Special Needs Trusts in Minnesota: Protecting Benefits While Providing for a Loved One

A special needs trust (also called a supplemental needs trust) is a legal arrangement designed to provide financial support for a person with a disability without jeopardizing their eligibility for means-tested government benefits such as Supplemental Security Income (SSI) and Medical Assistance (Minnesota’s Medicaid program). These benefits provide essential healthcare coverage and income support that a trust alone cannot replicate.

The challenge is straightforward: SSI imposes a $2,000 resource limit for individuals, and Medical Assistance has its own asset thresholds. Without a properly structured trust, even a modest inheritance can disqualify a beneficiary from programs that provide tens of thousands of dollars in annual benefits. Minnesota’s trust laws, particularly the Minnesota Trust Code (Minn. Stat. Chapter 501C) and the Supplemental Needs Trust provisions at Minn. Stat. Section 501C.1205, provide the legal framework for creating trusts that solve this problem.

How Special Needs Trusts Preserve Benefits

Government benefit programs distinguish between countable resources (assets that disqualify a person from benefits) and exempt resources (assets that do not count). A properly drafted special needs trust holds assets as exempt resources because the beneficiary does not own or control the trust assets and cannot demand distributions.

The trustee, not the beneficiary, decides when and how trust funds are used. Distributions are made for the beneficiary’s supplemental needs, meaning goods and services that government benefits do not cover. This structure allows the trust to enhance the beneficiary’s quality of life without replacing the benefits that provide baseline support.

Types of Special Needs Trusts

Minnesota recognizes three primary types of special needs trusts, each with different funding sources, establishment requirements, and consequences at the beneficiary’s death.

Third-Party Special Needs Trust

A third-party special needs trust is funded with assets that belong to someone other than the beneficiary, typically a parent, grandparent, or other family member. This is the most common type used in estate planning.

Parents most commonly establish third-party SNTs as part of their estate plan, either as a standalone trust or as a subtrust within a revocable living trust. The trust can be funded with gifts, bequests, life insurance proceeds, or retirement account distributions. Critically, no Medicaid payback is required — when the beneficiary dies, remaining assets pass to the remainder beneficiaries designated in the trust rather than being consumed by a state reimbursement claim. There is no age restriction on creating a third-party SNT.

First-Party Special Needs Trust (d)(4)(A) Trust

A first-party special needs trust is funded with the beneficiary’s own assets, such as a personal injury settlement, inheritance received outright, or accumulated earnings. These trusts are authorized under 42 U.S.C. Section 1396p(d)(4)(A), often referred to as “(d)(4)(A) trusts.”

Under federal law, a first-party SNT must be established by a parent, grandparent, legal guardian, or a court — not by the beneficiary themselves. The trust must be created before the beneficiary reaches age 65, and the beneficiary must meet the Social Security Administration’s definition of disability. The critical difference from a third-party trust: Medicaid payback is required. Upon the beneficiary’s death, remaining trust assets must first reimburse the state of Minnesota for Medical Assistance benefits paid during the beneficiary’s lifetime (Minn. Stat. Section 501C.1205).

First-party trusts are most commonly used when a person with a disability receives a personal injury settlement, inheritance, or other lump sum that would otherwise disqualify them from benefits.

Pooled Trust (d)(4)(C) Trust

A pooled trust is managed by a nonprofit organization that pools the investment of trust funds from multiple beneficiaries while maintaining separate accounts for each individual. Pooled trusts are authorized under 42 U.S.C. Section 1396p(d)(4)(C). Unlike a first-party (d)(4)(A) trust, a pooled trust can accept assets from a beneficiary who is 65 or older, though transfers at that age may trigger a Medical Assistance penalty period. Pooled trusts are practical for smaller amounts where the expense of a standalone trust is not justified. Several nonprofit organizations operate pooled trusts in Minnesota.

What a Special Needs Trust Can and Cannot Pay For

The distinction between supplemental needs and basic support determines what trust distributions are permissible without jeopardizing government benefits.

