Protecting SSI & Medicaid Benefits for Loved Ones in Katy, TX
Jennifer’s 22-year-old son Daniel has autism. He’s been receiving SSI benefits and Medicaid since he was 18, and those benefits pay for his therapies, medical care, and living assistance. When Jennifer’s mother passed away last year, she left Daniel $75,000 in her will. Jennifer thought the inheritance was a blessing until she talked to the Social Security Administration. They told her that the moment Daniel received that money, he’d lose his SSI and Medicaid benefits because his assets would exceed the $2,000 limit. Jennifer had a choice she never wanted to make. She could refuse the inheritance on Daniel’s behalf and let it go to someone else, or she could accept it knowing Daniel would lose benefits he desperately needed. The $75,000 might last a few years, but his benefits were worth far more over his lifetime. What Jennifer didn’t know was that a special needs trust could have solved the entire problem. If her mother had left the inheritance to a properly structured special needs trust for Daniel’s benefit instead of directly to Daniel, he could have received the full $75,000 without losing a single dollar of his government benefits. This is exactly what special needs trusts are designed to do. They allow families to provide financial support and improve the quality of life for a loved one with disabilities without jeopardizing the critical government benefits that person depends on. Whether you’re a parent planning for your child’s future or you’re helping a family member who just received a settlement or inheritance, understanding how special needs trusts work in Texas can protect your loved one’s financial security for life.
Key Takeaways
- Special needs trusts allow individuals with disabilities to receive financial support without losing SSI, Medicaid, or other means-tested government benefits
- The beneficiary must remain under the $2,000 asset limit for SSI and Medicaid, but assets in a properly structured special needs trust don’t count toward that limit
- Third-party special needs trusts are funded by family members and don’t require Medicaid payback after the beneficiary’s death
- First-party special needs trusts are funded with the beneficiary’s own assets and must include a Medicaid payback provision
- Trust funds can only be used for supplemental needs that improve quality of life, not for basic food and shelter that government benefits already cover
- Choosing the right trustee is critical because distributions must comply with strict SSI and Medicaid rules
What Is a Special Needs Trust?
A special needs trust, also called a supplemental needs trust, is a legal arrangement that holds and manages assets for the benefit of someone with a disability while preserving their eligibility for government benefits like Supplemental Security Income and Medicaid. The trust is designed so that the assets in the trust don’t count as the beneficiary’s personal resources for purposes of determining benefit eligibility.
SSI and Medicaid are means-tested programs, which means eligibility depends on having very limited income and assets. As of 2026, individuals can’t have more than $2,000 in countable assets and still qualify for SSI or most Medicaid programs. If your loved one receives an inheritance, a personal injury settlement, or any significant amount of money directly, they’ll exceed the asset limit and lose their benefits.
A special needs trust prevents that from happening. The money goes into the trust instead of to the beneficiary directly. The trustee manages the funds and uses them to pay for things that improve the beneficiary’s quality of life without replacing the basic support that government benefits provide.
How Special Needs Trusts Protect Benefits
The key is that the beneficiary doesn’t own the assets in the trust and doesn’t have direct access to them. The trustee has complete discretion over when and how to distribute funds. Because the beneficiary can’t simply withdraw money whenever they want, the Social Security Administration and Medicaid don’t count those assets against the eligibility limits.
The trust must also include specific language stating that distributions are meant to supplement, not replace, government benefits. Distributions have to follow strict rules about what they can be used for. Done correctly, a special needs trust allows the beneficiary to continue receiving SSI and Medicaid while also benefiting from family wealth or settlement funds.
Third-Party Special Needs Trusts
A third-party special needs trust is funded with assets that belong to someone other than the beneficiary. Typically, parents, grandparents, or other family members create and fund these trusts to provide for a loved one with disabilities without jeopardizing that person’s benefits.
How Third-Party Trusts Work
When you create a third-party special needs trust, you’re setting aside your own money or property for your loved one’s benefit. The assets never belong to the beneficiary, so they never count against the beneficiary’s asset limits. The trust can be created during your lifetime or at your death through your will or revocable living trust.
Most parents with a child who has disabilities will include a third-party special needs trust in their estate plan so that when they die, their child can inherit without losing benefits. Instead of leaving money directly to the child, the will or trust directs that the inheritance goes into the special needs trust.
No Medicaid Payback Requirement
One of the major advantages of a third-party special needs trust is that it doesn’t require a Medicaid payback provision. When the beneficiary dies, any remaining assets in the trust can be distributed to the other beneficiaries you’ve named in the trust. The state can’t make a claim against the trust for reimbursement of Medicaid benefits paid during the beneficiary’s lifetime.
