Special Needs Trusts in New Jersey

A special needs trust, also called a supplemental needs trust, holds money for a person with a disability so it can pay for things that improve their life without being counted as their own asset for means-tested benefits like SSI and Medicaid. Parents and grandparents usually create a third-party trust in their wills or as a standalone trust. When the money already belongs to the person with the disability, such as a personal injury settlement or an inheritance received outright, a first-party trust with a Medicaid payback is generally the tool.

Why can an inheritance cause a problem for someone with a disability?

SSI and Medicaid are means-tested: a recipient can generally keep only a very small amount of countable resources. An outright inheritance, a life insurance payout, or even a retirement account naming the person directly can push them over the limit and suspend benefits until the money is spent down.

In New Jersey, that is about more than a monthly check. Medicaid covers health care, and many adult services through the New Jersey Division of Developmental Disabilities depend on Medicaid eligibility. Losing eligibility can disrupt day programs, residential supports, and home care that took years to arrange.

A properly drafted special needs trust keeps the money available to improve the person's life, paying for things like education, therapies not otherwise covered, equipment, travel, recreation, and a phone or computer, while preserving eligibility.

What is the difference between first-party and third-party special needs trusts?

Third-party special needs trusts

Funded with someone else's money, usually parents, grandparents, or other relatives. It can be created in a will (a testamentary trust) or as a standalone trust that relatives can name in their own plans and beneficiary designations. There is generally no Medicaid payback, so whatever remains at the beneficiary's death can pass to siblings or others you choose. This is the trust most families use.

Make sure the rest of the family knows. A well-meaning grandparent who leaves money directly to the beneficiary, or names them on a life insurance policy, can undo the planning.

First-party special needs trusts

Funded with the beneficiary's own money: a personal injury or malpractice settlement, back benefits, child support, or an inheritance that was left to them outright. Under federal law, this kind of trust must be established for someone under age 65, and it can be set up by the individual, a parent, a grandparent, a guardian, or a court. At the beneficiary's death, the trust must generally repay Medicaid for benefits provided before anything passes to others.

Pooled trusts, run by nonprofit organizations that maintain separate accounts within a combined trust, are another option for a beneficiary's own funds, and can be useful when a standalone trust is not practical.

Who should serve as trustee?

The trustee decides how money is spent, so the choice matters as much as the document. The trustee should understand the benefit rules: cash handed directly to the beneficiary can reduce SSI, and paying for housing can reduce SSI benefits by a limited amount, which is sometimes still worthwhile. Generally, a trustee pays providers and vendors directly and keeps careful records.

Many families name a sibling or relative, sometimes alongside a professional trustee who handles investments and reporting. Name successor trustees, and consider leaving a letter of intent describing the beneficiary's routines, preferences, medical history, and the people who matter to them.

Is an ABLE account an alternative?

For some people, an ABLE account works alongside a special needs trust or instead of one. NJ ABLE accounts are tax-advantaged savings accounts owned by the person with the disability, who can often direct spending themselves, and balances up to certain limits do not affect SSI or Medicaid eligibility. Annual contributions are capped, and eligibility depends on the age at which the disability began; starting in 2026, federal law extended eligibility to people whose disability began before age 46, up from age 26. ABLE accounts are useful for independence and day-to-day expenses, but they are generally not a substitute for a trust when significant money is involved.

What else should parents plan for?

• Turning 18. At 18, parents lose the legal authority to make decisions for their child. Depending on the young adult's abilities, the answer may be a guardianship through the Superior Court, Chancery Division, Probate Part, or less restrictive tools such as a power of attorney and health care directive if the young adult has capacity to sign them. Planning generally starts before the 18th birthday.
• Your own will. Your will should name a guardian if needed, direct your child's share to the special needs trust, and coordinate with your beneficiary designations.
• The whole family plan. A special needs trust is one part of a broader estate plan. Our page on trusts explains how it fits with other kinds of trusts.

Talking to a lawyer about your situation

Planning for a child or relative with a disability involves benefit rules that change and a family structure that will outlast you. A lawyer can help you choose the right kind of trust, pick a trustee, and coordinate everything so your planning protects eligibility instead of threatening it.

Gray Law Group is in Jefferson and works with families throughout Morris, Sussex, Warren and Passaic counties and northern New Jersey. We would be glad to talk with you about your family's plan.