Special Needs Trusts and Medicaid: What They Are and How They Work

A special needs trust holds money for a person with a disability so that, when it meets federal Medicaid rules, the money is not counted against the person's Medicaid eligibility. Funds from the person's own assets generally must repay the state's Medicaid costs at death; funds from family members generally need not.

A son with a disability may be about to inherit from a grandparent. A daughter who relies on Medicaid may have received a settlement. A parent may be writing a will and wondering whether leaving money to a disabled child will cost that child the care Medicaid pays for. The worry underneath is the same: will the money help, or will it take away the coverage the family depends on?

This page explains how federal Medicaid law treats these trusts, the types the law recognizes, what the money can pay for, and what happens when the person dies. Federal law sets the framework. Each state runs its own Medicaid program on top of it.

What a Special Needs Trust Is Under Federal Law

A special needs trust (SNT) is a legal arrangement that holds assets for a person with a disability without counting those assets as the person's own resources for Medicaid or SSI, as long as the trust meets the rules that apply to it. A countable asset is a resource Medicaid adds up and measures against its eligibility limit. Assets that are not countable do not count toward that limit.

The reason the SNT matters starts with the general rule. Under 42 U.S.C. § 1396p(d)(2), a person is treated as having set up a trust if the person's own assets went into it and the person, a spouse, someone with legal authority to act for them or someone acting at their direction or request created it other than by will. For a revocable trust of that kind, 42 U.S.C. § 1396p(d)(3) says "the corpus of the trust shall be considered resources available to the individual." For an irrevocable one, any portion that could be paid to the person counts as a resource. CMS describes the same idea on its Medicaid eligibility policy page: a trust set up with at least some of the person's funds "can be considered available to the individual."

Without an exception, then, a trust funded with the beneficiary's own money could count against the limit and disqualify the person. 42 U.S.C. § 1396p(d)(4) supplies the exceptions: it states that these trust-counting rules "shall not apply" to the trusts it lists.

An SNT also differs from a general support trust. A support trust pays for a person's basic living needs. An SNT is meant to supplement public benefits, not replace them. Each state applies these federal rules through its own program and may add requirements beyond the federal floor.

The Trusts the Statute Lists, and Third-Party Trusts

The trusts 42 U.S.C. § 1396p(d)(4) lists are three: a trust for a disabled person under 65 in subparagraph (A), an income-only trust used in certain states in subparagraph (B), and a pooled trust in subparagraph (C). Two of those are special needs trusts. A further type, the third-party trust, sits outside the statute entirely.

First-party trust, § 1396p(d)(4)(A). This trust holds the beneficiary's own assets, such as an inheritance paid directly to them, a personal-injury settlement or their savings. The statute covers a trust "containing the assets of an individual under age 65 who is disabled" and "established for the benefit of such individual by the individual, a parent, grandparent, legal guardian of the individual, or a court," where the state will be repaid at death. The words "the individual" were added to § 1396p(d)(4)(A) by a 2016 amendment (Public Law 114-255, section 5007) that applies to trusts established on or after December 13, 2016. Before that change, the person with a disability could not set up the trust alone.

Pooled trust, § 1396p(d)(4)(C). A nonprofit association sets up and manages the trust. It keeps a separate account for each beneficiary but pools the accounts for investing. Accounts may be opened by the person, a parent, grandparent, legal guardian or a court. Subparagraph (C) states no age-65 limit. The federal exceptions to the transfer penalty for a transfer to a trust include one for a trust established solely for the benefit of an individual under 65 who is disabled (42 U.S.C. § 1396p(c)(2)(B)(iv)) and one for a trust established solely for the benefit of the individual's child who is blind or disabled as the statute defines it (§ 1396p(c)(2)(B)(iii)). How a state treats a pooled-trust account funded at 65 or older depends on that state's current rules.

Third-party trust. This trust holds only money that belongs to someone else, often a parent's estate plan. Because the beneficiary's own assets never formed the trust, the trust-counting rules in § 1396p(d), which apply to a trust formed with an individual's assets (§ 1396p(d)(2)), do not apply to it, and the payback condition in § 1396p(d)(4) does not attach.

For the first two, "disability" means the federal definition the statute cross-references, the same definition used for SSI.

How a Special Needs Trust Protects Medicaid and SSI Eligibility

The core of this is a resource limit, meaning the most countable assets a person may own and still qualify. For SSI, the federal resource standard effective January 1, 2026 is $2,000 for an individual and $3,000 for a couple, according to the CMS 2026 SSI and spousal impoverishment standards bulletin. A state's Medicaid resource limit depends on that state's current rules. California's figures, for example, are set out in the page on California Medi-Cal asset limits, and Florida's in the page on Florida Medicaid planning.

A first-party trust escapes the trust-counting rules only when it meets every condition of § 1396p(d)(4)(A): it holds the assets of a disabled person under 65, it is established for that person's benefit by the person, a parent, grandparent, legal guardian or court, and it repays the state at death up to the Medicaid paid. A pooled-trust account escapes them when it meets every condition of § 1396p(d)(4)(C): a nonprofit runs it, the account is separate, it is set up solely for a disabled person by a qualifying person or court, and the state is repaid from what the trust does not keep.

