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.