When parents first learn about special needs trusts….
One of the biggest questions they have is…
“What can the special needs trust actually pay for?”
While families want to support their child’s health, independence, and comfort, they also worry that an incorrectly drafted or poorly planned trust could affect public benefits such as Supplemental Security Income (SSI).
The short answer is that a special needs trust may be able to pay for many goods and services, but there is no single, universal list of expenses that applies to every trust.
The trust document, the type of trust, applicable state laws, and the beneficiary’s benefits all matter.
A payment can be permitted by the trust yet still affects a means-tested benefit such as SSI. (See secure.ssa.gov for more details.).
This guide will explain common special needs trust expenses, distribution rules, restrictions, food and housing considerations, Medicaid payback, and more.
Plus, we’ll follow the tale of 2 parents, Dave and Elena, and how they used this information to organize a plan for their son, Leo.
But before we do that, here is a brief message from our legal team!…
Disclaimer: All information provided in this article is strictly for educational purposes and is in no way deemed to be financial, tax, or legal advice. Please always consult with a qualified tax professional or attorney before making financial decisions, as laws and regulations can change. External links are provided for convenience and informational purposes only; they do not constitute endorsement or approval by Special Need Finances of any of the products, services or opinions of the corporation or organization or individual. Special Need Finances bears no responsibility for the accuracy, legality, or content of the external site or for that of subsequent links.
What is a Special Needs Trust?
We will not go into too much detail here because Zeke and I wrote a few detailed articles about this that explains it MUCH better!
If you want more in-depth knowledge about the basics of a special needs trust, check out these articles that Zeke and I wrote:
The 3 Types of Special Needs Trusts & How To Pick The Right One For You
The Special Needs Trust: A Parent’s All-Inclusive Guide to Securing Your Child’s Future
For this article, a special needs trust (SNT) is a legal arrangement in which a trustee manages the trust assets for the benefit of a beneficiary – in this case, an individual with a disability.
The trustee holds and administers the trust assets under the trust document and applicable laws.
Depending on the trust’s terms and state law, assets may be treated differently from assets the beneficiary owns or controls.
NOTE: Simply calling a document a “special needs trust” does not guarantee that it will preserve benefits (See secure.ssa.gov for more details).
How Do Special Needs Trust Distribution Rules Work?
A distribution is a payment or transfer made from the trust.
The trustee, NOT the beneficiary, typically reviews requests and decides whether payment is allowed under the trust document.
The trustee also needs to consider how the payment may be treated under relevant benefit rules (e.g. SSI).
In practice, a trustee may pay a vendor directly for an approved good or service.
This is often different from handing cash to the beneficiary….
For SSI purposes, cash paid directly to a beneficiary from a trust is generally counted as unearned income in the month received.
The distribution process should be spelled out or supported by clear trustee guidelines / procedures.
For example, a family might establish:
- How the beneficiary, parent, or support person requests a payment
- What information does the trustee need?
- Who reviews benefits-related questions
- How the trustee keeps receipts and records
The trust’s precise requirements depend on its terms and the applicable law of the state they live in.
What Expenses Can A Special Needs Trust Pay For?
The trust document controls the type of expenses a trust can pay for.
In general, common Social Security Administration (secure.ssa.gov) examples include:
- Therapies, medical or dental services not covered elsewhere, and assistive technology
- Education, vocational training, and job coaching
- Transportation, vehicle modifications, and mobility equipment
- Personal care, support services, or care management
- Computers, communication devices, and other useful technology
- Phone service, recreation, hobbies, and entertainment
Can A Special Needs Trust Pay For Food and Housing?
It may, but the benefit’s impact depends on how the payment is made and on current rules.
For SSI, the Social Security Administration (SSA) stopped including food in its in-kind support and maintenance (ISM) calculations effective September 30, 2024.
That means the value of food assistance is no longer used in those ISM calculations.
However, cash paid directly to the beneficiary, or a gift card treated as cash, MAY still count as unearned income.
Check ssa.gov to confirm the correct rules / guidelines for what you are trying to achieve.
Shelter is different…
If a trust pays a beneficiary’s rent, mortgage, or certain household shelter expenses, the payment MAY count as ISM and reduce the beneficiary’s SSI payment.
That does NOT automatically mean the beneficiary loses Medicaid or every other benefit.
The effects depend on the individual’s situation and the program’s rules.
Trust purchases of a home, mortgage payments, and home improvements also need careful review since SSA treats these situations differently. (secure.ssa.gov)
Because food and shelter rules have changed over time, families should confirm the current treatment rather than relying on an old checklist or a blanket rule.
Can A Special Needs Trust Pay For Fun Stuff?
If the trust permits it and the trustee approves the expense then YES!
I mean it can’t be all work and no play, am I right? 😊
A meaningful life is more than medical care.
A trust may be able to support hobbies, music lessons, camps, vacations, social activities, recreation, or entertainment.
Does your child like to collect baseball cards or go to the Special Olympics or Disneyland?
The special needs trust can pay for all those things.
