How a Special Needs Trust Affects Your Medicaid Coverage

A special needs trust does not disqualify you from Medicaid, but it changes how Medicaid counts your money

A special needs trust (also called a supplemental needs trust) is a legal tool that holds money or property for a person with a disability without counting that money as belonging to them for Medicaid purposes. When structured correctly, the trust pays for things Medicaid does not cover — therapy, education, equipment, transportation — while the person remains poor enough on paper to keep Medicaid coverage. The key is that the trust must be set up in a specific way, and the trustee (the person managing the money) must follow strict rules about what they pay for.

Medicaid has strict asset limits. In most states, you cannot have more than $2,000 in your own name and still receive Medicaid. A special needs trust gets around this by putting money in the trust's name instead of yours. Medicaid does not count trust money as your asset, so you can have hundreds of thousands of dollars in the trust and still may have access to for Medicaid. But this only works if the trust is irrevocable — meaning you cannot take the money back out — and if it was created before you turned 65 (with one exception for pooled trusts).

Key Takeaways

A properly structured special needs trust does not count as your asset for Medicaid, so you can keep Medicaid coverage even if the trust holds substantial money.
The trust must be irrevocable and created by you or your parent or guardian — not by you after you turn 65 — for Medicaid to ignore the money inside it.
The trustee can pay for medical equipment, therapy, education, and other services Medicaid does not cover, but cannot pay for food, shelter, or basic living expenses that Medicaid already covers.
If the trustee makes the wrong kind of payment, Medicaid may count part of the trust as your income for that month, which could suspend your coverage temporarily.
A pooled trust is an exception that allows someone over 65 to create a special needs trust, though the rules are stricter.

What the trustee can and cannot pay for

The trustee — usually a family member or professional — controls what the trust money pays for. Medicaid allows payments for things it does not cover: therapy sessions beyond what Medicaid pays for, dental work, vision care, hearing aids, wheelchairs, computers, tutoring, summer camp, job coaching, or a vehicle adapted for disability. The trustee can also pay for travel, recreation, and hobbies that improve quality of life.

What the trustee cannot do is pay for food, shelter, utilities, or other basic living expenses. If the trustee pays the rent or buys groceries, Medicaid counts that as income to you for that month. This can cause your Medicaid to suspend or terminate. Some states have different rules about what counts as an improper payment, so you should check with your state's Medicaid office or a special needs planning attorney before the trustee makes large payments.

The trustee also cannot give money directly to you. If you receive cash from the trust, Medicaid counts it as your income. The trustee must pay vendors, providers, or landlords directly on your behalf.

How to set up a special needs trust correctly

A special needs trust must be created by a lawyer who understands Medicaid rules. You cannot use a generic template or online service — the language has to match your state's Medicaid rules exactly, or the trust will not work. The person creating the trust is called the settlor. If you are the person with the disability, you can create your own trust only if you do it before you turn 65. If you are a parent or guardian, you can create a trust for the disabled person at any time.

The trust document names a trustee — the person who will manage the money and decide what to pay for. Many families name a parent as trustee while they are alive, then name a sibling or professional trustee to take over later. The trustee needs to understand Medicaid rules or work with an accountant who does, because a single wrong payment can affect Medicaid coverage.

You will also need to fund the trust by transferring money or property into it. This can happen through a will (called a testamentary trust), through a direct transfer during your lifetime, or through an inheritance that a lawyer redirects into the trust. If you inherit money and put it into the trust yourself, you must do this quickly — Medicaid counts inherited money as your asset for a limited time before you transfer it.

The difference between a first-party and third-party trust

A first-party trust is created with the disabled person's own money — usually an inheritance, lawsuit settlement, or their own savings. These trusts have stricter rules. When the person dies, Medicaid has the right to take back money from the trust to pay for the Medicaid services they received. This is called estate recovery. Also, a first-party trust must be created before age 65.

