If you’re caring for a loved one with a disability, planning for their future is likely one of your top priorities. You want to make sure they’re supported—not just emotionally, but financially—without putting their government benefits at risk. That’s where a Special Needs Trust can make a real difference.
Setting up this kind of trust allows you to leave money or assets to someone with a disability while keeping their eligibility for programs like SSI and Medicaid. But it only works if it’s done correctly. In Texas, specific rules must be followed to avoid triggering penalties or disqualifying your loved one from the support they rely on.
Learning how to set up a Special Needs Trust involves more than just filling out paperwork. You’ll need to understand which type of trust applies to your situation, how to fund it, and how to manage it within legal limits. Here’s a clear step-by-step look at what you should consider before moving forward:
- Start by Understanding the Types
- Choosing the Right Trustee
- Funding It Properly
- Legal Requirements You Must Follow
- Registering and Administering It
- What It Can Pay For
- Common Mistakes You Should Avoid
- Working With Professionals
Start by Understanding the Types
You need to know which type of Special Needs Trust fits your situation. There are three primary types you might consider:
- First-Party SNT: Funded with assets that belong to the person with special needs (e.g., a settlement or inheritance).
- Third-Party SNT: Funded by someone else, typically a parent or relative.
- Pooled Trust: Managed by nonprofit organizations where funds from multiple beneficiaries are pooled for investment but used for individual care.
In Texas, a first-party trust must meet the requirements under 42 U.S. Code § 1396p(d)(4)(A). This includes being created before the beneficiary turns 65, and it must contain a payback provision to Medicaid.
Each trust type has different funding rules, tax implications, and government reporting requirements. Choose carefully based on who owns the assets and what your goals are.
Choosing the Right Trustee
The trustee is the person or institution responsible for managing the trust assets and making distributions. Choosing someone trustworthy, financially responsible, and familiar with public benefit rules is essential.
In Texas, you can name a family member, a bank, a professional trustee, or a combination (such as a family member with a corporate co-trustee). Some families prefer a professional trustee because of the complexity involved in administering SNTs.
Before you make a decision, ask:
- Can this person or entity manage funds responsibly over the long term?
- Do they understand SSI and Medicaid requirements?
- Will they be emotionally impartial?
You should also name a successor trustee in case the original trustee becomes unable or unwilling to serve.
Funding It Properly
A Special Needs Trust doesn’t have to be funded immediately. You can create the trust now and add assets later through your will, life insurance, or retirement accounts.
When you’re ready to fund it, consider using:
- A lump sum of money
- Inheritance or life insurance proceeds
- Real estate
- Investments or other personal property
For third-party SNTs, it’s common to leave instructions in your will that direct your assets to the trust. For first-party trusts in Texas, it is especially important to comply with Medicaid recovery rules by including a payback clause, so improper funding doesn’t disqualify the beneficiary from benefits.
Make sure you work with a financial professional who understands how trusts impact tax liabilities and government benefits.
Legal Requirements You Must Follow
Each SNT must meet certain legal criteria. These requirements vary slightly based on the trust type but typically include:
- Naming the person with a disability as the sole beneficiary
- Prohibiting disbursements that would count as income under SSI/Medicaid rules
- Including required language for Medicaid payback (for first-party SNTs)
- Appointing a trustee who will act in the best interest of the beneficiary
- Stating how remaining assets will be distributed upon the beneficiary’s death
In Texas, the trust must be in writing and signed, and you must comply with state and federal trust laws. You’ll likely need to draft the trust document using language that satisfies the Social Security Administration and Medicaid eligibility rules.
Registering and Administering Special Needs Trust
Once your trust is legally drafted and signed, you’ll need to:
- Obtain a Tax ID Number (TIN) from the IRS for the trust
- Open a trust bank account using the TIN
- Fund the trust with your chosen assets
- Notify agencies (such as Social Security or Medicaid) that the trust exists
- Keep accurate records of every distribution and receipt
Trust administration must be consistent with public benefit regulations. For example, the trustee cannot give cash directly to the beneficiary, as that would reduce or eliminate SSI payments. Instead, funds should be used to pay third parties directly for goods or services that benefit the individual (like housing, therapies, or equipment).
You must also file annual tax returns for the trust and maintain clear accounting records. Missteps can lead to penalties or loss of benefits.
What Special Needs Trust Can Pay For
A Special Needs Trust can supplement but not replace government benefits. Here are some allowable expenses:
- Medical expenses not covered by Medicaid
- Therapy services (physical, occupational, speech)
- Dental and vision care
- Travel and transportation
- Educational programs
- Personal care attendants
- Entertainment, hobbies, and vacations
- Specialized medical equipment
In Texas, a trustee should avoid payments that provide food or shelter unless those items are covered in a specific way. Otherwise, they may count as in-kind support and maintenance, which can reduce SSI benefits. Make sure every purchase serves the beneficiary without violating income or asset thresholds.
Common Mistakes You Should Avoid
Even with the best intentions, errors can compromise your trust’s effectiveness. Common mistakes include:
- Naming the wrong type of trust
- Failing to include required legal language
- Giving the beneficiary control over the trust
- Funding the trust improperly
- Failing to notify Medicaid or SSI
- Using trust funds for disallowed purchases
- Choosing a trustee with no experience in disability law
Texas Medicaid Estate Recovery rules must be considered when using a first-party trust. If the trust lacks proper wording, the state can seek repayment for benefits provided during the beneficiary’s lifetime.
Taking the time to review your trust every few years can help you catch issues before they become serious problems.
Working With Professionals
Although you can technically draft a trust using templates or online forms, working with professionals can help you stay compliant with state and federal requirements.
You may need:
- An attorney experienced in special needs planning
- A financial planner who understands public benefits
- A CPA to help with tax reporting
In Texas, using a professional who understands local laws can reduce the risk of error and help you avoid jeopardizing benefits. They can also assist with language that aligns with Texas Estates Code and federal Medicaid rules.
Before choosing your team, ask for experience in special needs planning, familiarity with SNT administration, and whether they’ve worked with families who rely on programs like Medicaid and SSI.
Your Long-Term Peace of Mind Starts with the Right Setup
Understanding how to set up a Special Needs Trust is one of the most powerful steps you can take to protect your loved one’s future. Whether you’re creating a trust for a child, sibling, or spouse, it requires careful planning and compliance with specific rules. By taking the time to choose the right structure, draft the right language, and follow legal requirements, you give your loved one access to resources without risking vital government support.
A Special Needs Trust isn’t just a document. It’s a plan. And when done correctly, it can make all the difference for the person who depends on you.
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FAQs About How To Set Up a Special Needs Trust
Yes, you can create one using templates, but it is not recommended. Mistakes in language or structure can cause the trust to be disqualified for SSI or Medicaid purposes.
You can fund it during your lifetime or after your death through your estate plan. It depends on whether you want to support your loved one now or provide for them later.
They cannot directly access the funds. The trustee must make payments on their behalf for approved expenses.
For first-party trusts, remaining funds may need to be used to reimburse Medicaid. For third-party trusts, leftover assets go to other named beneficiaries.
No. SSDI is not a means-tested program, so setting up an SNT won’t impact SSDI eligibility.
