If you have a child or grandchild with a disability, leaving them money seems like it should be the simple part of your estate plan. Name the child in your will, or list the child as a beneficiary on a life insurance policy, and the money is there when it is needed.
The problem is that a direct inheritance can cost your child the government benefits they rely on. Supplemental Security Income (“SSI”) and Medicaid are means-tested programs. They look at what your child owns. Money that arrives in your child’s own name counts, and eligibility can end the month after it arrives.
A special needs trust in Texas (also called a supplemental needs trust) is the structure that solves this. The trust – not your child – owns the assets, so the assets generally are not counted against your child’s eligibility, while the trustee can still spend the money to make your child’s life better.
Common Concerns:
- Will an inheritance cause my child to lose Medicaid or SSI?
- What can the trust actually pay for?
- Who should I name as trustee, and what happens when that person is gone?
What is a Special Needs Trust in Texas?
A special needs trust holds money or property for the benefit of a person with a disability while preserving that person’s eligibility for means-tested government programs.
It is created the same way any other trust is created by a lifetime transfer or transfer at death to a trustee. What makes it a special needs trust is not a Texas statute. It is the drafting. The trust must be written so that your child has no right to demand anything from it, and so that it supplements rather than replaces what public programs provide. That result comes from federal SSI and Medicaid law and from Texas HHSC policy, applied to a trust document that is drafted to satisfy them.
SSI and Medicaid Have Strict Asset Limits
The reason a special needs trust is used for planning comes down to specific dollar thresholds.
SSI (Supplemental Security Income), administered by the Social Security Administration, limits countable resources to $2,000 for an individual. Texas Medicaid follows similar rules, with most programs setting the same $2,000 countable asset ceiling for individuals. Exceeding these limits can result in loss of benefits until assets are spent back down.For nursing facility care and for the home and community-based waiver programs, there is also a special income limit set at 300% of the federal benefit rate, which is $2,982 per month for an individual in 2026.
For a child or adult with a disability who relies on Medicaid for healthcare and SSI for basic income support, losing those benefits because of a well-intentioned inheritance is a serious and preventable problem. An inheritance of even $10,000 left directly to the beneficiary could disqualify them from Medicaid for months. A properly drafted special needs trust holds that same money and keeps eligibility intact.
What Happens If The Money Goes Directly To a Child?
This is the scenario families discover too late.
A grandparent leaves $50,000 to a grandchild with Down syndrome in a straightforward will. The money arrives. Resources are counted as of the first moment of each month, so as of the first of the following month the grandchild holds far more than $2,000 in countable resources, and SSI and Medicaid eligibility end. Benefits do not resume until the money has been spent down.
The same risk applies to life insurance proceeds, retirement account distributions, and personal injury settlements paid directly to the beneficiary.
Two things are worth saying plainly. First, an accident like this is often fixable if a lawyer is reached quickly. The funds may be able to be redirected into a first-party special needs trust, a pooled trust subaccount, or an ABLE account. Second, how long the disruption lasts depends entirely on the amount, on what the money is spent on, and on how fast the family acts. Do not assume it is hopeless, and do not assume it will resolve itself.
The better answer, of course, is to never let the money land in your child’s name in the first place.
What Type of Trust Is Needed?
Texas families typically encounter two categories of special needs trusts, and which one applies depends on whose money is funding it.
Third-Party Special Needs Trust
A third-party special needs trust is funded with assets belonging to someone other than the beneficiary, typically a parent, grandparent, or other family member. This is the most common type used in estate planning. When the beneficiary dies, any funds remaining in the trust pass to other beneficiaries the family designates, rather than being paid back to the government. There is no Medicaid payback requirement for third-party trusts.
First-Party Special Needs Trust
A first-party special needs trust, also called a (d)(4)(A) trust after the relevant section of federal law (42 U.S.C. § 1396p(d)(4)(A)), is funded with the beneficiary’s own money, such as a personal injury settlement or an inheritance the beneficiary already received. This type must include a payback provision, meaning that when the beneficiary dies, Medicaid must be repaid from any remaining trust assets before funds go to other heirs. First-party trusts must be established before the beneficiary reaches age 65.
Pooled Trust
A pooled trust is established and managed by a nonprofit association, which maintains a separate subaccount for each beneficiary while pooling the funds for investment. In Texas, The Arc of Texas Master Pooled Trust has operated since 1997 and administers both third-party and first-party subaccounts.
A pooled trust is often the practical answer when the amount involved is too small to justify a standalone trust and a professional trustee. Note one difference from a (d)(4)(A) trust: a pooled trust may retain remaining funds for its charitable purposes, and only the amount not retained is paid to the State.
