A family in Queens recently came to my office. Their teenage son, who has a permanent disability, was the beneficiary of a life insurance policy from a grandparent. The grandparents’ intention was pure love—they wanted to provide for his future. But in doing so, they inadvertently created a crisis. That inheritance, paid directly to their grandson, would have immediately disqualified him from the Medicaid and Supplemental Security Income (SSI) benefits that form the foundation of his care.
This is a scenario we see too often. The impulse to provide for a loved one with a disability is right and good. But the execution requires a specific legal instrument: the Supplemental Needs Trust, often called a Special Needs Trust (SNT). This trust holds assets for the benefit of a person with a disability without compromising their eligibility for essential government programs.
Setting one up is not a simple matter of filling out a form. The law is precise, and mistakes carry significant consequences. Over the years, I’ve seen a few common errors that can undermine the entire purpose of the trust.
Choosing a Trustee Based on Emotion, Not Skill
The most common—and often most damaging—mistake is naming the wrong trustee. Parents frequently name a sibling or another close relative to act as trustee after they are gone. The choice comes from a place of love and trust, but the role of a trustee for an SNT is not just a family responsibility; it is a demanding fiduciary position.
A trustee must do more than manage investments. They must understand the precise, and constantly changing, rules of Social Security and Medicaid. They need to know which payments can be made without affecting benefits. For example, paying the beneficiary’s rent directly to a landlord is handled differently than giving the beneficiary cash for rent. One might be permissible, while the other could be counted as income, reducing or eliminating monthly SSI payments.
The trustee has a fiduciary duty to keep meticulous records, file separate tax returns for the trust, and make distributions that serve the beneficiary’s best interests while preserving their benefits. This is not a casual role. It requires diligence, financial literacy, and an understanding of public benefits law. A well-meaning sibling who is busy with their own career and family may not have the time or expertise to manage these duties effectively. In many cases, the most prudent choice is a professional trustee, or naming a family member as a co-trustee alongside a professional who can handle the technical administration.
Using Generic Language or the Wrong Trust Structure
A trust is not a commodity. The language in the document is everything. Using a generic, off-the-shelf revocable trust form and simply titling it a “Special Needs Trust” is a recipe for failure. The trust document must contain specific provisions required by federal and state law to insulate the assets from being counted for benefits eligibility.
In New York, our Estates, Powers and Trusts Law (EPTL) § 7-1.12 provides the statutory authority for these trusts. The law is clear: the trust must be for the sole benefit of the person with a disability and must state its purpose is to supplement, not supplant, government benefits. This language is not optional. Without it, a court or government agency could rule that the trust assets are available to the beneficiary, terminating their eligibility.
Furthermore, establishing the correct type of SNT is critical. There are two primary forms:
- Third-Party SNT: This is funded with assets from someone other than the beneficiary—typically parents or grandparents, through their own estate plan or with lifetime gifts. When the beneficiary passes away, any remaining assets can be distributed to other family members.
- First-Party SNT: This is funded with the beneficiary’s own assets, such as from a personal injury settlement or a direct inheritance. These trusts have a critical requirement: they must include a “payback” provision. Upon the beneficiary’s death, any remaining funds must first be used to reimburse the state for any Medicaid expenses paid on their behalf.
Confusing these two, or failing to include the mandatory payback clause in a first-party SNT, will cause the trust to fail its essential purpose.
The “Set It and Forget It” Mindset
Creating the trust is the first step in a lifelong stewardship plan. It is not the last. A Supplemental Needs Trust is a living document that functions within a dynamic legal and personal environment. Laws governing SSI and Medicaid change. The beneficiary’s needs will evolve. The investment strategy for the trust assets may need to be adjusted.
The grantors of the trust (usually the parents) should provide the trustee with a Letter of Intent. This is not a legally binding document, but it is an invaluable guide. It can detail the beneficiary’s routines, preferences, medical needs, and the parents’ hopes for their child’s life. What brings them joy? Who are their trusted doctors and caregivers? What are the long-term goals for their housing and quality of life?
This guidance helps the trustee make discretionary distributions that are truly in the beneficiary’s best interest. Without it, a successor trustee is left to guess at the parents’ intentions. The trust, and the plan it represents, should be reviewed with an attorney every few years to confirm it still serves the family’s goals under current law.
The goal of a Supplemental Needs Trust is to provide a source of funds that can enrich a person’s life—paying for things like education, travel, hobbies, and specialized care that government benefits do not cover. Getting the details right is not about legal pedantry. It is about ensuring the legacy you intend to leave is the one your loved one actually receives.
If you are responsible for the well-being of a person with a disability, your first step is to create a clear picture of their life. Before meeting with an attorney, write down a detailed list of their current and anticipated needs, their sources of support, and your aspirations for their future. This document will become the foundation for building a trust that truly serves them.
