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In one page
| The problem | The solution |
|---|---|
| Most benefits for people with disabilities, such as SSI and Medicaid, stop when the person has more than $2,000 in their own name | A special needs trust holds the inheritance, so it is never in your loved one's name |
| An inheritance, life insurance payout, or retirement account left directly to them can end their benefits overnight | Your will, trust, policies, and accounts name the trust as beneficiary instead of your loved one |
| Leaving it to a sibling "to take care of them" puts the money at risk in that sibling's divorce, debts, or death | A trustee you choose manages the money under written rules, solely for your loved one |
| Some trusts must repay Medicaid when the beneficiary dies | A third-party trust funded with your money never has to pay Medicaid back |
The trust lets you leave as much as you want to a loved one with a disability, keep every benefit they rely on, and pass whatever is left to the rest of your family.
What a third-party special needs trust is
A special needs trust is a legal container that holds money and property for a person with a disability. The trustee uses it to pay for things that make life better, while the person keeps qualifying for needs-based government benefits. Because the money belongs to the trust and not to your loved one, the benefit programs do not count it.
"Third-party" means the money comes from someone other than the beneficiary: you, a grandparent, an aunt, or anyone else who wants to help. That one fact is what makes this kind of trust so valuable. When your loved one dies, whatever is left goes to the people you choose, not to the State.
The trust is sometimes called a supplemental needs trust, because it supplements benefits rather than replacing them.
Third-party and first-party trusts are different
| Third-party trust | First-party trust | |
|---|---|---|
| Whose money | Yours, or any relative or friend's | The beneficiary's own money, such as a lawsuit settlement or an inheritance already received |
| Pays Medicaid back at death | No | Yes. Medicaid is repaid first from what is left |
| What happens to what is left | Goes to the family members or charities you name | Goes to Medicaid first, then to others |
| When it is set up | Any time, often as part of your own estate plan | After the beneficiary already has money of their own |
Why leaving it outright is risky
Needs-based benefits have strict limits. Supplemental Security Income (SSI) stops for any month a single person has more than $2,000 in countable assets. In most states, SSI also brings Medicaid with it, and Medicaid pays for doctors, hospital stays, medicine, therapies, and long-term care services that few families could pay for on their own.
One inheritance can undo it all. If you leave $100,000 directly to your loved one, they will likely lose SSI and Medicaid until that money is spent down. Once it is gone, they must reapply, and some services, such as Medicaid waiver programs, can have waiting lists measured in years.
It also puts the money at risk. Money in your loved one's own name can be taken by people who do not have their interests at heart, lost to a bad decision, or claimed by creditors.
Who should have one
Consider a third-party special needs trust for any beneficiary who receives, or is likely to receive:
- Supplemental Security Income (SSI)
- Medicaid, including Medicaid waiver services for home and community care
- Housing assistance, such as Section 8 or public housing
- SNAP (food assistance) or other programs with income and asset limits
Even if they do not receive benefits today. A child who is young, an adult with a progressive illness, or a family member who may need long-term care later can all benefit. The trust costs nothing to hold until it is funded, and it keeps every option open.
The benefits of leaving it this way
Benefits stay in place. Because the trust owns the money, SSI and Medicaid do not count it. Your loved one keeps the health coverage and income they rely on.
No payback to Medicaid. A third-party trust funded with your money never has to repay the State. Whatever is left when your loved one dies goes to the people you name.
A better life, not just a basic one. The trust can pay for the things benefits never cover: therapies, education, a computer, travel, recreation, a better wheelchair, a trip home for the holidays.
Protection from people and problems. The money cannot be taken by a creditor, a scam, a bad influence, or a divorce. Your loved one cannot be pressured into giving it away.
A trustee you trust, following your wishes. You choose who manages the money and write down how you want it used. You can name backups and a trust protector to keep it working for decades.
Your family, not the court. The trust avoids the need for a court-supervised guardianship of the inheritance, and it keeps family affairs private.
Room for everyone to help. Grandparents, aunts, uncles, and friends can leave gifts to the same trust, so every gift is protected in one place.
