Special Needs Trust in New York

New York codified the supplemental needs trust at EPTL § 7-1.12, which sets out the language a trust must contain to be ignored for Medicaid and SSI resource purposes. The federal counterpart, 42 USC § 1396p(d)(4), recognizes three sub-categories: (A) first-party trusts funded with the beneficiary's own money — a personal injury settlement, an inheritance the family failed to redirect — and established before the beneficiary turned 65; (B) the rarely used Miller trusts (not applicable in New York's income-cap rules); and (C) pooled trusts administered by a nonprofit, which accept beneficiaries of any age in New York.

Third-party SNTs sit outside § 1396p and are governed exclusively by state trust law. Because the assets never belonged to the disabled beneficiary, no payback obligation runs to Medicaid on the beneficiary's death — a critical distinction we explain to every parent and grandparent considering a trust in their will or revocable plan.

The Social Security Administration's Program Operations Manual System (POMS) at SI 01120.200 et seq. provides the operational test SSA actually applies when deciding whether trust assets count against SSI. Drafting that satisfies EPTL § 7-1.12 but ignores the POMS standard can produce a trust that survives a New York audit and fails a federal one. We draft to both standards every time.

When the funding source is the beneficiary's own money — most often a personal-injury settlement or an inheritance that arrived before anyone redirected it — the only option is a first-party trust under 42 USC § 1396p(d)(4)(A). The statute imposes three conditions: the beneficiary must be under 65 at the time the trust is established and funded, the trust must be irrevocable, and on the beneficiary's death any remaining assets must be paid to the state up to the total amount of Medicaid the beneficiary received during life.

The payback obligation is often misunderstood as confiscatory. It is not. The state recovers only what Medicaid paid out; if the trust outlived the benefits paid, the excess passes to whoever the trust names — usually siblings or a residuary beneficiary. The trust earns its keep during the beneficiary's lifetime by paying for the items Medicaid does not cover: a companion aide, a wheelchair-accessible van, an iPad with adaptive software, summer programs, dental work above what Medicaid allows.

We litigate or settle the underlying personal-injury or wrongful-death case where appropriate, then immediately establish the SNT and direct the settlement proceeds into it. Timing matters. A check made payable to the beneficiary, deposited into a personal account even briefly, can disqualify the beneficiary for the month it sat there and trigger an avoidable transfer penalty.

Most of the SNTs we draft are third-party trusts created by parents, grandparents, or other relatives — typically inside a will or a revocable living trust, with funding triggered on the testator's death. These trusts hold inheritances, life insurance proceeds, or lifetime gifts from family for the benefit of a disabled relative. Because the corpus never belonged to the beneficiary, there is no payback to Medicaid on the beneficiary's death; the remainder passes to whoever the family designated, usually surviving siblings.

The single most expensive mistake families make is disinheriting the disabled child to preserve benefits, on the theory that any direct inheritance would disqualify them. Disinheritance solves nothing — siblings end up administering the inheritance informally, without the legal protections, tax structure, or supervisory mechanism of a trust. The correct answer is a third-party SNT funded with the disabled child's full equitable share, drafted with discretionary distribution language and no mandatory income payout.

Funding sources for a third-party SNT can include life insurance with the trust named as beneficiary, retirement accounts (with careful attention to the SECURE Act's ten-year payout rule and the disabled-beneficiary exception that preserves life-expectancy payout), real estate, brokerage assets, and cash gifts during life. We coordinate the beneficiary designations to ensure the funding actually arrives where the will or revocable trust directs it.

SSA's POMS rules and Medicaid's resource regulations together define the boundary between permissible supplemental distributions and prohibited support distributions. The trustee may pay third-party vendors directly for items that supplement, rather than replace, the benefits the beneficiary receives: a private aide for hours Medicaid does not cover, therapeutic equipment, education, recreation, travel, computers and electronics, transportation, a vehicle, dental and vision care above Medicaid's allowance, even funeral and burial expenses arranged in advance.

What the trust cannot do, without consequences, is hand cash to the beneficiary or pay for the categories SSI counts as in-kind support and maintenance (ISM) — food and shelter. A check from the trust to the grocery store is ISM. A check from the trust to the landlord is ISM. ISM reduces the SSI benefit dollar-for-dollar up to the presumed maximum value, and in some configurations can eliminate SSI entirely. We train trustees to route every distribution through a third-party vendor and to document the purpose on the face of every check.

Education is a category where SNT funds shine. Tuition at any level — special-needs day school, college, vocational training, music lessons, art classes — and the supplies that come with it, are clean disbursements that no benefits program counts against the beneficiary. The same is true of recreation, vacations, and most quality-of-life expenditures that distinguish a benefits-dependent existence from an actual life.

Trustee selection is the single most consequential decision in any SNT, because the trust will exist for the rest of the beneficiary's life and the trustee will make hundreds of discretionary judgment calls. We discuss three models with every family: an individual trustee, usually a sibling; a corporate trustee, typically a New York trust company or bank trust department; and a co-trustee structure pairing a family member with a professional.

Individual trustees are inexpensive but mortal. A sibling who is twenty years older than the beneficiary will likely predecease them, leaving the trust to a successor named in a document the sibling may never have updated. Corporate trustees are perpetual and bonded but charge annual fees and apply institutional investment policies that may not fit a modest trust. The co-trustee model — sibling for the human judgment, corporate trustee for the accounting and investment management — is the structure we recommend most often for trusts above $500,000.

Whoever serves as trustee owes fiduciary duties under EPTL § 11-2.3 (the Prudent Investor Act) and a duty to account periodically to the beneficiary and any interested party. We advise trustees on accounting practice, document every discretionary distribution, and provide annual review meetings to make sure the trust is still doing what the family intended.