Special Needs Trusts in New York

Understanding Special Needs Trusts

A Special Needs Trust is designed to hold and manage property for a person with a disability while taking into account eligibility rules for government benefit programs. New York law uses the term “Supplemental Needs Trust” for a qualifying discretionary trust established for a person with a severe and chronic or persistent disability. The basic concept is important: the trust is intended to supplement rather than replace government benefits or assistance for which the beneficiary may qualify.  Instead of giving assets directly to the beneficiary, property is held by a trustee. The trustee manages the assets and makes distributions according to the trust agreement and applicable benefit rules. New York law generally requires the beneficiary of a qualifying Supplemental Needs Trust to lack the power to direct or compel distributions from the trust. 

This structure can allow resources to be available for the beneficiary without necessarily treating the entire trust as property available to the beneficiary when eligibility for certain means-tested benefits is determined. However, the existence of a Special Needs Trust does not mean that every distribution is harmless to benefits. Actual distributions can affect eligibility or benefit amounts depending on what is paid, how it is paid, and which government program is involved. 

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How a Special Needs Trust Works

A Special Needs Trust generally involves three primary roles. The person establishing or funding the trust provides the property. The trustee holds and manages the trust property. The beneficiary is the person with a disability for whose benefit the trust is administered. The trustee typically has discretion over distributions rather than simply turning the trust property over to the beneficiary. That distinction is central to the planning. If assets are given directly to a beneficiary who receives means-tested government benefits, those assets may affect eligibility. A properly structured Special Needs Trust can instead allow assets to be managed and used for the beneficiary subject to the rules governing the trust and the applicable benefit programs. New York law specifically recognizes that principal and income held in a qualifying Supplemental Needs Trust should not be treated as an available resource to the beneficiary under government benefit programs. Actual distributions, however, may be treated as income or resources to the extent provided by the rules of the particular program. 

The trustee therefore has an important responsibility: distributions should be evaluated not only under the trust document, but also in light of the beneficiary’s circumstances and the government benefits the beneficiary receives.

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First-Party and Third-Party Special Needs Trusts

One of the most important distinctions in Special Needs Trust planning is the source of the money placed into the trust.

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Third-Party Special Needs Trusts

A third-party Special Needs Trust is funded with property belonging to someone other than the beneficiary. For example, a parent or grandparent might create or fund a trust for a child or grandchild with a disability. A third-party trust may be established during the person creating its lifetime or incorporated into an estate plan so that property passes to the trust after death. This can allow a parent, grandparent, or another person to provide an inheritance for a beneficiary with a disability without simply leaving the assets directly to that beneficiary. Third-party Special Needs Trusts can also provide flexibility in deciding what happens to property remaining after the beneficiary’s death. They should be distinguished from certain first-party Special Needs Trusts because the Medicaid repayment rules applicable to the beneficiary’s own assets are different.

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First-Party Special Needs Trusts

A first-party Special Needs Trust is funded with assets belonging to the person with a disability. Situations in which this may become relevant can include a beneficiary receiving a personal injury settlement, an inheritance left directly to the beneficiary, or other property that belongs to the beneficiary. Federal and New York Medicaid rules provide an exception for certain qualifying Special Needs Trusts funded with the assets of a person with a disability who is under age 65. New York Medicaid guidance states that a qualifying trust of this type must satisfy specific requirements and include a provision addressing repayment to the state from remaining trust property after the beneficiary’s death, up to the amount of Medicaid assistance paid on the beneficiary’s behalf.  This Medicaid repayment requirement is an important distinction between qualifying first-party trusts and properly structured third-party Special Needs Trusts. The source of the assets should therefore be identified before determining what type of Special Needs Trust is appropriate.

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Using a Special Needs Trust to Enhance Quality of Life

A Special Needs Trust is not simply a mechanism for preserving government benefits. Its broader purpose is to make additional resources available for the beneficiary in a manner consistent with the trust and applicable benefit rules.

Depending on the beneficiary’s circumstances and the particular benefits involved, trust funds may potentially be used for needs such as:

• Education and training

• Medical and dental expenses not otherwise covered

• Therapy and rehabilitation

• Transportation

• Technology and communication devices

• Personal assistance

• Recreation and entertainment

• Travel

• Furniture and personal items

• Certain housing expenses

• Other goods and services that enhance the beneficiary’s health, independence, comfort, or quality of life

Not every distribution receives the same treatment under every benefit program. For example, the Social Security Administration explains that cash paid directly from a trust to an SSI recipient can reduce SSI, and certain payments for shelter can also affect the SSI payment. Payments made to third parties for many other goods and services generally receive different treatment under SSI rules.  These rules can change and can differ among benefit programs. For that reason, successful Special Needs Trust planning requires attention not only when the trust is drafted but also when the trustee administers it.

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Choosing a Trustee and Managing Distributions

Choosing the trustee can be particularly important with a Special Needs Trust. The trustee may need to manage investments, maintain records, make distributions, prepare or coordinate tax filings, communicate with the beneficiary and family, and understand how distributions interact with government benefits. The trustee may also need to make judgment calls about whether a proposed distribution is worth a potential effect on benefits. New York law recognizes this issue. A qualifying Supplemental Needs Trust can, under specified terms, authorize certain distributions even when they could affect government assistance if the trustee determines that the beneficiary’s needs will be better met and that accepting the resulting effect on benefits is in the beneficiary’s best interests.  The appropriate trustee may be a family member, trusted individual, professional fiduciary, corporate trustee, or another qualified person or organization, depending on the circumstances. The decision should take into account more than investment ability. A trustee administering a Special Needs Trust should understand the beneficiary’s needs, exercise sound judgment, follow the trust terms, maintain appropriate records, and recognize when legal or benefits advice is needed before making a distribution.

