A Texas special needs trust holds money for a person with a disability without disqualifying that person from Supplemental Security Income, Texas Medicaid, and other means-tested programs. Without one, an inheritance, a lawsuit settlement, or even a well-meant gift from a grandparent can push a beneficiary over the resource limit and interrupt the benefits that pay for medical care, long-term services, and supports. With one, the same money can pay for the things that make life better while public benefits continue to cover basic needs.
This page explains the kinds of special needs trusts used in Texas, the federal rules that govern them, Texas-specific options including court-created trusts under the Property Code and Estates Code, how distributions affect SSI, how Texas ABLE accounts fit in, and how to choose a trustee. It is written for parents, grandparents, and other family members, and for people with disabilities planning for themselves. For the broader framework of Texas trust law, see the Texas trusts page.
Why a Texas Special Needs Trust Matters
SSI is a federal program with a strict resource limit: $2,000 for an individual and $3,000 for a couple. In Texas, SSI eligibility is closely tied to Medicaid eligibility, and many Texans with disabilities also rely on Medicaid waiver programs for community-based long-term services and supports. Losing SSI or Medicaid, even temporarily, can disrupt care that took years to put in place.
Assets held in a properly drafted special needs trust are not counted as the beneficiary’s resources because the beneficiary cannot compel distributions or use the trust assets for support. The trustee has discretion to pay for goods and services that supplement public benefits, such as therapies, education, recreation, travel, technology, and personal care items.
There are three main types of special needs trusts, and the right choice depends primarily on whose money is being placed in the trust.
Third-Party Special Needs Trusts in Texas
A third-party special needs trust holds money that belongs to someone other than the beneficiary, typically parents, grandparents, or other relatives. It is the most flexible and most common type in estate planning.
Key features
- No Medicaid payback is required. When the beneficiary dies, the remaining assets can pass to siblings, other family members, or charities as the trust directs.
- It can be created during the parents’ lifetime as a standalone trust, within a revocable trust, or in a will as a testamentary trust.
- It should be drafted as a fully discretionary trust with a spendthrift provision under Property Code § 112.035 and clear language that it is intended to supplement, not supplant, public benefits.
Funding through the family’s estate plan
A third-party trust is usually funded by the parents’ estate plan at death. That requires coordination. If a parent names the child with a disability directly as the beneficiary of a life insurance policy or retirement account, the proceeds go to the child outright and can cause disqualification. Beneficiary designations should name the special needs trust instead. Grandparents and other relatives should be told about the trust so they can leave gifts to it rather than to the beneficiary.
First-Party Special Needs Trusts: 42 U.S.C. § 1396p(d)(4)(A)
A first-party special needs trust holds the beneficiary’s own money, such as a personal injury settlement, back SSI payments, child support, or an inheritance that was left outright. Federal law in 42 U.S.C. § 1396p(d)(4)(A) allows these trusts if:
- The beneficiary is under age 65 when the trust is established and funded.
- The beneficiary has a disability as defined by the Social Security Act.
- The trust is established for the sole benefit of the beneficiary by the beneficiary, a parent, grandparent, legal guardian, or a court. Since the 21st Century Cures Act of 2016, a competent individual can establish his or her own trust.
- The trust provides that, at the beneficiary’s death, Texas and any other state that provided Medicaid will be repaid from the remaining assets for benefits paid during the beneficiary’s lifetime.
First-party trusts are subject to the sole benefit rule and to Social Security’s detailed requirements in its Program Operations Manual System, and Texas HHSC reviews these trusts when determining Medicaid eligibility. Drafting errors can make a trust countable, so first-party trusts should be prepared with care and reviewed against current agency guidance.
Pooled Trusts: 42 U.S.C. § 1396p(d)(4)(C)
A pooled trust is established and managed by a nonprofit organization. Each beneficiary has a separate subaccount, but the funds are pooled for investment and administration. Pooled trusts are available at any age for Medicaid purposes, although transfers by people 65 and older can raise transfer penalty issues for certain long-term care programs.
