Special Needs Trusts: Summary and How to Plan

By: Michael B. Shapiro, Esq. and Elizabeth Conklin

I. Introduction

Many disabled people depend on public benefits. However, eligibility for those public benefits is often limited to individuals with no more than a few thousand dollars in assets. For example, a person with special needs is automatically ineligible for Medicaid if she has excess resources—that is, too much money or savings. Seemingly, then, persons with disabilities must remain impoverished to qualify for those benefits. Fortunately, there are vehicles in place to provide disabled people with additional assets without disqualifying them for vital government benefits.

A special needs trust (“SNT”), also known as a supplemental needs trust, is a fund created for the benefit of a person with a “severe and chronic or persistent disability.” New York law defines such a person as an individual with “mental illness, developmental disability, or other physical or mental impairment, whose disability is expected to, or does give rise to a long-term need for specialized health, mental health, developmental disabilities, social or other related services, and who may need to rely on government benefits or assistance.” [1] The primary purpose of an SNT is to preserve the eligibility of the disabled person—that is, the beneficiary of the trust—for means-tested government benefits, like Medicaid, while supplementing the beneficiary with additional funds that she can use to pay for goods and services that are not covered by government programs. Trust assets are not included when the government determines eligibility, thus if the excess resources are placed in an SNT, the individual can still be eligible for Medicaid. [2]

Generally, to create a valid SNT, the beneficiary must be an individual who is certified as disabled and is younger than 65 years old when the trust is created. The grantor must meet further requirements upon choosing whether the SNT is a first-party or third-party SNT, which will be discussed in the next section. The trust instrument should clearly state the settlor’s intent in establishing the trust fund. New York law even goes so far as to suggest the language to use: “None of the income or principal of this trust shall be applied in such a manner as to supplant, impair, or diminish benefits or assistance of any…governmental entity for which the beneficiary may otherwise be eligible.” [3]

II. First-Party Trusts vs. Third-Party Trusts

Special needs trusts come in a variety of forms so that settlors can choose which would be most appropriate for their situation. A “first-party,” or “self-settled” SNT is one that is funded with the assets of the beneficiary. It may be established by the beneficiary herself, a parent, grandparent, legal guardian, or the court. To establish a first-party SNT, as stated above, the beneficiary must be under the age of sixty-five at its formation and must have a disability that prevents her from being gainfully employed. Additionally, the trust instrument must contain a provision that imposes a duty on the trustee to repay Medicaid when the SNT terminates for all benefits paid by Medicaid for the beneficiary throughout her life. [4]

There is a subset of first-party SNTs called “pooled trusts.” A pooled trust is one that is funded by the disabled individual’s assets, but it is established and managed by a nonprofit organization. The organization then pools the assets of multiple trusts together for investment purposes while still maintaining and managing subaccounts for individual beneficiaries. This type of trust is recommended for individuals who are not planning on transferring any large amount to an SNT. [5] Alternatively, if a beneficiary falls into this category, she may also consider opening an ABLE account, which will be discussed in Part IV.

A “third-party” SNT differs from a first-party SNT in two major ways. First, this type of SNT is funded with assets that are owned by people other than the beneficiary, such as parents, relatives, or friends. Often, a third-party SNT is created in a will by parents or grandparents as a method of leaving an inheritance to a disabled family member. It is even possible for parents with several children to create a third-party SNT for one disabled child as part of a larger pot trust where the assets are shared among all children. [6] Note that this is only one method of setting up trusts for multiple children, and a parent or guardian should consult with an estate planning attorney to determine which method would be best suited for the case at hand. Second, because a third-party SNT is funded with assets that are not owned by the beneficiary, it does not contain a Medicaid payback requirement. [7]

Regardless of the type of special needs trust an individual establishes, settlors, trustees, and beneficiaries alike must remember that the trust terminates when funds are completely depleted or when the beneficiary dies. [8]

III. Trustee’s Duties

Like the trustee of any trust, a special needs trust’s trustee has a fiduciary duty to the beneficiary, but more specifically, the trustee has a duty to meet the beneficiary’s needs where government programs are lacking.

The trustee has the discretion to make distributions; however, the distributions must be for the sole benefit of the beneficiary. It is permissible if another individual benefits from the distribution, but only in a “minor and indirect” way. [9] A trustee may make appropriate distributions for the beneficiary’s rent, utilities, vacation, dining, activities (for the beneficiary and one companion), and insurance on items owned by the trust. Note that if the beneficiary lives with other people, the trustee may only use SNT funds to pay for the beneficiary’s share of the rent or utilities. Additionally, the trustee can use SNT funds to pay for necessary medical equipment and services for the beneficiary, but only after requesting Medicaid to cover those expenses and being denied coverage. Finally, while a trustee is generally not permitted to use SNT funds to pay for the beneficiary’s funeral expenses, a trustee may buy a pre-need funeral arrangement during the beneficiary’s life. [10]

Perhaps most importantly, an SNT trustee is required to submit to a yearly accounting—that is, a report to the Department of Social Services on how the trustee managed the trust over the calendar year. The report details every financial transaction that the trust makes, including any income the trust receives on behalf of the beneficiary. The trustee is permitted to use SNT funds to hire an accountant or financial advisor to assist her in completing the accounting. [11] An accounting is required for every SNT, even if the beneficiary is not currently receiving government benefits or if the trust is not under court supervision, under the theory that the accounting should be on record so a reader could determine the nature and the amount of any payment or investment the trust makes. [12]

