What Is a Special Needs Trust and How Can It Help My Child?
For Illinois families with children who have disabilities, long-term financial planning often involves more than providing general support. Government programs like Medicaid and Supplemental Security Income (SSI) offer crucial assistance, but those benefits come with strict income and asset limits.
Giving a child direct access to money or property—without proper planning—can disqualify them from receiving those benefits. That’s where a special needs trust becomes valuable.
The Law Offices of Steven H. Peck, Ltd understands how Illinois families can use a special needs trust to support a child with disabilities while preserving eligibility for public benefits.
A properly drafted trust can protect assets, provide future financial security, and offer peace of mind. Illinois law recognizes several types of special needs trusts, each suited to different needs and circumstances.
What a Special Needs Trust Does
A special needs trust is a legal arrangement that allows a person with disabilities to receive financial support without directly owning the assets. By placing funds into the trust, family members or other parties can provide for the child’s needs while allowing them to continue receiving public assistance.
The person benefiting from the trust—called the beneficiary—does not control the assets. Instead, a trustee manages the trust according to its terms. The funds can be used for a wide variety of expenses, such as therapy, education, assistive technology, and recreational activities.
However, the money cannot be used for food or shelter if the beneficiary is receiving SSI, as this could reduce those benefits.
Under Illinois law, a special needs trust must meet specific requirements to be considered valid for preserving eligibility. These include the type of trust, how it is funded, and who manages it. Any missteps can affect benefits or create legal complications down the line.
Types of Special Needs Trusts in Illinois
Illinois recognizes three primary types of special needs trust structures, each of which serves different functions:
First-Party Special Needs Trust
This type of trust is funded with the beneficiary’s own assets, often as a result of a personal injury settlement or inheritance. Under federal law, a first-party special needs trust must be:
Established for a person under the age of 65
Created by a parent, grandparent, guardian, or the court
Irrevocable, meaning it cannot be changed or terminated without court approval
A key feature of a first-party special needs trust is the Medicaid payback provision. After the beneficiary’s death, any remaining assets in the trust must be used to reimburse the state for Medicaid benefits received.
Third-Party Special Needs Trust
This version is commonly used by parents or other family members who want to leave assets to a child with disabilities. It can be created during the parents’ lifetime or as part of an estate plan. Unlike a first-party trust, a third-party special needs trust does not require a Medicaid payback.
Parents often use life insurance policies, gifts, or estate bequests to fund the trust. Because the trust is never owned by the beneficiary, it avoids affecting SSI and Medicaid eligibility.
Pooled Special Needs Trust
A pooled trust is managed by a nonprofit organization and includes sub-accounts for multiple beneficiaries. Families often consider pooled trusts when there are limited assets available or when managing a standalone trust would be too burdensome. While each sub-account is used only for its beneficiary, all funds are pooled for investment purposes.
Illinois law allows pooled trusts as long as they meet state and federal requirements. Like first-party trusts, a pooled trust generally requires Medicaid reimbursement from remaining funds when the beneficiary passes away.
Benefits of Using a Special Needs Trust
Parents and guardians often choose a special needs trust because it offers a wide range of financial and legal benefits. Below is a list of the most significant advantages:
Preservation of Public Benefits: The trust allows the beneficiary to keep receiving Medicaid, SSI, and other programs by avoiding asset and income thresholds.
Supplemental Support: Trust funds can be used for education, travel, hobbies, therapy, and medical care not covered by insurance.
Controlled Disbursements: Because a trustee manages the funds, they are distributed in a way that supports the child’s long-term needs.
Legal Protection: Assets held in a special needs trust are generally protected from creditors and legal judgments against the beneficiary.
No Need for Court Oversight: Once the trust is established, court supervision is usually not required unless disputes arise or changes are requested.
Flexibility in Estate Planning: Families can structure third-party trusts to include successor beneficiaries or even transfer remaining assets to other relatives.
Avoiding Family Conflict: With clear legal instructions and a trustee in place, the trust can reduce confusion or disagreement among family members about how assets should be used.
What Can a Special Needs Trust Pay For?
Illinois law does not limit the use of trust funds so long as disbursements do not affect benefit eligibility. However, it’s important to follow federal SSI rules carefully. For example, the trust can pay for:
Medical or dental expenses not covered by insurance
Therapy (physical, occupational, speech, or behavioral)
Tuition or educational materials
Internet, phone, and cable services
Transportation, including modified vehicles
Personal care attendants or respite care
Recreation, hobbies, and entertainment
Travel or vacation costs
The trustee must avoid disbursing funds for rent or groceries directly to the beneficiary if they receive SSI, as these could be counted as income.
Choosing the Right Trustee
Selecting the right trustee is a crucial part of establishing a special needs trust. A trustee must be someone capable of understanding both the legal requirements of the trust and the personal needs of the beneficiary.
Many families name a relative as trustee, but some choose professional fiduciaries or corporate trustees, especially for larger trusts. Illinois law requires trustees to act in the best interests of the beneficiary, keep accurate records, and follow the terms of the trust document.
It’s also wise to name a successor trustee in case the original trustee is unable to continue serving. Some families choose to create a trust advisory committee to help guide the trustee, particularly when the beneficiary cannot express preferences clearly.
Modifying or Terminating a Special Needs Trust
While most special needs trust structures are irrevocable, certain modifications are allowed under Illinois law. A trust may be altered or terminated with court approval if the trust becomes unworkable or if the beneficiary’s needs change significantly.
Some reasons for modifying a trust include:
The original trustee becomes incapacitated
The cost of administration is no longer practical
New medical conditions arise that require different terms
Changes in state or federal law affect eligibility rules
Illinois courts generally support modifications when they are in the best interest of the beneficiary. However, any proposed changes must be handled carefully to avoid benefit disruptions.
Secure Your Child’s Future
The Law Offices of Steven H. Peck, Ltd has helped numerous families craft special needs trust documents tailored to their child’s specific needs. They are proud to serve Cook County, Lake County, McHenry County, and DuPage County, Illinois. Call today.