How To Use a Special Needs trust

Overview

Accessing funds from a special needs trust can be confusing, especially when you want to stay compliant with benefit rules. In this episode, attorney Michael Rutkowski of the Rutkowski Law Firm explains how beneficiaries on government aid can access money held in a special needs trust and what expenses are allowed. He also highlights the difference between first-party and third-party trusts, and the importance of choosing the right trustee to ensure smooth, ongoing support.

Key Takeaways:

• Special needs trusts are used when someone on government benefits receives money (e.g., inheritance or settlement) that could disqualify them.
• A third-party trustee must manage the trust — the beneficiary cannot control the funds directly.
• Trustees pay service providers directly for approved expenses; beneficiaries cannot receive direct cash.
• First-party special needs trusts (funded with the beneficiary's own money) require a Medicaid payback upon death.
• Third-party special needs trusts (funded by others) offer more flexibility and don’t require Medicaid reimbursement.
• Permissible uses of trust funds include:
  • Medical and dental care
  • Personal care and attendants
  • Transportation, home modifications, and rent (if structured properly)
  • Education and training
  • Assistive technology (e.g., phones, computers)
  • Entertainment and vacations
  • Legal, financial, and insurance services
• These trusts supplement government benefits (usually covering food and shelter) rather than replacing them.
• Staying on benefits while using a special needs trust prevents the hassle of reapplying later.

Full Transcript

Hello, and welcome back. We are continuing the conversation as it relates to trusts.
We did a video two ago about all the different trusts you could have, and in the previous video we talked specifically about special needs trusts.

Something that comes up often as it relates to a special needs trust that makes it different from the other trusts is how you can access the trust and what you can use it for.
There are different rules, and so we just wanted to quickly recap what those rules are so you know how it can impact you.

So Michael, welcome back.
So we're talking about setting up a special needs trust.
We do this when someone is on government benefits and maybe we're receiving some money for some reason — from a lawsuit, from an inheritance, from parents, from whatever, from another source.

All of a sudden we're going to get a slight influx of money which could take us above the means-based test for the benefit that we're on — which would kick us off the benefit.
So how do we preserve the benefit and not get kicked off our benefit?

And that's what we're talking about today.

So great questions that you just posed.
You know the first one we get all the time is, okay, I set up this trust. Now how do I access the money?
And then the second one is what on earth can I use the money for that's in this trust? I want to make sure that if I put it in there, that it can make sure it helps me.

So the first part is — and I talked about this in the last video — is that these special needs trusts or supplemental needs trusts (they're kind of interchangeable words), you have to have a third-party trustee.
Meaning that the trustee, the person in control of the trust, has to be someone other than you, the beneficiary receiving government benefits.

It can be anyone else in the world.
It can be your sibling, it can be an attorney, it can be your mom — it can be whoever you want it to be.

But it needs to be someone else besides you.
So what you're going to do, how that's practically going to work is that — let's say you need new tires on your car.
You're going to set up some way with your trustee that they can pay for those tires directly.

Whether they have a debit card tied to the trust account or something, they're going to pay those providers directly for those services.
They can't just cut you a check for cash or something like that.
They need to be paying for these services.

So we're always working through that trustee to gain access to the money.
So hopefully you set it up in a way — you get to pick.

So pick someone that you work well with, because you're going to probably talk to them a lot.

So let's next talk about what you can use the money for.
And another quick recap: there’s first-party special needs trusts and third-party special needs trusts.
First-party is — and that all has to do with whose money is it.

First-party is it’s yours.
Third-party is it’s someone else's.

So for an example of a first-party trustee — maybe you're in a lawsuit and you're receiving a settlement.
That would be a first-party special needs trust.

An inheritance — that would be first-party special needs trust.
Third-party would be someone else's money.

Maybe this is mom or dad setting it up for a disabled child and they're funding it over their lifetime — that would be a third-party special needs trust.

So I'm just going to kind of read through the list here so that you know what you can use the money for.

One big differentiator between the two also is that a first-party — there's the Medicaid payback provision that has to be in there, meaning that Medicaid will get paid back for the services they provide you first, before you can say who gets it after you pass away.

Where a third-party — you can just pick whoever you want.

So let's go through permissible uses:

• Medical and dental care
• Personal care attendants
• Transportation
• Home modifications and rent (if structured correctly)
• Education
• Training
• Special programs
• Assistive technology — so things like computers or things that can help an individual
• Your phone, those kinds of things
• Vacation
• Entertainment
• Legal and financial services
• Insurances

Those can all be paid through the special needs trust.

When it's a third-party special needs trust, there's a little bit more discretion as to what it can be used for because there's no Medicaid payback provision, so you can elaborate a little bit on those.
But at the end of the day, you can usually categorize most things under one of those categories in order for it to really help you.

Because the purpose of allowing this is that it supplements your government benefits.
So usually government benefits are going to cover things like food and shelter.
So those government benefits cover those, and then this can supplement everything else.

Otherwise, you're getting kicked off your benefits — and your benefits can be very valuable.
$1,500, $2,500+ per month — and it adds up.

Yeah, and the funds can run out eventually, right? And then what?
So getting — and as you mentioned in the previous video — getting back on your special needs benefits is a huge lift.

So being able to stay on your benefits while also having access to funds that can supplement all the things is huge.

Yeah, we have a lot of families that are concerned about that Medicaid payback provision.
But in all honesty, I mean, if you get an inheritance of $100,000–$200,000, you're going to spend that over a couple years’ time.

So you're only running the risk of, like, if you were to unexpectedly pass away or something.
But otherwise, usually people are spending through those proceeds through the special needs trust while receiving the government benefits.

I mean, heck — going on vacation, that sounds awesome.
Let’s go.
Where are we going?

Let's go.
Yeah.
Yeah.
I'm here. I'm in — sunny please.

Yeah, it's snow — it's snow and cold in Michigan right now. Let's get out of here.
Agreed.
Agreed.

Well thank you so much, Michael.

If you are on special needs benefits and you're looking for a special needs trust because you got some money coming your way, be sure to give us a call — the phone number is below.

If you're looking to continue to learn more about estate planning and how you might do it yourself, keep on watching.
We're here for you.

Thank you all so much and see you next time.
Take care.
Good job.