What the trust can pay for
The trustee pays for goods and services directly, rather than handing cash to your loved one. The rules below are the general federal rules for SSI; Medicaid follows similar rules. We go over the details with your trustee.
| Usually no effect on benefits | Handle with care |
|---|---|
| Medical and dental care Medicaid does not cover, therapies, and equipment | Cash or gift cards given to your loved one reduce SSI dollar for dollar |
| Education, tutoring, and job training | Rent, mortgage, property tax, and utilities can reduce SSI by a capped amount (no more than about $351 a month in 2026) |
| Phone, internet, a computer, and entertainment | Buying a home or car: often fine, but should be planned first |
| Travel, recreation, classes, and hobbies | Paying a family member for care: needs a written agreement |
| Clothing, furniture, and household items | Large purchases in the beneficiary's name that could count as assets |
| A care manager, advocate, or companion | Anything the trustee is unsure about: ask first, pay later |
Food no longer counts against SSI
Since September 30, 2024, the Social Security Administration no longer reduces SSI when someone else pays for your loved one's food. That gives the trustee more room to help with groceries and meals.
Many trustees also use an ABLE account alongside the trust. An ABLE account lets your loved one hold money in their own name, up to set yearly limits, without losing SSI on the first $100,000. Starting in 2026, people whose disability began before age 46 can open one.
How it works, step by step
We meet and plan. We talk about your loved one, the benefits they receive or may need, your family, and what you own. We decide whether the trust should stand on its own or be built into your will or living trust.
We draft the trust. The document names the trustee and backups, explains how the money may be used, and says who receives what is left. It includes the language benefit programs look for, so the trust is not counted.
You sign. You sign in front of a notary. Your trustee signs to accept the job.
We point your estate to the trust. We update your will or living trust, and we help you change the beneficiary on life insurance, retirement accounts, and bank accounts so they pay to the trust, not to your loved one.
You write a letter of intent. A short, plain letter tells the trustee about your loved one: routines, doctors, likes and dislikes, and what a good life looks like to them. It is not legally binding, but it is often the most useful page in the plan.
The trust is ready when it is needed. The trust can wait quietly until your death, or receive gifts now. Relatives can name it in their own plans at any time.
The trustee takes over. After your death, the trustee collects the money, invests it, pays for your loved one's needs, keeps records, and files a yearly tax return for the trust.
What is left goes to your family. When your loved one dies, the trustee pays final expenses and distributes what is left to the people or charities you named. No Medicaid payback.
Ways to fund the trust
| Source | How it reaches the trust |
|---|---|
| Your will or living trust | Your loved one's share passes to the special needs trust instead of to them |
| Life insurance | The trust is named as beneficiary of the policy, often the simplest way to fund it |
| Retirement accounts (IRAs, 401(k)s) | The trust is named as beneficiary. A properly drafted trust for a person with a disability can still stretch withdrawals over their lifetime |
| Gifts from relatives | Grandparents and others name the trust in their own wills and beneficiary designations |
| Gifts during your life | You can add money now; the trust holds it and it stays protected |
Tell the grandparents
A generous gift left directly to your loved one by a well-meaning relative can cause the same harm as your own. Once the trust exists, share its name with family members so they can leave gifts to it instead.
Who can be the trustee
Most families name a sibling, another relative, or a trusted friend, often with a backup. Some name a professional or a bank trust department, alone or alongside a family member. The trustee should be organized, patient, and willing to learn the benefit rules or ask before spending. We can meet with your trustee at no cost to help them understand their obligations and responsibilities.
When a first-party trust is the right tool
A third-party trust is the best choice for money that comes from you and your family. Sometimes, though, the money already belongs to the person with the disability. When that happens, a different kind of trust, called a first-party or self-settled special needs trust, can protect their benefits.