This makes third-party trusts the preferred option for families planning ahead. You maintain control over where the money goes after your loved one passes away, and you can structure the trust to benefit other family members or charities.
Flexibility in Funding and Distribution
Third-party trusts offer significant flexibility. You can fund them with cash, real estate, life insurance proceeds, retirement account beneficiary designations, or other assets. You choose the trustee, you set the distribution standards, and you decide what happens to any remaining funds after the beneficiary’s death.
First-Party Special Needs Trusts
A first-party special needs trust, also called a self-settled trust, is funded with assets that belong to the beneficiary. This type of trust is typically used when someone with a disability receives a personal injury settlement, an inheritance they’ve already accepted, back pay from Social Security, or other funds that are legally theirs.
When First-Party Trusts Are Needed
If your loved one has already received money directly and their benefits are at risk, a first-party special needs trust can protect those assets and restore eligibility. Instead of spending down the money to get back under the $2,000 limit, the funds are transferred into a properly structured first-party trust.
These trusts are also common in personal injury cases where a person with disabilities receives a settlement or jury award. The settlement funds can be placed directly into a first-party special needs trust so the person can benefit from the money without losing SSI or Medicaid.
Age and Disability Requirements
Under federal law, a first-party special needs trust must be established before the beneficiary turns 65. The beneficiary must also meet Social Security’s definition of disability. These requirements don’t apply to third-party trusts, but they’re mandatory for first-party trusts because the assets originally belonged to the beneficiary.
Medicaid Payback Requirement
The biggest difference between first-party and third-party trusts is the Medicaid payback provision. Federal law requires that first-party special needs trusts include language stating that when the beneficiary dies, any remaining assets in the trust must first be used to repay the state for Medicaid benefits paid on the beneficiary’s behalf during their lifetime.
Only after the state has been reimbursed can any remaining funds be distributed to other beneficiaries. In many cases, the trust is fully exhausted by the Medicaid payback, leaving nothing for other family members. That’s why third-party trusts are preferred for planning purposes, but first-party trusts are necessary when the beneficiary already owns the assets.
What Can Trust Funds Be Used For?
Special needs trusts are designed to pay for supplemental needs that improve the beneficiary’s quality of life beyond what government benefits provide. The trustee can use trust funds for a wide range of expenses, but not for basic food and shelter, which are already covered by SSI and Medicaid.
Permissible Expenses
Trust funds can typically be used for medical and dental care not covered by Medicaid, therapies and rehabilitation services, education and tutoring, vocational training and employment support, recreational activities and hobbies, personal care attendants beyond what Medicaid provides, transportation and vehicle expenses, computers and assistive technology, travel and vacations, entertainment and social activities, clothing and personal items, and legal and financial planning services.
The key is that these expenses must supplement government benefits, not replace them. If the trust pays for something that SSI or Medicaid is already supposed to cover, it could jeopardize the beneficiary’s eligibility.
Prohibited Distributions
Trust funds generally cannot be used for basic food and shelter, which SSI is designed to cover. If the trustee gives cash directly to the beneficiary, that cash counts as income and will reduce or eliminate SSI benefits. If the trust pays for the beneficiary’s rent or mortgage, utilities, or groceries directly, those distributions count as in-kind support and maintenance, which can reduce SSI benefits dollar for dollar up to a certain limit.
There are exceptions and workarounds, but they’re technical. An experienced trustee knows how to structure distributions to avoid jeopardizing benefits while still providing for the beneficiary’s needs.
Choosing the Right Trustee
The trustee of a special needs trust has significant responsibility and must understand both trust administration and the complex rules governing SSI and Medicaid eligibility. Choosing the wrong trustee can result in improper distributions that cost the beneficiary their benefits.
What the Trustee Does
The trustee manages the trust assets, makes investment decisions, reviews and approves distribution requests, pays bills on behalf of the beneficiary, keeps detailed records of all transactions, files tax returns for the trust, communicates with government agencies when necessary, and ensures that all distributions comply with SSI and Medicaid rules.
The trustee must exercise discretion and judgment. They can’t simply give the beneficiary whatever they ask for. They have to evaluate whether each request is appropriate, whether it will affect benefits, and whether it’s in the beneficiary’s best interest.
Family Members as Trustees
Many families choose a sibling, parent, or other relative to serve as trustee. This can work well if the family member is financially responsible, organized, and willing to learn the rules. Family trustees often have a better understanding of the beneficiary’s needs and preferences, and they’re typically more emotionally invested in the beneficiary’s well-being.
