Unitrusts as First-Party Special Needs Trusts in Pennsylvania

By: Adam Cohen, Esquire

Planning for a disabled individual who has received a personal injury settlement, inheritance, or other significant assets often requires a first-party special needs trust (SNT) to preserve essential government benefits such as Supplemental Security Income (SSI) and Medicaid. In Pennsylvania, structuring a first-party SNT as a unitrust can provide long-term stability, investment flexibility, and compliance with benefit eligibility rules.

Why Use a Unitrust for a First-Party Special Needs Trust?

A unitrust distributes a set percentage of the trust’s value each year, recalculated annually based on its fair market value. The standard payout is often 4%, though it can be written higher or lower depending on the trust document. For example, if a special needs trust holds $500,000, a 4% unitrust would provide $20,000 in the first year. As the trust grows in value, the annual distribution grows as well.

Using a unitrust offers several advantages over traditional income trusts:

• Predictable payments: Distributions are consistent each year, regardless of how the trust earns income.
• Reduced conflict: Beneficiaries and trustees share clear expectations, avoiding disputes over discretionary distributions.
• Investment flexibility: Trustees can pursue growth-oriented strategies instead of focusing only on income-generating assets.

Together, these benefits create stability for both the beneficiary and the trustee, while ensuring the trust can continue to meet the disabled individual’s needs long term.

Preserving Public Benefits with a First-Party SNT

1. Preserves Public Benefits Eligibility: Because distributions are directed to supplemental needs (not given directly as cash to the beneficiary), the trust’s payouts do not disqualify the beneficiary from SSI or Medicaid. Commonly, the trustee and beneficiary (or his or her agents) will create a budget, with the trust’s predictable distributions used to meet the budgetary needs. Proper drafting ensures the trustee retains discretion to make payments only for approved expenses to prevent loss of benefits.

2. Required Medicaid Payback: As a first-party trust, Pennsylvania law and federal Medicaid rules require a Medicaid payback provision. At the beneficiary’s death, any remaining trust assets must first reimburse the state for Medicaid benefits paid. A unitrust format does not affect this requirement but ensures the trust is managed for maximum value over the beneficiary’s lifetime.

Because of the long-term financial viability of a unitrust, which protects the state’s remainder interests, the Medicaid agency typically does not scrutinize the expenditures as it would in a discretionary SNT.

3. Investment Flexibility: With a unitrust, trustees are not constrained to income-producing assets. They can pursue total-return strategies, investing for growth while still guaranteeing a predictable annual distribution amount.

Practical Example of a Pennsylvania Unitrust

Suppose a 35-year-old individual receives an $800,000 personal injury settlement. To maintain Medicaid and SSI, the funds are placed in a court-approved first-party SNT drafted as a 4% unitrust. The first year’s payout is $32,000, which can be applied toward therapies, accessible housing modifications, entertainment needs, and other quality-of-life improvements.

The remainder is invested for growth, ensuring future distributions rise with the trust’s value, all while preserving benefits eligibility and planning for eventual Medicaid reimbursement. Suppose in 15 years the trust’s value is now $1,900,000. The trustee would have the ability to distribute $76,000 to the beneficiary.

Why a Unitrust May Be the Right Choice for Your Family

In Pennsylvania, structuring a first-party special needs trust as a unitrust offers a powerful blend of compliance, predictability, and investment flexibility. Families and guardians can be confident that the trust will supplement—not jeopardize—essential public benefits, while also providing long-term financial stability for the beneficiary.

Because these trusts must also comply with Medicaid payback provisions and court approval requirements, consultation with an experienced special needs planning attorney is essential. The estate planning attorneys at Mette can guide you through creating or managing a first-party special needs trust that protects both benefits and future security.