Special Needs Trusts in New Jersey: Planning for Your Loved One’s Future

For parents of a child with a disability, estate planning raises concerns that go well beyond deciding who will inherit their assets. Parents may spend years making sure their child has the right care, services, and support. Eventually, they must also confront a difficult question: Who will take over when they can no longer do so?

A special needs trust can be an important part of the answer. When properly structured, a special needs trust can provide financial resources to a person with a disability without disqualifying them from certain means-tested government benefits, including Supplemental Security Income (SSI) and Medicaid. Rather than replacing those benefits, the trust is designed to supplement them and provide for expenses that improve the beneficiary’s quality of life.

For New Jersey families, establishing the right trust requires more than simply inserting special-needs language into a will. The source of the assets, the beneficiary’s circumstances, the choice of trustee, and the way the trust is administered all matter.

Why a Direct Inheritance May Cause Problems

Leaving money directly to a child is the simplest way to provide for that child. If the child receives needs-based government benefits, however, an inheritance can have unintended consequences.

SSI and certain Medicaid programs impose financial eligibility requirements. An inheritance received directly by a beneficiary can increase the beneficiary’s countable resources beyond the applicable limits, potentially affecting eligibility for benefits that help pay for medical care, residential services, and other necessities.

That does not mean parents should refrain from providing an inheritance. Instead, they need to consider how the inheritance will be held. Rather than leaving assets outright to a child with a disability, parents can direct those assets to a properly drafted third-party special needs trust. The trust owns the assets, and the trustee manages them for the child’s benefit. The beneficiary can receive the benefit of those assets without owning them personally.

First-Party and Third-Party Special Needs Trusts

The distinction between a first-party and a third-party special needs trust is important because the rules differ.

A first-party special needs trust is funded with assets that belong to the person with a disability. This type of trust may be appropriate when an individual receives a personal injury settlement, inherits money directly, or otherwise acquires assets that could affect eligibility for needs-based benefits.

Federal law places specific requirements on first-party special needs trusts. An individual trust generally must be established before the beneficiary reaches age 65 and must contain a Medicaid payback provision. When the beneficiary dies, remaining trust assets generally must be used to reimburse the state for certain Medicaid benefits provided during the beneficiary’s lifetime, subject to applicable law.

A third-party special needs trust is funded with assets belonging to someone else, such as a parent, grandparent, or other relative. This is often the appropriate structure when parents are planning for a child with a disability. A properly drafted third-party trust generally does not have the same Medicaid payback requirement because the beneficiary never owned the assets. The person establishing the trust can instead specify who will receive any assets remaining after the beneficiary’s death.

The distinction becomes particularly important when parents are preparing or updating their estate plans. Creating a trust after a child has already received an inheritance may be considerably more complicated than structuring the inheritance correctly from the beginning.

A Special Needs Trust Must Be Part of the Larger Estate Plan

A special needs trust should work in conjunction with the rest of the family’s estate plan. Parents should review beneficiary designations on life insurance policies, retirement accounts, and investment accounts. If a child with a disability is named directly as the beneficiary of a substantial account, the proceeds may end up in the child’s name and undermine the planning accomplished through the special needs trust.

The same issue can arise with wills and revocable trusts. If parents intend to provide for their child through a special needs trust, the estate plan should be drafted so that the assets actually reach the trust.

Life insurance can also be useful in funding a third-party special needs trust. For families whose other assets may not be sufficient to meet the child’s long-term needs, a life insurance policy can provide additional resources after the parents’ deaths. The beneficiary designation, however, must be coordinated with the estate plan.

Choosing a Trustee

The trustee of a special needs trust has substantial responsibility for the beneficiary’s financial future. That person or institution will manage the trust’s assets, make distributions, maintain records, and deal with the rules governing the beneficiary’s public benefits.

Parents sometimes assume that a close relative is automatically the best choice. Family members often understand the beneficiary better than anyone else, but serving as trustee also requires a willingness to handle financial and administrative responsibilities and to learn the rules that apply to special needs trusts.

A professional trustee may offer experience in investments, accounting, and government benefit requirements but may not know the beneficiary personally. In some circumstances, a family member and professional trustee can serve together, combining personal knowledge with professional experience.