The downside is that family members might not have experience with trust administration or the technical rules governing SSI and Medicaid. They can make costly mistakes without realizing it. That’s why it’s important to work with an attorney who can guide the trustee through their responsibilities.
Professional Trustees
Some families prefer to use a professional trustee, such as a bank trust department, a corporate trustee, or a professional fiduciary. Professional trustees have experience managing trusts and complying with government benefit rules. They’re also neutral, which can be important in families with complicated dynamics.
The trade-off is cost. Professional trustees charge fees, usually a percentage of the trust assets each year. For smaller trusts, those fees can eat up a significant portion of the assets over time. But for larger trusts or situations where no family member is appropriate, a professional trustee can be the right choice.
Co-Trustees and Successor Trustees
You can name co-trustees who serve together and make decisions jointly, or you can name a primary trustee with successor trustees who take over if the primary trustee can’t serve. Many families use a combination, such as a family member as primary trustee with a professional as successor, or a family member and a professional serving together as co-trustees.
Coordinating Special Needs Trusts With Your Estate Plan
If you have a child or other loved one with disabilities, your estate plan needs to be carefully structured to protect their benefits while still providing for them financially.
Leaving Inheritances to the Trust
Instead of leaving assets directly to your loved one with disabilities in your will or revocable living trust, you should leave those assets to a special needs trust for their benefit. The trust can be created during your lifetime or at your death, but either way, the inheritance flows into the trust rather than to the beneficiary directly.
This ensures that your loved one can inherit without losing SSI or Medicaid. The trustee uses the inheritance to improve their quality of life while government benefits continue to provide baseline support.
Life Insurance and Retirement Accounts
Life insurance is one of the most common ways to fund a special needs trust. You name the trust as the beneficiary of your life insurance policy so that when you die, the proceeds go into the trust for your loved one’s benefit. The same approach works for retirement accounts, though there are special tax considerations you’ll need to address with your attorney.
Communication With Family Members
Make sure everyone in your family knows about the special needs trust and understands that they should never leave money or property directly to your loved one with disabilities. Well-meaning grandparents, aunts, uncles, and friends need to know that any gifts or inheritances should be directed to the trust, not to the beneficiary personally.
We’ve seen cases where a grandparent left $10,000 directly to a grandchild with disabilities, not knowing it would cause the grandchild to lose benefits. A simple conversation and proper planning prevents that from happening.
Pooled Special Needs Trusts
A pooled trust is a special type of first-party or third-party special needs trust managed by a nonprofit organization. Instead of creating a standalone trust, your loved one’s assets are placed in a subaccount within the pooled trust, and the nonprofit organization serves as trustee.
How Pooled Trusts Work
Each beneficiary has their own subaccount, but the nonprofit pools all the assets together for investment purposes, which can result in better investment returns and lower administrative costs. The nonprofit handles all the trust administration, distribution decisions, and compliance with government benefit rules.
Pooled trusts are particularly useful for people with smaller amounts of assets who can’t afford the cost of setting up and administering a standalone trust. They’re also helpful when there’s no appropriate family member to serve as trustee.
The Trade-Off
While pooled trusts are convenient and cost-effective, you give up control. The nonprofit organization makes all the decisions about distributions, and you can’t control who serves as trustee or how the trust is managed. Additionally, many pooled trusts include a provision that when the beneficiary dies, any remaining funds stay with the nonprofit rather than going to other family members.
ABLE Accounts: A Complement to Special Needs Trusts
ABLE accounts (Achieving a Better Life Experience accounts) are tax-advantaged savings accounts for individuals with disabilities. They’re not trusts, but they work alongside special needs trusts to help families save and pay for disability-related expenses.
As of January 1, 2026, individuals who became blind or disabled before the age of 46 can open ABLE accounts. Contributions to ABLE accounts (up to an annual limit) don’t count against SSI or Medicaid asset limits, and the funds can be used for qualified disability expenses without jeopardizing benefits.
ABLE accounts are simpler and less expensive than trusts, but they have contribution limits and restrictions on how funds can be used. Many families use both an ABLE account for short-term needs and a special needs trust for long-term planning and larger assets.
Tax Considerations for Special Needs Trusts
Special needs trusts are typically taxed as grantor trusts or complex trusts, depending on how they’re structured. The trust may need to file its own tax return, and income retained in the trust may be taxed at higher trust tax rates.
