Here’s a situation that happens more than most families expect. A parent with a disabled adult child dies and leaves that child $200,000 in the will — out of love, to make sure they’re taken care of. Within months, that inheritance disqualifies the child from Medicaid and Supplemental Security Income. The benefits disappear. The money gets spent down paying for care that Medicaid was covering for free. A few years later, the inheritance is gone and the family is trying to requalify for the same benefits they had before.
The parent meant well. The will was technically valid. The outcome was a disaster.
This is exactly what a Special Needs Trust — called a Supplemental Needs Trust in New York — is designed to prevent. And the time to set one up is before you need it, not after.
What a Special Needs Trust Actually Does
A Special Needs Trust (SNT) is a legal arrangement that holds assets for the benefit of a person with a disability — without those assets counting against them for government benefits like Medicaid and SSI.
Both Medicaid and Supplemental Security Income have strict asset limits. For SSI in 2025, a single individual generally cannot have more than $2,000 in countable resources. Anything above that threshold and eligibility disappears. A direct inheritance, a large gift, even a well-meaning bank account in the wrong name can trigger a loss of benefits.
Assets held inside a properly structured SNT, however, are not counted as a resource belonging to the beneficiary. Under EPTL § 7-1.12, New York’s statute governing supplemental needs trusts, principal and income held in trust are not deemed an available resource under any government benefit or assistance program. The trust exists alongside those benefits — supplementing them, not replacing them.
The trust can pay for things Medicaid doesn’t cover: education, transportation, entertainment, travel, home furnishings, technology, uninsured medical expenses, and quality-of-life expenses that make a real difference. What it cannot do is pay for things already covered by government programs in a way that would reduce those benefits.
Third-Party vs. First-Party: The Difference Matters
There are two types of SNTs in New York, and understanding which one applies to your situation matters enormously.
A third-party SNT is funded by someone other than the person with a disability — typically a parent, grandparent, sibling, or other family member. This is the type most families set up as part of estate planning. When the beneficiary dies, whatever remains in the trust can be distributed to other named beneficiaries, just like any other trust. There is no Medicaid payback requirement.
A first-party SNT (also called a self-settled SNT) is funded with the disabled person’s own assets — often after a personal injury settlement, an inheritance received before the trust was set up, or assets already in their name. Federal law requires that these trusts be irrevocable, established before the beneficiary turns 65, and include a Medicaid payback provision: when the beneficiary dies, the state must be reimbursed from remaining assets for Medicaid benefits paid during their lifetime. Only after that debt is satisfied can anything pass to other beneficiaries.
The payback requirement is one of the biggest reasons families are told not to wait. Once a disabled person receives assets directly — an inheritance, a legal settlement — a first-party trust may be the only option, and the payback obligation comes with it. A third-party trust set up in advance avoids that entirely.
What Happens When There’s No Trust in the Will
Many parents assume that leaving assets to a sibling — “with the understanding” that the sibling will use the money to care for the disabled family member — is a reasonable workaround. It isn’t.
An informal arrangement like this has no legal protection. The sibling who receives the money owns it outright. If they divorce, face creditors, get sued, or die unexpectedly, the money is gone. If the sibling uses the funds to directly support the disabled family member in ways that count as income, it can still affect benefits. And if the relationship deteriorates, there’s nothing to enforce.
The same problem arises when a will simply names a disabled person as a direct beneficiary without a trust. The inheritance arrives in their name, counts as a resource, and the benefits are at risk.
A properly drafted SNT embedded in your will — called a testamentary SNT — solves this. It doesn’t come into existence until you die, costs nothing to maintain during your lifetime, and ensures that whatever you leave goes directly into a protected structure rather than into the disabled person’s hands.
The Age 65 Deadline Nobody Talks About
For first-party trusts funded with the disabled person’s own assets, federal law imposes a hard cutoff: the trust must be established before the beneficiary turns 65. After that, the option largely disappears.
This matters most in situations involving personal injury settlements. A young person injured in an accident may receive a significant settlement that needs to be sheltered in an SNT. If the trust isn’t set up in time — or if the settlement is paid out before the trust is established — the window can close quickly.
