Many people refer to a Special Needs Trust (SNT) and a Supplemental Benefits Trust (SBT) as though they are the same, and to some extent that is true, but they also differ in a significant way. To understand the difference in these two trusts, it's helpful to first understand that makes them similar.
A SNT and a SBT are both trusts that are set up in order to preserve “means tested" government benefits on behalf of a person with a disability. By “means tested," I am referring to benefits that you can only qualify for if your assets and income are below a certain amount. So, it stands to reason that if you are receiving “means tested" benefits, you want to be careful not to receive money that will disqualify you for those benefits. Medicaid and Social Security Income (SSI) are good examples of “means tested" benefits.
So, how does a person who is disable and unable to work come into money? Well, that can happen in various ways. The person can receive an inheritance from someone who died, or they can be given a gift of some kind, or they could recover money damages from a lawsuit they filed. They could even win the lottery I suppose, but that's usually not the case!
There are many ways a person can receive money without working which can jeopardize their SSI and Medicaid benefits. In situations where a person is legally entitled to recover or receive funds, the law allows for those funds to be placed in trust (in either a SNT or SBT) for their benefit in order to preserve their governmental benefits. Where those funds come from is the key distinction between a SNT and a SBT.
If the funds are coming from the disabled person him or herself (for instance from a lawsuit they filed for a personal injury or if they win the lottery), then those funds must paid into a SNT. Sometimes these trusts are called first-party, self-settled SNT because the person for whom the trust is set up is the same person funding the trust. In order to self-settle a SNT, that person must be disabled in accordance with the social security regulations and under the age of 65. Since the money going into the SNT is the disabled person's money, there is a pay-back requirement to satisfy any Medicaid liens that may exist at the time the person dies before the trust funds can be distributed to any named residuary beneficiaries.
However, if the funds are coming from a third-party (for instance, from the estate of a parent or grandparent or from a gift where there is no legal obligation to make such a gift), then those funds can be placed into a SBT. Since these funds are not and never were owned by the disabled beneficiary, the SBT is not required to have a pay-back provision for Medicaid. What this means is that when the disabled person dies, any funds reaming in trust can pass directly to the named residuary beneficiaries.
There was a time, prior to the mid 1990's, when families had no other option but to disinherit their disabled child in order to preserve their child's governmental benefits. However, that is not the case any longer and now parents and grandparents can enjoy the peace of mind knowing that they can treat all their children equally without the fear of jeopardizing critically important benefits to which their disabled child may be entitled.