When planning for the long-term financial security of a loved one with disabilities, many New Jersey families first hear about special needs trusts (SNTs). Another option may be a separate trust drafted with broader discretionary distribution terms. The real issue is whether the trust is structured to help preserve SSI or Medicaid eligibility, or whether the family wants a trust that gives the trustee more freedom, even if some distributions could affect means-tested benefits. Some families need one approach, some need the other, and some may use more than one trust as part of a broader plan.
At The Matus Law Group, New Jersey special needs trust attorney Christine Matus helps clients evaluate which trust structure is right for their situation, taking the time to understand their family’s goals, financial needs, and long-term care concerns. Our experienced estate planning lawyers serve families throughout Monmouth County and guide them through every step of the process.
This guide explains how discretionary support trusts work, how they compare to special needs trusts under New Jersey law, when each structure may be appropriate, and what benefits and drawbacks families should consider. Call The Matus Law Group at (732) 785-4453 today.
What Is a Discretionary Trust and How Does It Work?
With a discretionary trust, the trustee has discretion over whether, when, and how much to distribute to the beneficiaries named in the trust. The trustee still must follow the trust terms and the settlor’s intent. In other words, the trustee usually does not get to create or choose new beneficiaries; the trust document controls who the beneficiaries are.
What Does “Trustee Discretion” Actually Mean?
Whether a beneficiary can force a distribution depends on the trust terms. In a discretionary trust, the trustee decides whether, when, and how much to distribute. In a mandatory trust, the trust terms require distributions at stated times or under a stated standard.
This distinction matters in special needs planning because beneficiary control over distributions can affect financial stability and, in some cases, benefit eligibility.
What Is a Discretionary Support Trust in New Jersey?
For New Jersey purposes, a “discretionary support trust” is not a fixed legal category that automatically determines how the trust is treated. What matters is how the trust is drafted and administered. A trust may give the trustee discretion to make distributions for a beneficiary’s support needs, but the actual treatment of those assets, particularly for Medicaid or Supplemental Security Income (SSI) purposes, depends on the specific trust language, the source of the funds, and how distributions are made in practice.
What Is a New Jersey Special Needs Trust?
A special needs trust, also called a supplemental needs trust, is designed to help a person with a disability without automatically disqualifying that person from means-tested benefits. Some special needs trusts are funded with the beneficiary’s own assets, while others are funded with someone else’s assets, and the governing rules differ depending on the trust structure.
Who Qualifies for an SNT Under NJ Law?
For a first-party special needs trust intended to preserve SSI eligibility or to qualify for the Medicaid trust exception, the beneficiary must meet the federal disability definition under 42 U.S.C. § 1382c(a)(3). The trust must contain the beneficiary’s own assets, be irrevocable, be for the beneficiary’s sole benefit, be established before the beneficiary reaches age 65, and include Medicaid payback language.
What Is the NJ Medicaid Payback Rule?
A critical distinction is whether the trust is first-party or third-party. A first-party special needs trust is funded with the disabled beneficiary’s own assets. To qualify under 42 U.S.C. § 1396p(d)(4)(A), it must provide that the State receives the amount remaining at the beneficiary’s death, up to the total Medicaid paid on the beneficiary’s behalf.
A third-party special needs trust is funded with someone else’s assets, such as a parent’s or grandparent’s assets, and it does not use the first-party Medicaid payback rule. A discretionary support trust also does not automatically carry first-party Medicaid payback language, but distributions can still affect SSI or Medicaid eligibility depending on how the trust is drafted and administered.
In New Jersey, trustees of first-party SNTs must also submit annual and final accountings. Additionally, they are required to give 45 days’ advance notice to the Division of Medical Assistance and Health Services (DMAHS) before making any single expenditure over $5,000. This notice is also required for any amount that would substantially deplete the trust principal or if the total payments to a single person or entity are expected to exceed $5,000 over a 12-month period.
Key Takeaway: Medicaid payback is a defining feature of a first-party special needs trust funded with the beneficiary’s own assets. That requirement does not apply in the same way to every other trust used in special needs planning.
How Does a Discretionary Support Trust Differ from an SNT?
The choice between a discretionary support trust and a special needs trust depends largely on whether the beneficiary receives or may need means-tested benefits such as SSI or Medicaid.
A special needs trust is often the better fit when preserving eligibility for those benefits is a primary goal. A discretionary support trust may be more appropriate when the beneficiary does not depend on those programs or when the family wants the trustee to have broader discretion over distributions.
Some Monmouth County families use more than one trust. One trust may be drafted to help preserve means-tested benefits, while another may be used for distributions the family wants handled under a different standard. An experienced attorney can help determine whether one or both structures are appropriate for your family’s situation.