Your attorney and accountant should work together to structure the trust in a way that minimizes tax liability while still protecting the beneficiary’s benefits. There are strategies to reduce taxes, such as making distributions to the beneficiary for qualified expenses or structuring the trust as a grantor trust where income is taxed to the person who created the trust rather than to the trust itself.
Common Mistakes to Avoid
Special needs trusts are technical, and mistakes can be costly. We’ve seen families make errors that cost their loved ones their benefits or resulted in wasted money.
Giving Cash Directly to the Beneficiary
Never give cash directly to the beneficiary from the trust. Cash counts as income and will reduce or eliminate SSI benefits. Instead, the trustee should pay for goods and services directly on the beneficiary’s behalf.
Paying for Food and Shelter Without Understanding the Rules
Paying for rent, mortgage, utilities, or groceries can reduce SSI benefits. There are ways to do this strategically, but you need to understand the in-kind support and maintenance rules and calculate how much the benefit reduction will be.
Failing to Keep Detailed Records
The trustee must keep detailed records of all distributions and be prepared to explain to government agencies what trust funds were used for. Poor record-keeping can result in benefit denials or audits.
Not Working With an Experienced Attorney
This isn’t an area where do-it-yourself planning works. The rules are complex, they change over time, and the consequences of mistakes are severe. Working with an attorney experienced in special needs planning is essential.
Frequently Asked Questions About Special Needs Trusts
- Can my loved one still work if they have a special needs trust?
Yes. Having a special needs trust doesn’t prevent your loved one from working. However, earned income can affect SSI benefits, so you’ll need to understand how SSI calculates income and plan accordingly. The trust can supplement their income and help them achieve greater financial independence. - What happens to the trust if my loved one no longer qualifies as disabled?
If your loved one no longer meets Social Security’s definition of disability, they may lose SSI and Medicaid eligibility regardless of the trust. At that point, the trust could be dissolved and the assets distributed to the beneficiary or restructured as a different type of trust. - Can the trust pay for housing?
Yes, but it will reduce SSI benefits. The trust can pay rent or mortgage, but SSI will be reduced by up to one-third of the federal benefit rate plus $20. For some families, that trade-off is worth it if the trust has sufficient assets and better housing significantly improves quality of life. - How much money should I put in a special needs trust?
There’s no minimum or maximum, but the trust should have enough to justify the administrative costs. For very small amounts (under $10,000), an ABLE account might be more practical. For larger amounts, a standalone special needs trust makes sense. Many families fund trusts with life insurance proceeds, which can provide substantial funds after the parents’ deaths. - Can I be the trustee of my child’s special needs trust?
Yes, as long as it’s a third-party trust funded with your assets, not the beneficiary’s. If it’s a first-party trust funded with the beneficiary’s own assets, some states restrict the beneficiary or certain family members from serving as trustee. Texas law is more flexible, but you should discuss the best approach with your attorney. - What if I don’t have enough money to fund a trust now?
You can create an unfunded trust now and fund it later through your will, life insurance, or other means. Many families create special needs trusts as part of their estate plan even though they’re not putting money into the trust during their lifetimes. - Can the trust pay for vacations and entertainment?
Yes. Vacations, entertainment, hobbies, and recreational activities are all permissible expenses because they improve quality of life and aren’t basic necessities covered by SSI or Medicaid. - Do I need a lawyer to create a special needs trust?
Absolutely. Special needs trusts must comply with federal and Texas law, SSI regulations, and Medicaid rules. Small mistakes can disqualify the trust or cause the beneficiary to lose benefits. This is not an area for online forms or do-it-yourself planning.
Planning for Your Loved One’s Future
If you have a child, sibling, or other loved one with disabilities, proper planning can make an enormous difference in their quality of life. A special needs trust allows you to provide financial support, pay for therapies and activities that improve their life, and ensure they’re cared for after you’re gone, all without jeopardizing the government benefits they depend on.
At Brewster Howard Law Firm, we help families throughout Katy, Katy, Fort Bend County, and nearby communities create special needs trusts that work. We’ll talk with you about your loved one’s needs, your family’s financial situation, and your goals for the future. We’ll help you decide whether a third-party or first-party trust is right for your situation, and we’ll draft a trust that complies with all applicable laws and protects your loved one’s benefits.
We’ll also coordinate the special needs trust with your wills, revocable living trusts, life insurance, and other estate planning documents so everything works together seamlessly. We’ll make sure your loved one is protected and provided for, no matter what happens.
If you’re planning for a loved one with disabilities, or if your loved one has just received a settlement or inheritance that’s putting their benefits at risk, don’t wait. Call us today and let’s talk about how a special needs trust can protect their future.