Jul 17, 2026 | Special Needs Trusts
A personal injury settlement can provide essential financial security after a serious injury. It may help pay for medical care, accessible housing, transportation, rehabilitation, caregiving, and other lifelong needs.
However, when the injured person receives Supplemental Security Income (SSI), Medi-Cal, or another means-tested benefit, accepting the settlement without advance planning can create an unexpected problem: the settlement proceeds may be counted as the recipient’s own assets and may interrupt benefit eligibility.
A properly established first-party special needs trust may allow a qualifying person with a disability to preserve settlement funds for future use while helping maintain eligibility for certain public benefits.
Why Can a Settlement Affect SSI or Medi-Cal?
SSI is a needs-based federal benefit. In 2026, the countable-resource limit remains $2,000 for an individual and $3,000 for a couple. If settlement proceeds are deposited into the recipient’s personal bank account and remain available, the recipient may exceed the resource limit and lose SSI eligibility.
Medi-Cal is California’s Medicaid program. Not every Medi-Cal eligibility category follows the same financial rules, but California again began counting assets for certain applicants and recipients on January 1, 2026, including many people who qualify based on age, disability, or long-term-care needs.
Through June 30, 2027, the general Medi-Cal asset limit for an affected individual is $130,000. Beginning July 1, 2027, the limit is scheduled to decrease to $21,000 for one person and $31,000 for two people, with adjustments for additional household members.
Even where a settlement falls below the current Medi-Cal limit, planning may still be necessary because SSI has a much lower resource limit and because the beneficiary’s Medi-Cal eligibility category may change over time.
What Is a First-Party Special Needs Trust?
A first-party special needs trust is funded with assets that legally belong to the person with a disability. It is commonly used when a person receives:
- A personal injury settlement;
- A medical-malpractice settlement;
- An inheritance paid directly to the person;
- Insurance proceeds; or
- Other assets already owned by the beneficiary.
The primary federal authority is 42 U.S.C. § 1396p(d)(4)(A). For the statutory exception to apply, the trust generally must:
- Contain the assets of a person who is disabled;
- Be established and funded for that person before age 65;
- Be established by the beneficiary, a parent, grandparent, legal guardian, or court;
- Be administered for the beneficiary’s benefit; and
- Provide for reimbursement to the state after the beneficiary’s death, up to the amount of Medicaid benefits paid on the beneficiary’s behalf.
This type of trust is also called a self-settled special needs trust, a (d)(4)(A) trust, or a Medicaid payback trust.
Does the Beneficiary Still Own or Control the Money?
The trust is not simply another personal bank account.
A trustee holds and manages the settlement proceeds. The beneficiary generally cannot demand unrestricted withdrawals, revoke the trust, or direct that the money be given to other people. The trustee must follow the trust document, applicable fiduciary law, and the rules governing the beneficiary’s public benefits.
The trust must be administered for the beneficiary’s benefit: not as a device for transferring settlement funds to family members.
What Can the Trust Pay For?
Depending on the beneficiary’s needs and benefit programs, trust assets may be used for expenses such as:
- Medical and dental care not otherwise covered;
- Therapy and rehabilitation;
- Accessible vehicles and transportation;
- Home modifications;
- Computers and assistive technology;
- Education and vocational training;
- Care management and professional services;
- Recreation, travel, and entertainment; and
- Other goods and services that improve the beneficiary’s health, independence, or quality of life.
Distribution decisions require care. Money paid directly from the trust to an SSI recipient generally reduces SSI. Payments made to provide shelter may also reduce the monthly SSI payment. By contrast, payments made directly to third parties for items other than food or shelter: such as medical care, education, telephone service, or entertainment: generally do not reduce SSI.
A trustee should therefore understand both the trust instrument and the beneficiary’s specific benefit programs before making distributions.
Timing Matters: Plan Before the Settlement Is Distributed
Ideally, the trust should be prepared before the settlement proceeds are released.
Simply receiving the money and transferring it into a trust later can create a period during which the settlement is treated as income or an available resource. Social Security’s guidance specifically recognizes that the treatment of settlement proceeds can depend on whether the proceeds were irrevocably assigned or directed into a qualifying trust before becoming available to the beneficiary.
The plaintiff’s attorney, special needs trust attorney, trustee, settlement planner, and lien-resolution professional should coordinate before the release is signed and before the settlement check is issued.
Is Court Approval Always Required?
No. A person does not need court approval merely because the person has a disability.
