What is a special needs trust and why do I need one in Illinois?

A special needs trust (supplemental needs trust) holds assets for a disabled person without disqualifying them from means-tested government benefits such as Medicaid and SSI. Leaving assets directly to a disabled beneficiary — even in a will — can cause them to lose these critical benefits. A properly drafted special needs trust allows the trustee to pay for supplemental expenses (education, recreation, transportation, therapy) while preserving eligibility for government benefits.

What is the difference between a first-party and third-party special needs trust?

A third-party special needs trust is funded with assets belonging to someone other than the beneficiary — typically parents or grandparents. It is the most flexible type and is not subject to Medicaid payback at the beneficiary's death. A first-party (self-settled) trust is funded with the disabled person's own assets — often from an inheritance or personal injury settlement. First-party trusts are subject to a Medicaid payback provision upon the beneficiary's death and must be established before age 65.

Special Needs Trust Attorney & CPA — Orland Park and Chicago Southwest Suburbs

Q: What can a special needs trust pay for?

A special needs trust can pay for goods and services that supplement — not replace — government benefits. Distributions for food and shelter can reduce SSI benefits under the in-kind support rules. Distributions for most other purposes — education, recreation, transportation, personal care items, electronics, vacations, and supplemental therapies not covered by Medicaid — generally do not affect benefits eligibility. Proper trustee selection and ongoing trust administration are critical to preserving the beneficiary's government benefits.

Families with a disabled child, sibling, or other loved one face a unique estate planning challenge: how to provide financial support without disqualifying that person from the government benefits — Medicaid, SSI, and others — they depend on to survive.

Special needs trust attorney CPA Orland Park Illinois

A Special Needs Trust — also called a Supplemental Needs Trust — is the primary legal tool designed to solve this problem. When properly drafted and administered, a special needs trust allows a disabled person to receive financial support from family without triggering the income and asset limits that govern SSI and Medicaid eligibility.

As an Attorney and Certified Public Accountant serving Orland Park, Tinley Park, Orland Hills, Mokena, and the broader Chicago southwest suburbs, Paul Lechner provides integrated special needs planning that addresses both the trust document and the tax and benefits implications of funding it.

Schedule a Consultation Call (708) 460-6686

Types of Special Needs Trusts

Third-Party Special Needs Trust

A third-party special needs trust is funded with assets belonging to someone other than the beneficiary — typically parents, grandparents, or other family members. This is the most common type and the most flexible. A third-party SNT can be created during the grantor's lifetime (a standalone trust) or through a will or revocable living trust (a testamentary trust that takes effect at death). Critically, a third-party SNT is not subject to the Medicaid payback requirement that applies to first-party trusts — when the beneficiary dies, remaining trust assets pass to family members or other beneficiaries rather than to the state.

First-Party (Self-Settled) Special Needs Trust

A first-party SNT — also called a (d)(4)(A) trust after the federal statute that authorizes it — is funded with assets belonging to the disabled person. This typically arises when a disabled person receives an inheritance outright, a personal injury settlement, or another lump sum. To preserve Medicaid eligibility, those assets must be placed into a compliant trust. First-party SNTs must be established before the beneficiary turns 65, require a parent, grandparent, guardian, or court to establish them, and are subject to a Medicaid payback provision upon the beneficiary's death.

Pooled Special Needs Trusts

A pooled trust is managed by a nonprofit organization that pools the assets of multiple beneficiaries for investment purposes while maintaining separate accounts for each. Pooled trusts can be funded by either third parties or by the disabled person's own assets, and are available for individuals of any age. They are often the most practical option when the amount of assets is too small to justify the cost of a standalone trust.

What a Special Needs Trust Can and Cannot Pay For

The trustee of a special needs trust must be careful to use trust funds only for goods and services that supplement — not replace — government benefits. Distributions for food and shelter (rent, mortgage payments, utilities) can reduce SSI benefits dollar-for-dollar under the in-kind support and maintenance rules. Distributions for most other purposes — education, recreation, transportation, personal care items, electronics, vacations, and supplemental therapies not covered by Medicaid — generally do not affect benefits eligibility.

This makes proper trustee selection and ongoing trust administration critically important. A trustee who is unfamiliar with these rules can inadvertently reduce or eliminate the beneficiary's government benefits through well-intentioned but improper distributions.

ABLE Accounts

The Achieving a Better Life Experience (ABLE) Act, enacted in 2014, created tax-advantaged savings accounts for individuals with disabilities. As of January 1, 2026, the ABLE Age Adjustment Act expands eligibility to individuals who became disabled before age 46 (increased from the prior threshold of age 26), significantly broadening access for those with late-onset disabilities, mental health conditions, and veterans injured after their mid-twenties. The One Big Beautiful Bill Act (OBBBA), enacted July 4, 2025, also decoupled the ABLE annual contribution limit from the gift tax exclusion by applying an earlier inflation adjustment reference date — resulting in a 2026 ABLE contribution limit of $20,000 per year (while the gift tax exclusion remains at $19,000). Account balances up to $100,000 do not affect SSI eligibility. Funds in an ABLE account can be used for qualified disability expenses including education, housing, transportation, health, employment training, and financial management. The OBBBA also permanently extended the ABLE-to-Work provision, allowing employed ABLE account holders who do not participate in an employer-sponsored retirement plan to contribute an additional amount up to the lesser of their annual earned income or the prior year’s federal poverty level, on top of the $20,000 base limit.

