Special Needs Trusts in Tennessee

A Special Needs Trust (SNT) is one of the most powerful legal tools for accomplishing these goals. This post explains what SNTs are, how they work in Tennessee, the different types, key elements, and why you should consult a Tennessee probate / trust & elder law attorney when setting one up.

What Is a Special Needs Trust?

A Special Needs Trust is a legal arrangement (a trust) set up to hold and manage assets for an individual with disabilities, in such a way that the assets in the trust do not disqualify the beneficiary from receiving means‐tested public benefits (such as SSI—Supplemental Security Income—and Medicaid / TennCare). The trust funds are used for supplemental, non‐basic needs (above and beyond what public benefits cover), enhancing quality of life but not replacing fundamental benefits.

Why They Matter in Tennessee

Tennessee uses TennCare for Medicaid and has SSI eligibility rules similar to the federal framework. Mistakes or poorly drafted trusts can cause loss of eligibility.
For people with disabilities, government benefits may cover essential medical care, long‐term care, housing assistance, etc. But many things families want to provide (education, recreation, assistive technology, therapists outside what TennCare covers, travel, enhanced care) may not be fully paid by public programs.
Assets received by the disabled individual—inheritances, settlements, savings—if held outright, are almost always considered in determining eligibility for SSI / TennCare.

Because of this, correctly structuring a Special Needs Trust, selecting the right type, trustee, and trust language is critical.

Types of Special Needs Trusts in Tennessee

Here are the main types of SNTs, and how they apply/are treated under Tennessee law:

Type	Funded By	Who Establishes It	Key Features & Key Constraints in Tennessee
First-Party (Self-Settled) Special Needs Trust	The beneficiary’s own assets (inheritance, personal injury settlement, savings)	Parent, grandparent, legal guardian, or by court	Must be irrevocable; upon the beneficiary’s death, remaining assets typically must repay TennCare for medical benefits provided. Also must satisfy federal & state rules for being exempt from countable assets. Tennessee may have specific requirements (e.g. that trust be established before certain events).
Third-Party Special Needs Trust	Assets belonging to someone other than the beneficiary (parents, family, friends)	Usually by the benefactor (family member) as part of estate plan	More flexible: no Medicaid payback requirement in many cases; grantor can decide who gets any leftover funds when beneficiary passes away; ideal for long‐term support beyond what public benefits provide. Must be drafted so trust assets are not considered as the beneficiary’s assets.
Pooled Special Needs Trust	Separate accounts pooled and managed by a nonprofit entity	The nonprofit organization owns the master trust; beneficiary has separate subaccount	Beneficiary gets professional management; usually less administrative burden for families; Tennessee allows these and they may have Medicaid reimbursement or payback provisions depending on how they are set up.

Key Elements of an Effective Special Needs Trust in Tennessee

To ensure a trust both protects the loved one and remains valid under Tennessee & federal law, the trust should include certain essential provisions and be structured carefully. Here are the critical elements:

Irrevocability (for certain types)
- First‐party trusts must generally be irrevocable. Once funded, the assets cannot be changed in a way that gives them directly back to the beneficiary.
Proper Trust Language to Preserve Benefit Eligibility
- Trust language must make it clear that the funds are for supplemental needs only, not daily support covered by SSI / TennCare.
- The beneficiary should not have direct control over the funds or ability to demand payment. Distributions must be at the discretion of the trustee.
- Include provisions required by federal law (for example, specifying that the trust is intended to meet the requirements under 42 U.S.C. § 1396p(d)(4)(A)/(B) for first-party trusts) and Tennessee statutes/regulations
Trustee Selection
- The trustee must understand both the special needs of the beneficiary and the rules of public benefit programs in Tennessee.
- A trusted family member or friend may serve, but professional or corporate trustees can provide more experience, neutrality, and continuity.
- Trustee must maintain accurate records and account for all distributions; avoid distributions that would be considered income or a countable asset.
Funding the Trust
- Determine what assets and how much funding is appropriate.
- Source matters: whether assets are from the beneficiary themselves (first-party), or from third parties.
- Be careful about overfunding in situations where certain thresholds might trigger loss of benefits. Likewise underfunding may leave the beneficiary without sufficient support.
Distributions / Use of Funds
- The funds must be used for goods, services, or enhancements that do not displace government assistance (e.g. paying for things that TennCare or SSI already cover).
- Examples: assistive technology, therapies, transportation, recreational activities, certain personal comfort items, education or job training.
- Trustee needs discretion, judgment, and good documentation.
Medicaid / TennCare Payback Provisions (for First‐Party and Some Pooled Trusts)
- In first‐party SNTs, upon the death of the beneficiary, remaining assets often must be used to reimburse TennCare for medical benefits provided.
- Tennessee rules will affect how, when, and how much is repaid.
Periodic Review and Updating
- Laws change. Benefit eligibility thresholds, SSI/TennCare rules, tax laws and estate/wills/trusts laws may shift.
- Beneficiary’s needs (medical, educational, housing) will change over time. The trust should be reviewed regularly to make sure it is still sufficient and properly structured.