Court involvement may nevertheless be required when:
- The claimant is a minor;
- The claimant lacks legal capacity;
- The claimant is subject to a conservatorship;
- A minor’s compromise or other settlement-approval proceeding is required; or
- A court is directing how the settlement proceeds must be held.
When a California court orders settlement proceeds into a special needs trust, Probate Code section 3604 requires the court to review and approve the trust. California Rule of Court 7.903 generally places a court-funded trust under the court’s continuing jurisdiction and imposes requirements concerning accountings, bond, trustee succession, compensation, and court approval of amendments or revocation.
Court-supervised trusts can provide important protection, but they also involve continuing administrative obligations and expenses.
A Special Needs Trust Does Not Eliminate Settlement Liens
Creating a special needs trust does not erase valid reimbursement claims.
If Medi-Cal paid for injury-related medical care, the California Department of Health Care Services may assert a personal injury lien. DHCS states that its personal injury liens must be satisfied before settlement proceeds are used to fund a court-approved special needs trust under Probate Code section 3604.
Medicare may also seek reimbursement for injury-related payments. Under the Medicare Secondary Payer Act, Medicare may make “conditional payments” while a personal injury claim is pending, but those payments generally must be repaid when a settlement, judgment, or award is received.
The trust normally receives the net settlement proceeds after attorney fees, litigation costs, valid liens, and reimbursement obligations are addressed.
How Is Medicare Different?
Medicare and Medi-Cal are not the same program.
Medicare is federal health insurance available primarily to people age 65 or older and to certain younger people with disabilities or qualifying medical conditions. Medicare eligibility is not generally based on the value of a person’s assets. Receiving a settlement therefore ordinarily does not cause a person to lose Medicare merely because the person now has additional money.
A client who has Medicare only may not need a special needs trust solely to preserve Medicare. However, Medicare conditional-payment claims and possible future-medical issues must still be evaluated.
The analysis changes when the client receives both Medicare and Medi-Cal. A person can qualify for both programs, and Medi-Cal may provide benefits that Medicare does not fully provide, including certain nursing-facility services, home-based services, and assistance with Medicare premiums or other costs.
A settlement may therefore leave Medicare intact while jeopardizing Medi-Cal or SSI.
What If the Settlement Recipient Is Already 65?
Age 65 is important for two separate reasons.
First, it is the age at which many people qualify for Medicare. Second, federal law generally limits an individual first-party special needs trust under § 1396p(d)(4)(A) to assets contributed for a person who is under age 65.
A properly established trust may continue after the beneficiary turns 65, but Social Security guidance states that most new additions made after age 65 do not qualify for the special needs trust exception.
Accordingly, a settlement recipient who is approaching age 65 should obtain advice before the settlement is finalized. A recipient who is already 65 may require a different strategy, depending on the benefits involved, the settlement amount, and whether a pooled trust or another planning option is appropriate.
The Medi-Cal Payback Requirement
A first-party special needs trust must contain a Medicaid reimbursement provision.
When the beneficiary dies, the state is entitled to reimbursement from the remaining trust assets, up to the amount of Medicaid benefits paid on the beneficiary’s behalf. Only after required reimbursement and legally permitted expenses are paid may any remaining balance pass to the trust’s remainder beneficiaries.
This payback requirement is a major difference between a first-party trust funded with the beneficiary’s money and a third-party special needs trust funded by parents, grandparents, or other family members.
The Bottom Line
A first-party special needs trust can be an effective settlement-planning tool, but it is not appropriate in every case and it does not solve every benefit issue.
The analysis should consider:
- The beneficiary’s age and disability;
- Whether the beneficiary receives SSI, Medi-Cal, Medicare, or a combination;
- The amount and structure of the settlement;
- Existing Medicare, Medi-Cal, or insurance liens;
- The beneficiary’s future medical and support needs;
- The cost of trust administration;
- Whether court approval is required; and
- The Medicaid payback requirement.
The most important step is to begin planning before the settlement proceeds are distributed.
How Duisters Giarratano, APC Can Help
Duisters Giarratano, APC assists individuals, families, and personal injury attorneys with the legal planning issues that arise when a settlement recipient has a disability.
Our services may include:
- Drafting first-party special needs trusts;
- Preparing court petitions to establish and fund trusts when judicial approval is required;
- Coordinating with plaintiff’s counsel, settlement planners, trustees, and lien-resolution professionals;
- Advising trustees regarding special needs trust administration; and
- Developing legal strategies designed to help preserve access to means-tested public benefits while maximizing the long-term value of settlement proceeds.
Settlement planning is most effective when it begins before the settlement documents are finalized and before the funds are released. Visit duisterslaw.com to learn more.
