How the New Rules for Special Needs Trusts Can Benefit You Today

Recent legal updates have reshaped how special needs trusts are managed and established, particularly in Texas. These changes affect who can create a trust, how funds can be used, and what reporting requirements you must follow. If you or someone you care for relies on public assistance like Medicaid or Supplemental Security Income (SSI), it’s important to understand how the new rules for special needs trust apply to your situation.

Special needs trusts are designed to protect assets for someone with a disability without affecting their eligibility for government benefits. With the new rules in place, you may have more control over how the trust works and how the money is spent. But the details matter, and here’s what you should know: 

• Why the New Rules for Special Needs Trusts Were Introduced
• How the New Rules for Special Needs Trust Affect Your Benefits
• Tax and Legal Considerations Under the New Rules for Special Needs Trust
• Choosing the Right Trustee Under the New Rules for Special Needs Trust
• Reviewing and Updating Existing Trusts
• When the New Rules for Special Needs Trust May Not Be Enough

Why the New Rules for Special Needs Trusts Were Introduced

The new rules for special needs trusts came in response to long-standing concerns about fairness, control, and personal autonomy. Before 2016, if you were a competent adult with a disability living in Texas, you still couldn’t create your own first-party special needs trust. Only a parent, grandparent, legal guardian, or the court could do it on your behalf. That changed with the passage of the 21st Century Cures Act, signed into law on December 13, 2016.

This law amended 42 U.S.C. §1396p(d)(4)(A), allowing mentally competent individuals with disabilities under age 65 to establish their own special needs trust—without needing court approval or assistance from a family member. In Texas, this was a welcome shift, especially for those navigating Medicaid eligibility through the Texas Health and Human Services Commission (HHSC).

Now, if you’re over 18, legally disabled, and mentally capable of managing your affairs, you can establish your own first-party (d)(4)(A) special needs trust. This change supports your ability to make your own choices about long-term care, financial security, and government benefit protection.

Here’s what else changed:

Self-Settled Trusts

Texas residents can now set up their own first-party special needs trust, so long as the trust complies with Texas Medicaid policy and federal law. This is particularly helpful if you receive a personal injury settlement, inheritance, or other assets that could otherwise disqualify you from SSI or Medicaid.

Trustee Discretion 

Trustees still control how the trust funds are used. However, the Texas HHSC follows federal SSA guidelines (including POMS) that specify acceptable expenses. These may include medical care, therapy, transportation, education, housing, and recreation—so long as they don’t provide you with cash or countable income under SSI rules.

Payback Provisions

This rule didn’t change. In Texas, just like elsewhere, Medicaid must be reimbursed from any assets left in a first-party special needs trust after your death. The state has the first claim before any remaining funds go to other beneficiaries.

Oversight & Compliance

The Texas HHSC and SSA require specific documentation when a trust is created or amended. You’ll need to ensure the trust meets Texas Medicaid asset and income rules, is irrevocable, and includes required language about Medicaid repayment. SSA will review the trust to determine if your SSI eligibility remains unaffected.

How the New Rules for Special Needs Trust Affect Your Benefits

Public benefits like Supplemental Security Income (SSI) and Texas Medicaid have strict income and asset limits. A properly structured special needs trust protects your eligibility by legally separating your assets from your personal resources. However, recent updates—especially through SSA’s revised guidance—clarify how trust disbursements can affect your benefits.

For Texas residents, understanding how distributions are categorized is critical to preserving your SSI and Medicaid eligibility.

How Distributions Can Affect Your SSI and Medicaid in Texas:

Shelter and Food Disbursements:

If your special needs trust pays for housing costs (like rent, mortgage, property tax, or utilities) or food, SSA treats these as in-kind support and maintenance (ISM). This could reduce your monthly SSI benefit—but not eliminate it altogether. In 2025, the standard ISM reduction (called the Presumed Maximum Value rule) still applies.

Medicaid eligibility in Texas is usually tied to SSI eligibility for most disabled individuals. So, any reduction or suspension of SSI due to ISM may affect your Medicaid access as well.

