How Much Money Can Be Put in a Special Needs Trust?

A Special Needs Trust (SNT) is a legal arrangement that holds assets for an individual with a disability. Its purpose is to manage resources that enhance the beneficiary’s quality of life by covering expenses not paid for by public assistance programs.

An SNT allows a beneficiary to receive supplemental support without jeopardizing their eligibility for needs-based government benefits like Supplemental Security Income (SSI) and Medicaid. These programs have strict asset limits, and because the trust holds title to the assets, the beneficiary does not own them directly, preserving their qualification for aid.

Contribution Limits for Special Needs Trusts

When considering how much money to place in a Special Needs Trust, there are no federal or state statutory limits on the contribution amount. You can contribute as much as you deem necessary to provide for the beneficiary’s long-term needs. This lack of a cap is intentional, as the cost of lifetime care for an individual with significant disabilities can be substantial.

The focus of the regulations is not on the amount of money held within the trust, but rather on how the trust is administered and the origin of the funds. The rules governing the trust are determined by the source of the assets used to fund it, which dictates the type of SNT that must be used.

Funding Sources and Trust Types

The classification of a Special Needs Trust is based on where the funding originates. This distinction determines the legal requirements the trust must follow, particularly concerning the reimbursement of state benefits.

Third-Party SNTs

A third-party SNT is funded with assets from anyone other than the beneficiary. Common sources include gifts from parents or grandparents, or inheritances left through a will. The beneficiary must have never owned or had a legal right to the assets before they were placed in the trust. Upon the death of the beneficiary, any funds remaining in a third-party SNT are not subject to a Medicaid payback requirement. This allows the person who created the trust to designate contingent beneficiaries to receive the leftover assets.

First-Party SNTs

A first-party SNT is funded with the beneficiary’s own assets. These funds might come from a personal injury settlement, a direct inheritance, or back payments from Social Security. To maintain eligibility for benefits, these assets must be transferred into a specific type of trust that complies with federal law, known as a (d)(4)(A) trust. The primary requirement for a first-party SNT is the Medicaid payback provision. This rule mandates that upon the beneficiary’s death, remaining trust assets must first be used to reimburse any state Medicaid agency for services provided to the beneficiary.

Pooled Trusts

A pooled trust is administered by a non-profit organization that pools assets from many individuals for investment and management purposes, which can lead to lower administrative fees. The non-profit maintains a separate sub-account for each individual beneficiary. Pooled trusts are flexible and can function as either a first-party or third-party trust, depending on the source of the money in a beneficiary’s sub-account. This makes them a viable option for individuals who may not have enough assets to justify establishing a standalone trust.

Permissible and Impermissible Distributions

The trustee is responsible for using the funds to pay for goods and services that supplement, but do not replace, government benefits. The rules are designed to ensure trust assets enhance the beneficiary’s quality of life without being counted as income that could reduce or eliminate public assistance.

Permissible Distributions (Supplemental Needs)

A trustee can pay for a wide variety of expenses directly from the trust without impacting the beneficiary’s eligibility for SSI or Medicaid. These payments are for “supplemental needs” and are made to the third-party vendor or service provider, not directly to the beneficiary in cash. These payments provide goods and services beyond the basic food and shelter that SSI is intended to cover.

Examples of permissible distributions include:

• Medical and dental care not covered by Medicaid
• Personal care attendants
• Education and rehabilitation services
• Travel, recreation, and entertainment
• A vehicle or the purchase of a home for the beneficiary to live in

Impermissible Distributions (In-Kind Support and Maintenance – ISM)

The Social Security Administration has specific rules regarding “In-Kind Support and Maintenance” (ISM), which refers to non-cash assistance for food or shelter. If the trust pays directly for the beneficiary’s core shelter costs—such as rent, mortgage, or utilities—the SSA considers this to be ISM. This is not a forbidden payment, but it has direct consequences for SSI benefits. When the trust makes ISM payments, the SSI benefit is reduced, but not on a dollar-for-dollar basis. The reduction is capped at a specific amount known as the “presumed maximum value” (PMV), which is approximately one-third of the federal SSI benefit rate. A rule effective September 30, 2024, removes food from the ISM calculation, meaning a trust can pay for groceries without causing a benefit reduction.

Tax Considerations for Trust Contributions

Funding a Special Needs Trust involves several tax considerations for donors and trustees, including gift, estate, and income taxes.

Gift Tax

When an individual contributes money or property to a third-party SNT, the transfer is considered a gift and may be subject to federal gift tax rules. For 2024, individuals can give up to $18,000 each year to any person without filing a gift tax return (IRS Form 709). However, contributions to most third-party SNTs are considered gifts of a “future interest,” which do not qualify for the annual exclusion. This means a gift tax return may need to be filed to apply the gift against the donor’s lifetime gift and estate tax exemption.

Estate Tax

Assets designated to fund a third-party SNT through a person’s will or revocable living trust are included in that person’s gross estate for federal estate tax purposes. For 2024, the federal estate tax exemption is $13.61 million per individual, so tax is only due if the estate’s value exceeds this amount. In contrast, assets remaining in a first-party SNT at the beneficiary’s death are considered part of the beneficiary’s estate for tax purposes.

Trust Income Tax

A Special Needs Trust can earn its own income and is required to file an annual income tax return, IRS Form 1041, U.S. Income Tax Return for Estates and Trusts. How the income is taxed depends on the trust’s structure. First-party SNTs are structured as “grantor trusts,” meaning the trust’s income is taxed to the beneficiary on their personal tax return. Third-party trusts are more complex, and the income may be taxed to the grantor, the trust, or the beneficiary, depending on the trust’s terms and whether income is distributed. Trust income tax rates are highly compressed, reaching the top marginal rate at a much lower income level than for individuals.