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John Bair
John Bair
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Spend Down & Special Needs Trusts: Financial Security After Settlement


Millions of children with disabilities rely fundamentally on Supplemental Security Income (SSI) benefits to live healthy, well-supported lives. In fact, more than 15% of SSI recipients are under the age of 18, according to the latest data compiled by the Social Security Administration.

But of course, being eligible for these benefits hinges on income and, in some states, assets. For families who have filed lawsuits on behalf of their children, and especially those who are approaching a settlement, the situation becomes far more complex.

Preserving Benefits, While Preparing For Long-Term Security

Without careful planning, a court award or settlement can push some families over the government’s income eligibility threshold, making them ineligible for SSI benefits. That’s the danger of accepting a settlement as a lump sum, a single one-time payment – at least when the settlement amount is big enough to push you over the program’s income limits. Smaller settlements, while too low to make a child entirely ineligible for SSI, can result in a reduction of benefits.

Obviously, for some families that can be disastrous, and Supplemental Social Security Income isn’t the only government benefit program threatened by a settlement. Social Security Disability Income and Medicare base eligibility on work history, rather than income or assets. So it’s highly unlikely that a settlement or inheritance would make a recipient ineligible for receiving those benefits. But any program that hinges on income is different. Along with SSI, Medicaid, SNAP (food stamps) and housing subsidies (HUD) are all put at risk in the acceptance of a settlement.

At their core, these programs go to cover the basic needs of daily life. They make living a quality life possible for many children with disabilities. But they are not an equation for long-term financial security. That’s why striking a balance between benefits and settlement is so important.

Navigating this situation can be daunting, a significant source of anxiety and frustration, especially for people who aren’t used to legal issues. At this point, we hope you have a better understanding of the problem at stake in this discussion. Now we’ll turn to possible solutions.

Striking The Balance

After accepting a settlement, most families will be faced by three options:

  1. choose to discontinue benefits
  2. try to re-qualify for benefits using a “spend down”
  3. establish a “special needs trust”

For obvious reasons, the first option is not ideal. It’s also the easiest to understand. Simply deposit the settlement in a bank and become ineligible for SSI benefits and, likely, Medicaid, SNAP and HUD as well. As we said, not ideal.

The second and third strategies are ways of avoiding that outcome, methods of preserving both day-to- day government benefits and establishing a long-term plan for a child’s financial security.

“Spend Down”

The basic concept behind a “spend down” is actually pretty simple. Accept a lump sum, but instead of placing the entire settlement in a bank, spend the money until you’ve reached SSI’s allowable resources limit. Determining the actual amount to “spend down” can be complicated, since different benefits programs will have different eligibility requirements.

For the purposes of Social Security Income, the Social Security Administration considers a lump sum settlement to be income for the month in which it is received. So you’d have to spend a sufficient amount of the settlement in that calendar month. Even so, it’s highly likely that the SSI recipient will still need to repay all or a portion of their benefits for that month. Parts of the settlement that aren’t spent will roll-over to the next month, and be counted as assets for the determination of SSI eligibility.

In a “spend down,” spending should be limited to so-called “exempt” resources, like medical expenses that aren’t covered by Medicaid or purchasing a home. “Exempt” resources aren’t counted toward asset limits under Social Security Income, so limiting your spending to these resources shouldn’t threaten benefits. These resources should be solely for the benefit of the SSI recipient.

“Spend down” is probably most appropriate for handling smaller settlements. It can also be a good choice for SSI recipients who need to purchase high-value items immediately – as long as those items are considered “exempt.”

Further Resources

“Spending down” effectively isn’t simple. Here are some more resources to help you think about when a “spend down” may be appropriate:

  • An excellent introduction to the basic concepts behind “spend down,” along with suggestions on when it may be the best choice:


Special Needs Trusts

Instead of deciding to go without benefits, or “spend down” a settlement, many people choose to establish a trust. There’s even a specific sort of trust, a “special needs trust,” designed to help people with disabilities retain their benefits.

