Individuals with disabilities often receive needs-based public benefits, such as Supplemental Security Income (SSI) and Medicaid. If you receive these benefits and later come into money, perhaps through an inheritance, lawsuit settlement, or even a back payment from Social Security, a sudden increase in your assets can disrupt your eligibility. This is where a First Party Special Needs Trust becomes a vital planning tool.
Texas law allows you to use a First Party Special Needs Trust to protect assets while maintaining access to essential public benefits. Understanding how these trusts work, when to use them, and how they are set up can help you make informed decisions.
Here’s an in-depth look at what a First Party Special Needs Trust entails, how it is created under Texas law, and the unique requirements you must consider before proceeding:
- What Is a First Party Special Needs Trust?
- Who Should Consider Establishing a First Party Special Needs Trust?
- How Do You Establish a First Party Special Needs Trust in Texas?
- What Must a First Party Special Needs Trust Include?
- What Can a First Party Special Needs Trust Pay For?
- How Does the Medicaid Payback Provision Work?
- Can You Make Changes to a First Party Special Needs Trust?
- What Should You Look for in a Trustee?
- What Happens When You Turn 65?
- Are There Alternatives to a First Party Special Needs Trust?
What Is a First Party Special Needs Trust?
A First Party Special Needs Trust, sometimes called a (d)(4)(A) trust, is funded with assets that belong to the individual with a disability. In other words, this is money or property you own personally, as opposed to funds coming from parents or other third parties.
The Social Security Administration and Medicaid recognize these trusts as exceptions to resource limits. When you place your assets into a properly drafted First Party Special Needs Trust, those assets will not count toward the $2,000 limit that typically applies to SSI and Medicaid eligibility.
Under Texas Estates Code Section 1301, this trust must meet certain criteria:
- You must be under age 65 when the trust is established and funded.
- The trust must be created by a parent, grandparent, legal guardian, or a Texas court.
- The trust must include a Medicaid payback provision. When you pass away, the state will be reimbursed from any remaining assets for Medicaid benefits paid on your behalf.
These core requirements distinguish a First Party Special Needs Trust from other planning options, such as pooled trusts or third-party trusts.
Who Should Consider Establishing a First Party Special Needs Trust?
You may want to explore a First Party Special Needs Trust if you expect to receive, or already have received, significant funds in your own name. Typical situations that trigger the need for this trust include:
- Personal injury or medical malpractice settlements
- Inheritance left outright to you
- Divorce settlements
- Accumulated savings or retroactive Social Security Disability benefits
Without transferring these funds to a First Party Special Needs Trust, you risk exceeding resource limits and losing eligibility for means-tested programs.
It is important to note that if you are already over the age of 65 when funds become available, you cannot use this type of trust. Instead, other planning options, like a pooled special needs trust, may be considered.
How Do You Establish a First Party Special Needs Trust in Texas?
Texas law has clear rules on who may create the trust and how it must be structured. You cannot set up this trust for yourself. One of the following parties must establish it on your behalf:
- A parent
- A grandparent
- A legal guardian
- A court with proper jurisdiction
Often, the process begins with a petition to the court, especially if there is no living parent or grandparent able to act. The court will review the proposed trust instrument to ensure compliance with federal law, Social Security Administration policies, and Texas Medicaid regulations.
Once approved, the trust document must be signed, funded, and administered in strict accordance with the rules. Any failure to comply could result in disqualification of the trust and the counting of the assets against your benefits.
What Must a First Party Special Needs Trust Include?
To qualify for the special exception to resource rules, your trust must have several essential features. The most important requirements include:
- Sole Benefit: All distributions must be for your sole benefit. Funds cannot be used to support other individuals.
- Medicaid Payback Clause: Upon your death, the trust must repay the Texas Health and Human Services Commission or any other state agency for Medicaid expenditures made on your behalf.
- Discretionary Distributions: The trustee must have complete discretion over when and how to make distributions. You cannot compel disbursements or direct the trustee.
- Prohibition on Assignments: You cannot assign or pledge the trust assets to creditors.
