Imagine a family member with special needs is set to receive an inheritance, or perhaps a personal injury settlement. The family is relieved, since the money will help cover care, equipment, or simply a better quality of life. Then someone mentions that accepting the money could disqualify that person from Medicaid or Supplemental Security Income (SSI). That is a huge problem, and it’s one of the most common situations families with special needs loved ones face.
The good news is that in New York City, there are legal tools specifically designed to solve this problem. With the right planning in place, a person with a disability can receive and hold significant assets without losing a single dollar of government benefits.
Why Does Government Benefits Have Asset Limits?
Two federal programs form the foundation of support for many people with disabilities: Medicaid, which covers health care and long-term services, and Supplemental Security Income (SSI), which provides monthly cash payments to people who are disabled and have limited income and resources.
Both programs are means-tested, meaning the government looks at how much money and property a person has before deciding whether they qualify. For SSI, the asset limit is just $2,000 for an individual. For Medicaid in New York, similar rules apply depending on the specific program.
That $2,000 ceiling is where the problem begins. If someone with a disability inherits money, wins a lawsuit, or receives a gift that puts them above that threshold, they can lose their benefits—usually the same benefits that pay for their health care and daily support. The benefits don’t disappear forever, but regaining them takes time, paperwork, and stress that families do not need.
What Is a Special Needs Trust?
A Special Needs Trust (sometimes called a Supplemental Needs Trust in New York) is a legal arrangement that holds money or property on behalf of a person with a disability. Assets inside the trust are generally not counted when the government determines eligibility for Medicaid or SSI.
The money in the trust is not given directly to the person with the disability. Instead, a trustee (a person or institution named to manage the trust) controls the funds and uses them to pay for things that improve the beneficiary’s life beyond what government programs cover. That could be a new wheelchair, a vacation, a computer, art classes, or a private caregiver on the weekends.
The trust does not replace government benefits. It supplements them—filling in the gaps that Medicaid and SSI leave behind.
The Two Main Types in New York
First-Party Special Needs Trusts
This type of trust is funded with the disabled person’s own money—for example, from a personal injury settlement, an inheritance that has already been received, or savings. In New York, these trusts are authorized under federal law and must follow specific rules. Importantly, when the beneficiary passes away, the state of New York may be reimbursed for Medicaid costs paid during the beneficiary’s lifetime. This is called a “payback” provision.
First-party trusts must generally be established before the beneficiary turns 65. An attorney must draft the trust to meet all legal requirements—a critical detail, because a poorly drafted trust can disqualify the beneficiary from benefits instead of protecting them.
Third-Party Special Needs Trusts
This type is funded with someone else’s money—a parent, grandparent, sibling, or other person who wants to leave assets for a loved one with a disability. Unlike a first-party trust, a third-party trust does not require a Medicaid payback at death. Remaining funds can pass to other family members or beneficiaries.
Third-party trusts are often created as part of a broader estate plan. For example, a parent updating their will can direct that any inheritance for their child with a disability flow into a special needs trust rather than going directly to the child.
NYC-Specific Note: What the Trust Can Pay For
In New York City, a special needs trust can typically be used to pay for personal care aides beyond what Medicaid covers, transportation including taxis and car services, technology and communication devices, education and vocational training, recreation and entertainment, home modifications and furnishings, and dental or vision care not covered by Medicaid.
What the trust generally cannot pay for: food, shelter, and clothing—because paying for those directly can reduce SSI payments under Social Security rules.
ABLE Accounts: A Simpler Option for Some
New York also offers ABLE accounts (Achieving a Better Life Experience), established under both federal and state law. An ABLE account works like a special savings account for people with disabilities that began before age 26. Contributions up to a yearly federal limit can be made by the person with the disability, family members, or others.
ABLE account funds are not counted toward the SSI asset limit (up to $100,000), and withdrawals for qualified disability expenses—housing, education, transportation, health care, and more—are not taxed. New York’s program is run through the New York ABLE program, and accounts can be opened without an attorney.
ABLE accounts are simpler and lower-cost than a special needs trust, making them a good fit for smaller amounts of money. For larger sums—or when planning for the long term—a special needs trust remains the stronger tool. Many families use both.