Special Needs Trust in New York

Families with a disabled relative face a structural problem that families without one do not. Means-tested benefits — Medicaid for medical and long-term care coverage, SSI for monthly income — are essential for most disabled adults regardless of how affluent the family is, because the cost of disability-related care exceeds what any but the wealthiest families can sustain privately. Direct inheritances and gifts that push the beneficiary above program resource limits trigger immediate disqualification.

The SNT resolves the problem. Assets held in a properly drafted SNT are invisible to Medicaid and SSI eligibility calculations under EPTL § 7-1.12 and 42 USC § 1396p(d)(4)(A) or (C). The beneficiary keeps the benefits; the trust pays for everything Medicaid and SSI do not cover. Done correctly, the family delivers significantly more lifetime support to the disabled relative than direct gifting could ever achieve.

Done incorrectly, the trust fails. The drafting must conform to a precise statutory framework, the trustee must follow specific operational rules, and the funding must be coordinated with the rest of the family's estate plan. We draft, fund, and supervise the implementation as a single engagement.

The right trust type depends on the funding source. A first-party SNT under 42 USC § 1396p(d)(4)(A) holds money that originated with the beneficiary — typically a personal-injury settlement. The trust must be established before the beneficiary turns 65, must be irrevocable, and must pay back Medicaid for lifetime benefits received before any residue passes to family.

A third-party SNT holds money that never belonged to the beneficiary — funded by parents, grandparents, or other relatives during life or at death. Because the corpus never passed through the beneficiary's name, there is no Medicaid payback. The remainder on death passes to whoever the family designates. This is the structure we use most often for family-funded estate planning.

A pooled trust under § 1396p(d)(4)(C) is administered by a New York nonprofit and is available at any age. It is the standard vehicle for sheltering surplus monthly income to qualify for Community Medicaid. We often combine a third-party SNT (for principal) with a pooled trust (for surplus income) in the same elder-law plan.

EPTL § 7-1.12 requires that the trust be irrevocable (for first-party trusts), include a fully discretionary distribution standard, give the beneficiary no right to compel distributions, and include the Medicaid payback provision for first-party structures. Standard third-party SNTs are typically also irrevocable and use the same discretionary distribution language to ensure benefits eligibility, without the payback obligation.

The distribution language must avoid three common drafting mistakes. First, no mandatory income distributions — they convert trust income into countable income for SSI. Second, no Crummey withdrawal rights — they give the beneficiary a present interest that disqualifies the entire corpus. Third, no support-and-maintenance distribution standards — they violate the supplemental-not-supplant rule. We draft to the federal POMS standard at SI 01120.200 as well as the New York statute.

The trustee must be someone other than the beneficiary. EPTL § 7-1.12 and the federal regulations both require an independent trustee with discretionary authority. The beneficiary may participate in distribution discussions, may receive accountings, and may even hold a limited power to remove and replace the trustee, but the actual authority to write trust checks must rest with an independent fiduciary.

Third-party SNTs are most often funded through life insurance, retirement accounts, or testamentary devises. Life insurance is straightforward: the SNT is named as the beneficiary, the policy pays into the trust on the insured's death, and the trustee invests and disburses according to the trust terms. Survivorship policies on both parents are a common structure for families with a disabled child.

Retirement-account funding is more nuanced. The SECURE Act of 2019 imposed a ten-year payout rule on most inherited IRAs, but preserved a 'stretch' over life expectancy for accumulation trusts benefiting an Eligible Designated Beneficiary, which includes a disabled individual. We draft the SNT's see-through provisions carefully to qualify for the stretch — the difference between a ten-year payout and a forty-year payout is enormous for a young disabled beneficiary.

Lifetime gifting to a third-party SNT uses the annual exclusion ($18,000 per donee in 2024) and lifetime exemption. Where the SNT is structured as a grantor trust under IRC §§ 671-679, the grantor continues to pay income tax on trust income — depleting the grantor's other assets while leaving the SNT corpus to grow tax-free, an effective accelerated wealth transfer.

We meet with every family at no charge for an initial consultation, usually two to three hours, in which we review the beneficiary's circumstances, the family's resources, the existing estate plan, and the goals. We diagnose which type of SNT fits the situation and identify funding sources. The output is a written engagement proposal with a flat fee for the work to be done.

Drafting takes three to four weeks from engagement to a signing ceremony in our office. We prepare the trust instrument, the corresponding revisions to the family's will and revocable trust, the beneficiary-designation update letters for the family's insurance and retirement accounts, and a trustee instructions manual. Everything is signed in one sitting with two disinterested witnesses and a notary, and the original instruments go into our fireproof vault at no charge.

Ongoing trustee support is available on an as-needed basis. When the family's trustee has a question about a discretionary distribution, an annual accounting, a beneficiary's changing needs, or a Medicaid or SSI rule change, we are reachable by phone or email at the firm. For families who prefer a more formal arrangement, we offer annual trust reviews on retainer.