Cash Disbursements Are Counted as Income

If your trustee gives you cash directly or reimburses you for purchases you made, the SSA counts that as unearned income. This could disqualify you from SSI and possibly trigger a Medicaid review under Texas Health and Human Services Commission (HHSC) policy.

To protect your benefits:

• The trustee should never issue direct payments to you.
• Reimbursements should be avoided unless the trust is paying a credit card strictly used for your trust-approved purchases.
  

Preferred Methods of Disbursement

The SSA and Texas Medicaid rules favor disbursements that do not give you direct control over the funds. Instead, trustees should:

• Pay third-party service providers directly (e.g., therapy clinics, special education tutors, or caregivers).
• Purchase goods and services on your behalf using trust-owned debit cards or checks—not personal accounts.
• Maintain detailed records, including receipts and purpose of each disbursement, for both SSA and HHSC reviews.

What’s New Under the Updated SSA Guidance:

The SSA’s Program Operations Manual System (POMS), particularly SI 01120.201 and SI 01120.203, has been updated to reflect stricter interpretation of allowable expenses and reporting. Trustees are now expected to:

• Follow precise disbursement protocols to ensure SSI is not unintentionally reduced or suspended.
• Prepare for periodic trust reviews by SSA or Texas HHSC that examine whether the trust is being administered according to federal and state guidelines.
• Provide justifications for each expense, especially for anything related to shelter, food, or recurring services.

Tax and Legal Considerations Under the New Rules for Special Needs Trust

The new rules don’t change the federal tax treatment of special needs trusts, but they do reinforce the importance of how income is reported.

• First-party trusts are considered grantor trusts for tax purposes. That means you, as the beneficiary, are responsible for paying taxes on trust income.
• Third-party trusts, where someone else (like a parent) funds the trust, are taxed differently and may file their own tax return.

If your trust earns interest or dividends, you must report this income unless the trust is structured to pay taxes itself.

In Texas, special needs trusts are governed by both federal law and the Texas Property Code. Texas recognizes special needs trusts established under 42 U.S.C. § 1396p(d)(4)(A) and enforces the Medicaid payback requirement after your death for first-party trusts.

These legal frameworks can be difficult to manage on your own. Trustees must be careful with how funds are spent, recorded, and reported to avoid legal or tax complications.

Choosing the Right Trustee Under the New Rules for Special Needs Trust

The trustee plays a central role in your trust’s success. The new rules for special needs trust make it even more important to choose someone with the ability, integrity, and time to handle their duties.

Some families appoint a parent or close relative, while others choose a professional trustee such as a trust company or attorney. In Texas, your trustee must follow both federal standards and local trust administration rules.

Ask yourself:

• Does the person understand the rules for SSI and Medicaid?
• Can they manage money responsibly?
• Will they document every transaction?
• Are they willing to consult professionals when needed?

You may also choose a co-trustee setup, where a family member makes day-to-day decisions and a professional trustee handles legal and tax matters.

Reviewing and Updating Existing Trusts

If your current special needs trust was created before the rule changes, it may still be valid but could need updates. Consider reviewing it to ensure:

• It includes proper language around discretionary distributions
• It identifies the right payback provisions
• The trust complies with new SSA reporting guidance
• The trust is aligned with your current needs and future goals

An outdated trust might still work but could create unnecessary problems or limit your benefits.

When the New Rules for Special Needs Trust May Not Be Enough

The new rules for special needs trust are helpful, but not every situation fits neatly within them. For example:

• If you expect a large inheritance or personal injury settlement, the trust must be carefully structured.
• If you have dual eligibility (SSI and SSDI), the trustee must understand both programs.
• If you move out of state, some rules may change. Although the federal framework is consistent, state-specific Medicaid rules might differ slightly.

In these cases, you may want to combine a special needs trust with other planning tools, such as an ABLE account, to give you more flexibility.

Conclusion

The new rules for special needs trust have given you more control over your future and clearer guidelines for trustees. These changes support independence, protect your access to essential benefits, and reduce the need for court involvement.

However, the rules are specific and the stakes are high. A misstep could lead to lost benefits or financial penalties. Understanding how the rules work, choosing the right trustee, and reviewing your documents regularly are key steps in making sure your trust continues to serve your best interests.

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