But first, let’s talk about what a trust actually is. Fundamentally, a trust is a legal arrangement in which one or more people give money over to a third-party, or trustee. The trustee will manage the money, investing it, but they have to act in the best interests of the trust’s beneficiary. Beneficiaries receive a portion of the profits from the trustees’ investments.

Special needs trusts involve a similar arrangement, but instead of being “supportive,” these particular trusts are meant to be “supplemental.” With a special needs trust, SSI benefits and Medicaid take care of basic living needs and healthcare, while the money coming out of the trust will provide for services and care beyond what the government covers. A properly-drafted special needs trust will be designed so that the trust’s assets cannot be counted toward the eligibility limits of needed government benefits.

To help people with special needs, there are three primary kinds of trusts:

  • first-party trusts are funded with the beneficiary’s own income, like a legal settlement, but they must be established by a parent, grandparent or court. While the beneficiary is living, the funds will be used to support his or her supplemental needs. After death, the remaining assets will be used to reimburse the government for any medical care that was paid for through a benefits program.
  • third-party trusts are funded with money or assets from someone other than the beneficiary, usually a parent or other family member. Like a first-party trust, third-party special needs trusts allow the beneficiary to continue receiving government benefits, while providing for supplemental needs that benefit programs don’t cover. But there isn’t a requirement to reimburse the government after the beneficiary’s death. Instead, the remaining assets can be passed to other family members or given to charity.
  • pooled trusts are set up by non-profit organizations and, as the name implies, funded by multiple beneficiaries. These funds are “pooled” for the purposes of investment, but each beneficiary retains a personal account intended to provide only for their own supplemental needs. After death, a portion of the remaining assets go to reimburse the government, while another portion goes to sustain the non-profit running the trust.

Obviously, special needs trusts aren’t a one-size- fits-all answer. Individual special needs trusts will generally afford you a greater degree of personalized service and more latitude in controlling the trust’s investments, but may come at stiffer up-front costs than pooled trusts. For larger settlements, those extra benefits may be well-worth the additional costs of choosing an individual trust. Pooled trusts, on the other hand, might be more appropriate for beneficiaries who have received smaller settlements.

More Resources On Special Needs Trusts

  • An overview of special needs trusts written for the parents of children with disabilities, with special emphasis on what does and does not count as a “supplemental need”:


  • A glossary of terms essential to understanding special needs trusts:


  • While this guide was written specifically for attorneys, it’s simple and clear enough for people who aren’t legally-inclined:


  • A state-by- state guide to approved pooled special needs trusts:



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  1. Rebecca Green says:
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    Hello, my son has a Medicaid irrevocable trust, the money from the settlement was put in NYL annuity for my son. He was 4 at that time, he is 14 now and still critically ill. He gets a monthly payment each month. My question is we are under the ssi required amounts for NC, but-everytime I go to sign up for ssi, they look at the total of the settlement and say he doesn’t qualify. I think the regional office has no clue what they are doing, I’m very frustrated. What can I do?

    • John Bair says:
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      Rebecca, thank you for visiting our site. More thank likely your son’s trust, is a special needs trust that was created when the case settled. The annuity from NYL more than likely also pays directly into that trust, or should. We specialize in creating special needs trusts, and managing the clients for their lifetime, and we have had many clients move after their settlement. Making sure that the trust for your child is “considered” in the new state is an important step. Sounds like you haven’t quite finished that step. Our team works with attorneys throughout the nation, so insure that a trust is portable to allow for families to move, and also maintain their eligibility for SSI and Medicaid for their disabled child. I would start with reviewing a copy of the trust, and conferring with an attorney in NC to see what if anything needs to be done to insure that the trust in and of itself is not considered a “countable” asset for eligibility. Please feel free to call or email us at jbair@milestoneseventh.com or 716.883.1833 and we would be happy to try and help you.