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Setting up a special needs trust is only one part of protecting a loved one with disabilities. The next, often more difficult step, is understanding how to use the funds properly. Special needs trust spending rules are strict for a reason. If you misuse the trust, even by accident, it could jeopardize your loved one’s eligibility for critical public benefits like Supplemental Security Income (SSI) or Medicaid.
Here’s what you have to know about how special needs trust spending rules work, what they allow, what they limit, and how you can stay compliant when you’re managing funds on behalf of a beneficiary in Texas.
- What Are Special Needs Trust Spending Rules?
- What Can Special Needs Trust Funds Be Used For?
- What Cannot Be Paid for With a Special Needs Trust?
- How Are Spending Decisions Monitored?
- Who Decides If a Purchase Is Allowed?
- How Should Trustees Handle Housing-Related Costs?
- Can the Trust Buy a Home or a Vehicle?
- What Happens If You Violate Spending Rules?
What Are Special Needs Trust Spending Rules?
Special needs trust spending rules refer to the limits placed on how money within the trust can be used. These rules are designed to protect the beneficiary’s eligibility for means-tested programs. Because public programs like SSI and Medicaid set strict income and asset limits, distributions from the trust must be made in a way that supplements—not replaces—those benefits.
To remain compliant, you must understand the distinction between what is considered a supplemental expense versus a basic need that could affect benefit eligibility. A well-managed special needs trust provides additional support without interfering with the services already provided by government programs.
What Can Special Needs Trust Funds Be Used For?
Funds in a special needs trust can be used for a broad range of goods and services, as long as they are not direct payments to the beneficiary for food or shelter. Instead, the funds must be used to enrich the beneficiary’s quality of life.
Examples of approved spending under special needs trust spending rules include:
- Personal care assistants or in-home caregivers
- Transportation expenses (vehicle purchase or modifications)
- Education and tutoring services
- Out-of-pocket medical expenses not covered by insurance
- Therapies (occupational, speech, behavioral)
- Legal fees for benefit advocacy or guardianship
- Travel for recreational or therapeutic purposes
- Cell phones, computers, or tablets
- Clothing and personal grooming items
- Subscriptions (magazines, streaming services)
- Non-food household goods
All purchases must directly benefit the person with special needs. The trustee should keep detailed records, including receipts and explanations, to show that every expense aligns with the trust’s purpose.
What Cannot Be Paid for With a Special Needs Trust?
Misuse of trust funds can cause serious problems. The most common mistake is using trust money for basic food or shelter costs. These are considered “in-kind support and maintenance” under Social Security rules, and if the trust pays for them, the beneficiary’s SSI payments could be reduced.
You must be careful with the following types of expenses:
- Rent or mortgage payments
- Utility bills (electricity, gas, water)
- Groceries or restaurant meals
- Cash payments or gift cards given directly to the beneficiary
- Direct deposits into the beneficiary’s personal account
However, some exceptions may apply. For instance, if the trust pays rent directly to a landlord and the beneficiary receives a reduced SSI payment in return, the trustee must assess whether that trade-off is worth it.
Also, payments to third parties (like Uber, a landlord, or a medical provider) are usually safer than giving money to the beneficiary to spend. It’s also wise to consult a legal or financial professional before making any potentially disqualifying payments.
How Are Spending Decisions Monitored?
Spending from a special needs trust must be well documented. Trustees are expected to:
- Keep receipts for every purchase
- Maintain detailed notes explaining how the item benefits the beneficiary
- Avoid undocumented cash withdrawals
- Prepare regular accountings to courts or government agencies, especially for court-supervised trusts or pooled trusts
Public benefits agencies like the Social Security Administration may review trust expenditures. If the agency determines that funds were spent incorrectly, it could cause a reduction or suspension of benefits. In extreme cases, the trustee could be held personally liable for misuse.
