Special Needs Trusts in Massachusetts: Keep Benefits Intact

The Problem With Good Intentions

You love your daughter Sarah. She has a developmental disability, she relies on SSI for income, and MassHealth covers her medications and supported living program. You want to leave her something when you're gone. So you put her name in your will, same as your other kids.

That decision, made with nothing but love, could cost her everything.

Under federal SSI rules, a person with a disability generally cannot have more than $2,000 in countable assets. MassHealth in Massachusetts follows similar resource limits. If Sarah inherits $50,000 outright, she will likely lose her SSI check and her MassHealth coverage the month that money hits her bank account. She would have to spend down the inheritance before her benefits restart. The support system she depends on gets dismantled, temporarily or permanently.

This is not a rare edge case. It happens to families all the time, because no one told them there was another way.

What a Special Needs Trust Actually Does

A special needs trust, sometimes called a supplemental needs trust, is a legal structure that holds money for a disabled beneficiary without counting as that person's personal asset under SSI and MassHealth rules. The trust owns the money. Sarah does not. Because she does not own it, it does not disqualify her.

The trust can pay for things her government benefits do not cover: a better wheelchair, a vacation, a computer, music lessons, dental care above the MassHealth cap, transportation, or companion services. It supplements her life without replacing the public benefits that fund her core needs.

Massachusetts law recognizes these trusts, and federal law (42 U.S.C. § 1396p(d)(4)) carves out specific exceptions that protect them from Medicaid disqualification when drafted correctly.

First-Party vs. Third-Party: Know the Difference

These two types of special needs trusts are not interchangeable, and mixing them up is expensive.

A third-party special needs trust is funded with someone else's money. You set it up in your estate plan, and it receives assets from your estate, or gifts from other family members. There is no payback requirement to MassHealth when the beneficiary dies. Whatever is left in the trust passes to whoever you name as remainder beneficiaries, such as siblings or a charity.

A first-party special needs trust (also called a self-settled or (d)(4)(A) trust) is funded with the disabled person's own money, often from a personal injury settlement or an inheritance that arrived the wrong way. To qualify for Medicaid protection, the beneficiary must be under 65, and the trust must include a Medicaid payback provision. That means when Sarah dies, MassHealth gets reimbursed from whatever remains in the trust before any other beneficiary sees a dollar.

If your brother David just won a $300,000 personal injury settlement and he receives SSI, a first-party trust is likely his only path to keeping benefits. If you are planning your estate now, a third-party trust is almost always the right vehicle, and it is far more flexible.

What Massachusetts Trustees Must Do

Running a special needs trust is not like managing a regular savings account. Massachusetts trustees carry real legal duties.

The trustee must not make distributions that replace SSI or MassHealth-covered services, because doing so can trigger a benefit reduction. Cash payments directly to the beneficiary are almost always a mistake. Paying a landlord directly for rent can reduce SSI. The trustee needs to understand what counts as "in-kind support and maintenance" under SSI rules and structure payments to avoid it.

Massachusetts also imposes fiduciary duties on trustees under MGL Chapter 203E, the Massachusetts Uniform Trust Code. The trustee must keep accurate records, act prudently, avoid self-dealing, and account to beneficiaries. For complex trusts, many families hire a professional or corporate trustee, or a nonprofit trust company that specializes in special needs administration.

Naming your other adult child as trustee is fine, but only if they are willing to learn the rules and follow them carefully. An untrained trustee making well-meaning but wrong distributions can jeopardize Sarah's benefits just as surely as an outright inheritance.

The Mistake Hiding in Plain Sight

The most common error I see is the will that leaves equal shares to all children, including the one with a disability. Sometimes the family knows about special needs trusts but assumed the will was good enough. It is not. A will bequest goes directly to the beneficiary unless the document specifically funds a trust instead.

If you have a family member receiving SSI, MassHealth, or any means-tested public benefit, their share of your estate should go into a properly drafted special needs trust, not to them outright. Review any existing will to confirm this. Check beneficiary designations on life insurance and retirement accounts too, because those pass outside the will entirely.

Getting this right is not complicated once you know what to look for. Getting it wrong can take years and a lot of legal fees to undo, if it can be undone at all.