Permissible Trust Expenditures

A special needs trust can pay for goods and services that supplement government benefits, including education and tutoring, recreational activities, personal care attendants, transportation (including vehicle purchase), adaptive technology, home modifications, dental and vision care not covered by Medical Assistance, and legal and financial advisory services.

Distributions That Affect Benefits

Distributions for food and shelter are treated as in-kind support and maintenance (ISM) under SSI rules, reducing the beneficiary’s SSI payment by up to one-third of the federal benefit rate plus $20. This reduction is not necessarily disqualifying, and for some beneficiaries, the value of what the trust provides exceeds the SSI reduction. Direct cash payments to the beneficiary, however, are counted as income and can disqualify them from benefits entirely. The trustee should always pay vendors directly rather than giving cash to the beneficiary.

ABLE Accounts as a Complement

Achieving a Better Life Experience (ABLE) accounts provide a tax-advantaged savings vehicle for individuals whose disability onset occurred before age 46 (expanded from age 26 under the ABLE Age Adjustment Act of 2022). ABLE accounts allow annual contributions without affecting SSI or Medical Assistance eligibility, so long as the account balance remains below $100,000 for SSI purposes.

An ABLE account does not replace a special needs trust, but it can complement one. The trustee can fund the ABLE account, and the beneficiary can draw from it with greater independence for qualified disability expenses.

Trustee Selection

The choice of trustee for a special needs trust is among the most consequential decisions in the planning process. The trustee must understand the complex interplay between trust distributions and government benefit eligibility, maintain meticulous records, file required tax returns, and exercise sound judgment about distribution requests.

Options include a family member (personal knowledge but may lack benefit-rule expertise), a professional or corporate trustee (expertise and continuity but higher fees), or co-trustees combining both. A trust protector—an independent party with limited powers to modify the trust—can oversee the trustee, replace an underperforming trustee, or adjust terms as laws change.

Because many special needs trusts must last for the beneficiary’s entire lifetime, planning for trustee succession is as important as the initial selection. The trust document should name successor trustees and establish a process for replacement.

Funding a Special Needs Trust

A third-party special needs trust can be funded during the grantor’s lifetime or at death. Common funding strategies include:

• Life insurance. A policy naming the special needs trust as beneficiary provides a lump sum at death without passing through probate or the beneficiary’s hands.
• Retirement accounts. An IRA or 401(k) can name the special needs trust as beneficiary, though the income tax consequences of distributions to a trust (which reaches the highest tax bracket at relatively low income levels) require careful planning.
• Pour-over will. A will that directs assets to the special needs trust at death.
• Gifts during lifetime. Family members can contribute to the trust during their lifetimes, subject to gift tax rules.

The Importance of Notifying Family Members

One of the most common ways a special needs trust is undermined is by a well-meaning relative who leaves an inheritance directly to the person with a disability. Even a modest bequest in a grandparent’s will can disqualify the beneficiary from benefits. Families should ensure that all relatives who might include the beneficiary in their estate plans understand the need to direct any bequests to the special needs trust rather than to the individual.

Integration with the Broader Estate Plan

A special needs trust does not exist in isolation. It must be coordinated with the family’s overall estate plan, including:

• Letter of intent. A non-binding document that describes the beneficiary’s daily routine, preferences, medical providers, and the family’s vision for their care. This guides future trustees who may not know the beneficiary personally.
• Sibling roles. If a sibling will serve as trustee or advocate, their responsibilities should be clearly defined.
• Beneficiary designations. Every beneficiary designation on life insurance, retirement accounts, and payable-on-death accounts should be reviewed to ensure nothing passes directly to the person with a disability.

An experienced estate planning attorney can ensure that the special needs trust is properly drafted under Minnesota law, coordinated with government benefit eligibility requirements, and integrated into a family plan that provides for all members. The technical requirements are precise, and errors can be costly, both in terms of benefit eligibility and in terms of the quality of life the trust is meant to protect.