ABLE accounts can be an effective complement to a special needs trust, particularly for expenses that the SNT cannot easily pay for or for giving the disabled person greater day-to-day financial independence. We help families evaluate whether an ABLE account, a special needs trust, or a combination of both best serves their situation.

Coordinating the Special Needs Trust With Your Overall Estate Plan

Creating a special needs trust is not a one-time event — it requires coordination across your entire estate plan. Parents of a disabled child must review and update their wills, revocable living trusts, beneficiary designations on IRAs and life insurance policies, and any existing estate plan documents to ensure that no assets pass directly to the disabled beneficiary at their death. A direct inheritance — even of a small amount — can trigger a review of the beneficiary's SSI and Medicaid eligibility.

We also help families think through the guardian and trustee selection process. The person best suited to care for a disabled family member is not always the person best suited to manage a trust, and these roles can be split between individuals or between an individual and a corporate trustee.

A letter of intent is not legally binding but can be one of the most important documents you create. This letter — addressed to the future trustee and guardian — describes your loved one's daily routines, medical needs, preferences, relationships, and life goals. We help families prepare this document as part of the special needs planning process.

Related Services

Estate Planning — wills, revocable living trusts, powers of attorney, and Medicaid planning
Tax and Financial Planning — tax-efficient funding of special needs trusts using life insurance or other assets
Probate and Trust Litigation — representing trustees and beneficiaries in trust administration disputes

For more information contact Paul Lechner, Esq., CPA at (708) 460-6686 or schedule a consultation online.

Frequently Asked Questions

Will leaving money to my disabled child in my will disqualify them from Medicaid and SSI?

Yes — if assets pass directly to a disabled beneficiary who receives Medicaid or SSI, that inheritance will count as a resource and can disqualify them from benefits until the inherited assets are spent down. The solution is to ensure that no assets pass directly to the disabled person. This requires reviewing and updating your will, revocable living trust, beneficiary designations on IRAs, life insurance policies, and retirement accounts to redirect those assets into a properly drafted third-party special needs trust. Even a modest inheritance that goes directly to a Medicaid recipient can interrupt critical benefits for months or years.

Can I name a special needs trust as the beneficiary of my IRA or life insurance policy?

Yes, with careful drafting. A special needs trust can be named as a beneficiary of an IRA or life insurance policy, but the trust must be structured correctly to work in this context. For IRAs inherited by a special needs trust after the SECURE Act, distribution rules depend on whether the trust qualifies as a see-through trust and whether the disabled beneficiary qualifies as an Eligible Designated Beneficiary — which allows for the more favorable lifetime stretch distribution rather than the 10-year rule. This is a technically complex area where the intersection of disability law, benefits law, and retirement account law requires specialized planning.

Who should serve as trustee of a special needs trust?

Trustee selection is one of the most important decisions in special needs planning. The trustee must understand the government benefit rules well enough to avoid distributions that inadvertently reduce or eliminate the beneficiary’s benefits. Trustees who pay housing costs, utilities, or food from the trust without understanding the in-kind support and maintenance rules can cause unintended benefit reductions. Options include a trusted family member (typically a sibling), a professional trustee, or a corporate trust department. For smaller trusts, a pooled special needs trust managed by a nonprofit may provide professional administration at a lower cost. It is also possible to split the trustee role — a family member as personal trustee and a professional co-trustee for financial and benefits management.

What is an ABLE account and how does it differ from a special needs trust?

An ABLE account is a tax-advantaged savings account for individuals who became disabled before age 46 (as of January 1, 2026, expanded from age 26 under the ABLE Age Adjustment Act). Contributions of up to $20,000 per year in 2026 — decoupled from the gift tax exclusion by the One Big Beautiful Bill Act (OBBBA) enacted July 4, 2025 — and account balances up to $100,000 do not count against SSI resource limits. Earnings grow tax-free and withdrawals for qualified disability expenses are tax-free. Employed ABLE account holders who do not participate in an employer-sponsored retirement plan may contribute an additional amount under the permanent ABLE-to-Work provision. ABLE accounts differ from special needs trusts in several important ways: they can be owned and controlled by the beneficiary directly, giving them financial independence; they are simpler and less expensive to establish; but they have annual contribution limits, a $100,000 SSI cap, and are subject to Medicaid payback at death. For many families, the two tools work well together — the trust for larger amounts and complex planning, the ABLE account for day-to-day financial flexibility for the beneficiary.

Does a special needs trust affect Medicaid eligibility in Illinois?

A properly drafted third-party special needs trust does not count as a resource for Medicaid or SSI purposes, because the disabled beneficiary does not own the trust assets — the trustee holds them for the beneficiary’s benefit. The key is that the trust must be properly structured: the beneficiary cannot have the right to demand distributions, and the trust must not be self-settled (funded with the beneficiary’s own assets) unless it meets the specific requirements of a first-party SNT under federal law. Illinois follows federal Medicaid rules on this point. Improperly drafted trusts — or trusts that give the beneficiary too much control — can be treated as countable resources and jeopardize eligibility.