Situations where it is usually needed
- A personal injury or medical malpractice settlement paid to your loved one
- An inheritance or life insurance payout already left to them directly by someone who did not plan ahead
- A large lump sum of Social Security back pay
- Child support, alimony, or a divorce settlement paid for their benefit
- Savings they built up before becoming disabled or before applying for benefits
The rules it must follow
| Rule | What it means |
|---|---|
| Age | The beneficiary must be under 65 when the trust is set up and funded |
| Who can create it | The beneficiary, a parent, a grandparent, a guardian, or a court |
| Sole benefit | The money may be used only for the beneficiary, not for other family members |
| Medicaid payback | When the beneficiary dies, Medicaid is repaid for the care it provided before anything passes to family |
How a pooled trust works
A pooled trust is a special needs trust run by a nonprofit organization. Each person has their own separate account, with its own records, but the nonprofit invests the money of all its members together and handles the paperwork. Like a first-party trust, it protects money that already belongs to the person with the disability, so they keep their benefits.
Families usually choose a pooled trust when the amount is modest, when no relative is able or willing to serve as trustee, or when the person is 65 or older and can no longer use a first-party trust.
| Advantages | Things to weigh |
|---|---|
| No family trustee needed. The nonprofit manages the account, invests it, and keeps the records. | Less control. The nonprofit approves each payment under its own policies, which can take time. |
| Open at any age. There is no under-65 rule, although some states treat funding after 65 as a gift. | Fees. Expect an enrollment fee and a yearly fee, usually a percentage of the account. |
| Works for smaller amounts. Many accept accounts that would be too small to justify a private trust. | What is left at death. The nonprofit may keep some or all of it to help other members, and Medicaid is repaid from the rest. |
| Fast to set up. Your loved one joins by signing an enrollment agreement rather than drafting a full trust. | You choose the nonprofit, not the rules. Each pooled trust has its own agreement, fees, and spending policies. |
Joining a pooled trust
Choose the trust. We compare the pooled trusts available in your state: fees, minimums, how quickly they pay, and what happens at death.
Sign the enrollment agreement. Your loved one, a parent, a grandparent, a guardian, or a court signs to open the account.
Fund the account. The money is deposited, and we notify the benefit agencies so eligibility continues without a break.
Request payments as needs arise. The family sends requests to the nonprofit, which pays vendors directly for approved items.
Some pooled trusts also accept family money into a separate third-party account that never repays Medicaid. That can be a good choice for relatives who want to help but do not want to set up a trust of their own.
First-party, pooled, or ABLE: choosing well
There is more than one way to protect money that belongs to your loved one. The right choice depends on the amount, their age, and how much flexibility they need.
| First-party trust | Pooled trust | ABLE account | |
|---|---|---|---|
| Best for | Larger sums, such as a settlement | Smaller sums, or when no family trustee is available | Everyday spending, up to yearly limits |
| Who manages it | A trustee you choose | A nonprofit organization | The beneficiary or a family member |
| Age limits | Set up before age 65 | Available at any age, though rules for those over 65 vary by state | Disability began before age 46 (starting 2026) |
| Medicaid payback | Yes | Yes, unless the nonprofit keeps what is left | May apply, depending on the state |
Keep the two trusts separate
Many families need both: a third-party trust for gifts and inheritances from relatives, and a first-party trust for money that already belongs to their loved one. Never put family money into a first-party trust. It would become subject to Medicaid payback for no reason.
Plan before the money arrives. If a settlement is pending, a first-party trust can be set up first and the settlement paid straight into it, so your loved one never owns the money and never loses a month of benefits.
The payback is not a reason to avoid it. Without the trust, the money would be spent down on care, and benefits would stop until it was gone. With the trust, your loved one keeps their benefits and uses the money to improve their life.
Related tools, in brief
Three other terms come up often in special needs planning. Each has a place, and none replaces a well-drafted trust.
ABLE accounts
A tax-advantaged savings account your loved one can own and use themselves, much like a college savings account.
- Available when the disability began before age 46 (starting in 2026)
- Anyone can contribute, up to $19,000 a year in total in 2026
- The first $100,000 does not count against SSI, and the balance does not count for Medicaid
- Pays for housing, education, transportation, health care, and other disability-related costs
- Medicaid may claim what is left at death, so larger sums belong in a third-party trust
Guardianship
A court process in which a judge appoints someone to make personal decisions, such as health care and where to live, for an adult who cannot make them safely.
