Many government benefits programs — Medicaid and SSI among them — have strict asset limits, meaning an inheritance left directly to a beneficiary with disabilities can disqualify them from benefits they depend on. A special needs trust is specifically designed to avoid that outcome.
How the trust structure preserves eligibility
Because the trust, not the beneficiary, technically owns the assets, and distributions are structured to supplement rather than replace government benefits, properly drafted special needs trust assets generally aren't counted against means-tested program limits.
First-party vs. third-party trusts
A third-party special needs trust, funded by someone other than the beneficiary (like a parent), has more flexibility and typically isn't subject to Medicaid payback requirements. A first-party trust, funded with the beneficiary's own assets, usually requires reimbursing Medicaid upon the beneficiary's death — an important distinction depending on the source of the funds.
What distributions can actually be used for
Distributions are typically structured for supplemental needs — items and services not covered by government benefits, like education, recreation, or specialized equipment — rather than for things like direct cash or basic food and shelter that could interfere with means-tested eligibility.
Coordinating it with the rest of an estate plan
A special needs trust needs to be coordinated with the rest of a family's estate plan — wills, other trusts, and beneficiary designations — since even a well-drafted trust can be undermined by a life insurance policy or retirement account that names the beneficiary directly instead of the trust.