Special Needs Trusts in Delaware

A Comprehensive Summary
Updated April 2026

A Special Needs Trust (SNT) is a legally established fiduciary arrangement that holds and manages assets on behalf of a person with a physical or mental disability, chronic illness, or other qualifying impairment, without disqualifying the beneficiary from means-tested government benefit programs. In Delaware, the two most critical programs at stake are Medicaid, administered by the Delaware Division of Medicaid and Medical Assistance (DMMA) within the Department of Health and Social Services (DHSS), and Supplemental Security Income (SSI), a federal program administered by the Social Security Administration. The fundamental purpose of an SNT is to supplement — not replace — these public benefits by funding goods and services that government programs do not cover, thereby enhancing the beneficiary’s quality of life and financial security.

Delaware SNT law is grounded in federal authority — principally 42 U.S.C. § 1396p(d)(4) of the Social Security Act and the Special Needs Trust Fairness Act of 2016 — as well as Delaware’s own trust law framework. Delaware is nationally recognized as one of the most trust-friendly jurisdictions in the United States, offering a sophisticated statutory environment under the Delaware Trust Act (12 Del. C. §§ 3301 et seq.) and the Delaware Uniform Trust Code. Delaware’s trust laws are regularly updated by the legislature to maintain the state’s competitive position as a premier trust situs, and these favorable laws — including provisions for directed trusts, perpetual trusts, and asset protection trusts — can be leveraged advantageously in SNT planning. When properly structured and administered, an SNT is excluded from the beneficiary’s countable resources for both SSI and Medicaid eligibility purposes.

Types of Special Needs Trusts

First-Party (Self-Settled) Special Needs Trusts — (d)(4)(A) Trusts

A first-party SNT is funded with assets belonging to the beneficiary, such as proceeds from a personal injury settlement, a direct inheritance, a divorce property award, or accumulated personal savings. Under 42 U.S.C. § 1396p(d)(4)(A) and applicable Delaware Medicaid regulations, a valid first-party SNT must satisfy the following requirements:

• • The beneficiary must be under age 65 at the time the trust is established and initially funded with the beneficiary’s own assets.
• • The beneficiary must have a disability as defined under the Social Security Act (42 U.S.C. § 1382c(a)(3)).
• • The trust must be established by the individual (permitted since the Special Needs Trust Fairness Act of 2016), a parent, grandparent, legal guardian, or a court of competent jurisdiction.
• • The trust must include a Medicaid payback provision directing that upon the beneficiary’s death, remaining trust assets first reimburse the State of Delaware (and any other state that provided Medicaid) for the total cost of medical assistance furnished during the beneficiary’s lifetime, before any distribution to other heirs or remainder beneficiaries.

Delaware DMMA reviews first-party SNT instruments for Medicaid compliance. Practitioners are strongly advised to submit the proposed trust document to DMMA prior to funding to confirm its acceptance as an excluded resource. Delaware courts — including the Court of Chancery, which has broad equitable jurisdiction over trusts — may be petitioned to establish an SNT on behalf of an incapacitated beneficiary, particularly in the context of approving personal injury settlements.

Third-Party Special Needs Trusts

A third-party SNT is funded exclusively with assets belonging to someone other than the beneficiary — most commonly a parent, grandparent, sibling, or other family member or friend. Because no assets of the beneficiary are used to fund the trust, there is no Medicaid payback obligation upon the beneficiary’s death, and remaining trust assets may pass to other designated beneficiaries or charitable organizations as specified in the trust instrument. Third-party SNTs may be established as inter vivos (living) trusts or as testamentary trusts under a Delaware Last Will and Testament. There is no age restriction on the beneficiary. Delaware’s trust-friendly legal environment — including the availability of directed trust structures, the ability to designate a trust protector, and the absence of a rule against perpetuities — makes the state a particularly advantageous situs for third-party SNTs intended to last for the beneficiary’s lifetime.

