Families caring for a loved one with a disability often face a difficult balancing act. On one hand, they want to provide financial support to improve quality of life. On the other hand, even modest inheritances or gifts can unintentionally disqualify that individual from critical government programs like Medicaid and Supplemental Security Income (SSI).
The solution in many cases is a Special Needs Trust (SNT). These trusts are specifically designed under both federal and New York law to protect assets for a disabled person while allowing them to remain eligible for government benefits.
This guide explores how Special Needs Trusts work, why they are vital for families, and how they safeguard both financial security and legal rights for individuals with disabilities.
For many individuals with disabilities, Medicaid is more than health insurance—it is the gateway to essential services such as:
Long-term care and home health aides
Medical equipment and therapies
Prescription drug coverage
Day programs and residential support
Vocational and community services
A Special Needs Trust (SNT)—also called a Supplemental Needs Trust in New York—is a legal tool that allows assets to be set aside for the benefit of a person with a disability without disqualifying them from government benefits.
Instead of giving money or property directly to the individual, the assets are placed in a trust managed by a trustee. The trustee uses the funds to pay for goods and services that supplement, but do not replace, government benefits.
These may include:
Out-of-pocket medical and dental expenses
Therapies not covered by Medicaid
Education, training, and assistive technology
Personal care items and clothing
Vacations, entertainment, and hobbies
Transportation, including accessible vehicles
By carefully structuring expenditures, the trust enhances the individual’s quality of life while preserving Medicaid and SSI eligibility.
Under New York and federal law, there are two primary types of SNTs:
Funded with the disabled person’s own assets (e.g., personal injury settlement, inheritance, savings).
Must be established before age 65.
Must include a Medicaid payback provision, meaning any funds left in the trust after the beneficiary’s death are used to reimburse Medicaid.
Funded with assets from parents, grandparents, siblings, or other relatives.
Can be created during life (inter vivos trust) or at death through a will.
Does not require Medicaid payback. Remaining funds can go to other family members after the beneficiary passes away.
For most estate planning purposes, families setting aside funds for a child or sibling with a disability typically choose a third-party SNT.
The most important benefit is that assets held in the SNT are not counted toward Medicaid’s $2,000 asset limit.
Funds can be used for expenses not covered by Medicaid, ensuring a better standard of living.
A trustee manages the trust and ensures compliance with complex regulations.
Since the beneficiary does not control the assets directly, the trust helps protect against fraud, undue influence, or poor spending decisions.
With third-party SNTs, families can ensure any unused funds go to other heirs or charitable causes.
If you leave money directly to a family member with a disability, the consequences can be severe:
Loss of Benefits: Even a small inheritance can cause disqualification from Medicaid and SSI.
Forced Spend-Down: The individual may have to use the inheritance for medical costs until assets are depleted, after which they must reapply for benefits.
Court Intervention: Without proper planning, the court may appoint a guardian or custodian to manage assets, reducing family control.
By contrast, an SNT avoids these risks and provides long-term stability.
The trustee of a Special Needs Trust plays a critical role. Options include:
Family Member Trustee: A parent or sibling who knows the beneficiary’s needs.
Professional Trustee: Banks or trust companies with expertise in compliance.
Pooled Trusts: Managed by nonprofit organizations, where funds are pooled for investment but accounted for separately.
Families often choose a combination approach—appointing a family member as trustee with a professional co-trustee or successor.
Creating a Special Needs Trust involves navigating complex rules and strict compliance requirements. Improper drafting or mismanagement can jeopardize benefits.
An experienced New York elder law attorney can:
Draft a trust that meets federal and state requirements.
Advise on trustee selection and responsibilities.
Integrate the SNT with your overall estate plan.
Coordinate with other planning tools, such as ABLE accounts, wills, and powers of attorney.
At Hynes & Chu LLP, we specialize in helping families protect their loved ones with disabilities while preserving critical benefits.
At Hynes & Chu Law LLP, we specialize in estate planning, elder law, and asset protection — providing personalized legal solutions with care, integrity, and experience.