- Often considered when a child with a disability turns 18 and parents lose their legal authority
- Can be full or limited to specific decisions
- Requires court filings, hearings, and ongoing reports
Conservatorship
A court process in which a judge appoints someone to manage an adult's money and property. In some states this is part of guardianship; in others it is a separate proceeding.
- Includes court supervision, yearly accountings, and often a bond
- Can be costly and slow compared with a trust
- A special needs trust usually avoids the need for one, because the trustee already manages the money
Common mistakes to avoid
We would rather you hear these from us now than learn them after a benefit is lost.
- Leaving an inheritance directly to a loved one who receives benefits, or might one day.
- Naming your loved one directly on a life insurance policy, a retirement account, or a payable-on-death bank account. These pass outside your will.
- Leaving everything to a sibling with a spoken promise to "take care of" them. That money belongs to the sibling, and it is exposed to their divorce, debts, and death.
- Using a first-party trust form, which forces a Medicaid payback that a third-party trust avoids.
- Relying on a generic online form. One wrong power, such as requiring the trustee to pay for support, can make the trust count against benefits.
- Forgetting to tell grandparents and other relatives about the trust.
- Never updating the plan when benefits, laws, or family circumstances change.
- Having the trustee hand cash to the beneficiary rather than paying bills directly.
Frequently asked questions
My loved one does not receive benefits now. Do we still need this?
Often, yes. If there is a reasonable chance they will need SSI, Medicaid, or long-term care later, the trust protects that option. If they never need benefits, the trustee can still use the money freely for them, and the trust protects it from creditors and poor decisions.
Does the trust pay Medicaid back when my loved one dies?
No. That is the key difference between a third-party trust and a first-party trust. Because the money was never your loved one's, Medicaid has no claim to it.
Can my loved one be the trustee?
No. If the beneficiary controlled the money, benefit programs would count it. They can, and should, be part of the conversation about how it is spent.
What about SSDI and Medicare?
SSDI and Medicare are not based on assets, so an inheritance does not affect them. Many people on SSDI also receive Medicaid or SSI, which do have limits. We check which benefits your loved one has.
Is an ABLE account enough by itself?
Usually not. ABLE accounts have yearly contribution limits and, unlike a third-party trust, may have to repay Medicaid at death. They work best alongside the trust.
Can the trust own a house or a car?
Yes. The trust can buy and hold a home or vehicle for your loved one's use. We plan how ongoing costs are paid.
Can I change the trust later?
If the trust is part of your will or living trust, you can change it any time while you are alive. We build in a trust protector who can make technical changes after your death if the law changes.
Who pays taxes on the trust's income?
The trust files its own tax return each year. Many special needs trusts qualify for a special tax exemption for disability trusts, which lowers the tax.
How much should I leave in the trust?
It depends on your loved one's needs, age, and other resources. Many families use life insurance to make sure the trust is large enough. We help you think through the number.
What happens if we move to another state?
SSI rules are federal and apply everywhere. Medicaid rules vary by state, so we review the plan if you or your loved one moves.
Why families choose Trusted Plan Lawyers
Plans built for real families. We draft every special needs trust around your loved one, not from a generic form.
Plain English. You will understand every page before you sign, and so will your trustee.
Your trustee is not alone. We can meet with your trustee at no cost to help them understand their obligations and responsibilities.
A partner for life. When benefits, laws, or your family change, we are still here.
Your next steps
List the benefits. Write down every benefit your loved one receives now, and any they may need later.
Gather your accounts. Life insurance, retirement accounts, and bank accounts, with their current beneficiaries.
Think about your trustee. Who is organized, patient, and likely to be around? Who is the backup?
Come to your planning meeting. We will walk through everything in this guide and tell you plainly how to set it up.
Ready to protect someone you love?
Call (844) 544-PLAN or visit trustedplanlawyers.com to schedule a planning meeting.
This guide is general information for our clients. It is not legal advice for your specific situation until we have met and reviewed your facts. Benefit figures are federal 2026 amounts published by the Social Security Administration for 2026, and they change each year. State Medicaid rules vary.
Licensed in Mississippi, Louisiana, and the District of Columbia, with more than twenty years helping families plan for incapacity, long-term care, and everything they want to pass on. This guide is general information as of September 2026 and is not legal advice.