In Texas, trustees may also be required to file annual accountings if the trust is court-supervised. Even if not mandatory, it’s smart to create a system of logs, spreadsheets, and folders (digital or physical) to store all relevant documentation.
Who Decides If a Purchase Is Allowed?
The trustee has sole authority to manage the trust and approve or deny spending requests. You must use discretion and ensure that every dollar spent meets the standard of enhancing the beneficiary’s life without violating special needs trust spending rules.
When in doubt, ask yourself the following:
- Is the purchase for the sole benefit of the beneficiary?
- Will the payment reduce their eligibility for public benefits?
- Is there documentation to support the expense?
- Is the payment being made directly to a third-party vendor?
If you answer yes to the first and no to the second, it is likely a permissible expense. Still, gray areas exist. For example, buying a car that others might use, or paying for a vacation that includes family members, must be handled carefully. The trustee must clearly show that the beneficiary receives the majority of the benefit.
How Should Trustees Handle Housing-Related Costs?
Housing expenses create one of the most confusing areas under special needs trust spending rules. If a trust pays for food or shelter, including rent or mortgage, this may reduce the beneficiary’s SSI payment by up to one-third.
That said, it is not illegal to use trust funds for rent or utilities. However, it creates what the SSA calls “in-kind support and maintenance,” which leads to a reduced benefit.
Trustees often consider alternatives such as:
- Having another family member pay for rent while the trust pays for other support
- Buying a home in the name of the trust to avoid direct payments
- Paying for housing-related repairs or modifications (which may not reduce benefits if done carefully)
Each approach should be reviewed in advance with legal or benefit planning guidance, especially if the housing plan significantly affects your loved one’s SSI amount.
Can the Trust Buy a Home or a Vehicle?
Under special needs trust spending rules, the trust can buy a home or a vehicle for the beneficiary. However, the title and usage matter.
For a home, the trust must hold the title to the property, and it must be used as the primary residence of the beneficiary. If anyone else lives in the home, their contributions and living arrangements must be structured to avoid triggering disqualifying benefits issues.
For a vehicle, the trust may purchase and own one car for the beneficiary’s personal use. If the vehicle is used by others, documentation must show that it primarily serves the needs of the person with disabilities.
Both purchases should be managed carefully. These are large assets and may require court approval if the trust is court-supervised.
What Happens If You Violate Spending Rules?
Improper use of trust funds can lead to several outcomes:
- The beneficiary’s SSI or Medicaid could be reduced or suspended
- You could be removed as trustee
- Legal action could be taken against you
- The trust could lose its protective status
Mistakes are common, especially for new trustees. If you are unsure about a particular purchase or pattern of spending, the safest approach is to hold off and seek guidance. Trustees are responsible for following the terms of the trust and staying within the limits set by federal and state rules.
Conclusion
Understanding special needs trust spending rules is critical if you’re a trustee managing a trust for a person with disabilities. You must use the funds in a way that supports their quality of life while protecting access to public benefits. Some expenses are clearly allowed, while others require careful planning and documentation.
Being thoughtful, cautious, and consistent will help you stay compliant and ensure the trust does what it was intended to do, and that is to provide lifelong support. If you’re unsure about specific spending decisions, it’s wise to consult with professionals who understand the structure and restrictions of special needs trusts in Texas.
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Frequently Asked Questions
Yes, but doing so may reduce SSI benefits. It’s allowed under the rules, but it’s classified as in-kind support and maintenance, which causes a reduction in payments.
No. Giving cash or gift cards directly to the beneficiary is not allowed and may cause disqualification from SSI or Medicaid.
Yes, but only if the trust clearly benefits the person with special needs. If others benefit too, the trustee must show the primary purpose is for the beneficiary’s care or recreation.
No. Paying for groceries counts as a basic need and is considered in-kind support, which can reduce SSI benefits.
Yes. Clothing, electronics like tablets or phones, and similar personal items are allowed as long as they directly serve the beneficiary and are not considered luxury items for others.
