Can You Use Special Needs Trust for Medicaid Without Losing Eligibility?

If you’re planning for a loved one with a disability, you might ask: can you use special needs trust for Medicaid? The short answer is yes—but only when the trust meets specific requirements. If done incorrectly, even a well-meaning trust could disqualify someone from benefits like Medicaid or Supplemental Security Income (SSI).

To protect benefits and still provide extra financial support, you’ll need a trust structure that complies with both federal and state laws. Here’s what you should know before setting one up.

• What Is a Special Needs Trust and How Does It Work With Medicaid?
• What Are the Different Types of Special Needs Trusts You Can Use for Medicaid?
• How Can You Use Special Needs Trust Funds Without Violating Medicaid Rules?
• What Happens If a Special Needs Trust Is Drafted Incorrectly?
• Can You Transfer Assets Into a Special Needs Trust Without Affecting Medicaid?
• Can You Still Use a Special Needs Trust If the Beneficiary Already Gets Medicaid?
• Are There Costs or Requirements to Maintain a Special Needs Trust for Medicaid?

What Is a Special Needs Trust and How Does It Work With Medicaid?

A special needs trust (SNT) is a legal tool that allows you to provide funds to someone with a disability without disrupting their access to means-tested benefits like Medicaid. These trusts are designed to hold assets for the benefit of a person who is disabled, while ensuring that those assets do not count against income or resource limits for government programs.

You can use a special needs trust for Medicaid if:

• The trust is structured under the rules allowed by federal and Texas law.
• The beneficiary is under age 65 at the time of the trust’s creation.
• The trust is set up for the sole benefit of a person with a documented disability.
• The trust funds are used only for supplemental needs, not basic support.

In Texas, Medicaid eligibility generally requires that the applicant have limited income and assets. As of the most recent guidelines, countable resources must not exceed $2,000 for an individual. A properly structured SNT keeps the funds in the trust from being considered countable assets.

What Are the Different Types of Special Needs Trusts You Can Use for Medicaid?

You can use one of three types of special needs trusts for Medicaid eligibility. Each has its own requirements and use cases:

1. First-Party Special Needs Trust

Also called a (d)(4)(A) trust, this type is funded with the disabled person’s own money. Common sources include:

• Personal injury settlements
• Inheritances received outright
• Divorce settlements
• Savings that exceed asset limits

To be valid for Medicaid purposes in Texas, the trust must:

• Be established by a parent, grandparent, guardian, or the court
• Be set up before the beneficiary turns 65
• Include a payback provision for Medicaid upon the beneficiary’s death

2. Third-Party Special Needs Trust

This version is funded with someone else’s money—usually a parent or grandparent. It can be set up during the donor’s lifetime or through a will. Importantly:

• It does not need to repay Medicaid when the beneficiary dies
• It’s used for future planning, such as leaving assets in a will
• It avoids the need for probate court in some cases

You can use this type of special needs trust for Medicaid without risking disqualification, as long as the beneficiary does not have control over the funds.

3. Pooled Trust

In Texas, pooled special needs trusts are administered by nonprofit organizations. Each beneficiary has a separate account, but all funds are managed collectively.

This option works well if:

• You don’t have a family member to serve as trustee
• You want lower administrative fees
• The amount of money going into the trust is relatively modest

It’s also eligible for Medicaid, but must include a Medicaid payback clause unless the funds stay in the nonprofit upon the beneficiary’s death.

How Can You Use Special Needs Trust Funds Without Violating Medicaid Rules?

Once you set up a valid trust, how you use the money matters. Medicaid rules in Texas and federally prohibit the trust from paying directly for housing or food unless it’s done very carefully. Such payments might reduce the person’s SSI benefit or affect other supports.

Acceptable uses that won’t typically affect Medicaid eligibility include:

• Medical and dental care not covered by Medicaid
• Therapy or rehabilitation services
• Transportation (such as a vehicle or transit passes)
• Education or training
• Electronics, phone, and internet services
• Clothing and personal items
• Recreation and travel for therapeutic or social benefit

To avoid problems, you should ensure the trustee pays vendors directly rather than giving cash to the beneficiary. Keeping accurate records of all disbursements is critical.

What Happens If a Special Needs Trust Is Drafted Incorrectly?

If a trust fails to meet the requirements under federal law or Texas Medicaid policy, the assets in the trust could be treated as countable resources. That would make the beneficiary ineligible for Medicaid or other programs like SSI.

Common mistakes include:

• Letting the beneficiary have control over the trust assets
• Using trust funds for prohibited expenses like rent or groceries without proper planning
• Failing to include required provisions (such as Medicaid payback in first-party trusts)
• Naming the wrong type of trustee
  

Once Medicaid eligibility is lost, it can be difficult and time-consuming to fix. You may have to go to court, restructure the trust, or spend down assets before reapplying. That’s why it’s important that your special needs trust meets all technical requirements the first time.

Can You Transfer Assets Into a Special Needs Trust Without Affecting Medicaid?

You can transfer assets into certain types of special needs trusts, but how and when you do it matters. In Texas, transferring assets to a third-party special needs trust is generally safe and doesn’t affect the disabled person’s Medicaid eligibility—because the assets were never theirs.

However, transferring your own assets into a first-party special needs trust does raise flags. Medicaid rules allow this transfer without penalty only if:

• The trust meets the (d)(4)(A) criteria
• The beneficiary is under 65 at the time of transfer

If the beneficiary is older than 65, or if the transfer is made to a noncompliant trust, Medicaid may treat it as a disqualifying transfer. This can trigger a penalty period, where the person cannot receive benefits for a set time based on the amount transferred.

Can You Still Use a Special Needs Trust If the Beneficiary Already Gets Medicaid?

Yes, you can use a special needs trust even if the beneficiary is already on Medicaid. The trust must still meet all the same legal and structural requirements, but the key benefit is that it helps preserve eligibility going forward.

You might do this if:

• The person receives a sudden windfall, like a settlement or inheritance
• You want to protect assets from being spent down unnecessarily
• You need a legal method to manage and spend money for the person without putting their benefits at risk

Timing and structure are everything. For example, if the trust is funded after the person turns 65, you’ll be limited to pooled trust options unless already grandfathered under prior rules.

Are There Costs or Requirements to Maintain a Special Needs Trust for Medicaid?

Yes, you’ll need to budget for:

• Legal fees to draft the trust correctly
• Trustee fees if you appoint a professional or corporate trustee
• Annual trust accounting and tax filings
• Compliance reviews to ensure distributions remain within Medicaid rules

Failure to comply with these requirements can cause disqualification from benefits. If you’re the trustee or plan to appoint one, make sure that person understands the Medicaid rules in Texas and knows how to handle trust administration properly.

Conclusion

You can use a special needs trust for Medicaid if it’s carefully structured and administered according to both federal and Texas law. These trusts allow you to support a loved one with a disability without putting their benefits at risk. However, getting the details wrong—even unintentionally—could lead to a loss of crucial services.

Understanding the type of trust, how the funds can be used, and what rules apply can help you make better decisions for your family. Whether you’re setting up a trust in advance or responding to a recent change in financial status, taking the right legal steps ensures long-term peace of mind.

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