Special Needs Trust Questions — Answered

A first-party (self-settled) SNT is funded with assets that legally belong to the beneficiary themselves — most commonly the proceeds of a personal injury or medical malpractice settlement, a direct inheritance received in the beneficiary's own name, or a lump-sum disability back-payment. These assets, if held outright, would disqualify the individual from SSI and Medi-Cal due to resource limits. A first-party SNT "rescues" those assets by placing them in a protected trust. Under federal law (42 U.S.C. § 1396p(d)(4)(A)) and California Probate Code § 3604, first-party SNTs must be irrevocable, established for the sole benefit of a person with a qualifying disability under age 65, and must contain a Medicaid/Medi-Cal payback provision. Importantly, since the Special Needs Trust Fairness Act of 2016 (Pub. L. 114-255), the beneficiary may now establish the trust themselves — a parent, grandparent, legal guardian, or court is no longer required to do so on their behalf, but may if they choose.

The Medicaid payback provision — sometimes called the "reimbursement clause" — mandates that upon the beneficiary's death, the state must be reimbursed for all Medicaid/Medi-Cal benefits paid on the beneficiary's behalf during their lifetime before any remaining trust assets pass to heirs. This requirement is a strict condition of validity for all first-party (self-settled) SNTs under 42 U.S.C. § 1396p(d)(4)(A). In California, Medi-Cal recovery is administered by the Department of Health Care Services (DHCS). Reimbursement is limited to benefits paid after the trust was established — not those paid before. This provision does NOT apply to third-party SNTs or testamentary SNTs funded with the grantor's assets. Assets remaining in a third-party trust at the beneficiary's death pass entirely to whomever the grantor designated as remainder beneficiaries, with no state reimbursement obligation — making the absence of a payback requirement one of the most significant planning advantages of a third-party SNT.

A third-party SNT is funded entirely with assets belonging to someone other than the beneficiary — most commonly a parent, grandparent, sibling, or other family member who wants to leave an inheritance without jeopardizing the beneficiary's government benefits. Because the trust is never funded with the beneficiary's own assets, no Medicaid/Medi-Cal payback is required at death. Remaining assets pass to whoever the grantor names as remainder beneficiaries — typically other family members. Third-party SNTs have no age restriction and can be established for a beneficiary of any age. They may be created during the grantor's lifetime as a standalone trust (revocable or irrevocable) or through a will (testamentary). A third-party SNT is the most widely used tool when parents or grandparents of an individual with a disability want to leave an inheritance or make lifetime gifts while preserving the individual's eligibility for SSI, Medi-Cal, regional center services, and other public benefits.

One of the most practical and widely used planning structures is embedding a Special Needs Trust directly inside a parent's or other family member's revocable living trust as a dedicated sub-trust. During the grantor's lifetime, the living trust remains revocable and fully under the grantor's control — nothing changes for the beneficiary with a disability. Upon the grantor's death, the living trust becomes irrevocable, and the SNT sub-trust springs into existence automatically, funded by whatever share of the trust estate the grantor designated for the beneficiary. Because the assets are already held in a trust — not in the grantor's individual name — no court supervision or probate is required, and funds are available to the beneficiary immediately after trust administration is complete. The SNT sub-trust is always a third-party trust: it is funded entirely with the grantor's assets, never the beneficiary's own property, so no Medicaid/Medi-Cal payback provision applies. There is no age restriction on the beneficiary. The grantor designates a successor trustee to manage the SNT sub-trust after their death — this can be a family member, a professional fiduciary, or a nonprofit trust company — and specifies the trustee's distribution standards and the remainder beneficiaries who inherit any funds remaining after the special needs beneficiary's death. The living trust can also be coordinated with life insurance policies, retirement accounts, and other assets by naming the SNT sub-trust as the designated beneficiary, ensuring all assets flow seamlessly into the protected trust without court involvement.

Age restrictions apply only to first-party (self-settled) SNTs. Under federal law (42 U.S.C. § 1396p(d)(4)(A)), a first-party SNT must be established for a beneficiary who is under age 65 at the time the trust is created. Once validly established, the beneficiary may remain in the trust past age 65 — but no new assets may be added after the beneficiary's 65th birthday. Any transfers made to a first-party SNT after the beneficiary turns 65 are treated as disqualifying transfers for Medi-Cal purposes, resulting in a period of ineligibility. Third-party SNTs and testamentary SNTs have no age restriction and may be created for a beneficiary of any age. For individuals over 65 who receive assets in their own name and cannot use a first-party SNT, a pooled trust — authorized under 42 U.S.C. § 1396p(d)(4)(C) and administered by a nonprofit organization — is an available alternative with no age restriction, though any funds remaining at death go to the “pool” rather than to the beneficiary's family.

An SNT is designed to pay for supplemental needs not covered by government programs — enhancing quality of life without replacing public benefits. Permissible expenditures typically include education, tutoring, therapy not covered by insurance, recreation and entertainment, technology and communication devices, transportation, personal care items, travel, household furnishings, clothing, and hobbies. An important SSA rule change took effect September 30, 2024: food provided by third parties — including distributions from an SNT — no longer reduces SSI benefits. The SSA eliminated the food in-kind support and maintenance (ISM) rule, making it easier to use SNT funds for groceries and meals. However, payments for shelter — rent, mortgage, property taxes, and utilities — can still reduce SSI benefits and must be handled carefully. Direct cash payments to the beneficiary always count as income and should be avoided. Trust funds should be paid directly to vendors and service providers on the beneficiary's behalf, never as cash to the beneficiary. In California, Medi-Cal eliminated its asset test for most programs as of January 1, 2024, but SNT planning remains critical for SSI eligibility and for protecting assets in the event of future policy changes.