Common Pitfalls & What to Watch Out For

Using the wrong type of trust: For instance, using a revocable trust that doesn’t protect assets for SSI/TennCare.
Poor choice of trustee: A trustee without experience or understanding of benefit rules may make distributions that trigger loss of eligibility.
Bad trust language: If language is vague or allows beneficiary direct access or gives them power over trust funds, the trust may fail to be recognized as exempt.
Failing to consider all sources of benefits: E.g. TennCare, SSI, possibly Social Security Disability, housing assistance, etc. Must plan so that the SNT supplements these but doesn’t violate their rules.
Not accounting for payback requirements: Especially in first-party and pooled trusts—if you don’t plan properly, beneficiaries may lose a lot of what remains after death.

Not adjusting for future changes: Benefit laws, regulations, or the situation of the beneficiary could change; what was valid years ago may no longer be sufficient.

Steps to Establishing a Special Needs Trust in Tennessee

Here is a roadmap to help you get started:

Assess the beneficiary’s current situation.
Understand what benefits they already get or expect to get (SSI, TennCare, SSDI, HUD, etc.), their medical, educational, housing, and personal needs.
Determine which type of SNT is appropriate.
Select a trustee.
Draft trust document.
Engage an attorney familiar with Tennessee law and benefit eligibility criteria to ensure the document contains required provisions, payback language, and preserves eligibility.
Fund the trust.
Implement and administer.
Trustee manages distributions, keeps records, works with the beneficiary’s other professionals (therapists, case managers, social workers, etc.).
Regularly review.

How a Tennessee Probate / Elder Law Attorney Can Help

At TN Probate Lawyer, we have deep experience handling trusts, estate planning, and probate issues in Tennessee. Here’s how we can help:

Explain the difference between SNT types and which fits your family’s goals.
Draft the trust in compliance with federal law and Tennessee law (statutes, case law, TennCare / state administrative rules).
Advise on the choice of trustee, funding strategy, distribution provisions.
Coordinate with other parts of your estate plan (wills, durable power of attorney, guardianship if needed).
Keep you updated on changes in laws/regulations that affect eligibility for public benefits or trust requirements.

Conclusion

A Special Needs Trust isn’t just a financial tool; it’s a way to provide peace of mind, dignity, and enhanced quality of life for a loved one with disabilities. In Tennessee, with its specific rules governing TennCare, SSI, Medicaid eligibility, and probate/trust law, getting the structure right from the start is essential. If you want to ensure your loved one is protected, their benefits preserved, and their future more secure, now is the time to plan.

Special Needs Trusts: Protecting a Loved One with Disabilities

Jana Lamanna

Share:

What Is a Special Needs Trust?

Why They Matter in Tennessee

Types of Special Needs Trusts in Tennessee

Key Elements of an Effective Special Needs Trust in Tennessee

Common Pitfalls & What to Watch Out For

Steps to Establishing a Special Needs Trust in Tennessee

How a Tennessee Probate / Elder Law Attorney Can Help

Conclusion

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Black McLaren Jones Ryland & Griffee, P.C.

Attorneys Licensed in Tennessee, Mississippi, Arkansas, Missouri, & New York