Pooled trusts can be a practical choice for smaller amounts, for people without a family member able to serve as trustee, or when a beneficiary needs a trust quickly. At the beneficiary’s death, the nonprofit may retain some or all of the remaining funds, and any remainder not retained is generally subject to Medicaid payback. Several nonprofit organizations operate pooled trusts available to Texas residents, and the terms, fees, and retention policies differ among them.
Texas Court-Created Trusts for People With Disabilities
Texas law offers two court-based paths that are often used to create special needs trusts, particularly when a minor or incapacitated person receives a settlement or judgment.
Property Code § 142.005 trusts
When a minor or an incapacitated person receives money through a lawsuit, Property Code § 142.005 allows the court to create a trust for that person’s benefit. These trusts can be structured to satisfy the (d)(4)(A) requirements, preserving benefits eligibility while providing court oversight. They are common in personal injury settlements involving children with serious injuries.
Estates Code chapter 1301 management trusts
Estates Code chapter 1301 allows a court with guardianship jurisdiction to create a management trust for a ward or for an incapacitated person who does not have a guardian of the estate. Management trusts can serve as an alternative to a guardianship of the estate and can be drafted to meet special needs trust requirements. They are subject to court supervision and statutory terms, including provisions for termination and payback where required.
These court-created trusts add accountability, but they also add ongoing court involvement and costs. When a family has time to plan, a privately drafted trust is usually more flexible.
How Distributions Affect SSI
Trustees must understand how SSI treats distributions, because a poorly chosen distribution can reduce benefits.
Payments directly to vendors
The general rule is that a trustee should pay providers directly rather than giving cash to the beneficiary. Cash given to the beneficiary, and cash equivalents such as gift cards that can be used to buy food or shelter, generally count as unearned income and can reduce SSI, after a small general exclusion, dollar for dollar.
In-kind support and maintenance
Payments for shelter, such as rent, mortgage, property taxes, and certain utilities, are treated as in-kind support and maintenance and can reduce the SSI payment, subject to a cap. Effective September 30, 2024, the Social Security Administration removed food from the calculation of in-kind support and maintenance, so trust payments for food no longer reduce SSI under that rule. Paying for shelter can still be the right decision when the benefit to the beneficiary outweighs the reduction, but it should be a deliberate choice.
Items that do not reduce benefits
Payments for medical care not covered by Medicaid, therapies, education, transportation, phone and internet service, furniture, electronics, recreation, and travel are generally permissible without affecting SSI, as long as they are paid directly to the provider.
Texas ABLE Accounts
ABLE accounts, authorized by Internal Revenue Code § 529A, let people with disabilities save money without losing SSI or Medicaid eligibility, within limits. Texas offers a program called Texas ABLE. For tax years beginning after December 31, 2025, eligibility extends to people whose disability began before age 46.
ABLE accounts and special needs trusts work well together. The beneficiary can manage an ABLE account directly, which supports independence, and ABLE funds can pay for housing without triggering in-kind support and maintenance reductions. A trustee can make distributions from a special needs trust into the beneficiary’s ABLE account, subject to annual contribution limits. Funds remaining in an ABLE account at death may be subject to a Medicaid claim.
Choosing a Trustee for a Texas Special Needs Trust
The trustee of a special needs trust has a demanding job. Beyond the ordinary duties under the Texas Trust Code, including loyalty, prudent investment under Property Code chapter 117, and keeping the beneficiary reasonably informed under § 113.060, the trustee must understand benefits rules, keep careful records, and report to agencies when required.
Families often choose a sibling or other relative who knows the beneficiary well, sometimes paired with a professional co-trustee or trust advisor for investments and compliance. A trust protector can be empowered to amend administrative provisions if benefit rules change. The trust should name several successor trustees, because a special needs trust may last for decades.
