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What Happens to a Special Needs Trust at Death?

Posted: in Elder Law

A special needs trust provides long-term care for someone who has special needs. The funds within this trust pay for medical bills, rehabilitation, daily needs, and so on. Thanks to the care provided through a special needs trust, many beneficiaries can lead longer lives than expected. Unfortunately, the sad reality is that some special needs beneficiaries pass away prematurely, leaving all the funds in the trust when they die. This leads to the complicated question of what will happen to those funds at death?

What Happens If There Is Money Left In The Trust?

When the special needs beneficiary dies, there might be money left in the trust fund. What happens next will depend on the type of special needs trust that’s been set up:

  • First-party special needs trusts - these trusts are funded by the person that has special needs.
  • Second-party special needs trusts - these trusts are funded by a third-party, someone who knows the beneficiary but doesn’t have special needs, usually a relative. 
  • Pooled special needs trusts - these trusts are set up by non-profit organizations that pool funds from lots of special needs trust accounts and manage all the funds for the benefit of all beneficiaries in all of the individual trusts. 


If the special needs trust is funded by the person with special needs, there are obligations that must be fulfilled when money is left in the fund. Primarily, there might be Medicaid or government-funded benefits to take care of. The beneficiary may have received benefits throughout their life, so the trust is used to pay them back. 

There is no obligation for the trustee to repay the government for any services the beneficiary received in their lifetime for third-party special needs trusts. In this instance, money can be distributed amongst any residual beneficiaries named when the trust was created. 

In the event of a death within a pooled special needs trust, any monies left in the account are used to help cover the cost of any administrative fees for the pooled trust. In essence, the money will help the trust keep going, so all other beneficiaries can still receive their benefits. 

What Happens To Any Money Still Left After Government Payments?

In the case of first-party special needs trusts, there could be money left after any Medicaid and government payments have been made. After this, money can then be distributed amongst the residual beneficiaries of the trust. 

Consequently, it’s important to always name beneficiaries before setting up a trust, just in case the worst happens. This ensures that any remaining funds are given to people the beneficiary cares about. Tax will have to be taken before the money is distributed, and some funds can also be placed in a special account by the trustee. This typically only happens if a beneficiary is currently not fit to inherit the trust’s assets. For instance, a minor, someone with disabilities, or someone with a gambling/drug problem. The money can be withheld until that person is deemed fit to have it. 

Make Sure Your Special Needs Trust Has What You Need with Elder Law Lexington

Folks with special needs require some extra assistance now and again. Their rights are valid and need to be followed. When you or your loved one’s special needs trust needs to be, consider Elder Law Lexington for your legal assistance. Give our team a call today to discuss your needs.