What to Know About Special Needs Trusts and Public Benefits
Last Updated: September 7, 2026
IN THIS GUIDE:
What to Know About Special Needs Trusts and Public Benefits
Navigating public benefits and long-term financial planning for a loved one with disabilities can feel overwhelming. That’s where Special Needs Trusts (SNTs) come in. They are powerful tools designed to protect eligibility for needs-based public benefits like Supplemental Security Income (SSI) and Medi-Cal while ensuring ongoing support.
There are two primary types of SNTs: first-party and third-party. Each has specific legal requirements, advantages, and uses. Let’s break down how they work, why they’re important, and the key terminology you need to understand when considering this option for your estate planning.
Understanding the Types of Special Needs Trusts
First-Party Special Needs Trust (Self-Settled Trust)
- Funded with the beneficiary’s own assets, often from a legal settlement, inheritance, or back payments of benefits.
- Must be established before the beneficiary turns 65 by a parent, grandparent, legal guardian, or the court.
- Must include a Medicaid payback provision, meaning any remaining funds at death go to reimburse the state for Medi-Cal services.
- Must be irrevocable.
Third-Party Special Needs Trust
- Funded by someone other than the beneficiary—commonly a parent or grandparent.
- Does not require Medicaid reimbursement at death.
- Can be revocable or irrevocable depending on the trust’s purpose and the grantor’s planning.
- Used in estate planning to pass wealth without disrupting the beneficiary’s benefits.
Pooled Special Needs Trust
- Managed by Nonprofit Organizations: Pooled trusts are administered by nonprofit organizations that specialize in serving people with disabilities.
- Assets Are Combined for Investment Purposes: While each beneficiary has their own separate sub-account, the funds from many participants are pooled together for investment. This allows for more efficient management and potentially better returns.
- Ideal When a Private Trustee Isn’t Available: If there’s no suitable family member, friend, or professional willing or able to serve as trustee, a pooled trust offers a reliable alternative.
Comparison Chart: Special Needs Trusts and Public Benefits in California
| Feature/Factor | First-Party SNT | Third-Party SNT | Pooled Special Needs Trust (Pooled SNT) |
| Who Funds It? | The beneficiary (using their own assets, such as inheritance, lawsuit proceeds, or savings) | A third party, such as a parent, grandparent, or friend | Typically the beneficiary, but managed by a nonprofit |
| When Can It Be Set Up? | Anytime before the beneficiary turns 65 | At any time, even after the beneficiary turns 65 | Usually anytime, regardless of age, though some restrictions may apply |
| Who Manages the Trust? | A private trustee (family, friend, or professional) | A private trustee (often a family member or estate planner) | A nonprofit organization serves as the trustee |
| Can It Preserve Government Benefits (SSI/Medi-Cal)? | Yes | Yes | Yes |
| Is a Payback to Medi-Cal Required? | Yes, upon the beneficiary’s death, Medi-Cal must be reimbursed | ❌ No, funds can go to other family members or heirs | Yes, Medi-Cal must be reimbursed from the sub-account balance |
| Can It Be Used in an Estate Plan? | ⚠️ Rarely (not ideal for estate planning purposes) | Yes, ideal for gifts and inheritances | Sometimes, especially when no trustee is available |
| Trustee Flexibility | Full control if a private trustee is chosen | Full control if a private trustee is chosen | Limited—nonprofit manages distributions based on trust rules |
| Investment of Funds | Managed individually | Managed individually | Pooled with other beneficiaries for investment but accounted for separately |
| Best For | Beneficiaries who have their own money and need to preserve benefits | Family members planning ahead to support a disabled loved one | Those without a suitable private trustee or needing a low-cost alternative |
Example of First-Party Special Needs Trust (Self-Settled)
Jasmine, a 25-year-old woman with a disability, is injured in a car accident and receives a $300,000 settlement. Since she receives SSI and Medi-Cal, directly owning that money would disqualify her from these programs. Her parents petition the court to create a first-party Special Needs Trust using her own settlement funds. In this case, Jasmine is the grantor (because the money is hers) and the beneficiary. A parent or the court must establish the trust. Upon her death, remaining funds must first reimburse Medi-Cal for services provided.
Example of Third-Party Special Needs Trust (Family-Funded)
David and Maria have a son, Alex, who has an intellectual disability and receives public benefits. They want to leave part of their estate to Alex without disrupting his benefits. In their living trust, they include a third-party SNT that will be funded when they pass away. David and Maria are the grantors. The trust is not funded with Alex’s own money. Upon Alex’s passing, remaining funds go to his siblings or a charity, not to Medi-Cal.
