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Last Modified on May 17, 2026
The disadvantages of a special needs trust include strict administrative burdens, high setup costs, and the beneficiary’s loss of direct financial control. The beneficiary must request funds from a trustee, which can lead to tension due to a lack of independence. Additionally, direct payments for housing from the trust can reduce a beneficiary’s SSI benefits.
In estate planning, trusts are a valuable tool for people who want to provide funds for others and avoid some of the issues of probate. Special needs trusts work similarly to traditional trusts but provide a service to those needing special health care.
Special needs trusts have a set of pros and cons that you should consider before putting in the time and money to create one. At the same time, these powerful tools aren’t suitable for every family and situation.
What Is a Special Needs Trust?
Special needs trusts seek to provide income to any individual who needs special medical attention and care. They work similarly to a traditional trust, where a grantor appoints a trustee who distributes funds and approves requests for money from the account. The trustee can be the beneficiary, but in many cases, it is a third party who will determine the eligibility for someone to use trust money for expenses.
What Makes a Special Needs Trust Different From Others?
Special needs trusts are less flexible than traditional trusts, which are already more difficult to alter than other methods of passing on wealth. While traditional trusts give beneficiaries wide latitude on spending, a special needs trust is specifically designed to cover supplemental quality-of-life expenses that government programs do not cover, such as education, recreation, therapy, and specialized equipment.
There are also a few regulations regarding who can set up or have a special needs trust, what happens to the money, and what you can spend it on, such as:
- The beneficiary cannot be over 65 when someone creates the trust.
- Under recent updates, trust money can now be used to purchase food without reducing a beneficiary’s SSI benefits. However, direct payments for housing may still impact their monthly SSI allowance.
- Nobody can revoke a special needs trust. Even in cases where creditors or claim winners are seeking money, they won’t be able to take funds from a special needs trust.
- When the beneficiary dies, any remaining assets in the trust are to go to other beneficiaries in the trust or to the sole beneficiary’s estate.
Before setting up a special needs trust, you should speak with an estate planning attorney to determine eligibility and whether the plan is right for your situation.
Disadvantages of a Special Needs Trust
When families ask us, “what are the disadvantages of a special needs trust?“, we always emphasize that while they are powerful protective tools, they come with strict administrative burdens, high setup costs, and a loss of direct financial control for the beneficiary.
Perhaps the biggest disadvantage of a special needs trust is the lack of control a beneficiary will have over the situation. The beneficiary does not have direct control of the funds and, instead, has to request money every time they wish to use them. This scenario can lead to tension between the trustee and the beneficiary, as the lack of independence in the situation can weigh on people over time.
A common misconception is that these trusts only cover medical bills. While they can greatly enhance a beneficiary’s lifestyle, one of the special needs trust pitfalls is the strict regulation on housing. Direct payments for rent can reduce their SSI benefits, requiring careful management by the trustee.
When weighing the pros and cons of a special needs trust, Medicaid (Medi-Cal) payback rules are a major factor. However, this only applies to First-Party SNTs (funded by the disabled person). A Third Party special needs trust (funded by family members) is NOT subject to Medi-Cal reimbursement, allowing remaining funds to pass to other loved ones.
There are ways to avoid this repayment, and you should speak with an estate planning attorney about your trust before committing to it.
The creator of the special needs trust will also deal with some expenses when setting up and maintaining the arrangement. There are heavy costs to setting up a special needs trust, including an initial setup fee and annual fees. You will also need to pay for an attorney and, likely, a trustee to maintain the trust and approve requests for funds.
You’ll likely want to find a trustee to handle your special needs trust, as they can be difficult to take care of on your own. A professional can take all the difficulty out of maintaining the trust, though you will have to pay for their services.
Advantages of a Special Needs Trust
A special needs trust does provide several advantages. Most importantly, these arrangements allow the beneficiary to maintain eligibility for government benefits, such as Medicaid.
Special needs trusts allow the beneficiary to have less of their income tied up in medical expenses and more for other needs, such as food and housing. While the special needs trust can’t pay for food, it can take some of the financial strain off the beneficiary, so their primary income can cover food expenses.
New Rules for Special Needs Trusts in California
If you are planning for a loved one’s future, you must be aware of the new rules for special needs trusts and government benefits effective in 2026:
Medi-Cal Asset Limits Returned: As of January 1, 2026, California reinstated the Medi-Cal asset limit ($130,000 for an individual). If a loved one accumulated savings during the 2024-2025 uncapped period, a special needs trust is now crucial to shelter those funds and prevent a loss of benefits.
CalABLE Expansion: Under the 2026 ABLE Age Adjustment Act, individuals whose disabilities began before age 46 (up from age 26) can now open CalABLE accounts. These accounts pair perfectly with a special needs trust to give the beneficiary more daily financial independence.
Because a single drafting mistake can jeopardize your loved one’s SSI or Medi-Cal benefits, hiring a qualified special needs trust attorney is the safest way to ensure the document complies with all state and federal regulations.
FAQs
How Is Money Distributed in a Special Needs Trust?
In a special needs trust, the beneficiary will need to seek approval from a trustee to see if they can use money from the account for medical expenses. The trustee will review the situation and decide whether to allow the money to go to the expense or deny the coverage.
What Is the Limit on a Special Disability Trust?
A common question is: how much money can be put in a special needs trust? Unlike CalABLE accounts, which have strict annual contribution limits, there is no legal limit to how much money can be placed into a special needs trust. However, the funds must be used strictly for the beneficiary’s supplemental needs to avoid jeopardizing their government benefits.
How Do I Know If a Special Needs Trust Is Right for Me?
A financial planner and an estate planning attorney can help you sort through the various options available to you in assisting your family and friends financially. Special needs trusts only help with medical bills, so you may want to create some additional arrangements to help them with things like food and housing.
Do You Pay Taxes on Money Distributed From a Trust?
Trust money is taxable in many instances. Special needs trusts also have other financial concerns as well. You’ll have to pay trust funds after a beneficiary dies to cover Medicaid expenses. Every trust is different, so speak with an estate planning attorney to see how your trust will affect your taxes.
Why should you not do a Special Needs Trust?
You might avoid it if the disabled individual does not rely on needs-based government benefits like SSI or Medi-Cal, or if they only have a very small amount of assets where a CalABLE account would be cheaper and easier to manage. The high setup costs and strict tax filing requirements are notable disadvantages of a special needs trust for smaller estates.
What are the main pros and cons of a Special Needs Trust?
When evaluating the pros and cons of a special needs trust, the biggest advantage is protecting a loved one’s eligibility for essential government benefits while still enriching their quality of life. The biggest cons are the high legal fees to establish the trust, the ongoing administrative burden placed on the trustee, and the lack of direct financial control for the beneficiary.
Goebel Estate Planning, PC: An Estate Planning Lawyer You Can Trust
It’s important to have an estate planning attorney on your side when you want to set up a trust or any other part of an estate plan. At Goebel Estate Planning, PC, I can help with your questions. Contact Hillary Goebel today to see how I can assist you with a special needs trust or any other estate planning needs.