Legal Disclaimer
This article is provided for general educational purposes only and does not constitute legal advice or create an attorney-client relationship. Public-benefit laws and agency policies are complex and subject to change. The proper strategy depends on the claimant’s age, disability, capacity, benefits, settlement terms, liens, and individual circumstances. Consult qualified legal counsel before accepting or distributing settlement proceeds.
Current through July 17, 2026.
Jul 12, 2026 | Special Needs Trusts
A successful personal injury settlement can provide lifelong financial security. For a client receiving—or likely to receive—Supplemental Security Income (SSI) or Medi-Cal, however, an improperly handled settlement can unintentionally jeopardize essential public benefits.
For California plaintiff’s attorneys, identifying these issues before settlement is finalized can make the difference between protecting a client’s long-term financial security and creating avoidable complications.
The Role of a First-Party Special Needs Trust
A first-party Special Needs Trust (SNT), authorized by 42 U.S.C. § 1396p(d)(4)(A), allows a disabled individual under age 65 to preserve eligibility for means-tested public benefits while retaining the benefit of his or her own settlement proceeds. Since enactment of the 21st Century Cures Act, a competent disabled individual may establish his or her own first-party SNT without requiring a parent, grandparent, guardian, or court to establish the trust. The trust must still satisfy all federal statutory requirements, including the mandatory Medicaid (Medi-Cal) payback provision upon the beneficiary’s death.
California practitioners should remember that a first-party SNT is appropriate only when the assets funding the trust belong to the beneficiary, such as proceeds from a personal injury settlement or judgment.
Timing Matters
One of the most common—and costly—mistakes occurs when settlement proceeds are distributed directly to the injured client before special needs planning has been completed.
Once received, those funds may become countable resources for SSI and Medi-Cal eligibility purposes, potentially resulting in a suspension or loss of benefits.
For that reason, plaintiff’s counsel should identify potential public-benefit issues early in the litigation, rather than after settlement has already been negotiated.
Draft the Settlement Agreement with the Trust in Mind
If a first-party Special Needs Trust is anticipated, the settlement agreement itself should expressly contemplate funding the trust instead of simply directing payment to the plaintiff.
Addressing the trust during settlement negotiations allows counsel to:
- Coordinate preparation of the trust before disbursement;
- Obtain any required court approvals;
- Properly direct structured settlement payments into the trust when appropriate;
- Coordinate lien resolution; and
- Avoid delays or eligibility problems after the settlement check is issued.
Early planning is almost always easier—and less expensive—than attempting to correct problems after funds have been distributed.
Court Approval Is Frequently Required in California
Although federal law permits a competent disabled individual to establish his or her own first-party SNT, California law frequently requires court approval when settlement proceeds are being distributed pursuant to a court-approved compromise or judgment involving a minor or a person with a disability.
Under California Probate Code §§ 3600–3613, a court approving such a settlement may order that the recovery be paid into a first-party Special Needs Trust. Before doing so, the court must determine that the trust satisfies the statutory requirements and approve its terms. Probate Code § 3604 authorizes the court to approve the trust and impose appropriate conditions regarding administration and distribution of the settlement proceeds.
Because these matters involve specialized probate and public-benefits issues, the California Standards of Judicial Administration, Standard 7.10, recommends that courts assign these matters to judges with probate and trust expertise whenever practical.
For that reason, coordinating with special needs planning counsel before the settlement approval hearing is a best practice.
Resolve Government Liens Before Funding the Trust
Another critical consideration is lien resolution.
A first-party Special Needs Trust does not eliminate valid governmental reimbursement claims arising from the personal injury recovery.
Indeed, California Probate Code § 3604(d) requires that before settlement proceeds are transferred into a court-approved Special Needs Trust, all applicable statutory liens owed to the California Department of Health Care Services (DHCS), the Department of State Hospitals, the Department of Developmental Services, and applicable counties or cities must first be satisfied. Likewise, DHCS guidance provides that Medi-Cal personal injury liens should be resolved before funding a first-party Special Needs Trust.
Accordingly, lien resolution should be treated as an integral component of settlement planning: not as an afterthought. Coordinating with experienced settlement planning professionals can significantly streamline this process.
A Valuable Resource for Plaintiff’s Attorneys
Successfully navigating catastrophic injury settlements often requires coordination among plaintiff’s counsel, special needs planning attorneys, structured settlement consultants, and lien resolution professionals.
For attorneys seeking educational resources and professionals experienced in Special Needs Trusts, settlement planning, Medicare and Medi-Cal liens, and public benefits preservation, consider visiting The Lien Project. The organization provides educational content and connects attorneys with professionals who regularly assist with these complex settlement issues.
