A client once came to my Manhattan office with a difficult problem. His father, a successful businessman, was updating his will and wanted to leave a generous inheritance directly to his grandson, who has a severe developmental disability. The grandfather’s intention was pure love—he wanted to ensure his grandson would always be comfortable. That single act of kindness, however, would have cost the young man his eligibility for the Medicaid and Supplemental Security Income (SSI) benefits that formed the foundation of his care.
This is a situation my firm has seen countless times. A family’s desire to provide for a loved one with a disability runs headlong into the strict financial eligibility rules of government assistance programs. A direct inheritance is treated as an available resource, often pushing an individual over the asset limit—typically a stark $2,000—and triggering a loss of benefits. This is where a Special Needs Trust (SNT) becomes not just a legal tool, but an act of profound stewardship.
Stewardship Beyond Government Benefits
An SNT, sometimes called a Supplemental Needs Trust, does not replace public benefits. It supplements them. Medicaid and SSI are designed to cover basic needs: housing, food, and essential medical care. They were never intended to provide for the things that give life richness and quality—a specialized wheelchair, a trip to visit family, therapeutic horseback riding, or a computer with assistive technology.
An SNT holds assets for the benefit of the disabled individual without those assets counting against them for eligibility purposes. A trustee, chosen by the person creating the trust, manages the funds. This trustee has a fiduciary duty to use the trust assets to pay for goods and services that enhance the beneficiary’s life—expenses that government programs simply will not cover. It’s a framework for providing a lifetime of support in a prudent, structured way.
The legal foundation for these trusts in New York is solid, codified in Estates, Powers and Trusts Law (EPTL) § 7-1.12. This statute authorizes these trusts, ensuring the assets are not considered available resources when determining eligibility for government aid.
The Two Primary Paths for Funding a Trust
When we work with families, the conversation about SNTs typically follows one of two paths, depending entirely on the source of the funds.
A Third-Party Special Needs Trust is the most common instrument we create. This trust is funded with assets belonging to someone other than the beneficiary—typically parents, grandparents, or other relatives. It can be established during the creator’s lifetime (an inter vivos trust) or through their will upon their death (a testamentary trust). The key advantage of a third-party SNT is its flexibility. Upon the beneficiary’s death, any remaining assets in the trust can pass to other family members or designated heirs, as specified by the person who created the trust. There is no requirement to pay back the government for Medicaid services rendered.
A First-Party Special Needs Trust, on the other hand, is funded with the beneficiary’s own assets. This often becomes necessary when a disabled individual receives a court settlement from a personal injury lawsuit or inherits money directly because no protective planning was done beforehand. While this trust also protects eligibility for benefits, it comes with a significant condition: upon the beneficiary’s death, any remaining funds must first be used to reimburse the state for all Medicaid expenses paid on their behalf. Only after that debt is settled can any remaining assets pass to heirs.
Understanding this distinction is fundamental. The foresight to establish a third-party trust is one of the greatest gifts a family can give, as it preserves generational wealth while providing for a vulnerable loved one.
The Critical Role of the Trustee
The trust document is only the first step. Choosing the right trustee is arguably the most critical decision in this entire process. A trustee is not a passive caretaker; they are an active fiduciary with immense responsibility. They must understand the complex rules governing SNT distributions, keep meticulous records, and file taxes for the trust.
A trustee must be able to say “no.” They will face requests—from the beneficiary or well-meaning family members—for distributions that could inadvertently jeopardize benefits. For example, paying for rent or groceries directly can be considered “in-kind support and maintenance” and may cause a reduction in SSI payments. Instead, the trustee must be prudent, paying third-party vendors directly for approved supplemental goods and services.
Many families choose to appoint a trusted sibling or relative. Others opt for a professional or corporate trustee who brings impartiality and deep expertise in the public benefits landscape. Sometimes, a combination of the two—a family member as a co-trustee or trust protector alongside a professional—provides the right balance of personal care and administrative rigor. The choice is deeply personal, but it must be made with a clear-eyed view of the duties involved.
Planning for a family member with special needs is a long-term commitment. It requires a deliberate structure that can provide support long after you are gone. An SNT is the legal cornerstone of that structure.
If your family is considering how to provide for a loved one with a disability, a productive first step is to inventory the assets that might eventually fund a trust. The next is to identify potential candidates to serve as trustee. With that information in hand, we can schedule a meeting to outline the specific fiduciary duties involved and determine the most effective path forward for your family’s legacy.
