Special Needs Trusts: Protecting Your Benefits After a Settlement

Supplemental Security Income and Medicaid are needs-based. Eligibility depends on staying under a resource limit that has not moved in decades: $2,000 for an individual, $3,000 for a couple.

A settlement paid into your own name is a countable resource. Even a modest recovery puts you over the limit immediately, and the benefits stop. For someone whose injury requires attendant care, therapy, medication and equipment, losing Medicaid frequently costs more over a lifetime than the settlement was worth.

A special needs trust breaks the link between having money and owning it. The trust holds the funds; you are the beneficiary but you do not control them. Because the resource is not yours to spend at will, it is not counted.

The distinction that matters most is whose money funded the trust, because it decides whether the state has to be repaid.

A first-party trust, sometimes called a self-settled or (d)(4)(A) trust, is funded with the beneficiary's own money. A personal injury settlement is the classic example: the money is legally yours, so a first-party trust is what applies. It is authorised by 42 U.S.C. §1396p(d)(4)(A), and it carries a Medicaid payback obligation.

A third-party trust is funded by someone else, typically a parent or grandparent planning ahead. Because the money was never the beneficiary's, there is no payback requirement, and whatever remains can pass to other family members. This is why families are often advised never to leave money directly to a disabled relative, and to leave it to a third-party trust instead.

A pooled trust under §1396p(d)(4)(C) is run by a non-profit association, which pools funds for investment while keeping a separate account for each beneficiary. Pooled trusts are often the right answer for smaller settlements where a standalone trust is not economical, and, unlike a (d)(4)(A) trust, they can be established for a beneficiary aged 65 or over.

A (d)(4)(A) trust is only excluded from countable resources if it satisfies every statutory condition, and SSA applies them strictly.

The beneficiary must be under 65 when the trust is established and funded, and must meet the Social Security definition of disability. The trust must be for the sole benefit of that beneficiary. And the trust must provide that on the beneficiary's death, the state receives whatever remains, up to the total amount of medical assistance Medicaid paid on their behalf.

Since the Special Needs Trust Fairness Act of 2016, a beneficiary with capacity can establish their own trust. Before that it had to be created by a parent, grandparent, legal guardian or a court, which added expense and delay for people who were perfectly capable of acting for themselves.

SSA evaluates trusts under its Program Operations Manual System, and the resource-counting rules for trusts are set out at POMS SI 01120.200 and following. A trust that looks fine to a layperson can still fail these tests on a technicality, which is why drafting is a job for an attorney who does this work regularly.

The trust is meant to pay for things benefits do not: therapies not covered by Medicaid, adaptive equipment, home modifications, an accessible vehicle, education, travel, technology, and the ordinary parts of a life that public benefits were never designed to fund.

What requires care is anything that looks like food or shelter. Under SSA's in-kind support and maintenance rules, trust payments for those categories can reduce the SSI payment rather than being ignored. The reduction is capped, and in many cases the trade is worth making deliberately, but it should be a decision rather than a surprise.

Cash handed directly to the beneficiary is counted as income. Distributions are normally made by paying a provider or vendor directly instead, which is one of the routine things a professional trustee handles so the beneficiary never has to think about it.

An ABLE account is not a substitute for a special needs trust, but the two work well together. ABLE accounts allow a person whose disability began before a statutory age threshold to save in a tax-advantaged account without the balance counting against the SSI resource limit, subject to annual contribution limits and a balance cap.

In practice a settlement is far too large for an ABLE account alone, so the usual structure is a trust holding the settlement, with modest transfers into an ABLE account for expenses the beneficiary can manage directly, including housing costs that would otherwise trigger the in-kind support reduction.

The failure modes here are avoidable and expensive: taking the settlement into your own name first, funding the wrong type of trust, missing the under-65 window, drafting language that does not satisfy the payback requirement, or making distributions that count as income.

The order matters. The trust should exist and be ready to receive funds before the settlement is disbursed, and the Medicaid lien on the recovery should be resolved as part of the same process rather than afterwards.