Conclusion
When a personal injury client has a disability—or may require means-tested public benefits in the future—the conversation should extend well beyond the settlement amount.
By identifying benefit eligibility issues early, drafting settlement agreements that contemplate Special Needs Trust planning, obtaining court approval where necessary, and resolving statutory liens before funding the trust, California plaintiff’s attorneys can help maximize both the value of the recovery and the client’s long-term financial security.
Early collaboration between the litigation team and special needs planning professionals remains one of the most effective ways to protect vulnerable clients long after the case has settled.
Visit SdCountyTrusts.com to learn more about how we protect families in Vista, Oceanside, Carlsbad, and throughout San Diego County.
Authorities
Jul 9, 2026 | Special Needs Trusts
When a person with a disability receives a personal injury settlement, medical malpractice recovery, workers’ compensation settlement, inheritance, or other money that legally belongs to that person, the funds can create an immediate public benefits problem. A properly drafted and administered first-party Special Needs Trust can be a solution, but it is not simply a form document. The trust must be coordinated with SSI, Medi-Cal, lien resolution, settlement approval, tax reporting, and trustee administration.
This article focuses on first-party Special Needs Trusts funded with settlement proceeds in California.
What Makes the Trust “First-Party”?
A first-party Special Needs Trust is funded with assets that belong to the beneficiary or to which the beneficiary is legally entitled. The California Department of Health Care Services (DHCS) describes first-party SNTs as trusts funded with assets belonging to the trust beneficiary, including assets from an award or settlement.1
This is different from a third-party Special Needs Trust, which is funded with someone else’s assets, such as a parent’s living trust, life insurance, or gift. The funding source matters because first-party trusts usually require a government payback provision, while properly structured third-party trusts generally do not.
Why Settlement Proceeds Can Affect Benefits
SSI remains resource-sensitive. The Social Security Administration states that the countable resource limit is $2,000 for an individual and $3,000 for a couple.2 A settlement paid directly to an SSI recipient can therefore suspend or terminate SSI eligibility unless the funds are properly handled.
Medi-Cal also requires current analysis. California eliminated the asset test for Non-MAGI Medi-Cal programs in 2024, but DHCS guidance states that starting January 1, 2026, Medi-Cal again counts assets for many affected categories, including people who are 65 or older, have a disability, live in a nursing home, or are in certain families with income too high for tax-based rules. DHCS lists the 2026 asset limit as $130,000 for one person, plus $65,000 for each additional eligible family member, subject to category-specific rules.3
For many beneficiaries, SSI is still the tighter limit. For others, Medi-Cal eligibility, share of cost, long-term care rules, and future redetermination issues may be equally important.
The Federal First-Party SNT Exception
The federal authority for the most common individual first-party SNT is 42 U.S.C. § 1396p(d)(4)(A).4 In general, the trust must contain the assets of an individual under age 65 who is disabled, must be established for that individual’s benefit by the individual, a parent, grandparent, legal guardian, or court, and must provide that the State receives remaining trust amounts at death up to the amount of medical assistance paid on the individual’s behalf.
SSA’s current POMS guidance reflects the 21st Century Cures Act change allowing a legally competent disabled individual to establish their own first-party SNT on or after December 13, 2016.5 That change is important, but it does not eliminate the need to analyze capacity, settlement approval requirements, lien issues, and California court rules.
California Settlement Proceeds and Court Approval
When money for a minor or person with a disability is paid to a Special Needs Trust under California Probate Code section 3604, the court must review and approve the trust terms.6 Section 3604 requires specific findings, including that the person has a qualifying disability, is likely to have special needs that will not be met without the trust, and that the amount to be paid to the trust does not exceed what appears reasonably necessary to meet those special needs.
California Rule of Court 7.950 requires petitions for approval of compromise, settlement, or disposition of proceeds for a minor or person with a disability to be verified and to fully disclose information bearing on the reasonableness of the compromise or disposition.7 If the trust is funded by court order, Rule 7.903 requires the order to provide that the trust is subject to the court’s continuing jurisdiction and may provide for court supervision.8
For plaintiff attorneys, this means the SNT should be addressed before final settlement distribution. If the funds are disbursed first and trust planning is handled later, the client may lose benefits, create reporting problems, or require a more expensive court fix.
