneficiaries.

  • Structure
  • A nonprofit organization establishes and manages a master trust
  • Individual beneficiaries join through a "joinder agreement"
  • Each beneficiary has a separate subaccount
  • Assets are pooled for investment purposes
  • Each subaccount tracks the beneficiary's share
  • Key Features
  • Feature Pooled Trust (d)(4)(C)
  • Management Nonprofit organization serves as trustee
  • Age requirement Available to individuals over age 65 (unlike first-party SNTs)
  • Funding Can be funded with beneficiary's own assets (like first-party)

Payback provision At death, funds may be retained by nonprofit for other disabled beneficiaries OR paid to state Medicaid

  • Expertise Professional management with special needs experience
  • Costs Often lower administrative costs due to economies of scale
  • Advantages of Pooled Trusts
  • Age flexibility : Only option for self-settled trusts when beneficiary is over 65
  • Professional management : Nonprofit has expertise in SSI/Medicaid rules
  • No individual trustee needed : Eliminates burden on family members
  • Investment efficiency : Pooled assets achieve better diversification
  • Organizational continuity : Nonprofit outlives individual trustees
  • State Variations

Some states (notably California and New York) do not exempt pooled trust assets for Medicaid eligibility when the beneficiary is over 65. CFP professionals must verify state-specific rules.

SNT Comparison Table

  • Feature First-Party (d)(4)(A) Third-Party Pooled (d)(4)(C)
  • Funding source Beneficiary's own assets Others' assets Beneficiary's own assets
  • Age to establish Under 65 Any age Any age (including over 65)
  • Medicaid payback Yes (to state) No To nonprofit or state

Who can establish Parent, grandparent, guardian, court, or competent beneficiary Anyone except beneficiary Nonprofit organization

  • Revocable option No Yes (grantor's choice) No
  • Trustee Named individual or corporate Named individual or corporate Nonprofit organization

Best for Lawsuit settlements, direct inheritances Family estate planning Older beneficiaries, those needing professional management

  • What SNTs CAN and CANNOT Pay For
  • Appropriate SNT Expenditures (No Benefit Reduction)

Trustees should use SNT funds for expenses that supplement government benefits and enhance quality of life:

  • Personal care : Clothing, grooming products, haircuts
  • Education : Tuition, books, tutoring, vocational training
  • Recreation : Vacations, entertainment, hobbies, sports equipment
  • Transportation : Vehicle purchase/maintenance, ride services, travel
  • Technology : Computers, tablets, smartphones, adaptive equipment
  • Medical : Therapies, treatments, and equipment not covered by Medicaid
  • Furniture and household items : Not shelter, but contents of the home
  • Legal and financial services : Attorneys, accountants, financial planners
  • Companion care : Paying for a caregiver or companion to travel with beneficiary

2024 Update : As of October 2024, the Social Security Administration removed food from the in-kind support and maintenance (ISM) category. SNTs can now pay for food without reducing SSI benefits.

Expenditures That May Reduce SSI (In-Kind Support and Maintenance)

Payments for shelter expenses are still considered ISM and may reduce SSI benefits by up to 1/3 of the federal benefit rate plus $20:

  • Rent or mortgage payments
  • Property taxes
  • Homeowner's/renter's insurance
  • Utilities (gas, electric, water, sewer, garbage)

Important : If the beneficiary receives only SSDI (not SSI), ISM rules do not apply, and the SNT can pay for any expenses including shelter.

  • What SNTs Should NEVER Do
  • Give cash directly to beneficiary : Cash is countable as income/resource
  • Pay for items the beneficiary then sells : Converts to cash
  • Provide refundable gift cards : Treated as cash equivalent
  • Duplicate Medicaid-covered services : Wasteful and unnecessary
  • Make loans to beneficiary : Creates countable asset
  • Trustee Considerations

Selecting the right trustee is critical for SNT success:

Individual Trustees (Family Members)

Pros : Know the beneficiary, motivated by love, no management fees Cons : May lack expertise, potential for burnout, family conflicts, finite lifespan

Corporate Trustees (Banks, Trust Companies)

Pros : Professional management, continuity, expertise in investment and tax Cons : Higher fees, may lack personal touch, minimum balance requirements

Best Practice: Co-Trustees

Many SNTs name both:

  • Individual co-trustee : Family member who knows the beneficiary and makes distribution decisions
  • Corporate co-trustee : Handles investments, accounting, tax filings, and compliance

This combination provides both personal attention and professional expertise.