What Can A Special Needs Trust Pay For?
A special needs trust is designed to supplement, not replace, what government programs provide. The trustee can use trust funds for a wide range of expenses that improve the beneficiary’s life, as long as those purchases don’t duplicate benefits the person is already receiving through Medicaid or SSI.
Uses that commonly work well:
- education, tutoring, and vocational training
- transportation, including purchasing and insuring a vehicle
- recreation, travel, and entertainment
- computers, phones, and assistive or communication technology
- household furnishings and personal care items
- therapies, dental and vision care, and medical services Medicaid does not cover
The area requiring the most care is shelter. If the trust pays a beneficiary’s rent, mortgage, property taxes, heating fuel, gas, electricity, water, sewer, or garbage collection, SSA may treat those payments as in-kind support and maintenance and reduce the SSI payment. The reduction is capped, and in many cases the value the trust provides is worth more than the SSI reduction costs — but that is a calculation to run deliberately, not a decision to make by accident. Your trustee should understand the rules before writing a housing check.
A Special Needs Trust in Texas Must Be Drafted Carefully to Stay Compliant
The language inside a special needs trust determines whether it actually protects the beneficiary’s benefits. A trust that is too loosely written can be treated as an available resource by Medicaid or SSI, defeating its purpose. Texas families working with a wills and trusts attorney familiar with special needs planning will want to ensure that the trust will:
- state clearly that distributions are supplemental to, and not a substitute for, government benefits;
- give the trustee fully discretionary authority, with no standard your child could enforce in court;
- give your child no power to demand, direct, revoke, or assign anything;
- include a spendthrift provision under Texas Property Code Section 112.035; and
- for a first-party trust, include payback language naming the State or States as residuary beneficiary
The trust also needs to clearly define what the trustee is authorized to do and how distributions are made. If the document gives the beneficiary direct control over assets, that can trigger resource-counting rules. Coordination with the family’s overall estate plan matters as well, because other documents such as wills, beneficiary designations, and life insurance policies need to point to the trust rather than to the beneficiary directly.
Who Should Serve as Trustee of a Special Needs Trust?
Trustee selection is one of the most consequential decisions in setting up a special needs trust. The trustee controls distributions, handles investments, files tax returns for the trust, and must navigate the rules that protect the beneficiary’s government benefits. Choosing the wrong person can result in accidental disqualification from Medicaid or SSI.
Family members often serve as trustees, and that can work well when the person has both the financial competence and the time to manage the responsibilities. A sibling who is organized, financially literate, and understands the benefit rules is a reasonable choice.
The concern is continuity: what happens if the sibling moves away, becomes ill, or predeceases the beneficiary? Many families name a corporate or professional trustee as a co-trustee or as successor trustee, so there is an institution behind the arrangement, and use a trust protector who can replace a corporate trustee that is not serving the family well.
Related considerations: ABLE accounts and turning 18
Two items should be given thoughtful consideration alongside the trust.
ABLE accounts. A Texas ABLE account lets your child hold up to $100,000 in their own name without it counting as an SSI resource. Two 2026 changes: the annual contribution limit is now $20,000, no longer tied to the $19,000 gift tax exclusion, and as of January 1, 2026 the age-of-onset requirement rose from before 26 to before 46. ABLE complements a trust but does not replace one – it has contribution caps and a Medicaid payback; a third-party trust has neither.
Turning 18. Your child becomes a legal adult regardless of disability, and your authority as a parent ends. Texas treats guardianship as a last resort: under Texas Estates Code, a court must first find that alternatives and available supports “have been considered and determined not to be feasible.” Those alternatives include powers of attorney, HIPAA authorizations, representative payee arrangements, and a supported decision-making agreement, which preserves your child’s legal capacity. Start this conversation before the eighteenth birthday, not after.
How to Get Started With a Special Needs Trust in Texas
Setting up a special needs trust is not something to do with a generic online template. The trust must be tailored to the beneficiary’s specific situation, the government programs involved, and the family’s broader estate plan. Texas families who work with an estate planning attorney familiar with disability planning in the Dallas area will go through a process that includes reviewing current benefit eligibility, identifying all assets that need to be redirected, and drafting the trust with language that satisfies both Texas law and federal benefit rules.
The trust usually becomes one piece of a coordinated plan that also includes an updated will, revised beneficiary designations, and letters of intent that describe the beneficiary’s daily life, preferences, and care needs for future trustees and caregivers. That documentation, while not legally binding, can be one of the most valuable things a parent leaves behind.
If you have a child or family member with a disability and want to understand how a special needs trust fits into your estate plan, the Tarleton Firm works with Texas families on exactly these situations. Reach out to schedule a consultation.