Liens Must Be Coordinated Before Funding
California Probate Code section 3604(d) requires a court order for payment of money to a Special Needs Trust to include a provision that statutory liens in favor of specified public entities, including DHCS, are first satisfied.6 DHCS also states that personal injury liens must be satisfied before funding an SNT from personal injury settlement proceeds.1
This is a practical issue. The SNT is not a substitute for lien resolution. The settlement team should coordinate personal injury liens, Medi-Cal liens, Medicare issues, private health insurance claims, structured settlement planning, and trust funding instructions before funds are released.
What Can the Trust Pay For?
A Special Needs Trust is designed to supplement, not replace, public benefits. SSA policy generally treats cash paid directly from the trust to the beneficiary as unearned income. Payments for food or shelter may create in-kind support and maintenance (ISM).
Payments to third parties for items such as education, therapy, transportation, professional fees, uncovered medical services, phone bills, recreation, and entertainment generally may avoid being treated as income, depending on the facts and the item purchased.
Because the distribution rules are technical, the trustee must understand benefits administration. A well-drafted trust can still fail in practice if the trustee gives the beneficiary cash, pays the wrong bills, ignores reporting obligations, or fails to keep records.
The Payback Requirement
The defining drawback of a first-party SNT is payback. At the beneficiary’s death or earlier termination, first-party SNTs must include federal and state payback provisions. DHCS states that it is required to recover up to the total medical assistance paid by Medi-Cal on the beneficiary’s behalf.9 California Probate Code section 3605 also addresses claims against trust property at death or termination for court-established SNTs under section 3604.10
This is why the source of funds matters. If the money belongs to the beneficiary, a first-party SNT may be necessary. If the money belongs to a parent, grandparent, or other family member, a third-party SNT should usually be considered instead.
Key Takeaway
A first-party Special Needs Trust can preserve eligibility and protect settlement proceeds, but the trust should be built into the settlement process early. The attorney handling the settlement, the SNT attorney, the lien resolution team, the structured settlement professional, and the trustee should coordinate before disbursement. In California, the details of Probate Code section 3604, California Rules of Court 7.903 and 7.950, DHCS notice and lien issues, SSI resource rules, and the required payback provision all matter.
Need help coordinating a Special Needs Trust with settlement proceeds? Contact Duisters Giarratano, APC at SdCountyTrusts.com to learn more about your options.
Disclaimer: This article is for educational purposes only. It does not constitute legal advice and does not create an attorney-client relationship. Public benefits rules are fact-specific and may change. Consult qualified counsel before taking action.
Legal Authorities and Sources:
- California Department of Health Care Services, Special Needs Trust.
- Social Security Administration, Supplemental Security Income (SSI) Resources.
- California Department of Health Care Services, Asset Limit Frequently Asked Questions.
- 42 U.S.C. § 1396p(d)(4)(A).
- SSA POMS, SI 01120.203, Exceptions to Counting Trusts.
- California Probate Code § 3604.
- California Rule of Court, Rule 7.950.
- California Rule of Court, Rule 7.903.
- SSA POMS, SI 01120.200, Trust Disbursement Rules.
- California Probate Code § 3605.
Jul 9, 2026 | Special Needs Trusts
Imagine for a moment that you live in Vista, and your adult child has lived with a disability since birth. They rely on Medi-Cal and SSI for their daily healthcare and basic needs. One day, a distant relative leaves them a $45,000 inheritance. Suddenly, that “gift” feels like a crisis. If your child accepts it directly, they lose their benefits. If you try to manage it yourself, you’re drowning in federal regulations you didn’t even know existed.
What do you do when the amount isn’t quite enough to justify the high costs of a custom, private trust, but it’s too much to simply ignore?
That is where a Pooled Special Needs Trust (PSNT) often enters the conversation.
At Duisters Giarratano, APC, we often see families across North San Diego County facing this exact puzzle. The short answer to whether a pooled trust is right for you? It depends. (That is a typical lawyer answer for you, but we’re going to break down why).
Keeping it Simple: What is a Pooled Trust?
A pooled Special Needs Trust is different from an individual first-party or third-party SNT. Instead of one private trustee managing one custom trust, a nonprofit association manages a master trust with separate subaccounts for individual beneficiaries. Funds are pooled for investment and management purposes, but each beneficiary has a separate account.
Think of it like a professional sports league. In a private trust, you are the owner, the coach, and the referee of your own tiny team. In a pooled trust, you are joining an established league where the nonprofit acts as the professional referee, ensuring every “play” (or distribution) follows the strict rules of the public benefits game.
For some beneficiaries, a pooled trust can be practical, cost-effective, and professionally administered. For others, an individual Special Needs Trust may provide more customization. The right choice depends on the funding source, beneficiary’s age, benefits, settlement terms, amount involved, trustee options, tax issues, and long-term care needs.