Key Takeaway: The main question is whether benefit preservation is central to the plan. If it is, a properly drafted special needs trust is often essential. If it is not, a discretionary support trust may provide greater flexibility.
Special Needs Trust Attorney in Red Bank – The Matus Law Group
Christine Matus, Esq.
Christine Matus has been a New Jersey attorney since 1995 and is the founder of The Matus Law Group, where her practice includes estate planning, real estate, and special needs planning. She graduated from Douglass College, Rutgers University, and earned her J.D. from Touro College, Jacob D. Fuchsberg Law Center.
She has more than two decades of experience in estate and special needs planning. Her professional and community involvement includes leadership roles in organizations such as the Ocean County Bar Association, where she serves as a Board of Trustee member. She has also served as a member of the Board of Directors for MOCEANS, Inc., a center for independent living. Christine also engages in community education, pro bono work, and speaking on estate and special needs planning topics.
When Should an NJ Family Choose a Discretionary Support Trust?
A discretionary support trust is often a strong option when the beneficiary does not receive SSI, Medicaid, or other means-tested benefits, or when the family wants the trustee to have broader discretion in making distributions. When SSI or Medicaid eligibility is part of the planning analysis, however, both the trust structure and the way distributions are made require careful attention.
This type of trust may be appropriate under circumstances such as the following:
- The beneficiary does not receive SSI, Medicaid, or other means-tested government benefits
- The family wants broader distribution flexibility than a first-party SNT usually offers when benefit preservation is the main goal, especially because some distributions can reduce SSI even if the trust itself remains valid
- The family wants the trustee to make distributions that may reduce SSI, especially direct cash payments to the beneficiary or payments for shelter costs such as rent, mortgage, utilities, or property taxes. As of September 30, 2024, SSA no longer counts food as in-kind support and maintenance for SSI purposes, although shelter-related support can still affect SSI in some situations.
- The beneficiary is over age 65, and the family is evaluating a first-party special needs trust under 42 U.S.C. § 1396p(d)(4)(A), because that specific trust type is limited to an individual under age 65
- The family does not want the remaining trust assets subject to Medicaid payback at the beneficiary’s death
Key Takeaway: The key issue is not how much the trust spends, but whether the trust is structured and administered in a way that helps preserve means-tested benefits. If preserving SSI or Medicaid eligibility is a priority, a properly drafted special needs trust may be important. If not, a discretionary support trust may offer greater flexibility.
How Do You Set Up and Fund a Discretionary Support Trust in NJ?
Creating a discretionary support trust in New Jersey begins with a grantor working with an attorney to draft the trust document, which sets the terms, names the trustee, and defines the beneficiaries. The trust language gives the trustee authority to decide how and when distributions are made, usually based on the needs of the beneficiaries.
Once established, the trust must be funded by transferring assets into the trust’s name. This can include cash, investments, real estate, or business interests. The grantor may transfer property during their lifetime or arrange for assets to flow into the trust through their will or other estate planning tools.
The trustee is then responsible for managing assets, making investment decisions, and distributing support according to the trust terms. Because the trustee has discretion, they can adapt distributions over time to meet the beneficiary’s evolving needs.
Who Should Serve as Trustee of a Discretionary Support Trust?
Choosing the right trustee is an important part of the planning process. Families generally have two options: a professional trustee or a family member. A professional trustee, such as a bank trust department or a licensed fiduciary, brings experience with investment management, tax compliance, and legal requirements. A family member may have a closer relationship with the beneficiary and a better understanding of their daily needs.
Some families appoint both: a professional trustee to handle financial management and a family member as a trust advisor or co-trustee to provide input on the beneficiary’s personal needs. When choosing a trustee, consider the following:
- Does the person understand the beneficiary’s needs and goals?
- Can they manage investments and distributions over a long time period?
- Are they willing to serve for the life of the trust?
- Do they understand the legal responsibilities of a trustee under New Jersey law?
What Are the Benefits of a Discretionary Support Trust?
A separately drafted discretionary trust may offer advantages in some cases, particularly when the beneficiary does not depend on means-tested benefits or when the family wants more flexibility in distributions. The trust document can define the trustee’s authority and distribution standards, but the way distributions are written and made still matters for benefit purposes.
The key benefits include the following advantages for eligible families and their beneficiaries:
- No automatic first-party Medicaid payback rule: unlike a first-party special needs trust funded with the beneficiary’s own assets, a discretionary support trust does not automatically include the statutory Medicaid payback requirement.
