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Creating long-term financial security when you or your loved one has a disability often requires more than just a savings account. If you’re receiving Medicaid or SSI and expect to get a financial settlement, inheritance, or back pay, putting that money into a self settled special needs trust could help protect your benefits. This type of trust is available in Texas, but you must follow specific rules to make it work.
This article explains how a self settled special needs trust works, what rules apply under Texas law, who can create one, and what to expect if you’re considering this option. We’ll also answer some of the most common questions, such as:
- What Is a Self Settled Special Needs Trust?
- When Should You Consider a Self Settled Special Needs Trust?
- Who Can Set Up the Trust and What Are the Requirements?
- How a Self Settled Special Needs Trust Affects Medicaid Eligibility
- What Can Be Paid From the Trust?
- How to Set Up a Self Settled Special Needs Trust in Texas
- What Happens to the Trust When You Pass Away?
- Are There Alternatives to Self Settled Special Needs Trusts?
What Is a Self Settled Special Needs Trust?
A self settled special needs trust (also called a first-party special needs trust) is a legal tool that holds money that belongs to a person with a disability. You set it up using your own assets—usually from a personal injury settlement, inheritance, or savings—without risking eligibility for public benefits like Supplemental Security Income (SSI) or Medicaid.
Here are some key characteristics of this type of trust:
- The trust must be created for a person under age 65 who has a qualifying disability.
- It can only be funded with assets that legally belong to the person with the disability.
- The trust must be created by a parent, grandparent, legal guardian, or court.
- It must include a provision to pay back Medicaid upon the beneficiary’s death.
Texas follows federal rules under 42 U.S. Code § 1396p(d)(4)(A), but the state has additional requirements under its Medicaid rules that must be followed carefully.
When Should You Consider a Self Settled Special Needs Trust?
You should think about using a self settled special needs trust when you expect to receive a lump sum that would otherwise disqualify you from Medicaid or SSI. That money can push your countable assets above the allowed limits, which are currently $2,000 for individuals.
Here are a few examples of situations where this type of trust could make sense:
- You receive a personal injury or accident settlement.
- You inherit money or property.
- You receive back pay from Social Security Disability.
- You have savings but are about to apply for public benefits.
A self settled special needs trust allows you to keep your financial support while staying eligible for the services you rely on.
Who Can Set Up the Trust and What Are the Requirements?
Even though it’s funded with your money, you cannot set up the self settled special needs trust yourself under federal rules. It must be created by one of the following:
- A parent
- A grandparent
- A legal guardian
- A Texas court
This requirement holds even if you are mentally capable. In Texas, most of these trusts are created through court approval as part of a settlement proceeding or legal guardianship.
Once created, the trust must meet these criteria:
- You must be under age 65 at the time it is funded.
- The trust must name a trustee who is not you.
- It must include a payback provision to reimburse Texas Medicaid when you die.
It must be irrevocable, meaning you cannot cancel or change it.
If any of these are missing, the trust may not qualify, and your benefits could be at risk.
How a Self Settled Special Needs Trust Affects Medicaid Eligibility
When you fund a self settled special needs trust, Medicaid and SSI will not count that money as a personal resource—as long as the trust is properly drafted and approved. This means:
- You can remain eligible for Medicaid services, including long-term care.
- You can keep your SSI payments if you meet income requirements.
- The trust can pay for things that public benefits don’t cover, such as therapy, dental care, education, or transportation.
However, the trust must not pay for basic needs like food and shelter directly, or it may reduce your SSI payments. It’s important that your trustee understands the limits and manages distributions properly.
Also, Texas Medicaid has a strict payback rule. When you die, the remaining trust assets must be used to reimburse Medicaid for the amount spent on your care. Only what’s left after that can go to your heirs.
What Can Be Paid From the Trust?
The trust can enhance your quality of life by paying for goods and services that Medicaid or SSI do not cover. This includes:
- Medical and dental expenses not paid by insurance
- Educational and training programs
- Personal care attendants or respite care
- Transportation costs, including vehicles
- Computers, electronics, and assistive technology
- Entertainment, hobbies, and vacations
Your trustee must manage the spending carefully. They cannot give cash directly to you, or it may be treated as income. Instead, the trust should pay vendors or service providers on your behalf.
Some common mistakes include:
- Paying rent or mortgage directly, which can reduce SSI
- Reimbursing you for purchases instead of paying third parties
- Mixing personal and trust funds
A professional trustee or someone familiar with public benefit rules should manage the trust.
How to Set Up a Self Settled Special Needs Trust in Texas
Setting up a self settled special needs trust involves several steps. You’ll likely need to work with a court, especially if the trust is part of a settlement.
Here’s what the process typically looks like in Texas:
- Determine Eligibility: Confirm that the person is under 65 and receiving or planning to receive Medicaid or SSI.
- Select a Trustee: Choose someone with experience managing trust assets and public benefits.
Draft the Trust: Work with an attorney to create the document following Texas Medicaid rules and federal law. - Obtain Court Approval: File a petition with the appropriate Texas court. This step is often needed even if a parent or guardian is involved.
- Fund the Trust: Transfer the settlement, inheritance, or other qualifying assets into the trust.
- Notify Medicaid: Provide a copy of the trust to Texas Health and Human Services for review.
Once the trust is approved and funded, the trustee can begin managing the assets under the rules.
What Happens to the Trust When You Pass Away?
After you die, any money left in the self settled special needs trust must first be used to repay the state Medicaid program for the amount it spent on your care.
The remaining balance, if any, may go to your named remainder beneficiaries. However, if the Medicaid payback uses all the funds, nothing will remain.
This payback requirement is a key difference between self settled and third-party special needs trusts. A third-party trust (funded with someone else’s money) does not have a Medicaid payback clause.
Are There Alternatives to Self Settled Special Needs Trusts?
Depending on your situation, other planning options might work better. These include:
- Third-Party Special Needs Trust: If someone else (like a parent or sibling) wants to leave money for you, they can set up this trust instead. It avoids the Medicaid payback.
- ABLE Accounts: If you’re disabled before age 26, you might qualify for an ABLE account. You can save money in it and still receive public benefits, though annual limits apply.
- Pooled Trusts: Some nonprofits offer pooled self settled trusts managed by professionals, which may be easier to set up if you lack a trustee or need a smaller trust.
Each option has pros and cons. You’ll need to consider your age, income, support network, and long-term goals.
Conclusion
A self settled special needs trust can be a powerful way to protect your benefits and give you financial flexibility, but it must follow strict rules. You can’t set it up on your own, and the trust must be drafted with care. Texas courts often play a role in approving and overseeing these trusts, especially if you’re receiving a settlement. Understanding how this tool works can help you keep your support systems intact without losing eligibility.
Other Related Posts
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- How Do I Make A Living Will? How One Simple Step Can Avoid Future Legal Nightmares
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- Adult Guardianship in Texas: A Step-by-Step Legal Guide for Families
Frequently Asked Questions
No. Even if you are mentally capable, only a parent, grandparent, legal guardian, or court can legally establish the trust for you under federal law.
Yes. You must be under age 65 at the time the trust is funded. If you’re 65 or older, the assets may count against you.
Cash distributions to you can count as income and reduce your SSI or disqualify you from Medicaid. All payments should go directly to service providers or vendors.
Yes, but the trustee must be cautious. Property used for your benefit may be allowed, but it depends on Medicaid and SSI rules. Improper use could affect eligibility.
A self settled special needs trust is funded with your own money and must repay Medicaid after you pass away. A third-party trust uses someone else’s money and does not have to repay Medicaid.
