Tennessee Special Needs Trust Rules (2026) | Complete State Guide

1. 1. No state income tax on trust earnings.
   Tennessee eliminated its last income tax (the Hall Tax on interest and dividends) in 2021. Your trust pays only federal tax on investment income — no state tax layer at all. That can save thousands a year compared to states like California or New York. Tennessee also has no state capital gains tax, no inheritance tax, and no estate tax.
2. 2. TennCare estate recovery is limited to probate assets — but the rules depend on which type of trust you have.
   (For third-party SNTs) Because this trust was funded with your money (not your child’s), it’s completely exempt from TennCare estate recovery. When your loved one passes away, the remaining funds go to whoever you named as beneficiary — family, siblings, a charity. TennCare has no claim. Tennessee’s estate recovery program is limited to the probate estate, and a properly drafted irrevocable third-party SNT stays outside probate entirely.
   
   (For first-party SNTs) Different rule. Because this trust was funded with your family member’s own money, federal law (42 USC §1396p) requires that any funds left in the trust when they pass away must first reimburse TennCare for benefits paid during their lifetime. This isn’t estate recovery — it’s a payback clause built into the trust itself. Whatever remains after Medicaid is repaid goes to the family. This is the tradeoff for protecting benefits during your family member’s life.
   
   Important note: A revocable living trust does not protect assets from TennCare recovery. Tennessee courts have ruled that TennCare can petition to claw back assets from a revocable living trust after death, treating them as part of the probate estate. Only an irrevocable special needs trust provides reliable protection.
3. 3. If your child’s income is over $2,982/month, they need a second trust to qualify for TennCare. (For first-party SNTs)
   Tennessee is an income cap state. Go over by $1 and TennCare says no. A separate trust (called a Qualified Income Trust or Miller Trust) fixes it, but your attorney needs to know about it upfront. Many Tennessee families end up needing two trusts — a QIT for income and an SNT for assets.
4. 4. Tennessee’s personal needs allowance is just $70/month — one of the lowest in the country.
   If your loved one is in a nursing facility on TennCare, they keep only $70 per month for personal expenses. Everything else goes to the cost of care. That’s less than half what Florida allows ($160/month). A special needs trust can supplement what TennCare doesn’t cover — clothing, entertainment, phone, personal care items — without affecting eligibility.
5. 5. Tennessee has one of the most flexible trust laws in the country.
   Tennessee’s decanting statute lets a trustee convert an existing irrevocable trust into a special needs trust — without going to court. If a grandparent left assets in a regular trust and your child now needs benefits, a trustee can restructure it. Tennessee is ranked among the top five states for trust flexibility.
6. 6. Tennessee’s ABLE savings accounts don’t pay TennCare back at death. (For first-party SNTs)
   Tennessee passed a law in 2023 (Public Chapter 44) prohibiting TennCare from recovering funds from ABLE accounts after the beneficiary dies. This is a significant advantage. Your attorney should consider moving money from a first-party trust into an ABLE TN account (up to $19,000/year) to shift assets from payback-exposed to payback-free.
7. 7. The trust can pay for groceries without reducing your child’s SSI.
   This changed in October 2024. Before that, buying food with trust money cut the SSI check. It doesn’t anymore. The trustee can now buy groceries, meal delivery, and other food without triggering the old in-kind support and maintenance penalty.
8. 8. The trust paying for housing DOES still reduce SSI.
   Rent, mortgage, utilities — if the trust pays those, the SSI check goes down (up to about $351/month in 2026). That’s the tradeoff, and it’s worth understanding before your trustee starts writing checks.
9. 9. Tennessee uses “conservatorship” for adults — not “guardianship.”
   In Tennessee, “guardianship” is for minors. For adults with disabilities, the legal process is called conservatorship. Tennessee law presumes limited conservatorship — the court should only remove specific decision-making rights where the person lacks capacity, preserving all other rights. Courts must also consider supported decision-making as an alternative before appointing a conservator.
10. 10. Tennessee has a Katie Beckett waiver for children with significant disabilities.
    If your child has serious medical needs or a disability and you make too much money for regular TennCare, the Katie Beckett program (launched 2020) lets children ages 1–18 qualify based on their own income — not yours. This is a lifeline for middle-class families who need TennCare coverage for expensive therapies, equipment, and medical care.
11. 11. The person managing the trust (the “trustee”) has to account for every dollar — no matter what type of trust you set up.
    Whether you created a third-party trust (funded with your money) or your child has a first-party trust (funded with theirs), Tennessee law (Tenn. Code Ann. § 35-15-813) gives your family the right to request a full accounting of how trust money is being spent. This isn’t optional — it’s the law. If a bank, attorney, or family member is serving as trustee and won’t show you where the money is going, that’s a red flag.

From my 15+ years helping families (including my own):

1. Leaving money directly to your disabled child. A well-meaning grandparent leaves $50,000 in a will to your child — and destroys their SSI and TennCare. Every dollar meant for your child needs to go through the trust, not to them.
2. Creating the trust but never funding it. A trust sitting in a drawer with no assets in it protects nothing. The trust only works if you actually move assets into it — bank accounts, life insurance beneficiary designations, your will.
3. Thinking a revocable living trust protects assets from TennCare. It doesn’t. Tennessee courts allow TennCare to claw back assets from revocable living trusts after death. An irrevocable special needs trust is the only trust structure that provides reliable protection.
4. Not knowing about Tennessee’s income cap. If your loved one’s income exceeds $2,982/month, TennCare will deny coverage unless a Qualified Income Trust is in place. This trips up families whose parent or spouse has a modest pension plus Social Security. The QIT must be set up before applying for TennCare.
5. Giving your child a debit card linked to the trust account. The moment your child can swipe that card, the entire trust balance becomes a countable asset. Benefits gone. The trustee must control distributions.
6. Never updating the trust as rules change. The food rules changed in 2024. ABLE account eligibility expanded in 2026. Tennessee eliminated ABLE recovery in 2023. A trust drafted five years ago may already be outdated.
7. Waiting until after you die to set up the trust. If you’re reading this page, do it now. Not next year. Your estate plan, your will, your life insurance beneficiary designations — all of it needs to point to the trust before something happens to you.

The best way to avoid these mistakes? Work with an attorney who knows Tennessee special needs law. Find Tennessee attorneys →

Beyond the Trust: Other Tennessee Planning Steps

Conservatorship: When your child turns 18, you may need legal authority to help with decisions. Tennessee uses conservatorship (not guardianship) for adults, with limited conservatorship as the default and supported decision-making as a less restrictive alternative. Compare your options →
TennCare Waivers: Tennessee’s ECF CHOICES program serves people with intellectual and developmental disabilities, but has an estimated 2,500-person waitlist — get on the list early. The Katie Beckett waiver covers children ages 1–18 with significant disabilities. Learn about waivers →