Parents should also name successor trustees. A special needs trust may remain in place for many years, and the person chosen today may not be able to serve indefinitely.

What Can the Trust Pay For?

The purpose of a special needs trust is to provide for expenses that supplement the beneficiary’s government benefits and enhance the beneficiary’s life. Depending on the circumstances, trust assets may be used for education and vocational training, transportation, technology, recreation, entertainment, furnishings, personal items, and other supplemental expenses.

Trustees must understand, however, that the effect of a distribution depends on the particular government benefit involved. Cash paid directly to the beneficiary and certain shelter payments, such as rent, mortgage, or utilities, can reduce SSI benefits. Notably, since September 30, 2024, the Social Security Administration no longer counts food as in-kind support and maintenance, so trust payments for groceries or meals generally no longer affect SSI.

For that reason, the trustee should understand both the terms of the trust and the rules governing the beneficiary’s benefits before making distributions. Good recordkeeping is also important.

ABLE Accounts May Be Another Option

For some individuals, an ABLE account can complement a special needs trust. An ABLE account is a tax-favored savings account that allows eligible individuals with disabilities to save and use funds for qualified disability-related expenses while maintaining eligibility for certain means-tested benefits. Beginning in 2026, eligibility expanded to individuals whose disability began before age 46, up from the prior cutoff of 26, which makes ABLE accounts available to many more adults with disabilities than in the past. Unlike a special needs trust, an ABLE account can provide the beneficiary with greater direct access to the money.

The two tools can also be used together. A special needs trust may be appropriate for larger assets and long-term planning, while an ABLE account may provide greater flexibility for certain day-to-day expenses. Ultimately, whether an ABLE account, special needs trust, or combination of the two makes sense depends on the individual’s circumstances, financial resources, and ability to manage money.

Planning for the Person, Not Just the Assets

Financial planning is only one part of preparing for a child’s future. Parents often have years of knowledge about their child’s personality, routines, medical needs, communication style, preferences, and abilities. Much of that information may never appear in a trust document, but it can be extremely valuable to the people who eventually take over the child’s care.

A Letter of Intent can provide that information to future trustees, caregivers, and family members. It is generally not a legally binding document, but it can serve as a practical guide to the beneficiary’s life and needs.

Parents should also address decision-making once their child reaches adulthood. At age 18, parents generally no longer have automatic legal authority to make decisions for an adult child. Depending on the child’s circumstances, the family may need to consider guardianship, powers of attorney, or supported decision-making arrangements. These decisions should be based on the individual’s abilities and needs, to provide appropriate support while preserving as much independence as possible.

Planning Before the Need Arises

The best time to address special needs planning is before an inheritance, settlement, or other significant asset transfer occurs. Parents should also talk to grandparents and other relatives about the family’s plan. A grandparent who intends to leave money directly to a grandchild with a disability may be trying to help. Still, an outright inheritance can create the very problem the parents’ estate plan was designed to avoid.

Plans should be reviewed as circumstances change. A beneficiary’s living arrangements, financial resources, government benefits, and level of independence may change over time, as can the family’s assets and choice of trustees.

A special needs trust is ultimately about more than protecting eligibility for government benefits. It gives parents a way to provide financial support for a loved one while also establishing a structure for managing those resources after they can no longer do so themselves.

How Scarinci Hollenbeck Can Help

Special needs planning involves estate planning, trust administration, and the rules governing government benefits. The attorneys of Scarinci Hollenbeck’s Trusts & Estates Practice can help families evaluate these issues and develop an estate plan tailored to the needs of the beneficiary and the family.

Our attorneys assist with first-party and third-party special needs trusts, wills and revocable trusts, beneficiary designations, ABLE accounts, and related estate-planning matters. We also advise trustees on the administration of special needs trusts and the responsibilities that come with serving in that role.

George A. McGowan III advises New Jersey families on special needs trusts and related estate planning from the firm’s Red Bank office. If you are planning for a child or other family member with a disability, early planning can help protect the resources available to that person and provide greater confidence about the future. Contact Mr. McGowan or a member of the firm’s Trusts & Estates Practice for personalized guidance.