The Federal Pooled Trust Rule
The federal pooled trust authority is 42 U.S.C. § 1396p(d)(4)(C).1 The statute describes a trust containing the assets of an individual who is disabled, established and managed by a nonprofit association, with a separate account maintained for each beneficiary while accounts are pooled for investment and management.
Accounts must be established solely for the benefit of disabled individuals by the individual, parent, grandparent, legal guardian, or court. At death, amounts not retained by the trust must be paid to the State up to the total medical assistance paid on the beneficiary’s behalf.
SSA’s POMS guidance similarly states that a pooled trust must be established and maintained by a nonprofit association, must maintain a separate account for each beneficiary, may pool funds for investment and management, and must be able to provide an individual accounting for each beneficiary.2
How a Pooled Trust Works
A pooled trust usually operates through a master trust agreement and a joinder agreement. The beneficiary, parent, grandparent, guardian, conservator, court, or other authorized person signs documents to enroll the beneficiary in the pooled trust. The nonprofit trustee or nonprofit-associated trustee then administers the account under the master trust.
The beneficiary does not control the funds. Instead, distribution requests are submitted to the pooled trust administrator. The trustee reviews whether the requested payment is allowed under the trust, whether it benefits the beneficiary, and whether it may affect SSI, Medi-Cal, housing benefits, or other programs.
If you have an estate plan or are looking into these options, you’re a planner. Good job! Planning is the best way to avoid the complications of intestate succession or unexpected benefit disqualification.
When a Pooled Trust May Be Useful
A pooled trust may be useful where the amount involved does not justify a standalone individual trust, where there is no suitable private trustee, or where the family wants an experienced organization familiar with SSI and Medi-Cal administration. It may also be considered for an adult who has capacity and needs to transfer their own assets into a benefits-sensitive vehicle.
Age is another issue. A first-party individual SNT under 42 U.S.C. § 1396p(d)(4)(A) is limited to a disabled individual under age 65. DHCS (Department of Health Care Services) states that a pooled trust can be established for a disabled individual of any age and must be established and managed by a nonprofit association.3
However, for older adults or long-term care Medi-Cal planning, transfer rules and timing must be reviewed carefully. Pooled trust availability does not automatically mean a transfer is consequence-free. This is particularly relevant given major 2025 changes to California laws regarding how we protect those who may lack full capacity.
Settlement Proceeds and Court Involvement
Pooled trusts are often considered in settlement cases. If proceeds belong to a minor or person with a disability and are being distributed through a court-approved compromise or judgment process, California Probate Code sections 3600 through 3613 and California Rules of Court may apply. Rule 7.950 requires a verified petition with full disclosure of information bearing on the reasonableness of the compromise or disposition.4
California Probate Code section 3611 authorizes, after hearing, payment of the remaining balance to a Special Needs Trust established under section 3604 for the benefit of a minor or person with a disability, with notice mailed to specified state directors at least 15 days before the hearing.5 If the trust is funded by court order, Rule 7.903 requires continuing court jurisdiction and may involve court supervision.6
In other words, a pooled trust can simplify trustee administration, but it does not eliminate the need to comply with settlement approval rules, lien resolution, notice requirements, or benefit reporting. Much like the probate process, the court wants to ensure that the vulnerable party is being protected.
Payback and Retained Funds
Most people encounter pooled trusts as first-party pooled trusts. That means the account is funded with assets belonging to the beneficiary, such as settlement proceeds, inheritance already received by the beneficiary, or excess savings.
Because those are the beneficiary’s assets, payback rules apply. Under 42 U.S.C. § 1396p(d)(4)(C), amounts remaining at death may be retained by the trust; to the extent not retained, the trust must pay the State up to the medical assistance paid on the beneficiary’s behalf.
This is different from a properly funded third-party SNT, which DHCS states is not subject to DHCS recovery when funded with assets belonging to someone other than the beneficiary and to which the beneficiary never had possession or legal interest. Some nonprofit organizations also offer third-party pooled trust accounts, but those should be reviewed separately from first-party pooled accounts.
Fees, Flexibility, and Practical Administration
Pooled trusts typically charge enrollment fees and ongoing administrative fees. Those fees may be reasonable when compared with the cost of forming and maintaining a private trust, especially for smaller accounts. But fees should be reviewed before enrollment.