Example of Pooled Special Needs Trust
Sofia is 40 and receives SSI and Medi-Cal due to a developmental disability. She inherits $90,000 from a distant relative. Rather than setting up her own individual SNT, she joins a pooled SNT managed by a nonprofit. The nonprofit becomes the trustee, and her funds are pooled with others for investment purposes. A portion of the remaining funds may go to the nonprofit or other beneficiaries when she passes.
Examples of Other Special Needs Trusts by Will or Living Trust
In addition to First-Party, Third-Party, and Pooled Special Needs Trusts, California also allows two additional forms of third-party SNTs that can be created either after death or during the grantor’s lifetime. These trusts are powerful tools for families who want to plan ahead for a loved one with a disability, while still controlling when and how the trust is created and funded.
Testamentary Special Needs Trust: Frank writes a will leaving a portion of his estate to his niece, Lily, who has a disability and receives public benefits.
Tip: The trust is not created until Frank dies. It is funded by the assets distributed through his will and functions as a third-party SNT, helping protect Lily’s eligibility for SSI and Medi-Cal while ensuring she still benefits from the inheritance.
Inter Vivos Third-Party SNT (Living Trust Version): Beth creates a revocable living trust during her lifetime for her daughter, Claire, who has a disability. She wants to fund the trust gradually and retain flexibility.
Tip: This “inter vivos” trust is created while Beth is still alive, and because she is the grantor, she can manage or revoke it during her lifetime. Upon her death, the trust becomes irrevocable and continues to function as a third-party special needs trust, preserving Claire’s public benefits and distributing funds under the trustee’s careful management.
The Importance of Specialty Trusts for Individuals Receiving Public Benefits
If a person with a disability receives money directly—whether by inheritance, personal injury settlement, or gift—it could disqualify them from receiving needs-based benefits. Special Needs Trusts and Public Benefits go hand in hand, as Special Needs Trusts keep those assets in trust while allowing the beneficiary to continue accessing public support.
The trust can pay for supplemental needs such as:
- Education
- Personal care attendants
- Travel
- Therapy
- Technology
But it cannot provide direct cash distributions without affecting benefits.
Special Needs Trust Terminology You Should Know
Parties
Grantor – The person who creates and funds the trust. In first-party SNTs, the beneficiary is the grantor (even though a parent, grandparent, guardian, or court must establish it). In third-party trusts, the grantor is usually a relative.
Trustee – The individual or institution that manages the trust. They ensure compliance with benefit rules and distribute funds according to the trust terms.
Successor Trustee – A backup trustee named in the document to take over if the original trustee is unable to serve.
Beneficiary – The person with a disability for whom the trust is established. They must qualify under Section 1614(a)(3) of the Social Security Act. See SSA Disability Listings for qualifying conditions.
Remainder Beneficiary – The individual or entity that receives remaining trust assets after the beneficiary dies. In first-party trusts, Medi-Cal is reimbursed first. In third-party trusts, Medicaid should not be named.
Trust Documentation
Trust Estate – All the property and income held in the trust.
Schedule A – The list of assets held in the trust. It must be updated regularly.
Compensation – Trustees are usually paid for their time and management responsibilities, either based on state law or as detailed in the trust document.
Irrevocable – A trust that cannot be changed or terminated. First-party SNTs must be irrevocable.
Revocable – Can be changed or canceled by the grantor. Only third-party SNTs can be revocable and usually become irrevocable at the grantor’s death.
Testamentary Trust – A trust created within a will. It only becomes active when the grantor dies.
Inter Vivos Trust – A trust created and funded during the grantor’s lifetime. First-party trusts must be inter vivos.
Bond or Surety – A form of insurance that protects the trust if the trustee mismanages funds. Often required when family members serve as trustees.
Accounting – A report showing trust activity. Trustees may need to provide this to beneficiaries, courts, Medi-Cal, or the SSA.
Choosing the Right Type of Disability SNT Trust
Each special needs trust structure serves a different purpose depending on your goals, the funding source, and whether preserving eligibility for public benefits like SSI or Medi-Cal is important. Because these distinctions can have long-term financial and legal consequences, we strongly recommend that you consult with a qualified attorney to determine which type of special needs trust is best for your situation.
Once you’ve received legal guidance and selected the right trust option, Probate & More can assist with professionally preparing the documents at a fraction of the cost of a law firm.
Need help creating a First-Party or Third-Party Special Needs Trust? We’re here to help with our low-cost, expert document assistance tailored to California law.
Smart. Simple. Affordable. Legal Help Without the Lawyers.
This article is for general informational purposes only and does not constitute legal advice.
We are a California Registered Legal Document Assistant (LDA). We prepare legal documents — we do not practice law.
For legal advice specific to your situation, please consult a licensed California probate attorney.
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