One of the most common, and frankly, most heart-wrenching conversations I’ve had over my 25+ years as a financial planner started with a parent’s late-night worry: “Michael, what happens to my child when I’m gone?”
When that child has special needs and relies on government benefits like Medicaid or SSI, that fear is magnified a thousand times. You want to leave them money to ensure their comfort and quality of life. But doing it the wrong way could accidentally disqualify them from the very benefits they need to survive.
This is a devastatingly common mistake. But it’s also a solvable one. The tool for this job is a Special Needs Trust (SNT), but the rules of the game have just changed significantly. Let’s break down what’s new and what it means for your family’s financial security.
💡 Key 2025 Changes at a Glance:
- The New Food Rule: Effective September 30, 2024, the SSA no longer counts food expenses paid by a trust as income, giving trustees immense new flexibility.
- Expanded ABLE Accounts: Starting in 2026, the age of disability onset for opening a tax-advantaged ABLE account increases from 26 to 46.
- QDT Tax Adjustments: The annual tax exemption for Qualified Disability Trusts (QDTs) has been adjusted for inflation.
Key Takeaways Ahead
The Bedrock: What is a Special Needs Trust?
Think of a Special Needs Trust (SNT) as a protective financial bubble. You place assets (cash, investments, life insurance proceeds) inside this protective bubble. A person you choose, the Trustee, manages everything within it.
The crucial part? The money inside this bubble does not legally belong to your loved one (the beneficiary). It is owned by the trust for their benefit.
Because they don’t own it directly, the assets don’t count against them when the government checks their eligibility for programs like Medicaid and SSI, which have strict asset limits. This allows the trust to pay for things government benefits don’t cover. Such as therapy, transportation, or hobbies, radically improving their quality of life.
The Two Flavors of SNTs: It’s All About Where the Money Came From
Use the interactive tool I create below to compare the 1st Part SNT with the 3rd Party SNT:
Funded by: Someone Else (The Preferred Option)
A parent, grandparent, or other relative funds this trust, typically through their own estate plan or a life insurance policy. The money never belongs to the beneficiary.
The Critical Catch:
- When the beneficiary passes away, any remaining money in the trust can go to other heirs or charities you’ve designated.
- There is NO payback required to the state. This is the key advantage.
Funded by: The Beneficiary Themselves
This trust is used when the person with a disability receives money directly, such as from a personal injury settlement or an inheritance they weren’t expecting.
The Critical Catch:
- This type of trust has a mandatory Medicaid Payback Provision.
- When the beneficiary passes away, the state must be reimbursed from any remaining trust funds for Medicaid services provided during their lifetime.
Michael Ryan Money Tip:
A Third-Party SNT is almost always preferable because it avoids the Medicaid payback. This is why a proper estate plan is so critical for these families.
- If you have further questions, feel free to read my more detailed article: 29 Special Needs Trust FAQ
The ISM Game-Changer: Food is No Longer the Enemy of SSI
For decades, a well-meaning trustee who used SNT funds to buy groceries would inadvertently cause a reduction in the beneficiary's monthly SSI check due to a policy called In-Kind Support and Maintenance (ISM).
That era is over.
Effective September 30, 2024, the Social Security Administration enacted a monumental change. According to the SSA's final rule, 89 FR 22003, food is no longer included in the ISM calculation. A trustee can now pay for groceries directly without reducing SSI benefits.
Putting the New Food Rule into Practice: A Trustee's Guide
- Pay Vendors Directly:
This rule only works if the trustee pays the vendor (the grocery store, the restaurant) directly. Giving the beneficiary cash for food is still considered income and will reduce their SSI check. - Use a Dedicated Card:
I advise all my trustee clients to get a dedicated trust debit card used exclusively for these food purchases. It creates a clean paper trail for your fiduciary records. - The Group Home Nuance:
If your loved one is in a group home that charges for "room and board," the trustee can now pay the home directly for the food portion of that bill without penalty. This is a huge win for many families.
The ABLE Account Revolution: SECURE 2.0 Act Opens the Door
The ABLE account is a powerful, tax-advantaged savings tool, but its major limitation has always been its strict age requirement: the disability must have occurred before age 26.
The SECURE 2.0 Act of 2022 has fundamentally changed this.
The New Rule:
As detailed in Section 125 of the Act, starting January 1, 2026, the age of disability onset for ABLE account eligibility will increase from 26 to 46. This opens the door for a new generation of beneficiaries, including many veterans and those who acquire disabilities in early adulthood, to save and invest tax-free. You can learn more at the official ABLE National Resource Center.
The Planner's Playbook: Using SNTs and ABLE Accounts Together
The smartest financial plan doesn't see these as an "either/or" choice. It uses them in synergy. See which might be the best fit for your situation with this quick tool.
Here’s a common strategy I recommend:
The SNT as the Fortress:
Parents or grandparents fund the Third-Party SNT. This trust is the main vehicle for large, irregular expenses: a wheelchair-accessible vehicle, uncovered medical treatments, or a vacation.
The ABLE Account as the Flexible Checking Account:
The trustee can transfer money from the SNT into the beneficiary's ABLE account (up to the annual limit of $18,000 for 2024). Because ABLE account funds can be used for housing and food without an SSI reduction, this becomes the perfect tool for paying monthly rent and groceries.
This two-account strategy maximizes flexibility while providing ironclad protection for government benefits.
A Quick Note on Taxes: What is a Qualified Disability Trust (QDT)?
A QDT isn't a different type of trust, but a special tax status some SNTs can claim under IRC Section 642(b)(2)(C). Its key benefit is a larger personal tax exemption, similar to an individual taxpayer.
For 2025, the personal exemption amount for QDTs is $5,000 (increased from the $4,700 for 2024). This is significantly higher than regular trusts, which only get:
- $100 exemption for simple trusts
- $300 exemption for complex trusts
This allows the trust to earn more income each year before paying taxes.
Building Your Team: Finding the Right Attorney
This is not a DIY project. Drafting an SNT is a highly specialized legal task.
The best place to start your search is the Special Needs Alliance (SNA), a national organization of attorneys who focus on this specific area of law. Finding the right professionals for your team is a crucial step in any sound financial planning process.
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Note: The content provided in this article is for informational purposes only and should not be considered as financial or legal advice. Consult with a professional advisor or accountant for personalized guidance.
