Special needs trusts in New Jersey: first-party, third-party and ABLE

Why families use special needs trusts

Medicaid and SSI are means-tested, so a person with a disability can lose them by having too much money in their own name. An inheritance, a lawsuit settlement or even a well-meaning gift from a grandparent can cause problems. A special needs trust (also called a supplemental needs trust) holds the money for the person's benefit so it supplements, rather than replaces, government benefits.

The trustee, not the beneficiary, controls the money and pays for things that improve quality of life. How the trust is set up depends on one key question: whose money is going into it?

First-party (self-settled) special needs trusts

A first-party trust holds the disabled person's own assets, such as a personal injury settlement, back child support or an inheritance that was left to them outright. Federal law (42 U.S.C. 1396p(d)(4)(A)) allows this kind of trust for a person under 65 who is disabled, and it can be set up by the individual, a parent, a grandparent, a legal guardian or a court.

New Jersey's Division of Medical Assistance and Health Services (DMAHS) adds its own requirements under N.J.A.C. 10:71-4.11. The trust must be irrevocable and for the sole benefit of the beneficiary, and all deposits must be made before the beneficiary turns 65. The trust documents and annual accountings must be disclosed to the eligibility agency and to DMAHS's Beneficiary Administrative Action Unit. The trustee must give DMAHS 45 days' notice before any expenditure over $5,000 (a single payment or the expected total to one payee in 12 months) or any spending that would substantially deplete the trust.

If a personal injury recovery funds the trust, DMAHS says Medicaid must be repaid for the related injury costs before the trust is established.

Medicaid payback

The trade-off for a first-party trust is payback. When the beneficiary dies, New Jersey is the first remainder beneficiary, up to the total Medicaid benefits paid during the beneficiary's lifetime. According to DMAHS, only allowable administrative costs come first, and the state's claim must be paid before funeral costs. Some families plan funeral arrangements in advance for this reason.

Pooled trusts, authorized by 42 U.S.C. 1396p(d)(4)(C), are run by nonprofits that keep separate accounts for many beneficiaries. The federal statute sets no age limit, but one New Jersey elder law firm notes that transfers into a pooled trust by someone over 65 face a transfer penalty, so age matters here too. Remaining funds that the nonprofit does not keep for its pool are used to repay Medicaid.

Third-party special needs trusts

A third-party trust holds money that belongs to someone else, usually parents or grandparents, for the benefit of a person with a disability. It is often written into a will or living trust so a child's inheritance flows into the trust instead of to the child directly.

Because the money never belonged to the beneficiary, a properly drafted third-party trust generally has no Medicaid payback requirement. When the beneficiary dies, whatever is left can go to siblings or other people the parents choose. Other relatives can also name the trust as a beneficiary of life insurance or retirement accounts. For many families, this is the single most important estate planning step for a child with special needs.

What a first-party trust can pay for

DMAHS describes the purpose of a first-party trust as supplementing, not replacing, impairing or diminishing, other government benefits. The trustee can pay for the beneficiary's special needs and reasonable trustee fees allowed under New Jersey law and the trust terms. For medical care, DMAHS expects the trustee to look first to the beneficiary's Medicaid managed care plan and any other health insurance before using trust money.

Cash given directly to the beneficiary counts as unearned income, which can reduce benefits, so trustees usually pay providers and vendors directly. When there is doubt about an expense, the 45-day advance notice rule for larger expenditures gives DMAHS a chance to object before the money is spent, which protects both the trustee and the beneficiary.

NJ ABLE accounts

An ABLE account is a tax-advantaged savings account for people with disabilities. New Jersey's program, NJ ABLE, is run through the Division of Disability Services. Starting in 2026, it is open to people whose disability began before age 46 and who qualify for SSI or SSDI based on disability, are blind, or have a similarly severe disability documented by a physician.

For 2026, NJ ABLE allows contributions of up to $20,000 a year, with a $305,000 account cap. Working beneficiaries may be able to contribute more under the ABLE to Work rules. The first $100,000 is not counted for SSI. If the balance goes over $100,000, SSI cash benefits are suspended but Medicaid continues. HUD also disregards ABLE balances for housing subsidies. Money can be spent on a broad range of qualified disability expenses, including housing, education, transportation and assistive technology.

ABLE accounts also have a Medicaid payback at death: DMAHS can recover remaining funds up to Medicaid paid after the account was opened, once qualified expenses, including funeral costs, are paid. Many families use an ABLE account alongside a trust, not instead of one.

Common mistakes to avoid

A few errors come up again and again in special needs planning.

• Leaving an inheritance directly to a disabled child, which can end their benefits
• Leaving money to a sibling with an informal promise to take care of the child
• Trustees handing cash to an SSI recipient, which can reduce benefits
• Missing DMAHS notice or annual accounting requirements on a first-party trust
• Not updating beneficiary designations on life insurance and retirement accounts