First-Party Special Needs Trusts

A first-party special needs trust holds the assets of a person with a disability without disqualifying that person from Supplemental Security Income and Medicaid. It may be appropriate when a person who relies on those programs receives assets that exceed the resource limit, such as a personal injury settlement, an inheritance left outright, a lump-sum award of back benefits, a divorce settlement, or savings above the resource limit. Without the trust, the money must be spent down before benefits resume. With it, the money is preserved to pay for what the programs do not, for the rest of the beneficiary’s life.

Federal law provides an exception to the rules that ordinarily count a person’s own trust assets toward benefit eligibility. To qualify, the trust must meet specific conditions, including repayment to the state Medicaid agency from remaining assets at the beneficiary’s death. Careful drafting and administration help preserve eligibility and avoid distributions that reduce benefits.

Milvidskiy Law Group P.C. drafts and establishes first-party special needs trusts, obtains court approval where it is required, handles the notices to the Social Security Administration and the state Medicaid agency, and advises trustees on distributions year after year.

Who Needs a First-Party Trust

The Social Security Administration counts a person’s resources in deciding eligibility for SSI, and the resource limit is low: $2,000 for an individual and $3,000 for a couple, according to the agency’s program operations manual, figures that have not changed in decades. Medicaid in New York, New Jersey, and Connecticut applies its own resource tests for people who receive it on the basis of disability. A person who relies on these programs and receives money in his or her own name is over the limit, often the month the money arrives.

The typical situations:

• A personal injury or medical malpractice settlement for a child or adult whose injuries also qualify them for benefits.
• An inheritance left directly to a disabled beneficiary by a relative who did not know to use a trust, or a life insurance or retirement account payable to the beneficiary by designation.
• A lump sum of retroactive SSI or Social Security disability benefits.
• Equitable distribution or support arrears in a divorce.
• Accumulated earnings or savings of a working adult with a disability.

The Federal Requirements

The special needs trust exception in federal Medicaid law, as applied by the Social Security Administration, requires each of the following.

• The beneficiary’s own assets. The trust holds property that belongs to the disabled individual. Assets contributed by anyone else belong in a separate third-party trust with no payback.
• Under 65. The beneficiary must be under age 65 when the trust is established and funded. Additions after 65 are treated as transfers and can create a penalty.
• Disabled. The beneficiary must meet the Social Security definition of disability.
• Established by the right person. The trust must be established by the beneficiary, a parent, a grandparent, a legal guardian, or a court. Since the federal law was amended in December 2016, a mentally competent beneficiary may establish his or her own trust; before that, a parent, grandparent, guardian, or court was required.
• Sole benefit. The trust must be for the sole benefit of the beneficiary during life. Distributions that benefit others, other than permitted payments for the beneficiary’s care and reasonable administrative costs, disqualify the trust.
• Medicaid payback. At the beneficiary’s death, the trust must repay each state that provided Medicaid up to the total amount paid on the beneficiary’s behalf, before any distribution to remainder beneficiaries.

The Pooled Trust Alternative

Federal law also recognizes a pooled special needs trust run by a nonprofit organization, in which each beneficiary has a separate account but the funds are pooled for investment and management. A pooled trust can accept a beneficiary of any age, though transfers by a beneficiary over 65 may still be penalized for Medicaid purposes in some states, and it is often the practical choice for smaller amounts where the cost of an individual trust is not justified. At the beneficiary’s death, the nonprofit may retain a portion of the account instead of, or before, the state payback, depending on the trust’s terms. Pooled trusts are also used for surplus income in New York community Medicaid planning, a different application of this structure.

How the Trust Is Established

For a minor or an adult who lacks capacity, the trust is usually established by a parent or by the court, and settlement proceeds for a minor require court approval in any event. An adult guardianship proceeding may be needed when a guardian must act. For a competent adult, the beneficiary can now establish the trust directly, which avoids a court proceeding when no other approval is needed. In each of New York, New Jersey, and Connecticut, the Medicaid agency reviews the trust document, and the Social Security Administration evaluates it under its own rules, so the trust is drafted to satisfy both before it is signed. Notice requirements and approval practices differ by state and by county, and we handle them as part of the engagement.

Administering the Trust: What the Trustee Can Pay For

The trust pays for what benefits do not: therapies and equipment Medicaid does not cover, a vehicle and its upkeep, education, travel and recreation, a computer and phone, furniture, personal care attendants beyond authorized hours, and the professional fees of administering the trust. The trustee pays vendors directly. Two categories require care:

• Cash to the beneficiary is counted as income and reduces SSI dollar for dollar after a $20 monthly exclusion. The trustee does not give the beneficiary cash.
• Shelter. Paying the beneficiary’s rent, mortgage, or utilities is treated as in-kind support and maintenance and reduces SSI by up to one-third of the federal benefit rate plus $20, which is $351.33 a month in 2026. Sometimes that reduction is worth accepting; the trustee should evaluate the reduction before authorizing a payment.

The trustee also keeps records that will satisfy an SSI redetermination or a Medicaid recertification, files the trust’s tax returns, and reports as the agencies require. Most first-party trusts are taxed to the beneficiary as grantor trusts. A trust can also own a home for the beneficiary to live in, which raises its own SSI and Medicaid questions that should be reviewed before purchase.

Coordination With Other Tools

An ABLE account, a tax-advantaged savings account for people whose disability began before a specified age, can hold modest amounts and pay for housing without the SSI reduction that trust payments trigger, and it is often used alongside a special needs trust. The family’s own planning should place any future inheritance in a third-party special needs trust that carries no payback, so that money from parents and grandparents never has to pass through the first-party trust. And where the beneficiary’s condition may improve, the trust can be drafted to address that.

When a First-Party Trust Is Not the Right Tool

A first-party trust is unnecessary when the beneficiary does not receive and will not need means-tested benefits, and it is unavailable in individual form when the beneficiary is 65 or older, in which case a pooled trust or other planning is considered. It is not the vehicle for money that comes from parents or other relatives; that money belongs in a third-party trust without payback. And where the amount is small, the cost of an individual trust may exceed its benefit compared with a pooled trust or an ABLE account. Related eligibility rules for long-term care also need to be considered as part of Medicaid planning.

Establishing the Trust and Coordinating Benefits

• Analysis of the beneficiary’s benefits, the source and amount of the funds, and whether an individual trust, a pooled trust, an ABLE account, or a combination fits.
• Drafting the trust to satisfy both the Social Security Administration’s rules and the state Medicaid agency’s requirements, including the payback and sole-benefit provisions.
• Court proceedings where required, including approval of settlements for minors and coordination with personal injury counsel.
• Notices to and approvals from the Social Security Administration and the Medicaid agency, and coordination with structured settlement providers.
• Trustee selection and ongoing guidance on distributions, record-keeping, tax filings, and agency reporting, including our own professional trustee services where a family member should not serve.

Discuss Your Planning Options

If someone who relies on SSI or Medicaid is about to receive money in their own name, the trust should be in place before the funds arrive. Our attorneys practice in New York, New Jersey, and Connecticut. Contact Milvidskiy Law Group P.C. to schedule a consultation.

This page is provided for general informational purposes only and does not constitute legal advice. Laws differ by state and change over time. Benefit figures can change. For advice about your situation, consult a qualified attorney.