The term Special Needs Trust is often used generically and interchangeably when considering asset preservation for a disabled individual receiving government benefits. However, it is important to understand there are two types of Special Needs Trusts that have different rules and consequences. Recognizing the distinction between these instruments is critical prior to establishing and funding the trust.
Types of Special Needs Trusts
Self-settled trusts (also known as first-party trusts) are funded with the disabled individual’s own assets. These funds are usually derived from a personal injury award, custodial account or assets accumulated prior to disability.
Most notably, a self-settled trust requires a payback provision, i.e. any funds remaining in the trust at the individual’s death must first be used to reimburse the State for benefits expended on behalf of the disabled individual. In addition, the Trustee must file an annual accounting with the State detailing how the funds are used. The nature of the disbursements can be questioned by the State since every dollar spent during the disabled individual’s life means there is less available to reimburse the State upon his/her death. In addition, some States have restrictions on the amount expended without prior approval. A self-settled trust must: contain assets of the disabled individual, be for the sole benefit of the disabled individual, and established prior to the beneficiary turning age 65.
Third-party trusts (also known as supplemental needs trusts or supplemental benefits trusts) are established with funds belonging to someone other than the disabled individual. In general, these funds typically originate through an inheritance or gift from a family member. Like a self-settled trust, a third-party trust permits assets to be preserved for a disabled individual without disqualifying him or her from SSI or Medicaid. However, third-party trusts do not have the same limitations or restrictions as a self-settled trust.
For example, any funds remaining in a third-party trust can be distributed as directed by the person establishing the trust (the Grantor). Likewise, there is no accountability to the State as to how the funds are disbursed during the lifetime of the beneficiary, since no payback to the State is necessary. A third-party trust can also be established and funded irrespective of the beneficiary’s age.
The advantages of a third-party trust make this the preferred option. Avoidable mistakes, however, sometimes result in assets passing directly to the disabled individual, leaving the self-settled trust as the only option to preserve government benefits. For example, if a parent unintentionally leaves an inheritance to a disabled child by a Will or beneficiary designation, a self-settled trust may be the only way to salvage the situation. Likewise, it is common for family members to establish a UTMA or custodial account for disabled children, not realizing these assets vest with (become owned by) the child when he or she turns age 18 or 21, thereby disqualifying the child from benefits. Once assets vest with the child, a self-settled trust may be the only recourse to preserve benefits. For this reason, it is critical to engage in proactive estate planning, so assets are distributed directly to a third-party trust.
Choosing a Trustee
Choosing the right person to serve as trustee is one of the most important and difficult decisions in creating a trust. A trustee manages the day-to-day operations of the trust by making distributions to the disabled individual, investing the assets, filing tax returns and paying expenses, all while maintaining the individual’s eligibility for government benefits.
A trustee can be the individual’s parent, relative, friend, professional (e.g. lawyer or accountant), trust company, bank or non-profit organization specializing in administering trusts. Many people prefer to name a family member as trustee. However, in certain instances, the strains of the individual’s demands for distributions can create challenges and tension between family members that are avoidable when an unrelated entity is appointed trustee. As a compromise, a family member can be designated as a “trust protector.” A trust protector is given certain rights and powers related to the trust without being designated the trustee. These powers can include replacing the trustee, reviewing the trust management and advocating for the needs of the disabled individual.
What Can a Special Needs Trust Pay For?
Government programs like Medicaid and SSI provide essentials such as medical care, food, clothing and shelter. Special Needs Trusts (whether self-settled or third-party) are intended to supplement, not supplant (take the place of) this support. Special Needs Trusts can pay for expenses not covered by government benefits such as education, recreation, counseling, therapy, travel, special equipment, entertainment, electronic devices, home improvements, care mangers and companions. While the trust may pay expenses, money should not be given directly to the trust beneficiary as this may result in the reduction or termination of benefits.
Speak With a Professional
Navigating the complexities of special needs trusts requires careful planning, informed decision-making, and ongoing oversight to ensure the trust beneficiary’s financial security and continued eligibility for government benefits. Whether establishing a third-party or self-settled trust, selecting a knowledgeable trustee and understanding compensation are critical components of effective trust administration. Because every situation is unique, consulting with experienced professionals is essential to tailor the trust to the beneficiary’s needs and preserve assets for their lifetime care.
For additional guidance on Special Needs Trusts (SNTs), the special needs attorneys at Mandelbaum Barrett PC are available to help and answer any questions you may have. Learn more: https://mblawfirm.com/practice-areas/special-needs/
* No aspect of this article has been approved by the Supreme Court of New Jersey or the American Bar Association. A description of the standard or methodology used by Super Lawyers can be found at www.superlawyers.com/about/selection-process
ABOUT THE AUTHORS:
Richard I. Miller, Esq. is a “Certified Elder Law Attorney” by the National Elder Law Foundation, accredited by the American Bar Association. He practices Elder Law, Guardianships, Special Needs Planning, Estate Planning, Asset Protection, Estate Administration, and Probate Litigation. He serves as Executor, Administrator, Guardian, Trustee, and Mediator in probate matters. He received the 2020 New Jersey Judiciary Pro Bono Award and is Past-President of the Passaic County Bar Association. A frequent speaker on elder law, benefit planning, and guardianships, he has been selected to New Jersey Super Lawyers from 2010–2025.* He earned his J.D. from Rutgers Law School (1992) and B.A. from Rutgers College (1989). Contact him at rmiller@mblawfirm.com
Shawna Brown, Esq. is a trusted advocate at the intersection of compassion and complex estate law who brings extensive experience in Elder Law and Special Needs matters – guiding families through aging, incapacity, and estate disputes with clarity and care. She focuses on estate and trust litigation, probate, guardianship, and estate planning, often serving as counsel or temporary guardian in incapacity proceedings. With a decade advising the Public Administrator of New York County, she handles multi-jurisdictional matters in NY and NJ. Honored by the New Jersey Judiciary in 2024, she lectures and writes to raise awareness of issues affecting aging individuals and their families. Contact her at sbrown@mblawfirm.com
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