Tennessee Special Needs Trusts: Protect Adults Now

What Is a Special Needs Trust?

A Special Needs Trust is a legal arrangement that holds assets for a person with a disability without those assets being counted as the person’s own resources for certain means-tested benefits, when federal requirements are met and the trust is administered correctly. See the Social Security Administration’s overview of trusts and SSI treatment (SSA, SSI Spotlight on Trusts) and the Medicaid trust exceptions at 42 U.S.C. § 1396p(d)(4).

Why Families Use Special Needs Trusts in Tennessee

Even modest assets or gifts can jeopardize SSI or TennCare/Medicaid eligibility if held outright. An SNT can receive inheritances, gifts, or settlement proceeds and pay for supplemental needs such as therapies, assistive technology, transportation, and education. While many SNT-funded purchases are permitted, cash given directly to the beneficiary and certain support for food or shelter may be treated as income and can reduce SSI payments under the in-kind support and maintenance (ISM) rules (SSA, SSI Income; 20 C.F.R. § 416.1130).

Types of Special Needs Trusts

• First-party (self-settled) SNT: Funded with the beneficiary’s own assets (for example, a settlement or existing savings). To qualify for the Medicaid exception, it must meet federal criteria in 42 U.S.C. § 1396p(d)(4)(A), including a Medicaid payback provision for benefits provided during the beneficiary’s lifetime. Administration is also evaluated under SSA policy (POMS SI 01120.203).
• Third-party SNT: Funded by someone other than the beneficiary (often parents or relatives) during life or through an estate plan. Properly drafted third-party SNTs are generally not subject to Medicaid payback; the donor may direct any remainder at the beneficiary’s death (see SSA, SSI Spotlight on Trusts).
• Pooled SNT: Managed by a nonprofit that maintains separate sub-accounts for each beneficiary while pooling funds for investment and administration. Many Tennessee pooled trusts accept both first-party and third-party funds, but program terms vary. First-party sub-accounts must satisfy § 1396p(d)(4)(C) and applicable SSA guidance (POMS SI 01120.203).

Note: For pooled first-party sub-accounts, federal law allows the nonprofit to retain remaining funds at death or, if not retained, requires Medicaid payback up to the amount of medical assistance paid (POMS SI 01120.203).

Key Legal Features That Help Keep Benefits Intact

• Sole-benefit requirement: Distributions must be for the sole benefit of the beneficiary (see POMS SI 01120.203).
• Avoid direct cash to the beneficiary: Cash payments are generally counted as income for SSI purposes (SSI Income).
• Limit food and shelter support: Paying for food or shelter may reduce monthly SSI under ISM rules (20 C.F.R. § 416.1130; POMS SI 00835.400).
• Use an experienced trustee: Trustees should understand SSI/TennCare resource and income rules and maintain detailed records (SSA Spotlight on Trusts).
• Follow Tennessee law and federal requirements: Tennessee’s trust code governs formation and administration, alongside federal Medicaid/SSI rules (Tennessee Trust Code amendments; TennCare SNT Guidance).

Tennessee Practice Considerations

In Tennessee, first-party SNTs using an adult beneficiary’s assets often arise in settlement or conservatorship contexts. Court approval may be needed depending on the facts and local practice, especially when a conservator is involved or when funding from a personal injury settlement is contemplated. Drafting and administration should align with TennCare’s guidance and current SSA rules (TennCare SNT Guidance; POMS SI 01120.203).

Coordinating SNTs with ABLE Accounts

ABLE accounts can complement an SNT by allowing certain qualified disability expenses to be paid directly from the account without affecting SSI up to program thresholds and subject to federal limits. An SNT can fund an ABLE account as part of a coordinated plan. Confirm current eligibility criteria and contribution limits before funding (SSA, ABLE Spotlight).

