If you have a family member with a disability, you already know that planning for their future looks different. You want to provide for them financially, but leaving assets outright can disqualify them from Medicaid, Supplemental Security Income (SSI), housing assistance, and other benefits they depend on. A recent piece from The Street, “How to secure your child’s financial future with a special needs trust,” lays out how the right trust structure can solve this problem. Here’s what that looks like under Illinois law.
Why You Can’t Just Leave Assets Outright
If a family member with a disability inherits money or property directly, it counts against them when the state or federal government determines eligibility for means-tested benefits. That can mean losing Medicaid coverage, SSI payments, or housing assistance, sometimes undoing years of planning in one transfer.
A special needs trust, which Illinois law also calls a supplemental needs trust, solves this by holding assets separately from the beneficiary. The trustee can use trust funds for the beneficiary’s benefit, but because the beneficiary doesn’t own or control the assets directly, they generally aren’t counted against eligibility limits.
The Two Main Types of Special Needs Trusts
Illinois recognizes two primary structures, and the rules for each are quite different.
Third-party trusts are funded with someone else’s assets, typically a parent’s or grandparent’s. These trusts are fairly flexible. They can benefit one person for life and then pass to other beneficiaries, and they can even benefit more than one person at a time. The core requirement is that the beneficiary can’t serve as trustee or manage the funds themselves.
First-party trusts (also called self-settled or payback trusts) are funded with the beneficiary’s own assets, such as a personal injury settlement or an inheritance received directly. These must be established before the beneficiary turns 65, and they come with a significant tradeoff: when the beneficiary dies, any remaining trust assets must first go toward reimbursing the state for Medicaid benefits paid during their lifetime. Only after that reimbursement can remaining funds pass to other beneficiaries.
Distributions Have to Stay Discretionary
For either type of trust, the trustee’s discretion over distributions is what keeps the trust from being counted against benefits eligibility. If the trust document requires the trustee to pay for specific things like housing or medical care, a benefits agency can argue those assets should count against eligibility after all.
This is why the trust language matters so much. It needs to clearly give the trustee discretion, not obligate them to cover particular expenses. Getting this wording right is one of the main reasons families work with an attorney experienced in both trust drafting and public benefits law.
Most-Third Party Trusts Are Funded After the Parent’s Death
A common approach is to leave a third-party special needs trust unfunded during the parents’ lifetimes, then direct their estate plan to fund it after both parents have passed. This lets parents use their own assets freely while they’re alive, while still ensuring their disabled family member inherits through the trust rather than outright. It keeps the family member from being disinherited while protecting the benefits they rely on.
This only works smoothly if the special needs trust is built into the broader estate plan from the start, not added as an afterthought. A will or revocable trust that doesn’t account for a beneficiary with a disability can accidentally leave assets to them outright, creating exactly the problem the family was trying to avoid.
Why This Isn’t a DIY Project
Special needs trusts sit at the intersection of trust law and public benefits law, and Illinois has its own rules layered on top of the federal framework, including specific requirements around the payback provision, discretionary language, and timing for pooled trusts. Getting a detail wrong doesn’t just create a paperwork problem. It can mean a family member loses benefits they’ve relied on for years.
If you’re starting to think through this kind of planning, we’d be glad to talk through your options. Schedule a Complimentary Discovery Call, and let’s build a plan that protects everyone you call home.
Reference: The Street (June 4, 2026) “How to secure your child’s financial future with a special needs trust”