The hardest part of planning for a family member with a disability is that generosity can do damage. Money left directly to someone receiving means-tested benefits can disqualify them from the very support they depend on. A special needs trust exists to solve exactly that problem.
Written by Trust Law Legacy Group, APC, an Estate Planning, Trust & Probate Law Firm in San Jose, California. Reviewed by Gerald Smith, Esq., Litigation Attorney. Updated August 2026.
Quick Answer: A special needs trust holds money for a person with a disability without that money counting as their own resource, which is what keeps means-tested benefits intact. Which type you need depends on whose money it is. Your money, set aside for your child, goes into a third-party trust with no government payback. The beneficiary’s own money (a settlement or an inheritance they already received) must go into a first-party trust, which repays Medi-Cal at their death.
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What a Special Needs Trust Actually Protects
Means-tested benefits have resource limits. Supplemental Security Income, for example, is generally unavailable to an individual holding more than $2,000 in countable resources. An inheritance of any real size lands squarely above that line.
A properly drafted special needs trust changes the ownership question. The beneficiary does not own the money; the trust does, and a trustee decides how it is used. Because the beneficiary cannot demand the funds, the assets are generally not counted as theirs.
California made a significant change here in 2024: the state eliminated the asset limit for Medi-Cal eligibility. That is real relief, and it is often misread as making these trusts unnecessary. It does not. SSI is a federal program with its own resource limit that California cannot remove, other benefits remain means-tested, and the trust does far more than protect eligibility. It puts a trustee, a structure, and a plan around money that would otherwise be handed to someone who may not be in a position to manage it.
Third-Party Trusts: The One Most Parents Need
A third-party special needs trust is funded with someone else’s money, typically a parent’s or grandparent’s, for the benefit of a person with a disability.
Its defining advantage is that there is no government payback. Because the funds were never the beneficiary’s, whatever remains when they die passes to whoever you named: siblings, other family, or a charity. Nothing is owed back to the state.
This is the trust that belongs in a parent’s estate plan, and it is the one most often missed. Families frequently disinherit a child with a disability entirely, intending to protect their benefits, and ask a sibling to look after them informally. That arrangement has no legal force, exposes the funds to the sibling’s creditors and divorce, and depends on relationships holding for decades.
Disinheriting a child to protect their benefits is the mistake we see most.
First-Party Trusts: When the Money Is Already Theirs
When the assets already belong to the person with a disability (a personal injury settlement, an inheritance received outright, back benefits), a third-party trust is not available. The money is theirs, and it has to go into a first-party special needs trust.
These trusts are authorized under federal law and carry conditions that third-party trusts do not:
- The beneficiary must be under 65 when the trust is established and funded.
- The beneficiary must meet the disability standard.
- The trust must include a payback provision requiring the state to be reimbursed for Medicaid benefits paid on the beneficiary’s behalf when they die.
The payback is the trade. It is still almost always better than holding the money outright and losing eligibility, but it is the reason a third-party trust is worth setting up in advance rather than reacting later.
Pooled Trusts: The Practical Option for Smaller Amounts
A pooled trust is managed by a nonprofit organization that maintains separate sub-accounts for many beneficiaries while investing the funds together.
For smaller amounts, this is often the sensible answer. Setting up and administering a standalone trust for a modest sum can cost more than the structure returns, and a pooled trust gives access to professional administration at a scale an individual trust cannot reach.
Pooled trusts can accept both first-party and third-party funds. First-party sub-accounts carry their own payback or retention rules, which vary by organization and are worth reading closely before choosing one.
What the Trustee Can and Cannot Pay For
This is where well-intentioned trustees create problems. Distributions are not simply “allowed” or “not allowed”; some reduce benefits without disqualifying anyone.
Cash handed directly to the beneficiary is generally treated as income and is the clearest mistake. Payments the trust makes for food or shelter can reduce an SSI payment under the in-kind support rules, without ending eligibility.
Distributions that typically work well are the ones that improve quality of life without substituting for what benefits already cover:
- Education, tutoring, and vocational training
- Travel, recreation, hobbies, and companionship
- Electronics, computers, and internet service
- Therapies, medical equipment, and care not covered by benefits
- A vehicle and its ongoing costs
- Professional services: legal, tax, care management
ABLE accounts are worth knowing about alongside a trust. They let a person with a qualifying disability hold funds in their own name for disability-related expenses, within annual contribution limits and a balance threshold, and they complement rather than replace a special needs trust.
Get the distribution rules right before the trustee has to guess.
Choosing a Trustee
The trustee decides what gets paid for, keeps records, and navigates benefit rules that change. It is an administrative job as much as a family one.
A family member knows the beneficiary and will act out of love, but may not know the benefit rules well enough to avoid a costly distribution. A professional trustee knows the rules and charges for the service. Many families use both: a professional trustee for administration and a family member with an advisory role, so neither the relationship nor the compliance depends entirely on one person.
Whatever the choice, name successors. This trust may need to run for decades, and the person who is right for it today will not always be available.
Frequently Asked Questions
What is the difference between a first-party and a third-party special needs trust?
It comes down to whose money funds it. A third-party trust is funded with someone else’s assets, usually a parent’s, and has no government payback, so anything left goes to whoever you named. A first-party trust holds the beneficiary’s own money, must be established before they turn 65, and must repay the state for Medicaid benefits when they die.
California removed the Medi-Cal asset limit in 2024. Do I still need a special needs trust?
In most cases yes. California eliminated the asset limit for Medi-Cal eligibility effective January 1, 2024, but SSI is a federal program with its own resource limit that the state cannot change, and other means-tested programs still apply. A special needs trust also provides structure, a trustee, and long-term management that an outright inheritance does not.
Can I just leave my child’s share to a sibling to hold for them?
It is legal, but it is not protection. Money left to a sibling belongs to the sibling. It is exposed to their creditors, their divorce, and their own estate, and the arrangement depends on relationships holding for decades. A third-party special needs trust accomplishes the same intent with legal force behind it.
What can the trust pay for without affecting benefits?
Generally, things that improve quality of life without substituting for what benefits already cover: education, travel, recreation, electronics, uncovered therapies and equipment, a vehicle, and professional services. Cash given directly to the beneficiary is usually treated as income, and payments for food or shelter can reduce an SSI payment under the in-kind support rules.
Who should serve as trustee of a special needs trust?
It depends on the balance between knowledge of the beneficiary and knowledge of benefit rules. Family members bring the first, professional trustees bring the second, and many families combine them. Whatever the structure, name successor trustees, because this trust may need to operate for decades.
Key Takeaways
- A special needs trust keeps assets from counting as the beneficiary’s own resource.
- Third-party trusts are funded with your money and carry no government payback.
- First-party trusts hold the beneficiary’s own money, require establishment before age 65, and repay Medi-Cal at death.
- California removed the Medi-Cal asset limit in 2024, but SSI’s federal resource limit still applies.
- Cash to the beneficiary, and payments for food or shelter, are the distributions most likely to cause problems.
Plan it once, properly, so the people who come after you aren’t guessing.
About the Firm
Trust Law Legacy Group, APC is an estate planning, trust, and probate law firm in San Jose, California, serving families across Santa Clara County and the greater Bay Area. Our team includes a State Bar of California-certified specialist in Estate Planning, Trust and Probate Law.
This article is general information about California law, not legal advice, and reading it does not create an attorney-client relationship. Every family’s situation is different. Talk to a lawyer about yours.
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