Special Needs Trusts in Arizona: Preserving Benefits

Summary: In Arizona, a properly drafted special needs trust (SNT) can hold assets for a person with a disability without counting them as that person’s own resources. This helps preserve eligibility for means-tested benefits like SSI and Medicaid (AHCCCS/ALTCS). Under federal law, a first-party trust must include a Medicaid payback clause so the state can recover costs after the beneficiary’s death. Arizona recognizes “special treatment trusts” (STTs) for ALTCS if the trust meets detailed requirements for remainder beneficiaries, trustee discretion, and reporting. (AHCCCS Policy 803)

Why Use a Special Needs Trust in Arizona
Legal Framework & Key Rules
Types of Special Needs Trusts
How a Trustee Should Make Distributions
Essential Drafting Features
Common Mistakes to Avoid
When You Need a Lawyer
Key Takeaways
FAQ

1. Why Use a Special Needs Trust in Arizona

Programs like SSI, AHCCCS, and ALTCS limit how much cash or assets a person with a disability can have. If they inherit money or receive a settlement, it can push them over the limit and cause a loss of benefits. A special needs trust allows those funds to be held for their benefit—without counting toward those limits—while still covering supplemental needs like therapy, equipment, or education.

2. Legal Framework & Key Rules

Arizona Special Treatment Trusts (STTs)

Arizona’s Medicaid agency (AHCCCS) allows “Special Treatment Trusts” that are excluded from ALTCS resource counts if they meet strict requirements, such as naming AHCCCS as a remainder beneficiary and limiting distributions to allowed expenses. (AHCCCS Policy 803(E))

Trustee Discretion

Under A.R.S. § 14-10814, trustees must act in good faith and for the benefit of the beneficiary. Distributions should be discretionary—not mandatory—to avoid the assets being treated as the beneficiary’s own.

Medicaid Payback Requirement

Federal law (42 U.S.C. § 1396p(d)(4)(A)) requires a payback clause in any first-party SNT so that remaining funds reimburse the state for Medicaid or ALTCS services provided.

Estate Recovery

Arizona’s estate recovery program allows AHCCCS to recover medical expenses from the estate of deceased beneficiaries. (AHCCCS Estate Recovery Notice)

3. Types of Special Needs Trusts

Type	Funded by	Payback?	Key Features
First-party (self-settled)	Assets of the person with a disability	Yes — required by federal law	Must be irrevocable; must include Medicaid payback clause; used for inheritances or settlements.
Third-party (supplemental care)	Parent, grandparent, or other person	No	Used for gifts or inheritances; more flexible; may name other remainder beneficiaries.
Pooled trust	Funds combined under a nonprofit master trust	Sometimes — depends on funding source	Nonprofit manages separate accounts; often used for smaller estates or when no family trustee is available.

4. How a Trustee Should Make Distributions

Do not pay cash directly — Cash given to the beneficiary usually counts as income and can reduce SSI or ALTCS.
Pay providers directly — For rent, medical care, or transportation, issue payment directly to vendors.
Avoid food or shelter payments — These can reduce SSI benefits unless carefully structured.
Keep detailed records — Maintain invoices, receipts, and notes explaining each disbursement.
File reports as required — STTs must meet AHCCCS reporting rules to retain eligibility status.

5. Essential Drafting Features

Clear statement that one purpose is to preserve benefit eligibility
Spendthrift and irrevocability clauses (as needed)
No power for the beneficiary to revoke or amend the trust
Trust protector with limited amendment powers (A.R.S. § 14-10818)
Medicaid payback clause for first-party trusts
Compliance with AHCCCS “special treatment trust” language

6. Common Mistakes to Avoid

Giving the beneficiary control over distributions
Failing to include the Medicaid payback clause in a self-settled trust
Distributing cash directly to the beneficiary
Paying for food or housing improperly
Not reviewing or updating the trust when laws change
Inadequate recordkeeping and reporting

7. When You Need a Lawyer

Special needs trusts combine estate planning, tax, and public-benefits law. Work with an experienced Arizona estate planning attorney if you:

Are setting up or amending a special needs trust
Need to coordinate a settlement or inheritance for a disabled person
Must ensure compliance with SSI, AHCCCS, or ALTCS rules
Want to include a trust protector or amendment power
Are administering an existing trust and unsure about distributions

8. Key Takeaways

A special needs trust preserves public benefit eligibility while supplementing quality-of-life needs.
Arizona recognizes “special treatment trusts” that meet strict AHCCCS standards.
First-party trusts require Medicaid payback; third-party trusts do not.
Trustee discretion, compliance, and careful drafting are essential.
Professional review helps avoid disqualification and protects assets long term.

9. FAQ

Q: Does every special needs trust have to reimburse the state?
Only first-party trusts funded with the beneficiary’s assets must include a Medicaid payback clause.

Q: Can the trustee pay rent or utilities?
Yes, but the trustee should pay landlords or utility companies directly, not the beneficiary, to avoid SSI income reductions.

Q: What happens to the remaining trust funds at death?
For first-party trusts, the state must be reimbursed first. For third-party trusts, any remainder can pass to heirs named in the trust.

Q: What is the ALTCS look-back period?
Arizona’s Medicaid/ALTCS program generally applies a 60-month (five-year) look-back for transfers of assets.

Not legal advice. This post provides general information only. For advice tailored to your situation, please contact The Woodruff Law Firm to discuss creating or updating a special needs trust in Arizona.