What Is a Special Needs Trust, and Do You Need One in KY?
Planning for the future of a loved one with a disability can raise difficult financial and legal questions. You may want to provide money for their care and quality of life without putting important government benefits at risk. A special needs trust may be one option worth considering.
A special needs trust is a legal arrangement that holds assets for a person with a disability while, when properly established, helping preserve eligibility for certain means-tested benefits.
The rules surrounding these trusts can be complicated, particularly because federal benefit programs have specific requirements. If you are considering a special needs trust in Kentucky, understanding the basics can help you decide whether to speak with an attorney about setting one up.
How Does a Special Needs Trust Work?
A special needs trust allows assets to be managed for the benefit of a person with a disability rather than simply giving the assets directly to that person. A trustee manages the trust and uses its funds for the beneficiary according to the terms of the trust.
This can be particularly important when the beneficiary receives Supplemental Security Income (SSI) or Medicaid. These programs have financial eligibility requirements, and assets owned directly by the beneficiary can affect eligibility.
In 2026, for example, SSI generally has a $2,000 countable-resource limit for an individual. Certain types of special needs trusts are excluded from SSI resource calculations when they meet federal requirements.
What Is a First-Party Special Needs Trust?
A first-party special needs trust is generally funded with assets belonging to the person with a disability. Federal law provides an exception for certain trusts established for a disabled individual who is under age 65.
The trust must meet specific requirements, including provisions concerning repayment to the state after the beneficiary’s death for Medicaid assistance provided to that person.
Because the beneficiary’s own assets are involved, establishing this type of trust requires careful attention to the applicable rules. Simply calling a document a “special needs trust” does not make it qualify for the federal exception.
What Is a Third-Party Special Needs Trust?
A third-party special needs trust is funded with assets belonging to someone other than the person with a disability, such as a parent, grandparent, or another family member. It can be useful for parents who want to leave an inheritance to a child with a disability while planning around the child’s potential eligibility for needs-based benefits.
The trust can help provide funds for expenses that improve the beneficiary’s quality of life without requiring the beneficiary to receive the assets outright. The precise effect depends on the trust’s terms and the benefit program involved.
Do You Need a Special Needs Trust in Kentucky?
Not everyone with a disability needs a special needs trust. Whether one makes sense depends on factors such as the person’s assets, current and anticipated government benefits, family circumstances, and long-term financial plans.
It is also important not to assume that putting money into any trust will automatically protect benefits. The Social Security Administration explains that trusts established with a beneficiary’s own assets can generally count as resources unless an applicable exception is satisfied.
Trust distributions can also affect SSI depending on how they are made and what they are used to pay for.
Get Help With Special Needs Planning
Creating a special needs trust involves more than preparing a standard trust document. The trust must be structured carefully to address the beneficiary’s needs while complying with applicable federal and Kentucky requirements.
If you are considering a special needs trust for yourself or a loved one, a Kentucky estate planning attorney can help you evaluate your circumstances and understand your options.
At Hoffman Walker & Knauf, we can help you work through the legal considerations involved in planning for a loved one’s future. Contact us today to discuss your situation and learn more about special needs planning in Kentucky.