Third-party trust assets were never the beneficiary's property, so they are not counted as the beneficiary's resources, provided the trust does not give the beneficiary the power to take the money.

The trust document carries the weight here. A trust that misses a condition may still be counted as a resource, whatever its title says. Distributions are a separate question from resource counting: money paid out can affect SSI as income even when the trust itself is not counted. Each state's Medicaid agency applies these rules and may impose more.

What a Special Needs Trust Can — and Cannot — Pay For

The trustee is the person or organization that manages the trust's assets and pays them out according to its terms. The trustee owes a fiduciary duty, a legal duty to act for the beneficiary and within the trust's purpose.

Benefit to the beneficiary. A first-party trust under § 1396p(d)(4)(A) must be established "for the benefit of" the disabled person, and the federal transfer exception for funding a trust for a disabled person under 65 requires a trust "established solely for the benefit of" that person (42 U.S.C. § 1396p(c)(2)(B)(iv)). Paying for someone else's needs out of a first-party trust works against both.

Supplemental spending. Trusts of this kind are typically used for goods and services that add to what Medicaid and SSI provide rather than replace it. Common examples include education, recreation, some travel expenses, phone bills, a computer, and medical services Medicaid does not cover.

Cash to the beneficiary. SSI counts income month by month. A cash payment handed to the beneficiary can count as income, which can lower that month's SSI payment or, if large enough, leave the person ineligible for that month.

Food and shelter. When a trust pays for food or shelter, SSI may treat it as in-kind support and maintenance, meaning help received as goods rather than cash. That can also reduce the SSI payment.

Distributions that benefit someone other than the beneficiary can lead an agency to treat the trust as countable, ending the protection the trust was built to give.

The Medicaid Payback Requirement and What Happens at Death

The price of the first-party exception is repayment. Under 42 U.S.C. § 1396p(d)(4)(A), the trust qualifies only "if the State will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State plan." Repayment is capped at what Medicaid paid.

Pooled trusts work a little differently. Under § 1396p(d)(4)(C), "to the extent that amounts remaining in the beneficiary's account upon the death of the beneficiary are not retained by the trust," the trust pays the state up to the Medicaid paid. The nonprofit may keep some or all of what is left under its own terms, and only the rest goes to the state.

A third-party trust carries no payback requirement under § 1396p(d)(4), because its money never belonged to the beneficiary. What remains passes to the people the trust names, such as siblings.

Estate recovery is the process by which a state seeks repayment of Medicaid costs from a person's estate after death. CMS's estate recovery page notes that "money remaining in a trust after a Medicaid enrollee has passed away may be used to reimburse Medicaid." For first-party trusts, the payback clause is the route by which the state reaches trust assets. Separately, federal law delays estate recovery, without cancelling it, while a surviving spouse, a child under 21 or a blind or disabled child survives, and states must set up undue-hardship waivers. The general mechanics appear in the page on Medicaid crisis planning. What a given state recovers, and how, depends on that state's current rules.

How a Special Needs Trust Differs from an ABLE Account

Families weighing a trust often hear about ABLE accounts too. An ABLE account, created under the Achieving a Better Life Experience Act, is a savings account for a person with a disability that, within set limits, generally does not count against SSI and Medicaid resource limits.

The two tools differ in shape more than purpose:

• Caps. ABLE accounts carry an annual contribution limit, and above a certain balance SSI begins counting the account again. Federal Medicaid law sets no contribution cap on a special needs trust.
• Age of onset. An ABLE account is open only to a person whose disability began before a set age under federal ABLE law.
• Scale and flexibility. An SNT can hold larger sums and can be shaped for more complex assets. An ABLE account is usually simpler to run.
• Using both. Some families use the two together, for example a trust for the larger funds and an ABLE account for day-to-day spending. Whether that fits turns on the amounts, the beneficiary's needs and the state involved.

This site does not cover the tax treatment of ABLE accounts.

Key Questions About a Special Needs Trust

These are the questions that decide which rules apply to a special needs trust:

• Whose money is it? Assets that belong to the beneficiary point toward a first-party or pooled trust. Assets that belong to a parent or other relative point toward a third-party trust.
• How old is the beneficiary? Subparagraph (A) covers a trust containing "the assets of an individual under age 65 who is disabled."
• Which state's Medicaid applies? Each state's program has its own resource limits and trust rules, and a move between states can bring a different set.
• Is a pooled trust available? Whether a nonprofit pooled trust operates for the beneficiary's state, and on what terms, varies.
• Who will serve as trustee? The trust also needs a plan for funding and managing it over time.
• How will distributions work? Paying vendors directly rather than handing over cash, and care around food and shelter, bear on SSI.

Families who come to this question during a parent's nursing-home crisis may find that the trust question sits beside a spend-down or transfer question. The page on Medicaid spend-down covers that side.

This site provides information about how federal Medicaid law treats special needs trusts. It does not cover Medicare, private long-term-care insurance or veterans' benefits, and it does not give legal advice about anyone's situation.

If You'd Like to Talk Through a Special Needs Trust

A special needs trust depends on details that are easy to get wrong: whose money it is, the beneficiary's age, the wording of the payback clause and the state whose Medicaid program applies.

A consultation request about your family's Medicaid and long-term-care options can be made through Medicaid Asset Protection Group.