We can write it into the trust, and the trustee can make sure some of the money pays for something the child wants to do for fun.
SSA includes recreation and entertainment among examples of third-party trust payments that generally are not considered SSI income. (secure.ssa.gov)
When deciphering to pay or not to pay, the trustee should ask:
- Does the expense benefit the beneficiary?
- Does the trust allow it?
- Could the payment affect SSI or another benefit?
- Is there a clear receipt or invoice?
For example, paying an activity provider directly may be preferable to handing the beneficiary unrestricted cash (which may be counted as unearned income and affect SSI benefits).
What Expenses Are Prohibited?
Short answer, there is no single federal menu that makes every possible purchase categorically prohibited during a beneficiary’s lifetime.
The trust document may limit spending, and the trustee must follow those terms.
Payments can also create benefit or compliance problems even when the underlying item seems reasonable.
Common expenses to avoid or review carefully include:
- Direct payment to the beneficiary: it can count as SSI income and disqualify their benefits.
- Prohibited Assets: any asset that can disrupt eligibility for government benefits. Examples include cash, stocks, bonds, and index funds not properly managed within the trust.
- Items Considered “In-Kind” Income: it’s important to structure the trust so that it pays for items that enhance the beneficiary’s quality of life (e.g. education, travel, or entertainment) without impacting their benefits eligibility that covers basic needs (e.g. food and shelter).
- Gifts / Loans: gifts or loans to others from the trust can create tax issues and could be viewed as mismanagement of trust funds.
- A purchase outside the trust’s terms: a trustee does not have unlimited authority to spend trust money.
- Certain payments after the beneficiary’s death & before required Medicaid reimbursement: for a qualifying first-party special needs trust, examples include funeral costs, debts owed to third parties, and payments to remainder beneficiaries before the state’s required reimbursement. (secure.ssa.gov)
Check out these articles to learn more about Medicaid payback provisions and reimbursement……
The 3 Types of Special Needs Trusts & How To Pick The Right One For You
How Do I Tell Whether An Expense Is Allowable?
Use these four questions as a guideline before asking the trustee to pay:
- Does the trust document allow it? The trustee must follow the document and relevant state law.
- Does the expense benefit the beneficiary? This is especially important for a first-party trust, which generally must meet a sole-benefit requirement.
- How will the payment be made? A direct payment to a vendor may be treated differently from cash or a beneficiary-owned debit card.
- Could it affect a benefit? Check SSI income and shelter rules, plus the rules for any other program the beneficiary receives.
NOTE:
- ALWAYS Keep the invoice, receipt, explanation of the beneficiary’s need, and record of the trustee’s decision.
- When the answer is uncertain, ask the trustee, benefits specialist, or attorney before paying.
How Dave and Elena Planned For Leo’s Special Need Trust
To continue our story, Dave and Elena worried that leaving money directly to their son, Leo, could interfere with benefits.
They also considered leaving assets to Leo’s sister, Mya, and asking her informally to help.
However, it was a plan that could leave the money exposed to changes in her life and would not give Leo the structure and protection of a professionally drafted trust.
They began by listing whose money might fund the trust.
Their own savings and gifts from relatives were third-party assets.
They agreed not to casually mix in assets belonging to Leo, such as a settlement or inheritance, without separate legal advice.
They asked a special needs planning attorney to explain which trust structure fits those funding sources and how it interacted with their state’s rules.
Next, they also made a distribution plan.
The family would ask the trustee to pay providers directly when appropriate, keep invoices and receipts, and review shelter-related payments before making them.
They did not ban every quality-of-life expense.
Leo’s communication device, therapy, social activities, and enjoyable outings were part of the life they wanted the trust to support.
Also Leo was an avid Pokémon card and vintage comic book collector so they allowed this in their special needs trust plan.
They treated cash, gift cards, housing, and mixed credit-card bills as “check first” categories to ensure it did not impact Leo’s SSI benefits.
Finally, they coordinated the trust with their estate documents and planned to tell relatives how to direct gifts.
Parent Reminder
A well-designed special needs trust is more than a document.
It is a funding, trustee, distribution, and recordkeeping plan that has flexibility built into it for future “what if” scenarios.
None of us knows what the future holds so it is important to build flexibility into any plan to be able to pivot when needed.
Being too restrictive could lead to potentially tying those funds up legally when your child needs them the most.
Ensure having an experienced special needs planning attorney review the trust before transferring assets or making payments on the beneficiary’s behalf.
Rules can change over time so verify current guidance with the relevant agencies and qualified advisors.
A special needs trust is really a wonderful vehicle to take care of your child and still provide them maximum independence and quality of life…. once set up properly.
Live The Life You Love, Want, And Deserve! 😊
Ready to get started?
If you need help…… Zeke and I are glad to assist!
We have the knowledge, products, and services to help you level up your financial game!
OR
if you need more specialized 1-on-1 support…
I highly recommend consulting with a financial advisor who specializes in special needs planning to explore your options… Like Zeke! 😊
Schedule a call with my friend Zeke Zimmerman here!
