Special Needs Trusts and Benefits Eligibility After a Catastrophic Injury Recovery

A recovery on behalf of a person with a permanent disability is intended to pay for care over a lifetime. Received outright, it can instead disqualify that person from means-tested programs, most importantly Medicaid and Supplemental Security Income, that may be essential to their care. Structuring the recovery to preserve eligibility is therefore part of resolving the claim, not an afterthought to it.

This discussion describes the principal structures under federal law and their tradeoffs. Their application to a particular person depends on age, benefits, state program rules, and the terms of the recovery, and requires counsel experienced in special needs planning.

Why eligibility is at risk

Supplemental Security Income is subject to a resource limit of $2,000 for an individual, and Medicaid eligibility in many categories is tied to SSI or to comparable resource rules. A recovery paid directly to the injured person, or held in an account the person controls, is generally a countable resource. The result can be loss of benefits until the funds are spent down, including Medicaid coverage for services the recovery may not fully replace.

For a minor, the analysis changes at eighteen. Parental income and resources are generally attributed to a child for SSI purposes during minority; at majority, the young adult’s own resources control. A recovery held for a child may therefore become a disqualifying resource precisely when the young adult first becomes independently eligible.

The first-party special needs trust

Federal Medicaid law, 42 U.S.C. § 1396p(d)(4)(A), permits a trust containing the assets of a disabled individual under age sixty-five to be disregarded for eligibility purposes if it is established for the individual’s benefit by the individual, a parent, a grandparent, a legal guardian, or a court, and if it provides that on the beneficiary’s death the state will be reimbursed from remaining funds for Medicaid benefits provided. The authority of the individual to establish the trust was added by the Special Needs Trust Fairness Act of 2016.

The trust must be administered for the sole benefit of the beneficiary, and distributions must be made with attention to their effect on benefits; payments for food or shelter, for example, may reduce SSI. Trustee selection, including the use of a professional or corporate trustee, is consequential. In Pennsylvania and New Jersey, the state Medicaid agency publishes requirements and review procedures for these trusts; New Jersey’s Division of Medical Assistance and Health Services describes the trust as available to any individual under sixty-five who is disabled under the Social Security standard.

Pooled trusts

A pooled trust under 42 U.S.C. § 1396p(d)(4)(C) is managed by a nonprofit association, with separate accounts maintained for each beneficiary and funds pooled for investment. Pooled trusts may be appropriate for smaller recoveries or where no suitable individual trustee is available. Their remainder provisions differ from those of individual trusts and should be reviewed.

ABLE accounts

An ABLE account under 26 U.S.C. § 529A allows a person whose disability began before a specified age to hold funds without loss of SSI up to a statutory threshold; balances up to $100,000 are excluded from the SSI resource limit, and balances are excluded for Medicaid purposes. Effective January 1, 2026, the qualifying age of onset was raised from twenty-six to forty-six. ABLE accounts are subject to annual contribution limits and may be subject to Medicaid reimbursement at the beneficiary’s death, and they are generally used alongside, not instead of, a special needs trust in a substantial recovery.

Court approval and structured settlements

Recoveries for minors and incapacitated persons require court approval, under Pa.R.C.P. 2039 and 2064 in Pennsylvania and Court Rule 4:44 in New Jersey, and the court will consider whether the proposed structure protects the beneficiary. Funding a special needs trust, purchasing a structured settlement annuity payable to the trust, or combining the two are common approaches. The structure should be designed before the settlement is finalized, because changing it afterward may require further court proceedings and may not be possible on the same terms.

Liens and reimbursement claims

Separate from the trust’s eventual payback obligation, a state Medicaid program that paid for care related to the injury may assert a reimbursement claim against the recovery itself. Under Arkansas Department of Health & Human Services v. Ahlborn, 547 U.S. 268 (2006), Wos v. E.M.A., 568 U.S. 627 (2013), and Gallardo v. Marstiller (U.S. 2022), the state’s claim is limited to the portion of the recovery allocated to medical care, past or future. In Pennsylvania, the Department of Human Services asserts these claims under 62 P.S. § 1409. The allocation of a recovery among categories of damages, and the resolution of reimbursement claims, must be addressed before funds are distributed.

Pennsylvania periodic payment

In Pennsylvania medical professional liability actions, MCARE § 509 provides for periodic payment of future medical and related expenses, with payments ending at the claimant’s death. That structure interacts with trust planning and should be considered when the recovery is designed. The firm’s discussion of life care plans after catastrophic childhood injury addresses it in more detail.

Scope

Benefits preservation is a specialized area of law, and coordination between litigation counsel and special needs planning counsel should begin well before resolution. The firm’s work in catastrophic injury matters includes that coordination where a recovery will fund lifetime care. A recovery that is not structured with benefits in view may not serve the purpose for which it was obtained.