Pooled Special Needs Trusts — (d)(4)(C) Trusts

Pooled trusts are established and administered by nonprofit organizations that pool assets from multiple beneficiaries for investment purposes while maintaining separate sub-accounts for each individual. Delaware beneficiaries have access to pooled trust programs offered by regional and national nonprofit administrators. Pooled trusts are appropriate for beneficiaries whose assets are insufficient to justify the cost of an individually administered trust, or where no suitable individual trustee is available. For self-settled sub-accounts funded with the beneficiary’s own assets, Medicaid payback applies to amounts not retained by the nonprofit organization upon the beneficiary’s death. Beneficiaries age 65 or older may face Medicaid transfer-of-assets scrutiny when funding a self-settled pooled trust sub-account, though exceptions may apply.

Requirements for Legal Compliance

To be recognized as a valid SNT under Delaware and federal law, the trust instrument and its ongoing administration must satisfy each of the following requirements:

• • Disability Qualification: The beneficiary must meet the SSA definition of disability for first-party trusts, or the trust document must clearly identify the beneficiary’s disabling condition and restrict distributions to supplemental purposes for third-party trusts.
• • Authorized Establishment: First-party trusts must be created by the individual, a parent, grandparent, legal guardian, or a Delaware court. Delaware’s Court of Chancery has broad jurisdiction to establish and supervise trusts, including SNTs created in the context of approving settlements for minors and disabled persons.
• • Sole Benefit Requirement: All expenditures from a first-party SNT during the beneficiary’s lifetime must be made for the sole benefit of the disabled beneficiary. Distributions that benefit third parties may jeopardize the trust’s exempt status under Medicaid rules.
• • Medicaid Payback Clause: First-party trusts must contain an explicit payback provision naming Delaware DMMA as a priority remainder beneficiary to the extent of Medicaid expenditures. This provision is strictly enforced and must be precisely worded.
• • DMMA Notification and Review: Delaware Medicaid practice requires that the trust instrument be submitted to DMMA and that the local Division of Social Services be notified when a first-party SNT is established on behalf of a current or prospective Medicaid recipient.
• • Supplemental Purpose Language: The trust should contain clear language stating that distributions are intended to supplement, not supplant, government benefits, and that the trustee must take into account the availability of public benefits before making any distribution.
• • Fully Discretionary Distributions: The trust must vest the trustee — not the beneficiary — with sole and absolute discretion over distributions. Any legally enforceable right of the beneficiary to compel a distribution may cause trust assets to be treated as a countable resource for SSI purposes.
• • Spendthrift Provision: The trust must prohibit the beneficiary from assigning, pledging, or encumbering any interest in the trust corpus or income. Delaware’s trust statutes provide robust support for spendthrift provisions under 12 Del. C. § 3536.
• • Trustee Competency and Recordkeeping: The trustee must maintain comprehensive records of all receipts, disbursements, and investment activity and must be prepared to provide accountings to DMMA upon request and to the Court of Chancery if required.

Limitations on Disbursements

The trustee holds broad but carefully bounded discretionary authority over distributions. SSI income rules and Delaware Medicaid regulations impose specific constraints on how trust funds may be spent. The governing principle is that every distribution must supplement, not supplant, government benefits. Improper distributions can reduce or terminate SSI and Medicaid eligibility, sometimes retroactively, and may expose the trustee to personal liability for breach of fiduciary duty under Delaware’s strict fiduciary standards.

Prohibited or Restricted Distributions

• • Direct Cash Payments: Any cash paid directly to the beneficiary constitutes unearned income under SSI rules and reduces the SSI benefit dollar-for-dollar. Trustees must always pay vendors, service providers, and contractors directly on behalf of the beneficiary.
• • Food and Shelter — In-Kind Support and Maintenance (ISM): Payments made directly for the beneficiary’s food, rent, mortgage, property taxes, heating fuel, gas, electricity, water, or sewer service constitute In-Kind Support and Maintenance under SSI regulations and can reduce the monthly SSI benefit by up to one-third of the federal benefit rate plus $20. Delaware trustees should obtain a benefits analysis from a qualified benefits counselor before authorizing any such payments.
• • Purchases Creating Countable Resources: Acquiring assets titled in the beneficiary’s name — savings or checking accounts, brokerage accounts, or non-exempt real property — can generate countable resources that jeopardize SSI and Medicaid eligibility. Trust-purchased assets should be titled in the name of the trust.
• • Post-Age-65 Contributions to First-Party Trusts: Adding assets belonging to the beneficiary to a self-settled SNT after the beneficiary reaches age 65 constitutes a disqualifying transfer for Delaware Medicaid purposes and may result in a penalty period of ineligibility.

