Leaving money directly to a person with a disability can cost them the benefits they depend on. Supplemental Security Income and Medi-Cal are means-tested: SSI generally limits countable resources to $2,000 for an individual and $3,000 for a couple, and Medi-Cal eligibility often follows SSI. A $60,000 inheritance, a personal injury settlement, or a well-meant gift from a grandparent can suspend benefits and, with them, the medical coverage, in-home supportive services, and residential placement that no private policy replaces.
A special needs trust solves this. Assets held in a properly drafted special needs trust are not counted as the beneficiary’s resources, so benefits continue, while the trust pays for everything the benefits do not cover. The Holmes Law drafts California special needs trusts, coordinates them with the rest of a family’s estate plan, and advises trustees on administering them without jeopardizing eligibility.
Third-Party Special Needs Trusts
A third-party special needs trust is funded with someone else’s money — most often a parent’s or grandparent’s — and never with assets that belong to the beneficiary. It is the trust a family creates as part of its own estate plan, and it is the better of the two structures whenever it is available.
Its defining advantage is that a third-party trust carries no Medi-Cal payback. When the beneficiary dies, whatever remains passes to the remainder beneficiaries the family named — usually the person’s siblings or a charity — rather than reimbursing the state for a lifetime of benefits. That difference alone can be worth hundreds of thousands of dollars.
A third-party trust can be created two ways. It can be established now as a standalone irrevocable trust that grandparents and other relatives can contribute to during their lifetimes. Or it can be written into the parents’ living trust as a subtrust that comes into existence and is funded at their deaths. Many families do both: a standalone trust so relatives have somewhere to direct gifts, with the parents’ trust pouring in at death.
The Mistakes That Undo It
Two errors defeat a third-party trust before it starts. The first is a beneficiary designation that was never updated: a retirement account, life insurance policy, or payable-on-death account naming the person with a disability directly. The designation controls, the money arrives outright, and the trust never sees it. Every designation has to name the trust, not the individual.
The second is the informal arrangement — leaving the disabled child’s share to a sibling with an understanding that they will “take care of” their brother or sister. Those funds belong to the sibling. They are exposed to the sibling’s divorce, creditors, and death, and the sibling has no legal obligation to spend a dollar of it. Families who choose this route are usually trying to keep things simple; it is the single most expensive simplification in this area of law.
Extended family also needs to be told. A grandparent’s will that leaves “$25,000 to each grandchild” undoes the planning. The fix is a short conversation and a redirection of that gift to the trust.
First-Party Special Needs Trusts
When the assets already belong to the person with a disability — a personal injury settlement, a direct inheritance that was not planned for, retroactive benefits, or savings accumulated before disability — a first-party or self-settled special needs trust is the remedy. These are authorized by federal law at 42 U.S.C. section 1396p(d)(4)(A) and are commonly called “(d)(4)(A)” trusts.
The requirements are strict:
- The beneficiary must be under 65 when the trust is established and funded.
- The trust must be established by the individual themselves, a parent, a grandparent, a legal guardian, or a court. The Special Needs Trust Fairness Act of 2016 added the individual to that list; before then, a competent adult had to find a parent or go to court.
- The trust must be irrevocable and for the sole benefit of the beneficiary.
- The trust must include a Medicaid payback provision requiring that, at the beneficiary’s death, the state be reimbursed for medical assistance paid on their behalf, up to the amount remaining.
That payback is the price of using the beneficiary’s own money, and it is why a family should never let an inheritance pass outright to a person with a disability when a third-party trust could have received it instead. The same dollars, routed correctly, avoid the payback entirely.
In California, first-party trusts funded from litigation proceeds are frequently established through the probate court under Probate Code section 3600 and following, with section 3604 setting out the findings the court must make. Court-established trusts typically require ongoing court supervision, bonding, and periodic accountings.
Pooled Trusts
A pooled trust, authorized at 42 U.S.C. section 1396p(d)(4)(C), is managed by a nonprofit organization that maintains a separate sub-account for each beneficiary while investing the assets together. Several nonprofits operate pooled trusts serving California.
Pooled trusts make sense for smaller amounts where a standalone trust with a professional trustee is not economical, and where no suitable family member can serve. The organization brings experience with benefits rules that most individual trustees lack. The tradeoffs are less flexibility, ongoing administrative fees, and — depending on the program and the state’s rules — the possibility that funds remaining at death are retained by the nonprofit rather than passing to family.
ABLE Accounts and How They Fit
An ABLE account — California’s program is CalABLE — is a tax-advantaged savings account for people with disabilities. Contributions are capped annually at the federal gift tax annual exclusion amount, with an additional allowance for a working beneficiary, and SSI disregards the first $100,000 in the account. Distributions for qualified disability expenses are tax-free.
The ABLE Age Adjustment Act took effect for tax years beginning after December 31, 2025, raising the age-of-onset requirement from before age 26 to before age 46. That change makes ABLE accounts available to a substantially larger group of Californians, including many people disabled in adulthood.