- Proper Identification of Funding Source: The trust instrument should clearly state that the funds belong to you.
These elements ensure the trust qualifies for treatment as an exempt resource. Failure to include any one of them can cause the trust to be deemed invalid.
What Can a First Party Special Needs Trust Pay For?
Although distributions must be for your sole benefit, you can still use the trust to pay for many items that enhance your quality of life. Common examples include:
- Medical expenses not covered by Medicaid
- Dental care
- Personal care attendants or aides
- Transportation costs, including a vehicle adapted to your disability
- Education and training
- Internet and telephone services
- Recreational activities
- Durable medical equipment
It is important to recognize that certain payments can reduce your SSI cash benefit. For example, if the trust pays for housing or food, the Social Security Administration may treat this as in-kind support and maintenance, leading to a reduction in monthly benefits. Your trustee must be aware of these potential impacts and plan distributions carefully.
How Does the Medicaid Payback Provision Work?
One of the most distinctive features of a First Party Special Needs Trust is the Medicaid payback requirement. When you pass away, any remaining funds must first be used to reimburse the state for the total amount of Medicaid benefits you received.
The payback process typically works as follows:
- The trustee notifies the state Medicaid agency of your death.
- The agency calculates the amount owed.
- The trustee pays the claim from the trust assets.
- Any remaining funds may be distributed to your other beneficiaries, if allowed under the trust terms.
This payback provision is non-negotiable. Even if you prefer to leave funds to your family members, Medicaid reimbursement must occur first.
Can You Make Changes to a First Party Special Needs Trust?
Once the trust is established and funded, its terms generally remain fixed. However, certain modifications may be permitted with court approval, such as:
- Changing the trustee
- Clarifying administrative provisions
- Correcting drafting errors
Any amendment must be consistent with federal law and not compromise the trust’s compliance with Medicaid and SSI requirements.
What Should You Look for in a Trustee?
The trustee of a First Party Special Needs Trust carries significant responsibility. This person or institution must:
- Manage and invest assets prudently
- Keep detailed records of all transactions
- Ensure all distributions comply with benefit rules
- File annual tax returns and accountings as required
Choosing an experienced trustee familiar with special needs planning and Texas Medicaid rules is essential. Some families opt for a professional fiduciary or trust company to avoid conflicts of interest and ensure compliance.
What Happens When You Turn 65?
Under federal law, you cannot add new assets to a First Party Special Needs Trust once you reach 65. Any additional funds received after this milestone will count as your resources.
However, the trust itself does not terminate solely because you turn 65. Assets already held in the trust can continue to be used for your benefit, subject to the same rules. This distinction is important if you expect to receive multiple disbursements over time.
Are There Alternatives to a First Party Special Needs Trust?
Depending on your circumstances, other planning tools may be appropriate:
- Third-Party Special Needs Trust: Funded with assets belonging to someone other than you, such as a parent’s estate.
- Pooled Trust: Managed by a non-profit association. Assets are pooled for investment purposes but maintained in sub-accounts.
- ABLE Account: A tax-advantaged savings account available to individuals whose disability began before age 26.
Each option has its own eligibility requirements, funding limits, and implications for public benefits.
Conclusion
A First Party Special Needs Trust can protect your eligibility for SSI and Medicaid while allowing you to benefit from assets that would otherwise disqualify you. Texas law requires strict compliance with statutory requirements, and the creation and administration of such a trust demands care and expertise.
Whether you are anticipating a settlement or already hold funds in your name, careful planning can help preserve your benefits and enhance your quality of life.
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Frequently Asked Questions
A First Party Special Needs Trust is funded with your own assets, while a Third-Party Special Needs Trust is funded with assets belonging to someone else, such as parents or grandparents.
No. Under federal and Texas law, the trust must be created by a parent, grandparent, legal guardian, or a court.
Trust distributions used for shelter or food can reduce your monthly SSI benefit, so the trustee must plan payments carefully.
Yes. You must be under age 65 when the trust is established and funded.
Any competent individual or professional fiduciary can serve, but it is important to choose someone with experience administering special needs trusts.
