Special Needs Trusts

Supplemental Security Income and Medicaid are means-tested benefits, so eligibility depends on how much a person owns and earns. When a person with a disability receives money directly, through an inheritance, a gift, or a lawsuit settlement, it can count against those limits and put existing benefits at risk. A special needs trust prevents that outcome. Instead of the person receiving funds outright, the trust holds and manages the money on their behalf, so it can support their life without counting as their own resource.

Fisher Stone prepares special needs trusts for families across New York City for a flat fee, quoted up front, after a short, free consultation. A licensed New York attorney handles your matter from start to finish, reachable directly by call, email, or text, and fits the trust to the benefits your relative currently receives and the rest of your family’s plans.

How a special needs trust protects benefits

A special needs trust works by changing who legally owns the money. Once assets are properly transferred into the trust, they belong to the trust rather than to the beneficiary, and a trustee, not the person with a disability, controls how and when the money is spent. Done correctly, this keeps the funds from counting as the beneficiary’s own resources for SSI and Medicaid purposes. Whether that goal is achieved depends on how the trust is drafted, funded, and administered.

A trustee typically spends trust funds to supplement the benefits a person already receives rather than replace them, covering therapies, equipment, education, and other needs those programs do not fully pay for. Paying certain expenses directly, particularly food and shelter, can reduce a beneficiary’s monthly SSI payment, so a trustee usually handles those categories with current guidance rather than assuming any expense is safe to cover.

What a trustee can and cannot pay for

A trustee generally has flexibility to pay for goods and services that add to what government programs already cover, including:

• Medical, dental, and therapeutic care not covered by insurance or Medicaid
• Education, tutoring, and job or vocational training
• A computer, adaptive equipment, or other assistive technology
• Transportation, including a vehicle and any needed modifications
• A personal care attendant, companion, or additional caregiving support
• Recreation, hobbies, and vacations

Distributions made directly to the beneficiary in cash are generally treated the same as if the beneficiary owned the money outright, which works against the purpose of the trust, so a trustee pays vendors and providers directly instead. Because these rules depend on the beneficiary’s specific benefits and change over time, Fisher Stone reviews what a trust can safely cover as part of preparing it.

Three types of special needs trusts

Which type of special needs trust fits your family depends mainly on whose money is funding it.

Third-party special needs trusts

A third-party special needs trust is funded by someone other than the beneficiary, typically a parent, grandparent, or other relative, using their own assets. Because the money never belonged to the person with a disability, there is no requirement to repay Medicaid when the beneficiary dies, and remaining funds can pass to other family members or causes the family chooses. This is the trust most parents build into their own estate plan, often alongside a will, so money intended for a child with a disability never passes to them directly.

First-party (self-settled) special needs trusts

A first-party, or self-settled, special needs trust is funded with the beneficiary’s own money, most often a personal injury settlement, a direct inheritance received before any planning was in place, or savings that have grown large enough to threaten eligibility. These trusts are generally irrevocable once established. Because the money belonged to the beneficiary, federal law requires the trust to include a Medicaid payback provision: when the beneficiary dies, any funds remaining must first reimburse Medicaid for benefits paid during their lifetime before anything passes to other family members. Families are often surprised by this requirement, since it works differently from a third-party trust.

Pooled trusts

A pooled trust is run by a nonprofit organization that manages a single trust with separate accounts for many beneficiaries, pooling the funds for investment while keeping each account distinct. It can be funded with a beneficiary’s own money or with family contributions, and it is often a practical option for a smaller amount or when a family has no one able to serve as trustee. When funded with a beneficiary’s own money, it generally follows the same Medicaid payback approach as a first-party trust, though the exact terms are set by the nonprofit’s own trust document.

ABLE accounts as a complementary option

An ABLE account is a tax-advantaged savings and investment account available to an eligible person with a disability, used alongside or instead of a trust for smaller amounts. The account owner, or someone authorized to act for them, controls it directly, without a trustee or a separate trust document, and funds can be spent on a broad range of disability-related expenses. Eligibility depends on when the person’s disability began, and the rules have changed recently, so we confirm eligibility case by case rather than assume it based on age.

Annual contributions to an ABLE account are limited, and the account can only grow so large before it affects SSI and Medicaid eligibility. Current figures change, so we review them with your family directly rather than quote a number that may be out of date. For many families, an ABLE account works best alongside a special needs trust: the account handles smaller, everyday spending, while the trust holds larger sums such as a settlement or an inheritance.

Choosing a trustee

A special needs trust is often in place for decades, so the trustee’s role is a long one. The trustee needs to understand your family’s wishes, keep accurate records, and stay current on the benefit rules that affect what the trust can pay for. Some families name a relative or close family friend who knows the beneficiary well. Others choose a professional or corporate trustee, such as an attorney or a bank trust department, sometimes serving alongside a family member as co-trustee.

The right choice depends on the size of the trust, how comfortable a family member is with ongoing financial and legal responsibility, and how long the trustee is likely to serve. Whoever you choose, name a successor trustee as well, so the trust continues smoothly if your first choice can no longer serve.

The most common and costly mistake

The most common and costly mistake families make is leaving money directly to a child with a disability, in a will, a life insurance policy, or a retirement account, without a trust in place to receive it. Money left this way passes directly to the person, and it can disqualify them from SSI and Medicaid until it is spent down, undoing benefits the family may be counting on for the rest of that person’s life.

This mistake is not always the parents’ own doing. A grandparent, aunt, uncle, or godparent can name the same child as a beneficiary of their own will or life insurance policy without knowing a special needs trust exists, undoing the family’s planning without meaning to. The whole family’s estate plans need to be coordinated: relatives should know the trust exists before they finalize their own wills or beneficiary designations. If an adult family member can no longer manage their own affairs and no trust or power of attorney is in place, guardianship may also become part of the picture. Fisher Stone reviews how a special needs trust fits with the rest of your family’s plans, so an inheritance from any relative supports your family member instead of costing them their benefits.