Flexibility is another consideration. A pooled trust uses a master trust document. That can make administration efficient, but it may offer less customization than a standalone SNT. Families should review:
- Investment policy
- Distribution procedures
- Response times
- Permitted expenses
- Housing policies
- Tax reporting
- Final expense policies
- What happens to funds after death
Distribution Rules Still Matter
Pooled trust administration must still follow SSI and Medi-Cal rules. SSA policy treats cash paid directly from a trust to the beneficiary as unearned income. Payments for food or shelter can create in-kind support and maintenance.
Payments to third parties for items such as education, therapy, transportation, professional fees, uncovered medical services, phone bills, recreation, and entertainment generally may avoid being counted as income, depending on the item and facts.7 A pooled trust does not allow unlimited spending without benefit consequences. It simply provides a professional structure for reviewing and making distributions.
Advantages and Possible Drawbacks
The Advantages:
- Professional Administration: You get experts who understand the nuances of Social Security and Medi-Cal.
- Nonprofit Oversight: These trusts are run by organizations dedicated to the disability community.
- Infrastructure: The trust documents and investment channels are already in place.
- Cost-Effective: Often better for smaller accounts that wouldn’t make sense for a private corporate trustee.
The Possible Drawbacks:
- Less Customization: You are joining a “master” trust, not drafting a bespoke one.
- Speed: Distribution approvals can sometimes be slower than if a family member held the checkbook.
- Payback Provisions: For first-party accounts, the state or the nonprofit often retains remaining funds after death.
Key Takeaway
A pooled Special Needs Trust can be an excellent planning tool when professional nonprofit administration is needed. It may be especially useful for settlement proceeds, smaller accounts, beneficiaries without a suitable private trustee, or certain situations where an individual first-party SNT is not practical.
However, pooled trusts are not one-size-fits-all. Before funding a pooled account, review SSI, Medi-Cal, payback, court approval, lien, tax, and fee issues.
Considering a pooled Special Needs Trust? Visit SdCountyTrusts.com to learn more about your options and see if this model fits your family’s needs.
Disclaimer: This article is for educational purposes only. It does not constitute legal advice and does not create an attorney-client relationship. Public benefits, trust, tax, and court rules are fact-specific and may change. Consult qualified counsel before taking action.
Legal Authorities and Sources:
- 42 U.S.C. § 1396p(d)(4)(C).
- SSA POMS, SI 01120.203, pooled trust exception.
- California Department of Health Care Services, Special Needs Trust.
- California Rule of Court, Rule 7.950.
- California Probate Code § 3611.
- California Rule of Court, Rule 7.903.
- SSA POMS, SI 01120.200, trust disbursement rules.
Jul 9, 2026 | Special Needs Trusts
Parents, grandparents, and relatives often want to leave money to a loved one with disabilities. The goal is simple: provide stability, dignity, and quality of life. The problem is that leaving assets directly to a person who receives means-tested benefits can create benefit issues. A third-party Special Needs Trust is often the planning tool that solves this problem.
Unlike a first-party Special Needs Trust, a third-party SNT is funded with assets that never belonged to the beneficiary. That distinction affects SSI treatment, Medi-Cal recovery, beneficiary designations, tax planning, and who receives remaining trust assets after the beneficiary’s death.
What Is a Third-Party Special Needs Trust?
SSA defines a third-party trust as a trust established with assets belonging to someone other than the trust beneficiary or the beneficiary’s spouse.1 DHCS similarly describes third-party funded SNTs as trusts funded with assets belonging to someone other than the beneficiary and to which the beneficiary never had possession or legal interest.2
Common funding sources include a parent’s living trust, a grandparent’s will, life insurance, investment accounts, real property, and gifts from relatives. The key is that the beneficiary should not receive the assets outright first. Once the assets legally belong to the beneficiary, the planning may shift from third-party trust planning to first-party payback trust planning.
Why Not Leave Assets Directly?
SSI eligibility is resource-sensitive. SSA states that the countable resource limit is $2,000 for an individual and $3,000 for a couple.3 An outright inheritance, beneficiary designation, or gift can push the beneficiary over the limit.
Medi-Cal rules also require current review. DHCS states that beginning January 1, 2026, Medi-Cal again counts assets for many affected categories, including individuals who are 65 or older, have a disability, live in a nursing home, or fall within certain income categories. The 2026 asset limit is listed as $130,000 for one person, plus $65,000 for each additional eligible family member, subject to program-specific rules.4
The purpose of a third-party SNT is to hold assets for the beneficiary’s supplemental needs while avoiding direct ownership or control by the beneficiary. SSA policy provides that if the beneficiary cannot revoke or terminate the trust, and cannot direct the use of the trust assets for support and maintenance, the trust principal is generally not the beneficiary’s SSI resource.5
Why Third-Party Trusts Are Different From First-Party Trusts
A first-party SNT is funded with the beneficiary’s own assets and generally requires a Medicaid payback provision. A third-party SNT is different. DHCS states that third-party trusts are not subject to recovery by DHCS.2
That is one of the major advantages of planning early. The person creating the trust can usually decide who receives any remaining assets after the disabled beneficiary’s death, such as siblings, nieces and nephews, charities, or other family members. By contrast, first-party SNTs generally must repay the State before remainder beneficiaries receive anything.
