What Is a Special Needs Trust and How Does It Work in Illinois?

 Posted on July 18, 2025 in Estate Planning

When drafting an estate plan, you can incorporate documents to protect your loved one with a disability. A special needs trust can be used to help them have financial security without compromising their benefits. Consider the purpose and benefits of these trusts and then speak with an experienced Wheaton, IL estate planning attorney about how to incorporate one in your estate plan.

What Is a Special Needs Trust?

A special needs trust is a legal arrangement that allows you to hold and manage money or property for the benefit of a person with a disability. This person is known as the beneficiary. The funds in the trust can pay for things that improve the beneficiary’s quality of life, such as special medical treatments, therapy, education, travel, or recreation. Often, a special needs trust will address needs or wants that government benefits do not typically cover.

Many people use special needs trusts so that the beneficiary can continue receiving funds from needs-based government programs like Supplemental Security Income (SSI) and Medicaid. These programs have strict income and asset limits. Without a trust, money given directly to someone with a disability could disqualify them from government assistance. However, when the money is properly held in a special needs trust, it generally does not count as the person’s own resources.

What Types of Special Needs Trusts Are There in Illinois?

Illinois recognizes three types of special needs trusts, each suited to different situations. A first-party special needs trust is funded using money that belongs to the person with a disability. To protect eligibility for Medicaid and other benefits, these funds can be placed into a first-party trust, as allowed under federal law in 42 U.S.C. § 1396p(d)(4)(A). However, one important condition is that the beneficiary must be under age 65 when the trust is created. Additionally, when they pass away, any funds remaining in the trust must first be used to repay the state for Medicaid benefits that they received during their lifetime.

In contrast, a third-party special needs trust is established and funded by someone other than the individual with the disability, such as parents, grandparents, or other family members. People often include these trusts in their estate plans so they can leave gifts or inheritance to a loved one with a disability without risking that person’s eligibility for government benefits. Under the Illinois Trust Code, 760 ILCS 3/, third-party trusts offer flexibility because any money left in the trust after the beneficiary dies does not have to be paid back to the state. Instead, the remaining funds can go to other family members or charities if the trust document allows.

Finally, a pooled special needs trust is an option for people who may not have enough assets to justify setting up an individual trust. Pooled trusts are managed by nonprofit organizations that combine the assets of many individuals into a larger investment pool. This helps reduce costs and may achieve better investment results than smaller, separate trusts.

Every type of trust follows specific rules under both federal and Illinois law. Speak with an experienced attorney to find the right fit for your family.

Contact a Lombard, IL Estate Planning Attorney

The DuPage County, IL estate planning lawyers at A. Traub & Associates help our clients create plans that will protect their beneficiaries long after they are gone. We will work directly with you to build the perfect estate plan, including special needs trusts for your more vulnerable loved ones. Call 630-426-0196 today to schedule a consultation.