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Coordinating the Trust With the Family’s Estate Plan

A Special Needs Trust works best when the rest of the family’s estate plan is coordinated with it. Creating the trust does little good if an inheritance is accidentally directed to the beneficiary individually. Wills, living trusts, life insurance, retirement accounts, beneficiary designations, and other assets should be reviewed to determine whether property intended for the beneficiary should instead pass to the Special Needs Trust. This can be particularly important for grandparents and other relatives. A parent may carefully establish a Special Needs Trust, but another family member who names the beneficiary directly in a will or beneficiary designation can create an entirely different result. Planning should therefore address both the trust itself and the paths by which future assets are expected to reach it.

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Special Needs Trust FAQs

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What Is the Difference Between a Special Needs Trust and a Supplemental Needs Trust?

The terms are often used interchangeably, but New York law specifically uses the term “Supplemental Needs Trust.”

New York EPTL § 7-1.12 defines a Supplemental Needs Trust as a qualifying discretionary trust established for a person with a severe and chronic or persistent disability and designed to supplement rather than supplant government benefits or assistance.  “Special Needs Trust” is commonly used more broadly, including when discussing trusts that qualify for particular federal Medicaid and SSI exceptions. The exact legal requirements depend on the type of trust and the benefits being protected, so the label alone does not determine whether a trust qualifies.

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Will a Special Needs Trust Affect Medicaid or SSI?

A properly structured Special Needs Trust may allow trust assets to be excluded as an available resource for certain means-tested benefit programs, but distributions from the trust can still affect benefits. New York law expressly recognizes that actual distributions may be considered income or resources under the rules of the particular government program. 

SSI provides a good example. The Social Security Administration explains that cash paid directly to an SSI recipient from a trust can reduce SSI. Certain shelter payments can also reduce the SSI payment, while payments made directly to others for many goods and services other than shelter generally do not reduce SSI in the same manner.  The trustee therefore needs to consider both the trust agreement and the rules governing the beneficiary’s particular benefits before making distributions.

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What Is the Difference Between a First-Party and Third-Party Special Needs Trust?

The principal difference is whose property funds the trust. A first-party Special Needs Trust is funded with assets belonging to the beneficiary. A third-party Special Needs Trust is funded with assets belonging to someone else, such as a parent or grandparent. That distinction can have significant consequences. A qualifying first-party Special Needs Trust funded with the beneficiary’s assets is subject to specific federal and state requirements. New York Medicaid guidance includes a Medicaid repayment requirement for qualifying first-party Special Needs Trusts. A properly structured third-party Special Needs Trust funded exclusively with someone else’s property is not subject to that same first-party Medicaid payback requirement merely because the beneficiary received Medicaid.

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What Can a Special Needs Trust Pay For?

A Special Needs Trust can potentially pay for a wide variety of goods and services for the beneficiary, but the consequences depend on the particular benefit program and how the payment is made. Potential expenditures can include medical or dental care not otherwise covered, education, transportation, technology, personal assistance, recreation, travel, furnishings, and other expenses that improve the beneficiary’s quality of life. Housing and direct cash distributions require particular attention because they may affect means-tested benefits such as SSI. The appropriate question is therefore not simply whether the trust is legally permitted to purchase something. The trustee should also consider how that particular distribution will affect the beneficiary’s benefits and overall financial well-being.

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What Happens to a Special Needs Trust When the Beneficiary Dies?

The answer depends significantly on the type of Special Needs Trust. For certain first-party Special Needs Trusts funded with the beneficiary’s own property, federal and New York Medicaid rules require provisions addressing repayment to the state from remaining trust assets, up to the applicable amount of Medicaid assistance paid for the beneficiary. Third-party Special Needs Trusts are different. When properly structured and funded with someone else’s property, the person creating the trust can generally specify who should receive the remaining property after the beneficiary dies, subject to the trust terms and applicable law. This is one reason why distinguishing first-party assets from third-party assets at the beginning of the planning process is so important.

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Sources & Legal References

New York Estates, Powers and Trusts Law § 7-1.12 — Supplemental Needs Trusts Established for Persons With Severe and Chronic or Persistent Disabilities

https://www.nysenate.gov/legislation/laws/EPT/7-1.12

New York Estates, Powers and Trusts Law Article 7 — Trusts

https://www.nysenate.gov/legislation/laws/EPT/A7

New York State Department of Health — Trusts Information and Medicaid Eligibility

https://www.health.ny.gov/health_care/medicaid/trusts.htm

Social Security Administration — SSI Spotlight on Trusts

https://www.ssa.gov/ssi/spotlights/spot-trusts.htm

Social Security Administration — Program Operations Manual System, Trusts Established With the Assets of an Individual

https://secure.ssa.gov/poms.nsf/lnx/0501120200

Social Security Administration — Program Operations Manual System, Exceptions to Counting Trusts Established on or After January 1, 2000

https://secure.ssa.gov/poms.nsf/lnx/0501120203