A third-party trust is created with someone else's money — usually a parent's. These trusts have fewer restrictions. Medicaid does not have the right to recover money from a third-party trust after the person dies. A parent can create a third-party trust at any time, even after the disabled person turns 65. Many families use a third-party trust because it offers more flexibility and does not trigger Medicaid recovery.

What happens if the trustee makes a mistake

If the trustee pays for something Medicaid considers a basic living expense — like rent or groceries — Medicaid counts that payment as income to you. The amount counts as unearned income for that month. Depending on your state and your other income, this could reduce your Medicaid payment, suspend your coverage, or require you to pay back some benefits. It does not automatically disqualify you permanently, but it creates a problem that needs to be fixed.

If the mistake is caught early, the trustee can sometimes correct it by reimbursing Medicaid or by documenting that the payment was made in error. But prevention is much easier than correction. The trustee should keep detailed records of every payment, save receipts, and check with a Medicaid specialist before making any large or unusual payment.

Pooled trusts for people over 65

A pooled trust is a special option for people who are over 65 or who become disabled after 65. A nonprofit organization manages a master trust that holds money for many disabled people. Each person has a separate account within the trust, but the nonprofit is the legal trustee. Pooled trusts follow the same Medicaid rules as first-party trusts — Medicaid can recover from the account after death — but they allow someone over 65 to create one.

Pooled trusts are useful when a person has received an inheritance late in life or when a family cannot afford to hire a private attorney to draft a trust. The nonprofit charges a fee to manage the account, usually a percentage of the balance or a flat annual fee. You can find pooled trusts through disability advocacy organizations in your state or through the National Resource Center for Supplemental Security Income (SSI) and Medicaid.

How a special needs trust interacts with SSI

If the person with a disability receives Supplemental Security Income (SSI) in addition to Medicaid, the special needs trust rules are even stricter. SSI has its own asset limit of $2,000, and SSI counts trust distributions differently than Medicaid does. If the trustee distributes cash to the person, SSI counts it as income and reduces the SSI payment dollar-for-dollar. If the trustee pays a vendor directly, SSI may count it as in-kind support and maintenance, which also reduces the SSI payment.

Because of this, many trustees of special needs trusts avoid distributing money in ways that trigger SSI reductions. Instead, they pay for things that do not reduce SSI — like medical equipment, therapy, education, or recreation. A special needs planning attorney can explain which payments will affect SSI in your specific situation.

Frequently Asked Questions

Can I put my own money into a special needs trust after I turn 65?

No, unless you use a pooled trust. A first-party trust (created with your own money) must be created before age 65. A third-party trust (created with someone else's money, usually a parent's) can be created at any time. If you receive an inheritance after 65, a lawyer can help you explore a pooled trust option.

What happens to the money in the trust after I die?

With a first-party trust, Medicaid can recover the remaining balance to pay back the cost of your care. With a third-party trust, the money goes to whoever the trust document says — usually other family members or a charity. The trust document controls this, not Medicaid.

Does the trustee have to ask permission before spending trust money?

No, but the trustee should keep records and consult a Medicaid specialist before making large payments or paying for anything that could be considered a basic living expense. The trustee has legal authority to manage the trust, but they also have a duty to protect your Medicaid coverage.

Can I change the trustee if I do not trust them?

It depends on the trust document. If the document allows you to remove the trustee, you can do so. If not, you may need a court order. This is why choosing a trustee carefully at the start matters — ideally someone who understands Medicaid rules or is willing to learn them.

Does a special needs trust affect my Medicaid coverage for long-term care?

No. A properly structured special needs trust does not count as your asset, so it does not affect whether you may have access to for Medicaid long-term care. The trust can actually help pay for services Medicaid does not cover, like private duty nursing or specialized therapy, while you keep your Medicaid coverage.

This guide is for general information only and is not medical, financial, legal, or other professional advice. For decisions specific to your situation, consult a qualified professional. See our Editorial Policy.