Using Special Needs Trusts to Get Medicaid in New York

For an updated version of this article, click here.

Keep Medicaid and SSI

A Special Needs Trust (also known as the Supplemental Needs Trust or SNT) shields a disabled person’s assets from Medicaid. A Special Needs Trust is paramount to protecting assets from being counted for the purposes of Medicaid, SSI, vocational rehabilitation, subsidized housing, and other benefits based upon financial need.

Supplemental Needs Trusts are authorized by New York State and Federal Law. The Omnibus Budget Reconciliation Act passed by Congress in 1993 specifically authorized the use of Supplemental Needs Trusts for the benefit of individuals who are under the age of 65 years and disabled according to Social Security standards. The Social Security Operations Manual (POMS) authorizes Supplemental Needs Trusts for non-countable assets.

A Supplemental Needs Trust (SNT) can only be established for an individual who is (a) disabled and (b) under the age of 65. It can be used to pay for expenses that Medicaid does not cover, such as certain home care services, travel, entertainment, automobiles, a house, technology, furnishings, and other necessary of luxury items.

There are two kinds of Special Needs Trusts:

Third-Party Special Needs Trust – funded with the funds of a third party, such as a parent or a grandparent. It does not require a Medicaid payback provision.

Self-Settled Special Needs Trust – funded with the disabled person’s own assets. Such a trust can only be established by a court. It requires a Medicaid payback provision.

The great thing about the Special Needs Trust is that unlike the Medicaid Trust, there will not be an ineligibility period, and Medicaid will not be able to consider the SNT when determining eligibility.

Special Needs Trusts Can Be Used as an Estate Planning Tool

Being a trust, the Special Needs Trust provides additional benefits, including keeping the money in the blood-related family, protecting money from a divorce, and saving on estate taxes. For that reason, a Special Needs Trust is a preferred way of leaving an inheritance to a disabled child – the last thing you want is for the child to loose government benefits.

Special Needs Trust Provides Protection from Creditors

Because a Special Needs Trust is not revocable, assets in such trusts are not easily reachable by future creditors of the beneficiary, and are hard for the courts to reach if there is ever a judgment against the disabled beneficiary

Most Assets in a Supplemental Needs Trust are Not Subject to Repayment

Assets contributed to a third-party special needs trust are not subject to repayment to the government. Only assets that at some point belonged to the disabled person can be taken back by Medicaid, and even that occurs only after the death of the disabled individual and can often be settled.

Call the Law Offices of Albert Goodwin at (212) 233-1233 and schedule a consultation to discuss if a Special Needs Trust is right for your situation.

How SNTs Interact with Specific Benefits Programs

The SNT design works because of how specific benefits programs treat trust assets. Each program has its own rules, but the basic structure is the same: assets in a properly drafted SNT are not "available resources" of the beneficiary and therefore do not affect eligibility.

SSI. Supplemental Security Income has a $2,000 resource limit and an income limit. Assets in an SNT do not count toward the resource limit. Distributions from the SNT can affect SSI depending on what they are paid for: direct cash to the beneficiary is income; payment for food and shelter creates in-kind support and maintenance that reduces SSI by up to one-third of the federal benefit rate; payment for non-food, non-shelter items has no effect.

Medicaid. Medicaid eligibility for non-MAGI categories has similar resource and income standards. SNT assets are not countable. Distributions for medical needs that Medicaid would otherwise cover should be coordinated with Medicaid to avoid coverage gaps. Distributions for things outside Medicaid coverage (recreation, additional services, comfort items) supplement rather than replace Medicaid.

Subsidized housing. Section 8 and other housing programs have income limits. SNT distributions used for housing-related expenses can count as income for these programs. Distributions should be structured to avoid affecting housing eligibility.

SNAP (food assistance). SNAP has both income and resource tests. SNT assets are typically not counted as resources. Distributions for food can count as income.

Vocational rehabilitation. Some programs have means tests; others do not. The interaction with SNTs is program-specific.

Trustee Decisions That Matter

The SNT trustee's distribution decisions shape the benefit outcome. Best practices:

• Pay vendors directly. Buy items for the beneficiary or pay service providers directly rather than giving the beneficiary cash to make purchases.
• Avoid food and shelter expenses. Skip rent payments and grocery purchases for SSI beneficiaries, or accept the reduced SSI benefit as a deliberate trade-off.
• Use credit cards or pre-paid cards. A trustee can establish a credit card in the trust's name, with the beneficiary as an authorized user, for specific approved purchases. The trust pays the card; the beneficiary uses it for permitted items.
• Coordinate with case workers. Many beneficiaries have Medicaid case workers, SSI representatives, or other professionals involved in their lives. Building a relationship with these professionals helps the trustee navigate program rules.
• Document the purposes. Each distribution should be documented with its purpose, so the trustee can defend the decision if a benefits agency questions it.

Establishing a First-Party SNT

First-party SNTs come into play when the disabled individual has received assets directly — through inheritance, settlement, or back benefits. The funds must be transferred into a properly structured first-party SNT to preserve eligibility.

The (d)(4)(A) trust requires:

• The beneficiary must be under 65 at the time the trust is established and funded.
• The trust must be established by a parent, grandparent, legal guardian, the court, or (after a 2016 federal change) the individual themselves.
• The trust must include a Medicaid payback provision, requiring the state to be reimbursed for Medicaid services from any remaining trust assets at the beneficiary's death.

The (d)(4)(C) pooled trust is operated by a nonprofit organization. The beneficiary's funds are pooled with funds of other disabled beneficiaries for investment purposes, but each beneficiary's share is maintained separately. Pooled trusts can be established by individuals over 65 (a benefit not available for (d)(4)(A) trusts). They include similar Medicaid payback provisions, sometimes with options for the remainder to be retained by the pooled trust nonprofit rather than refunded to the state.

Establishing a Third-Party SNT

Third-party SNTs are typically established by parents as part of their estate plan. The structure can be:

• An inter vivos trust funded during the parents' lifetime.
• A testamentary trust created in the parents' wills and funded at death.
• A combination — an inter vivos trust funded modestly during life and substantially funded by life insurance and bequests at death.

The advantages of inter vivos funding include earlier asset accumulation, ability for other family members (grandparents, aunts, uncles) to direct gifts to the existing trust, and clear separation of assets from the parents' estate. The disadvantages are upfront cost and the need to actually fund the trust during life.

Funding Strategies

Common funding sources for third-party SNTs:

• Life insurance. A second-to-die policy on the parents' lives, with the trust as beneficiary, provides substantial funds when both parents have died. The premiums can be modest if started early.
• Retirement accounts. Naming the trust as beneficiary requires care because of the SECURE Act's distribution rules. Some structures still work; others have lost favorable tax treatment.
• Outright lifetime contributions. Parents can contribute during life if they can afford to do so.
• Bequests in wills. The parents' wills direct the disabled child's share into the SNT.
• Contributions from extended family. Grandparents and other relatives can direct their own gifts and bequests to the SNT.

Letter of Intent

One important supplementary document is a Letter of Intent. This is an informal document, written by the parents, that describes the disabled beneficiary — medical history, preferences, routines, what works and what does not, important relationships, religious or cultural considerations. The Letter of Intent provides essential context for whoever ends up caring for and making decisions about the beneficiary after the parents are gone.

The Letter is not legally binding but is enormously practical. It captures decades of parental knowledge that would otherwise be lost. We help families prepare these letters as part of the broader special needs planning.