For families caring for a loved one with a disability, one of the greatest concerns is ensuring that person has financial security without jeopardizing the government benefits they depend on. Supplemental Security Income (SSI) and Medi-Cal provide critical support, but both are means-tested programs with strict asset limits. A direct inheritance or financial gift, even one made with the best intentions, can disqualify a beneficiary from these programs overnight.
A special needs trust (SNT) offers an elegant solution. When properly drafted, an SNT holds assets for the benefit of a person with a disability without counting those assets toward eligibility thresholds. The trust can pay for supplemental needs that government programs do not cover, such as personal care attendants, recreational activities, specialized therapies, electronics, travel, and quality of life enhancements.
First-Party vs. Third-Party Special Needs Trusts
The distinction between first-party and third-party special needs trusts is fundamental, and choosing the wrong structure can have severe consequences.
First-Party (Self-Settled) SNT
A first-party SNT, authorized under 42 U.S.C. Section 1396p(d)(4)(A), is funded with the disabled person's own assets. This situation commonly arises when a person with a disability receives a personal injury settlement, an inheritance paid directly to them, or accumulates assets before becoming disabled. Under federal and California law, a first-party SNT must be established by a parent, grandparent, legal guardian, or court. The beneficiary must be under age 65 at the time of funding, and the trust must contain a Medicaid payback provision, meaning that upon the beneficiary's death, any remaining trust assets must first reimburse the state for Medi-Cal benefits provided during the beneficiary's lifetime.
Third-Party SNT
A third-party SNT is funded exclusively with assets belonging to someone other than the beneficiary, typically parents or grandparents. Because the beneficiary never owned these assets, there is no Medicaid payback requirement. Upon the beneficiary's death, remaining trust assets pass to other family members or heirs as designated in the trust document. This makes third-party SNTs the preferred planning vehicle for most families. They can be established as standalone trusts or incorporated as subtrusts within a parent's revocable living trust.
Pooled Trusts: An Alternative Worth Considering
Pooled trusts, authorized under 42 U.S.C. Section 1396p(d)(4)(C), are managed by nonprofit organizations that pool the investments of multiple beneficiaries while maintaining separate accounts for each participant. They offer several distinct advantages. There is no age restriction for joining, making them the only option for individuals over 65 who receive an inheritance or settlement. Administrative costs are shared among participants, and the nonprofit provides professional trust management without the need to locate and compensate an individual trustee.
In California, several established nonprofit organizations operate pooled trusts. The trade-off is that upon the beneficiary's death, a portion of any remaining funds may be retained by the nonprofit, and any balance returned to the individual's estate may be subject to Medi-Cal recovery.
ABLE Accounts: A Complement to the SNT
Achieving a Better Life Experience (ABLE) accounts, established under the ABLE Act of 2014 and available in California through CalABLE, allow eligible individuals with disabilities to save up to $100,000 without affecting SSI eligibility. The onset of disability must have occurred before age 26 (expanded to age 46 under the ABLE Age Adjustment Act effective 2026). Annual contribution limits align with the federal gift tax exclusion, currently $18,000 per year.
ABLE accounts are not a replacement for a special needs trust. They function best as a complementary tool, providing the beneficiary with more autonomy over day-to-day spending while the SNT handles larger assets and longer-term planning. Funds in an ABLE account can be used for qualified disability expenses including housing, education, transportation, health and wellness, assistive technology, and employment support.
Preserving SSI and Medi-Cal Eligibility
California's SSI asset limit is $2,000 for an individual. Even a modest inheritance can push a beneficiary over this threshold, resulting in loss of both SSI cash benefits and Medi-Cal coverage. Once benefits are lost, the reinstatement process can take months, during which the individual has no medical coverage and no income support.
The trust must be carefully drafted to ensure distributions supplement rather than replace government benefits. The trustee should never distribute cash directly to the beneficiary or pay for food and shelter in a way that constitutes in-kind support and maintenance (ISM), which can reduce SSI benefits. Proper trustee education is essential. A well-intentioned trustee who pays the beneficiary's rent directly from the trust, for example, can trigger ISM rules and reduce the monthly SSI payment by up to one-third plus $20.
Selecting the Right Trustee
Trustee selection is one of the most consequential decisions in special needs planning. The trustee must understand the complex interplay between trust distributions and government benefit eligibility. They must keep meticulous records, file annual tax returns for the trust, and make distribution decisions that genuinely enhance the beneficiary's quality of life.
Family members often serve as trustees, but this can create tension, particularly when the trustee must say no to a distribution request that would jeopardize benefits. Professional trustees and corporate trustees offer expertise and impartiality but charge annual fees, typically between 1% and 1.5% of trust assets. Many families choose a co-trustee arrangement, pairing a family member who understands the beneficiary's personal needs with a professional who handles compliance and investment management.
Planning Ahead: What Families Should Do Now
If you have a family member with a disability, the most important step you can take today is to review your own estate plan. Confirm that no assets, including life insurance proceeds and retirement account beneficiary designations, would pass directly to the disabled individual. Direct bequests from well-meaning relatives are one of the most common threats to benefit eligibility. Communicate with extended family members and ask them to direct any gifts or bequests to the special needs trust rather than to the individual.
Consider establishing a letter of intent alongside the trust. While not legally binding, this document provides the trustee with invaluable guidance about the beneficiary's daily routines, medical needs, social activities, living preferences, and the family's vision for the beneficiary's quality of life.
This article is for informational purposes only and does not constitute legal advice. Special needs trust planning involves complex interactions between federal and state benefit programs. Contact MVP Law Group for a consultation tailored to your family's specific circumstances.