Special Needs Trusts and Divorce: Ensuring Protection for Children with Disabilities

For couples who have children with special needs, divorce, and child support agreements can present unique challenges. Special needs trusts become invaluable tools for ensuring these children's well-being and financial security after divorce proceedings.

What Is a Special Needs Trust?

A special needs trust is a legal arrangement that allows parents or guardians to set aside funds for the benefit of a person with disabilities without impacting their eligibility for government benefits such as Medicaid or Supplemental Security Income (SSI).

Special needs trusts are estate planning tools that outline how a special needs individual's money and assets will be stored and handled. It creates a secure place for the person to receive financial gifts, court settlements, and other funds, providing money for goods and services that are not covered by benefit programs, including funds for:

  • Camp attendance
  • Counseling programs
  • Education
  • Extracurricular activities
  • Living expenses
  • Travel

In New York, the special needs trust is referred to as a supplemental needs trust or SNT. The purpose of SNTs is to enhance the quality of life for individuals with disabilities and special needs by supplementing government benefits, not supplanting them.

How Supplemental Needs Trusts Work

Various parties are involved in special needs trusts. The "grantor" is the individual or organization that funds the trust. The "beneficiary" is the person with special needs who will benefit from the trust. The "trustee" is the person who manages the funds and ensures that the beneficiary receives the services guaranteed by the trust. Trustees can be family members, friends, colleagues, professionals, or an organization.

Special needs trusts and SNTs include specific provisions to meet the child's needs. These provisions outline how the trust funds should be used and expended while still adhering to the rules and regulations set forth by government benefit programs. For example, the funds can be used to pay for medical expenses, rehabilitation therapies, education, home modifications, and other necessary support services that enhance the child's life.

Generally, there are two types of supplemental needs trusts: first-party SNTs and third-party SNTs.

A first-party supplemental needs trust (also called a self-settled SNT or Medicaid payback trust) is an irrevocable trust funded with assets that belong to the person with special needs, such as personal injury settlements, inheritances, or other assets owned by the individual. Parents, grandparents, legal guardians, or the court can establish a first-party SNT for any beneficiary under age 65.

Conversely, a third-party special needs trust is funded by someone other than the special needs individual. A third-party SNT can be irrevocable or revocable. There is no age restriction on this type of trust, and it is not subject to government payback requirements. Trustees of a third-party SNT can distribute the remaining funds upon the beneficiary's death.

Supplemental Needs Trusts and New York Divorce

In the context of divorce, SNTs may become involved in various areas. Divorcing parents of special needs children may consider incorporating special needs trusts into child support agreements. Alternatively, the family court may decide that both parents of the special needs child must contribute to a special needs trust, even for adult children with special needs. Here, the judge will examine various factors to determine how much each parent must give to the trust, including salary, retirement accounts, and other forms of income. The court may also consider the child's lifestyle before divorce and seek to prevent disruption to that lifestyle as much as possible.

It is essential to ensure that child support payments are structured in a way that does not affect the child's eligibility for government benefits. By directing the child support payments into the special needs trust, parents can provide additional financial support for their children while safeguarding their eligibility for vital government programs.

After divorce, selecting a trustee for the special needs trust is paramount. The trustee will manage the trust funds and make decisions for beneficiary children with special needs. While divorced parents may wish to serve as co-trustees, it is essential to carefully consider the dynamics and potential conflicts that may arise. Co-trustees must be able to effectively communicate and collaborate to ensure the proper administration of the trust.

In some cases, divorced parents may opt to appoint a corporate trustee to oversee the special needs trust. A corporate trustee brings professional expertise and impartiality to the administration of the trust. They can help navigate complex legal and financial matters, prioritizing and protecting the child's best interests.

Divorcing couples who have children with disabilities must carefully consider how child support, custody arrangements, and divorce will impact special needs trusts. Whether through co-trusteeship or the appointment of a corporate trustee, it is crucial to ensure that the trust is managed to safeguard the child's well-being and preserve their access to essential government assistance programs.

With careful planning and the guidance of an experienced family law attorney, divorcing couples can navigate the complexities of divorce and special needs trusts while safeguarding their child's future.

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Dror Bikel

Dror Bikel co-founded Bikel Rosenthal & Schanfield, New York’s best known firm for high-conflict matrimonial disputes. A New York Superlawyer℠ and twice recognized (2020 and 2021) New York Divorce Trial Lawyer of the Year, Dror’s reputation as a fearsome advocate in difficult custody and divorce disputes has led him to deliver solid outcomes in some of New York’s most complex family law trials. Attorney Bikel is a frequent commentator on high profile divorces for national and international media outlets. His book The 1% Divorce - When Titans Clash was a 5-category Amazon bestseller.

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