B. Permissible Distributions

Trustees should concentrate disbursements on goods and services not covered by Medicaid or other public benefit programs, including but not limited to:

• • Education, continuing education, vocational training, tutoring, and job coaching
• • Recreation, travel, entertainment, cultural experiences, and hobby supplies
• • Transportation, including vehicle purchase, insurance, fuel, maintenance, and accessibility modifications
• • Personal care items, clothing, electronics, computers, and household furnishings
• • Medical, dental, vision, psychiatric, and therapeutic costs not covered by Medicaid
• • Assistive technology, communication devices, and adaptive or accessibility equipment
• • Private home care, companion services, and care management beyond publicly funded hours
• • Legal fees, financial planning, benefits counseling, care coordination, and trust administration expenses

1. Recommended Guidance: Separating the Roles of Trustee and Claims Administrator

One of the most consequential structural decisions in designing and administering a Special Needs Trust is whether to vest all responsibilities in a single trustee or to separate the fiduciary role of trustee from the operational role of claims administrator. This summary strongly endorses the division of these two roles as a matter of best practice, and sets forth the rationale and practical framework for doing so.

Defining the Two Roles

The Trustee holds legal title to the trust assets, exercises fiduciary oversight, makes investment decisions, and bears ultimate responsibility for compliance with the trust instrument and applicable law. The trustee may be an individual (such as a family member) or a corporate fiduciary such as a bank or trust company.

The Claims Administrator (sometimes called a Benefits Coordinator or Trust Advisor) manages the day-to-day operational functions of the trust: reviewing and processing distribution requests, verifying that proposed expenditures are permissible under public benefit rules, coordinating with government agencies, and maintaining records. This role requires specialized knowledge of Medicaid, SSI, and other benefit programs rather than financial or investment expertise.

The Case for Separation

The consolidation of fiduciary and administrative functions in a single trustee creates significant risks. A family member serving as sole trustee may be highly attuned to the beneficiary’s needs but lack the technical expertise required to navigate benefit program rules, resulting in inadvertent distributions that compromise eligibility. Conversely, a corporate trustee with investment sophistication may be ill-equipped to handle the rapid, individualized decision-making that benefit administration demands.

Separating these roles offers the following concrete advantages:

• • Specialization: The claims administrator can develop deep, current expertise in SSI, Medicaid, and related benefit programs, reducing the risk of impermissible distributions.
• • Responsiveness: Administrative decisions—such as approval of a distribution request—can be made more quickly by a dedicated administrator without requiring full trustee deliberation.
• • Accountability and Oversight: Separation creates a natural system of checks, with the trustee reviewing administrator recommendations and retaining ultimate authority over trust assets.
• • Family Involvement: Where a family member serves as trustee, separation allows them to maintain meaningful oversight and relational connection to the beneficiary without bearing administrative burdens beyond their expertise.
• • Conflict Reduction: A neutral claims administrator can serve as a buffer in emotionally complex family situations, making benefit-related decisions on objective grounds.

Structural Recommendations

When drafting an SNT intended to utilize a split-role structure, the trust instrument should expressly define the authority and limitations of both the trustee and the claims administrator, establish a clear process for communication and dispute resolution between the two roles, specify which decisions require joint approval and which fall within the exclusive domain of each role, and provide a mechanism for replacing either party without disrupting trust operations.

Ideally, the claims administrator should be a qualified professional—such as Medical Fund Advisors, who have over 100 years of combined claims, medical, financial and legal expertise ensures that medical costs are paid appropriately and expediently.