Note that a trustee cannot deposit into the SNT any funds that the beneficiary receives from the Supplemental Security Income (“SSI”) program. Instead, if the beneficiary is capable of managing her own funds, she should deposit those funds into a separate account in her own name. If the beneficiary cannot manage her own funds, the representative payee—who may or may not also be the trustee of the SNT—should follow suit and deposit the funds into a separate account in accordance with the SSI program guidelines. Conversely, a trustee may deposit into an SNT account Social Security income, Survivor’s Benefits, and Social Security Disability Income. [13]

IV. ABLE Accounts

In 2014, Congress passed the Achieving a Better Life Experience (“ABLE”) Act, which created Section 529A of the Internal Revenue Code and established tax-advantaged savings accounts for people with disabilities (“ABLE accounts”). In an ABLE account, the account owner is also the beneficiary, and the income earned by the account is not taxed. ABLE accounts are not substitutes for SNTs. Rather, they should be treated as a place to save small sums of money for the day-to-day use of the beneficiary and for qualified disability expenses (“QDEs”), which are all expenses related to the beneficiary as a result of being disabled. [14] QDEs may include absolute necessities, like food and housing, as well as expenditures that may simply improve the person’s health, independence, or quality of life, such as transportation or companionship services. [15]

In order to be eligible for an ABLE account, the beneficiary must have a disability that can be expected to last for at least a year or can cause death and that has existed before the beneficiary’s twenty-sixth birthday. If a person meets this age criterion and is receiving SSI or SSDI benefits, she is automatically eligible for an ABLE account. If a person is not receiving these benefits, she may still be eligible if she meets the Social Security Administration’s definition of disability and she can produce a letter of certification from a licensed physician. [16]

Anyone can establish an ABLE account for a disabled individual, including the designated beneficiary herself, a parent or guardian, or any authorized agent with the ability to access and review the account. ABLE accounts are limited to one per person. Notably, anyone can contribute to an ABLE account, and all contributions from third parties are not considered income.

State law limits the capacity of ABLE accounts to $15,000 per year and $100,000 in total for SSI recipients. If an account exceeds $100,000, the beneficiary’s SSI benefits are suspended until the account falls back down below the threshold. Importantly, Medicaid eligibility is not affected by balance at all. [17]

[1] EPTL §7-1.12(5).

[2] Supplemental/Special Needs Trust, NYCBAR.ORG, David Caraway ed., https://www.nycbar.org/get-legal-help/article/wills-trusts-and-elder-law/trusts/supplemental-needs-trust/ (Aug. 2020).

[3] Joan Lensky Robert, Esq., Drafting Supplemental and Special Needs Trusts, NYSBA COURSEBOOKS (Fall 2020), https://nysba.org/NYSBA/Coursebooks/Fall%202013%20CLE%20Coursebooks/Advanced%20Document%20Drafting/8.Drafting.Supplemental.J.Robert.pdf

[4] Guidelines for Trustees of First Party Supplemental Needs Trusts, NYSBA ELDER LAW SECTION (June 2012), https://nysba.org/app/uploads/2020/02/GuidelinesforTrusteesofFirstPartySupplementalNeedsTrusts_brochure-smaller-June-2012.pdf

[5] Bernard A. Krooks & Joel Krooks, Guardianships and Special Needs Trusts (NY), LEXIS Practice Note (current as of August 2021).

[6] Id.

[7] Amy C. O’Hara, Your Special Needs Trust Explained, Special Needs Alliance, THE VOICE NEWSLETTER vol. 4 (Aug. 2010), https://www.specialneedsalliance.org/the-voice/your-special-needs-trust-explained-2/

[8] Trustee Guidelines for Administration of a Supplemental Needs Trust, NYC Dep’t of Social Services (2017), https://www1.nyc.gov/assets/hra/downloads/pdf/services/program_integrity/trustee_guidelines_for_administration_of_a_supplemental_needs_trust.pdf

[9] Id.

[10] Id.

[11] Id.

[12] Administering a Special Needs Trust: A Handbook for Trustees, Special Needs Alliance 12, https://www.specialneedsalliance.org/wp-content/uploads/2016/04/2016-Handbook-for-Trustees.pdf.

[13] Trustee Guidelines for Administration, supra note 8.

[14] About ABLE Accounts, ABLE National Resource Center, https://www.ablenrc.org/what-is-able/what-are-able-accounts/.

[15] Frequently Asked Questions, ABLE National Resource Center, https://www.ablenrc.org/frequently-asked-questions/

[16] About ABLE Accounts, ABLE National Resource Center, https://www.ablenrc.org/what-is-able/what-are-able-accounts/.

[17] Becoming ABLE Ready, ABLE National Resource Center, http://www.ablenrc.org/becoming-able-ready/.

DISCLAIMER: This summary is not legal advice and does not create any attorney-client relationship. This summary does not provide a definitive legal opinion for any factual situation. Before the firm can provide legal advice or opinion to any person or entity, the specific facts at issue must be reviewed by the firm. Before an attorney-client relationship is formed, the firm must have a signed engagement letter with a client setting forth the Firm’s scope and terms of representation. The information contained herein is based upon the law at the time of publication.