ABLE accounts complement a special needs trust rather than replacing it. The beneficiary can control an ABLE account directly and use a debit card, which supports independence and handles routine spending — including food and housing costs, which an ABLE account may pay without the reduction that a trust distribution for shelter can cause. The trust holds the larger sums, and the trustee funds the ABLE account periodically. Note that on the beneficiary’s death an ABLE account may be subject to a Medicaid claim, and each state’s approach differs.
What a Special Needs Trust Can Pay For
The governing principle is that the trust supplements public benefits rather than replacing them. Distributions should be made directly to vendors and providers, never as cash to the beneficiary — cash is income and reduces SSI dollar for dollar.
Appropriate expenditures typically include education and tuition, job training, therapies and equipment not covered by Medi-Cal, dental and vision care, a computer or phone and internet service, transportation including a vehicle, travel and vacations, recreation and hobbies, furniture, clothing, personal care attendants, pet care, professional fees, and a companion’s expenses when the beneficiary needs assistance to travel.
Food and Shelter: An Important Recent Change
Payments for a beneficiary’s food or shelter have historically counted as in-kind support and maintenance, reducing the SSI payment. That changed in part: effective September 30, 2024, the Social Security Administration removed food from the in-kind support and maintenance calculation. Shelter — rent, mortgage, property tax, heating fuel, gas, electricity, water, sewer, and garbage collection — still counts.
The practical effect is that a trustee now has meaningfully more latitude on food expenses, while shelter payments still require thought. Paying rent is not prohibited; it simply reduces SSI, capped at the presumed maximum value. Sometimes that tradeoff is worth it — a modest SSI reduction in exchange for far better housing is frequently the right call. The point is that the trustee should make the decision deliberately rather than discover it on a benefits notice.
Choosing a Trustee
Administering a special needs trust is harder than administering an ordinary trust. The trustee must invest prudently, keep meticulous records, understand SSI and Medi-Cal rules well enough to avoid disqualifying distributions, respond to redetermination requests, and exercise judgment about what genuinely improves the beneficiary’s life — and do it for what may be decades.
A family member brings knowledge of the beneficiary and no fee, and may have no experience with benefits rules and a limited horizon. A professional fiduciary or corporate trustee brings expertise and continuity and charges for it, and may not know the beneficiary at all. Many California families use a combination: a professional trustee for investment and compliance, with a family member serving as trust advisor or trust protector empowered to direct spending priorities and to remove and replace the trustee. Whatever the structure, name successors — this trust may outlive everyone who set it up.
The Letter of Intent
A letter of intent is not a legal document and it may be the most useful thing in the file. It records what a future trustee and caregiver cannot learn from the trust instrument: the beneficiary’s medical history and providers, medications, daily routine, communication style, what calms them and what distresses them, their friendships, their interests, their educational and work history, the family’s hopes for their living arrangement and level of independence, and funeral wishes.
Write it, keep it with the trust documents, and update it every year or two. Parents who have done this describe it as the part of the plan that gave them the most peace of mind.
Coordinating With the Rest of the Plan
A special needs trust only works if everything else points at it. That means reviewing and updating every beneficiary designation — retirement accounts, life insurance, annuities, payable-on-death accounts — so the trust is named rather than the individual. It means considering whether life insurance should fund the trust, since a second-to-die policy is often an efficient way for parents to create a meaningful pool of supplemental funds. It means addressing whether other children’s shares should be equal in dollars or equal in effect. And where the beneficiary is an adult who needs assistance with decisions, it means considering whether a conservatorship is necessary or whether supported decision-making and properly drafted powers of attorney will serve.
Frequently Asked Questions
What is the difference between a third-party and a first-party special needs trust?
A third-party trust is funded with someone else’s assets and has no Medi-Cal payback at the beneficiary’s death. A first-party trust holds the beneficiary’s own assets, must be established before age 65, and must reimburse the state at death.
Can I just leave my child’s share to their sibling instead?
You can, and it is a serious risk. Those assets belong to the sibling and are exposed to their divorce, creditors, and death, with no enforceable obligation to spend them on your disabled child.
Can the trust give my child spending money?
Not as cash — cash counts as income and reduces SSI directly. Pay vendors and providers instead, or fund an ABLE account, which the beneficiary can spend from with a debit card.
Can the trust pay my child’s rent?
Yes, but shelter payments count as in-kind support and maintenance and reduce SSI up to a capped amount. Food no longer counts, following a Social Security Administration rule effective September 30, 2024. The trustee should weigh the benefit against the reduction.
Do we need a special needs trust if our child receives only Medi-Cal, not SSI?
Usually yes. Many Medi-Cal programs and services are means-tested, and an outright inheritance can disrupt them. The specific programs involved determine the analysis, which is worth reviewing before assets arrive.
Speak With a California Special Needs Planning Attorney
The Holmes Law drafts California third-party and first-party special needs trusts, integrates them with parents’ living trusts and beneficiary designations, advises on ABLE accounts and pooled trust options, and counsels trustees on distributions that preserve eligibility.
To discuss planning for a family member with a disability, contact the office. You may also want to review our pages on California trusts, CA irrevocable trusts, California elder law, and California estate planning.