Ancillary Issues

Delaware as a Trust Situs — Unique Advantages

Delaware’s national reputation as a premier trust jurisdiction offers distinctive advantages for SNT planning. The Delaware Trust Act permits directed trusts, allowing the settlor to separate investment management from distribution authority by appointing an investment advisor or distribution advisor alongside the trustee — a structure well-suited for SNTs where family members may wish to guide distributions while a corporate trustee manages investments. Delaware also permits trust protectors, who may hold broad powers to modify trust terms, replace trustees, or adapt the trust to changes in law or the beneficiary’s circumstances over time. Delaware has abolished the rule against perpetuities for most trusts, allowing an SNT to be drafted to continue in perpetuity if appropriate. These structural options are unavailable or more limited in most other states.

Delaware Court of Chancery

Delaware’s Court of Chancery is one of the most respected trust and equity courts in the nation, with a dedicated judiciary experienced in complex fiduciary matters. The Court of Chancery has jurisdiction over trust administration disputes, trustee removal and replacement, accounting proceedings, and petitions to modify or terminate trusts. For SNTs involving settlement proceeds on behalf of minors or incapacitated persons, court approval is required and is handled through the Court of Chancery or Superior Court. The Court’s sophistication and efficiency are additional advantages of Delaware as an SNT situs.

Estate Planning Coordination

Comprehensive estate planning for Delaware families with a disabled member must ensure that no assets pass outright to a beneficiary receiving SSI or Medicaid. Wills, revocable trusts, life insurance beneficiary designations, retirement account beneficiary designations, and transfer-on-death accounts should all be coordinated to direct assets into a third-party SNT. Delaware does not impose a state estate tax or inheritance tax, which simplifies planning compared to neighboring states such as Pennsylvania, New Jersey, New York, and Maryland, all of which impose one or both. This tax advantage makes Delaware an attractive domicile and trust situs for families engaged in multi-generational disability planning.

ABLE Accounts

Delaware participates in the federal ABLE Act program through the Delaware ABLE program administered by the Office of the State Treasurer. ABLE accounts allow individuals whose disability onset occurred before age 26 to save and invest funds without affecting SSI or Medicaid eligibility, subject to annual contribution limits (up to $19,000 in 2024) and a total account balance cap. Delaware ABLE accounts can complement an SNT by offering the beneficiary more direct and flexible access to funds for qualified disability expenses including education, housing, transportation, and health care. Careful coordination between the ABLE account balance and the SSI resource limit is necessary to avoid inadvertent benefit reductions.

Tax Considerations

First-party SNTs are typically classified as grantor trusts for federal income tax purposes, with income taxed to the beneficiary at individual rates. Third-party SNTs may be grantor or non-grantor trusts depending on how they are structured. Non-grantor trusts reach the highest federal income tax brackets at very low income thresholds, making tax-efficient trust investment critical. Delaware imposes no state income tax on non-resident trusts — a significant advantage for SNTs with out-of-state beneficiaries administered by a Delaware trustee — though Delaware resident trusts and resident beneficiaries remain subject to Delaware’s income tax. Trustees should retain tax professionals with expertise in both federal and Delaware trust taxation.

Coordination with Delaware State Benefit Programs

Beyond SSI and Medicaid, Delaware SNT beneficiaries may receive services through the Division of Developmental Disabilities Services (DDDS), the Division of Substance Abuse and Mental Health (DSAMH), the Housing Choice Voucher program, veterans’ benefits, and other state and local assistance programs. Each program maintains its own income and resource counting rules that may differ from SSI and Medicaid standards. Trustees and families should conduct a thorough benefits analysis before authorizing any significant distribution and should strongly consider retaining a Delaware elder law or disability planning attorney and a Certified Special Needs Planner (CSNP) to navigate this complex and evolving regulatory environment.

Disclaimer

This document is provided for general informational purposes only and does not constitute legal advice. Special needs trust law involves complex and frequently changing interactions between federal and Delaware state law. Individuals should consult a qualified Delaware elder law or disability planning attorney before establishing or administering a Special Needs Trust.