Standalone SNT or Sub-Trust Inside a Living Trust?
A third-party SNT can be drafted as a standalone trust or as a sub-trust inside a parent’s revocable living trust. Both can work if drafted properly. However, a standalone third-party SNT often provides cleaner administration where multiple people may fund it over time.
For example, a standalone SNT can be named as beneficiary of life insurance, bank accounts, investment accounts, and gifts from relatives. It can also be shared with grandparents or other family members who want to include the beneficiary in their own estate plan. This reduces the risk that one well-intentioned relative leaves money directly to the beneficiary and unintentionally creates a benefits problem.
Retirement Accounts Require Special Planning
IRAs and 401(k)s require careful beneficiary planning. The IRS explains that non-spouse beneficiary options depend in part on whether the beneficiary is an “eligible designated beneficiary.” Disabled and chronically ill individuals are included in that category.6
That does not mean a retirement account should casually name a Special Needs Trust without tax advice. Trust drafting, conduit versus accumulation treatment, applicable multi-beneficiary trust rules, required minimum distributions, income tax brackets, and beneficiary designation language can all change the tax result. For some families, life insurance or after-tax assets may be easier to direct to the SNT than retirement assets. For others, retirement assets can be coordinated, but the drafting must be precise.
What Can the Trustee Pay For?
A trustee should usually pay vendors directly rather than give cash to the beneficiary. SSA policy treats cash paid directly from the trust to the beneficiary as unearned income. Payments for food or shelter can create in-kind support and maintenance. Payments to third parties for items such as education, therapy, transportation, professional fees, uncovered medical services, phone bills, recreation, and entertainment generally may avoid income treatment depending on the item purchased and the facts.7
Common supplemental expenses may include dental care not covered by benefits, therapies, assistive technology, phone and internet service, transportation, recreation, education, clothing, companion care, furniture, and quality-of-life expenses. The trustee should understand the beneficiary’s benefits, keep receipts, document decisions, and coordinate with the beneficiary’s representative payee or benefits advocate when appropriate.
Trustee Selection Matters
The trustee controls the funds. That role should not be treated as honorary. The trustee must understand fiduciary duties, investment management, tax reporting, SSI and Medi-Cal rules, distribution restrictions, accounting, and family dynamics.
Some families choose a trusted family member. Others use a private professional fiduciary, bank, trust company, or nonprofit trustee. In many plans, a family member may serve as trust protector, advisory committee member, or care advocate while a professional trustee handles administration.
Common Mistakes
The most common mistake is leaving assets directly to the beneficiary. Other mistakes include naming the beneficiary individually on life insurance, leaving a retirement account directly to the beneficiary without tax and benefits review, using mandatory distribution language, giving the beneficiary the right to demand distributions, or letting relatives make gifts directly into the beneficiary’s personal bank account.
Another common mistake is waiting too long. A third-party SNT works best when it is created before anyone dies and before beneficiary designations are updated. Planning ahead gives the family time to coordinate the living trust, financial accounts, insurance, retirement assets, and instructions to relatives.
Key Takeaway
A third-party Special Needs Trust is often the most flexible and protective planning tool for parents and relatives of a loved one with disabilities. It can preserve eligibility for SSI and Medi-Cal, provide supplemental support, avoid first-party payback, and allow the family to choose remainder beneficiaries. The key is making sure the beneficiary never receives the assets directly.
Planning for a loved one with disabilities? Visit SdCountyTrusts.com to learn more about Special Needs Trust planning.
Legal Authorities and Sources
- SSA POMS, SI 01120.200, definition of third-party trust.
- California Department of Health Care Services, Special Needs Trust.
- Social Security Administration, Supplemental Security Income (SSI) Resources.
- California Department of Health Care Services, Asset Limit Frequently Asked Questions.
- SSA POMS, SI 01120.200, resource treatment of trusts.
- Internal Revenue Service, Retirement Topics—Beneficiary.
- SSA POMS, SI 01120.200, trust disbursement rules.