Choosing and Supporting the Trustee

• Consider a trusted individual, professional fiduciary, or nonprofit pooled trust administrator.
• Ensure familiarity with SSI/TennCare resource and income rules, including ISM.
• Keep meticulous records and receipts; prepare for agency inquiries and annual reviews.
• Coordinate with benefits counselors before major purchases.
• Engage qualified tax and legal advisors as needed.

What an SNT Can Pay For

• Uncovered medical, dental, and mental health services
• Therapies, habilitative services, and respite care
• Education, job coaching, and vocational supports
• Assistive technology, internet, and communication devices
• Transportation, ride services, and vehicle modifications
• Recreation, travel, camps, and social activities
• Care management and advocacy services

Important: Payments for food or shelter may reduce SSI; plan distributions accordingly (POMS SI 00835.400).

How to Create a Special Needs Trust in Tennessee

• Assess the beneficiary’s benefits, diagnoses, and long-term goals.
• Choose the trust type (first-party, third-party, pooled) that fits the funding source and objectives.
• Draft Tennessee-compliant documents that meet federal SNT requirements.
• Coordinate beneficiary designations, wills, and powers of attorney.
• Establish trustee procedures for distributions and recordkeeping.
• When required, obtain court approval and provide any necessary notices to agencies.
• Fund the trust and align future gifts and estate plans to avoid disqualifying transfers.

Practical Tips

Checklist: Getting Started in Tennessee

Common Pitfalls to Avoid

• Making direct cash distributions to the beneficiary (counts as income for SSI)
• Paying for food or shelter without accounting for potential SSI reduction
• Commingling trust assets with personal funds
• Omitting Medicaid payback language in first-party SNTs
• Failing to update plans after life events or law/policy changes

When Court Approval May Be Required

If the adult beneficiary’s own assets fund the trust, or if a conservatorship or settlement is involved, a Tennessee court may need to approve establishment and funding. Requirements can vary by county and case. Early coordination with counsel helps ensure the trust structure satisfies TennCare and SSA requirements (TennCare SNT Guidance).

FAQ

Will an SNT affect SSI or TennCare eligibility?

When properly drafted and administered, an SNT is generally not a countable resource for SSI and TennCare, but certain distributions can reduce SSI under ISM rules.

Do first-party SNTs require Medicaid payback?

Yes. First-party SNTs must include a Medicaid reimbursement provision for benefits paid during the beneficiary’s lifetime.

Can a third-party SNT keep remainder funds in the family?

Yes. Properly drafted third-party SNTs typically allow the grantor to direct remainder beneficiaries without Medicaid payback.

Should we use an ABLE account with an SNT?

Often. ABLE accounts can handle small, routine expenses while the SNT holds larger funds, subject to contribution limits and program rules.

Do we need court approval?

Possibly, especially for first-party trusts funded from settlements or when a conservator is involved. Local practice varies.

Get Guidance Now

Special Needs Trust planning affects daily life and long-term security. Our Tennessee attorneys draft, fund, and administer SNTs and coordinate with SSI and TennCare requirements. Contact our Tennessee SNT team to discuss your options.

References

• Social Security Administration — SSI Spotlight on Trusts
• Social Security Administration — SSI Income
• Social Security Administration — SSI Spotlight on ABLE Accounts
• Tennessee General Assembly — Public Chapter 470 (Tennessee Trust Code amendments)
• TennCare — Special Needs Trusts
• 42 U.S.C. § 1396p(d)(4)(A)-(C) (Medicaid trust exceptions)
• 20 C.F.R. § 416.1130 (In-kind support and maintenance)
• SSA POMS SI 01120.203 (Trusts — including d(4) trusts and pooled trusts)
• SSA POMS SI 00835.400 (ISM — Value of food or shelter)
• 20 C.F.R. § 416.1201 (What is a resource)

Disclaimer: This blog is for general informational purposes only and is not legal advice. Laws and agency policies change, and outcomes depend on specific facts. Consult a Tennessee attorney about your situation.