Planning for a Family Member with Disabilities Using a Special Needs Trust

When you’re responsible for a loved one with a disability, estate planning takes on a different level of importance. You want to be sure they’re cared for—financially and personally—without putting their government benefits at risk. In New York, one of the most effective ways to achieve this is by creating a special needs trust.

A special needs trust is designed to manage resources for a person with disabilities while preserving their eligibility for public programs like Supplemental Security Income (SSI) and Medicaid. It gives families a reliable way to support someone long-term, without jeopardizing vital services.

Why traditional inheritance can cause problems

Many public assistance programs have strict income and asset limits. For example, to qualify for SSI, an individual generally must have less than $2,000 in countable resources. If someone inherits money or receives a large gift, that amount could disqualify them from receiving those benefits.

Even a well-intentioned act—like naming your disabled child as a beneficiary in your will—can do more harm than good if the result is a loss of healthcare coverage or monthly income. A special needs trust allows families to avoid this issue altogether.

How a special needs trust works

A special needs trust (sometimes called a supplemental needs trust) holds assets for the benefit of a person with a disability. The trust is managed by a trustee, who distributes funds for approved expenses. The person with the disability, called the beneficiary, doesn’t directly control the trust, which is an important distinction under benefit program rules.

The assets in the trust don’t count toward the beneficiary’s resource limit as long as they are used for permitted purposes. This can include things like:

• Personal care attendants

• Education or tutoring

• Medical and dental expenses not covered by insurance

• Travel and transportation

• Hobbies and entertainment

• Certain home modifications

• Assistive technology

These are items and services that enhance the person’s quality of life but go beyond what government programs typically cover.

Types of special needs trusts

There are two main types of special needs trusts used in New York estate planning: third-party and first-party.

Third-party special needs trust
This type is created and funded by someone other than the beneficiary, usually a parent, grandparent, or guardian. It can be set up during the lifetime of the person creating it or included in a will or revocable trust to take effect at death.

A key advantage is that any funds left in the trust after the beneficiary passes away can go to other family members or charities. The state does not require repayment for Medicaid benefits after the trust ends.

First-party special needs trust
This version is funded with the beneficiary’s own money, such as a personal injury settlement or inheritance. The trust must be created before the beneficiary turns 65 and must include a clause requiring any remaining funds be used to reimburse Medicaid after the person’s death.

This type of trust is more restrictive and subject to federal and state rules. In New York, it must comply with both state law and Social Security Administration regulations to protect eligibility.

Choosing the right trustee

Selecting a trustee is an important part of setting up a special needs trust. This person or institution must understand benefit rules, make responsible financial decisions, and keep detailed records. The trustee is responsible for managing the trust in the best interest of the beneficiary and ensuring distributions do not conflict with public assistance rules.

Families sometimes choose a professional fiduciary or corporate trustee, especially for larger trusts or where there are complex needs. Others choose a trusted relative, ideally with help from an attorney or financial advisor to stay compliant.

You can also name a successor trustee in case the original trustee can no longer serve. It’s helpful to have backup options and review your trustee choices periodically as circumstances change.

Setting up the trust correctly

The trust document must follow specific legal requirements to be valid and effective. In New York, it’s essential that the trust clearly states it is intended to supplement—not replace—public benefits. Language in the trust should align with both federal and state benefit program rules.

Working with an attorney who understands special needs planning is critical. A mistake in wording or structure could cause the trust to be disqualified, potentially leaving the beneficiary without support or access to services.

Coordinating with your overall estate plan

A special needs trust should be one part of a broader estate plan. You may want to:

• Coordinate with your will or revocable living trust

• Update beneficiary designations on retirement accounts or life insurance policies

• Make sure other family members understand not to leave assets directly to the individual with disabilities

• Consider letters of intent or care plans that explain daily needs, routines, or preferences

A thoughtful estate plan ensures there’s a system in place not just for funding care, but also for managing it with compassion and consistency.

Avoiding common pitfalls

One common mistake is delaying planning until it’s too late. Special needs trusts can be established at any time, and the sooner you start, the better prepared your family will be.

Another pitfall is failing to communicate with other family members. If a well-meaning grandparent or aunt names the person with a disability in their will or gives them a direct gift, that could jeopardize benefits. Encourage loved ones to coordinate through the special needs trust instead.

Also, remember that laws and benefits programs change. Reviewing your trust every few years—or whenever there’s a major life event—helps ensure it still meets your goals and complies with current rules.

Conclusion

Caring for a loved one with disabilities requires long-term thinking. A special needs trust provides a way to support their future without compromising the resources they rely on today. It gives families the ability to contribute meaningfully while avoiding legal or financial complications.

If you’re in New York and have questions about creating a special needs trust, consider speaking with an estate planning attorney who focuses on this area. The process can feel complex, but with the right guidance, you can build a plan that honors your loved one’s needs—now and into the future.