The core problem this trust solves

Supplemental Security Income (SSI) and Medi-Cal have strict income and asset limits. A person receiving these benefits typically cannot own more than $2,000 in countable assets without losing eligibility. For parents of a child with a disability, this creates a planning problem: if you leave money directly to your child in a will or name them as a beneficiary on a retirement account, that inheritance may push them over the asset limit and cause them to lose the government benefits they depend on.

A special needs trust, also called a supplemental needs trust, is designed to hold assets for a person with a disability without those assets counting against their SSI or Medi-Cal eligibility. The trust supplements, rather than replaces, the government benefits.

How special needs trusts work

The trust is an irrevocable structure, meaning once assets are transferred in, they belong to the trust, not to the beneficiary personally. Because the beneficiary does not own the assets, the Social Security Administration and California’s Department of Health Care Services (DHCS) do not count them toward the eligibility limits.

The trust is managed by a trustee, who makes distributions from the trust for approved purposes. What the trust can and cannot pay for is specific and matters significantly.

What a special needs trust can pay for:

  • Education, tutoring, and vocational training
  • Recreation, travel, and entertainment
  • Medical and dental care not covered by Medi-Cal
  • Technology, including computers, tablets, and communication devices
  • Clothing and personal effects
  • Home furnishings and accessibility modifications
  • Transportation and vehicle modifications
  • Legal fees and advocacy services

What it generally should not pay for:

  • Cash distributions directly to the beneficiary
  • Food and housing expenses (which can reduce SSI benefits if paid from the trust)
  • Anything that could be characterized as a substitute for SSI or Medi-Cal benefits

The trustee needs to understand these distinctions to make proper distributions. A distribution that should not have been made from a special needs trust can trigger a benefits review or reduction.

Types of special needs trusts in California

Third-party special needs trust. This is funded with money from someone other than the beneficiary, typically parents, grandparents, or other relatives leaving assets to the beneficiary through estate planning. When the beneficiary dies, the remaining trust assets pass to whomever the trust names, such as other family members. There is no requirement to reimburse the state for Medi-Cal costs.

This is the most common structure for parents planning how to include a disabled child in their estate plan.

First-party special needs trust (self-settled or d4A trust). This is funded with the beneficiary’s own assets, typically from a personal injury settlement, an inheritance received before the trust was established, or back-paid benefits. Under 42 U.S.C. 1396p(d)(4)(A), the trust must be established before the beneficiary turns 65, funded with the beneficiary’s own funds, and managed by a parent, grandparent, guardian, or court. When the beneficiary dies, the state of California must be reimbursed for Medi-Cal benefits paid during the beneficiary’s lifetime before remaining assets pass elsewhere.

The reimbursement requirement is a significant distinction. Third-party trusts do not carry it; first-party trusts do.

Pooled trust. California also allows participation in a pooled trust administered by a nonprofit organization. Each beneficiary has a sub-account within the larger pool. Pooled trusts are useful when the amount of assets is too small to justify the administrative cost of a standalone trust, or when there is no suitable trustee available.

Setting up a third-party special needs trust for your child

If your child has a disability and you want to include them in your estate plan without disrupting their benefits, the most common approach is to establish a third-party special needs trust as part of your living trust. At your death, the share that would have gone to your child instead passes into the special needs trust sub-trust.

This requires specific drafting in your living trust (or a standalone special needs trust document) that addresses:

  • Who will serve as trustee (and who the successor trustees are)
  • The specific purposes for which distributions can be made
  • What happens when the beneficiary dies
  • How the trust interacts with the beneficiary’s specific benefit programs

Getting this language right matters. A trust that is too broadly drafted may be treated as a countable resource by SSI or Medi-Cal. The Social Security Program Operations Manual System (POMS) and California’s Medi-Cal regulations both have specific rules about what language a special needs trust must include to protect eligibility.

For more on the document and its requirements, see the special needs trusts service page.

Who can be the trustee

The trustee of a special needs trust carries significant responsibilities. They must make appropriate distributions, keep records, file trust tax returns, respond to benefit agency inquiries, and understand the changing rules around SSI and Medi-Cal.

Some families use a professional trustee, a bank trust department or professional fiduciary licensed by the California Department of Consumer Affairs, for this role. A professional trustee charges a fee, typically 0.5-1.5% of trust assets annually, but brings expertise and eliminates the burden from family members.

Other families use a trusted family member, often a sibling or other relative, sometimes with the guidance of a special needs attorney who can advise the trustee on distributions.

A third option is a letter of intent, also called a letter of instruction, prepared by the parents, which explains the beneficiary’s needs, preferences, daily routine, medical situation, and quality-of-life goals. It is not a legal document, but it gives the trustee a detailed picture of the beneficiary’s life that no legal document can fully capture.

ABLE accounts as a complement

California participates in the federal ABLE Act program, which allows individuals whose disability onset was before age 26 to open a tax-advantaged savings account (an ABLE account or CalABLE account in California) that does not count against SSI and Medi-Cal eligibility up to a limit (currently $100,000 in the account before SSI is affected). Contributions can be made by the beneficiary or by others.

ABLE accounts are simpler to set up than a trust and have lower administrative cost. They work well for smaller amounts or for more flexible spending (including food, housing, and everyday expenses) that a special needs trust cannot cover without benefit implications.

For larger amounts, a trust is the right vehicle. Many families use both: an ABLE account for flexible day-to-day spending and a third-party special needs trust to hold the larger inheritance.

Getting the planning right

Special needs trust planning involves the intersection of federal benefit program rules, California Medi-Cal regulations, and trust law. The documents need to be drafted by an attorney who is familiar with all three.

The California State Bar at calbar.ca.gov can connect you with a licensed estate planning attorney in San Diego County who has experience with special needs planning.

Trust Law SD connects San Diego families with local estate planning attorneys who handle special needs trust drafting. Call (858) 925-5546 to get matched with an attorney who can review your situation and help you include your child in your estate plan in a way that protects their benefits. For context on where special needs trusts fit in the broader estate plan, see the estate planning service page.

Can a sibling be the trustee of a special needs trust?

Yes. A sibling or other family member can serve as trustee. The trustee takes on meaningful administrative responsibilities, including record-keeping, tax filings, and making correct distributions. Many families structure it as a co-trustee arrangement or build in professional trustee oversight for guidance. The attorney who drafts the trust can walk through trustee duties and what support resources are available.

What happens to the trust if the beneficiary dies?

For a third-party special needs trust, the remaining assets pass to the remainder beneficiaries named in the trust (such as other siblings or charities). There is no Medi-Cal reimbursement requirement for third-party trusts. This is one of the key reasons third-party trusts are preferred over self-settled trusts when the funding comes from parents or relatives.

What if my child receives an inheritance or lawsuit settlement directly?

If a person with a disability receives assets directly, those assets can disqualify them from benefits. A first-party (d4A) special needs trust can be used to hold those assets and preserve eligibility, subject to the state reimbursement requirement at the beneficiary’s death. The trust must typically be established quickly after receipt of the funds. An estate planning attorney can advise on the timing and mechanics.