When John and Emily’s daughter was born with a disability that will require lifelong care, the couple decided to set up a special needs trust (SNT). Also known as a supplemental needs trust, an SNT allows you to enhance a family member’s quality of life without jeopardizing his or her eligibility for government benefits, such as Medicaid or Supplemental Security Income (SSI). Let’s take a closer look at questions to consider when using an SNT.

Will government benefits be preserved?

The costs of extended-term care for a family member with special needs can be enormous and aren’t always predictable. These costs can endanger your family’s financial security. An SNT can preserve your loved one’s access to government benefits that cover health care and other basic needs.

Medicaid and SSI pay for basic medical care, food, clothing and shelter. To qualify for these benefits, however, a person’s resources must be limited to no more than $2,000 in “countable assets.”

Generally, every asset is countable with just a few exceptions. The exceptions include a principal residence, regardless of value. (But if the recipient is in a nursing home or similar facility, he or she must intend — and be expected — to return to the home.) They also include a car; a small amount of life insurance; burial plots or prepaid burial contracts; furniture, clothing, jewelry and certain other personal belongings.

An SNT is an irrevocable trust designed to supplement, rather than replace, government assistance. To preserve eligibility for government benefits, the beneficiary can’t have access to the funds, and the trust must be prohibited from providing for the beneficiary’s “support.” That means it can’t be used to pay for medical care, food, clothing, shelter or anything else covered by Medicaid or SSI, such as the basic medical care provided by those programs.

Are supplemental expenses covered?

With those limitations in mind, an SNT can be used to pay for virtually anything government benefits don’t cover, such as unreimbursed medical expenses, education and training, transportation (including wheelchair-accessible vehicles), insurance, computers, and modifications to the beneficiary’s home. It can also pay for “quality-of-life” needs, such as travel, entertainment, recreation and hobbies.

Keep in mind that the trust must not pay any money directly to the beneficiary. Rather, the funds should be distributed directly — on behalf of the beneficiary — to the third parties that provide goods and services to him or her.

Should an SNT include spendthrift language?

Like many trusts, most SNTs contain spendthrift language to protect the trust assets against creditors’ claims. Also, in some states, it may be necessary to include specific language providing that the trust is an SNT, that the funds are intended for only nonsupport purposes and that your intention is to preserve the beneficiary’s eligibility for government benefits. In other states, simply designing the trust as a discretionary trust may be sufficient, but it can’t hurt to include SNT spendthrift language just to be safe.

Communicate your plans

After John and Emily created an SNT, their estate planning advisor stressed the importance of notifying family and friends of the trust. Why? Because well-meaning loved ones might inadvertently undermine the strategy by making gifts or bequests directly to John and Emily’s daughter. The couple let loved ones know in advance that the best way for them to help the child is to make gifts or bequests to the SNT.