Third-party trusts don’t carry the same age restriction. But they still need to be in place before assets pass to the disabled person. Trying to set one up after an inheritance has already been received is far more complicated than planning ahead.
What the Trustee Needs to Know
Choosing the right trustee is one of the most consequential decisions in SNT planning, and it’s one families often underestimate.
The trustee of an SNT isn’t just managing investments. They have to understand which distributions are safe and which ones could reduce the beneficiary’s benefits. Paying rent directly to a landlord can reduce SSI. Giving cash directly to the beneficiary counts as income. Paying for a vacation, a computer, or a therapy program the beneficiary needs? Generally fine — but the details matter.
A trustee who makes distributions without understanding these rules can inadvertently disqualify the beneficiary from the very programs the trust was set up to protect. Many families choose a professional trustee or co-trustee — an attorney or institutional trustee who specializes in SNT administration — precisely because the stakes are high and the rules are unforgiving.
What a Special Needs Trust Can Pay For
Done correctly, an SNT can cover a wide range of expenses that meaningfully improve a person’s life without touching their benefits:
- Education and vocational training
- Transportation and vehicle expenses
- Technology — computers, tablets, communication devices
- Home furnishings and modifications
- Entertainment, travel, and recreational activities
- Uninsured medical and dental expenses
- Personal care items not covered by Medicaid
- Legal and financial advocacy fees
What the trustee needs to avoid is making distributions for expenses already covered by government programs — and paying cash or direct income to the beneficiary in ways that count against SSI. The structure works when it’s managed carefully.
Why “I’ll Do It Later” Is the Most Expensive Plan
Special needs planning is one of the areas of estate law where procrastination has immediate, concrete consequences. A parent who dies without an SNT in place may leave a disabled child worse off than if they had left nothing at all — because now the family is scrambling to fix something with a first-party trust that requires Medicaid payback and carries a 65-year-old deadline.
A testamentary SNT built into a will costs nothing until it’s needed. A standalone third-party SNT can be funded gradually over time. The legal work is a one-time investment that protects benefits for decades.
The families who end up in the most difficult situations aren’t the ones who planned poorly. They’re the ones who meant to plan and ran out of time.
Common Questions
Will a Special Needs Trust affect my child’s Medicaid?
A properly structured SNT will not. Under EPTL § 7-1.12, assets held in a conforming supplemental needs trust are not counted as available resources for government benefit programs including Medicaid.
What’s the difference between a first-party and third-party SNT?
A third-party SNT is funded with someone else’s money — usually a parent’s or grandparent’s — and has no Medicaid payback requirement. A first-party SNT is funded with the disabled person’s own assets and must include a Medicaid payback provision reimbursing the state when the beneficiary dies.
Can I just leave money to my other child to use for their sibling?
You can, but there’s no legal protection. That money legally belongs to the child who receives it and is vulnerable to divorce, creditors, lawsuits, and death. It also can’t be enforced if the arrangement falls apart. An SNT is the legally protected option.
When should I set up a Special Needs Trust?
As soon as you know a family member may rely on government benefits long term. For third-party trusts, earlier is always better. For first-party trusts funded by the disabled person’s own assets, the trust must generally be established before age 65.
Can the trust pay for housing?
It can, but with caution. Direct payments toward rent or mortgage can reduce SSI benefits. How housing payments are structured matters, and a trustee needs to understand the rules before making those distributions.
What happens to the money in the trust when the beneficiary dies?
For a third-party SNT, remaining assets pass to whoever is named in the trust — other family members, a charity, or any designated beneficiary. For a first-party SNT, Medicaid must be reimbursed first from remaining assets before anything passes to others.
Sources
- EPTL § 7-1.12 — Supplemental Needs Trusts for Persons With Severe and Chronic or Persistent Disabilities (NY Senate)
- EPTL § 7-1.12 (Justia)
- The Challenges of Being the Trustee of a Special Needs Trust (NY State Bar Association)
- Surrogate’s Court forms index (NY Courts)
Disclaimer: This article is general educational information about New York law and is not legal advice. Laws change and individual circumstances vary. If you are planning for a family member with a disability, consult a licensed New York attorney experienced in special needs planning.
