Is There a Difference Between “Supplemental” and “Special” Needs Trusts?

Have you heard the terms “special” needs trust and “supplemental” needs trust and wondered what the difference is? The short answer is that there’s no difference. Here’s the long answer:

When the field of special needs planning began more than two decades ago, trusts created for people with disabilities were generally called supplemental needs trusts. The thinking was that the purpose of the trusts was to supplement the assistance provided by Medicaid, Medicare, Social Security, Supplemental Security Income and other public benefit programs whose level of support is often meager.

With passage of legislation in 1993 (“OBRA”) authorizing the creation of self-settled trusts (first-party) under 42 USC 1396p(d)(4)(A), some practitioners called for distinguishing between these new trusts and third-party trusts often created by a parent, by calling the former special needs trusts and continuing to call the latter trusts supplemental needs trusts. But this approach never really caught on.

Instead, over time both types of trusts have come under the rubric of special needs trusts and the term “supplemental needs trust” has fallen away. The term “special needs trust” refers to the purpose of the trust — to pay for the beneficiary’s unique or special needs. In short, the name is focused more on the beneficiary, while the name “supplemental needs trust” addresses the shortfalls of our public benefits programs.

Special needs trusts now encompass both traditional third-party trusts and first-party trusts created under OBRA, which are often known as (d)(4)(A) trusts (referring to the statute), or as pay-back trusts (referring to the feature that any funds remaining in the trust at the beneficiary’s death must be used to reimburse the state Medicaid agency), or as self-settled trusts (referring to the fact that these trusts are created with the Medicaid beneficiary’s own funds).

Special needs trusts created with someone else’s funds, whether a parent, grandparent, or someone else, are often referred to as third-party special needs trusts.

In short, the reference to the trusts as supplemental needs trusts rather than special needs trusts is something of a survival. But what’s in a name? Whether supplemental or special, the trusts serve the same purpose of helping meet the needs of individuals with disabilities while still permitting them to qualify for vital public benefits programs.