Coordinating With Guardianship and Alternatives
A special needs trust manages money, but it does not give anyone authority to make personal, medical, or legal decisions for an adult with a disability. For adults who need help, Texas offers a range of options, including a supported decision-making agreement under Estates Code chapter 1357, powers of attorney for adults with capacity to sign them, and guardianship when less restrictive options are not sufficient. For a minor child with a disability, parents should plan ahead for the transition at age 18. These topics are covered on the Texas elder law page.
Building a Special Needs Trust Into Your Estate Plan
For parents, a Texas special needs trust is usually one piece of a larger plan. The plan typically includes:
- A third-party special needs trust, either standalone or inside a revocable trust or will.
- Beneficiary designations on life insurance and retirement accounts naming the trust.
- A pour-over will or traditional will that directs the child’s share to the trust.
- A letter of intent describing the beneficiary’s routines, needs, medical providers, and preferences for the trustee’s guidance.
- Guardian designations for minor children and a plan for adulthood.
Common Mistakes in Texas Special Needs Planning
Families who try to plan for a loved one with a disability often make the same avoidable mistakes:
- Leaving the beneficiary’s share outright in a will or trust, which can cause immediate loss of SSI and Medicaid until the funds are spent down.
- Naming the beneficiary directly on a life insurance policy or retirement account, overriding an otherwise careful plan.
- Using a first-party trust when a third-party trust would work, and unnecessarily exposing family money to Medicaid payback.
- Drafting a support trust instead of a fully discretionary trust, which can make trust assets countable.
- Giving the trustee cash distributions to hand to the beneficiary rather than paying providers directly.
- Failing to name successor trustees for a trust that may need to last for the beneficiary’s lifetime.
- Relying on a single informal caregiver arrangement without documenting the family’s intentions in a letter of intent.
- Forgetting to update the plan when benefit rules change or when the beneficiary becomes an adult.
Most of these mistakes are easy to avoid when special needs planning is built into the family’s estate plan from the start rather than added after an inheritance or settlement has already been received. A periodic review, particularly after changes to SSI or Medicaid rules, keeps the trust aligned with current requirements.
Frequently Asked Questions
What is the difference between a first-party and third-party special needs trust?
A third-party trust holds money from others, such as parents, and has no Medicaid payback requirement. A first-party trust holds the beneficiary’s own money, must be established before age 65, and must repay Medicaid from remaining assets at the beneficiary’s death.
Can a special needs trust pay for housing in Texas?
Yes, but shelter payments can reduce SSI as in-kind support and maintenance. Food payments no longer reduce SSI after September 30, 2024. Housing may also be paid from an ABLE account without that reduction.
What happens to a Texas special needs trust when the beneficiary dies?
A third-party trust passes remaining assets to the beneficiaries named in the trust. A first-party trust must first repay Medicaid for benefits paid during the beneficiary’s life, and a pooled trust may retain funds for the nonprofit.
Can a court create a special needs trust in Texas?
Yes. Texas courts can create trusts for minors and incapacitated persons under Property Code § 142.005 and management trusts under Estates Code chapter 1301, which can be drafted to meet special needs trust requirements.
Should I leave my child’s inheritance to a sibling instead of a trust?
Generally not. Money left to a sibling legally belongs to that sibling and is exposed to his or her creditors, divorce, and death. A special needs trust provides legal protection and a fiduciary duty to the beneficiary.
Who is eligible for a Texas ABLE account?
For tax years beginning after December 31, 2025, a person whose disability began before age 46 and who meets the disability requirements can have an ABLE account.
Speak With a Texas Special Needs Trust Attorney
Holmes Law prepares third-party and first-party special needs trusts for Texas families and coordinates them with wills, revocable trusts, and beneficiary designations. Michael Holmes is licensed in Texas and meets with families remotely across the state. To plan for a loved one with a disability, contact Holmes Law. More resources are available on the Texas estate planning hub and the elder law page.