- Flexible distributions: the trustee may have more room to make distributions for shelter or direct support, but those distributions can still affect SSI or Medicaid, depending on how the trust is drafted and administered
- No DMAHS SNT reporting requirement: In New Jersey, first-party SNTs monitored by the Division of Medical Assistance and Health Services (DMAHS) generally require annual and final accountings and notice of certain expenditures. A discretionary support trust that is not an SNT is not subject to those specific DMAHS reporting rules, depending on its structure
- No age restrictions: A discretionary support trust does not carry the age-65 rule that applies to first-party special needs trusts funded with the beneficiary’s own assets. That age rule does not describe every special needs trust, because third-party special needs trusts are different
- Broader beneficiary eligibility: The beneficiary does not need to meet the SSA disability standard
- Benefit-eligibility protection: When the beneficiary does not own the trust assets outright, a properly structured trust may help keep those assets from being counted for programs with asset limits.
What Are the Downsides of a Discretionary Support Trust?
A discretionary support trust can offer flexibility, but it also comes with tradeoffs families should understand. Issues involving administration, family dynamics, cost, and tax planning may all affect whether this type of trust is the right fit.
- Administrative Burden: A discretionary support trust can require significant ongoing oversight. A trustee may need to manage investments, keep records, evaluate distribution requests, and work through legal and tax responsibilities over time. For a family member serving as trustee, these duties can become difficult without professional guidance.
- Potential Family Tension: Because distributions are left to the trustee’s judgment, disagreements can arise over what is fair or appropriate. One beneficiary may receive more support than another, or family members may disagree about how trust funds should be used. That can create resentment and strain relationships.
- Reduced Direct Control: Although the settlor can provide guidance in the trust document, the trustee still has broad discretion under the trust’s terms in making decisions.
- Ongoing Costs: Professional trustee fees, legal fees, tax preparation costs, and other administrative expenses can reduce the amount ultimately available for beneficiaries. Families should understand these potential expenses before creating and funding the trust.
- Tax Considerations: Trust income can create tax issues for the trust, the trustee, or the beneficiary, depending on how the trust is structured and administered. Careful planning is important to help avoid unintended tax consequences.
| Downside | Why It Matters | Example |
|---|---|---|
| Administrative Burden | The trustee may need to manage legal, tax, investment, and distribution responsibilities over many years | A family member serving as trustee may need outside legal or tax guidance |
| Potential Family Tension | Because distributions are discretionary, beneficiaries may disagree about what is fair | One beneficiary receives more support than another, leading to resentment |
| Reduced Direct Control | The grantor can set standards, but the trustee still has broad judgment in making distributions | The trustee prioritizes healthcare expenses over other requested uses of trust funds |
| Ongoing Costs | Professional trustee fees, legal fees, and tax preparation costs can reduce the amount available for beneficiaries | A family hires outside professionals to help administer the trust each year |
| Tax Considerations | Trust income can trigger tax issues that require careful planning and administration | Investment income inside the trust may require annual tax reporting and planning |
Red Bank Special Needs Trust Legal Guidance
Choosing the right trust for a loved one with special needs requires careful planning. Some families may benefit from a special needs trust, while others may be better served by a discretionary support trust or a combination of both, depending on their goals and the beneficiary’s circumstances.
Christine Matus has helped New Jersey families plan for the long-term care of loved ones with special needs since 1995. Our experienced New Jersey special needs trust attorneys work closely with clients to identify appropriate trust options and provide clear guidance on structuring their plan.
Call The Matus Law Group at (732) 785-4453 or visit our office at 125 Half Mile Rd #201A, Red Bank, NJ 07701 to learn more about how we can help you. We serve families throughout Monmouth County and New Jersey.
Frequently Asked Questions
Can a discretionary support trust be used alongside a special needs trust?
Yes. Some families use both, with one trust structured for benefit preservation and another used for broader discretionary distributions.
Does a discretionary support trust affect SSI or Medicaid eligibility in NJ?
It can. The effect depends on the trust terms, the source of the trust assets, and how distributions are made.
What happens to a discretionary support trust when the beneficiary dies?
Remaining assets pass according to the trust terms. Unlike a first-party special needs trust funded with the beneficiary’s own assets, a discretionary support trust does not automatically require Medicaid payback.
Can a trustee refuse to make a distribution from a discretionary support trust?
Yes. The defining feature of a discretionary trust is that the trustee has the authority to approve or deny distribution requests. The beneficiary cannot compel the trustee to make a distribution, which is why selecting a trustworthy and capable trustee is essential.
Is a discretionary support trust irrevocable in New Jersey?
It depends on how the trust is drafted. A discretionary support trust can be revocable or irrevocable. A first-party special needs trust funded with the beneficiary’s own assets is generally drafted as irrevocable for Medicaid and SSI purposes. A third-party special needs trust is different and may be revocable or irrevocable depending on how it is created.
How much does it cost to set up a discretionary support trust in NJ?
Costs vary depending on the trust’s structure, the assets involved, and attorney fees.
What assets can be placed into a discretionary support trust?
A discretionary support trust may hold cash, investments, real estate, business interests, and other property, depending on the family’s planning goals.
