A supplemental needs trust in Texas holds assets for a person with a disability so those assets don’t disqualify them from Medicaid or Supplemental Security Income. SSI limits countable resources to just $2,000 for an individual, so even a modest inheritance or settlement can end benefit eligibility overnight.1Texas Health and Human Services. Medicaid for the Elderly and People with Disabilities Handbook – F-1300, Resource Limits The trust owns the assets itself, so agencies don’t count them against the beneficiary. Which type you need, what it can pay for, and how you keep benefits intact all depend on where the money is coming from.
The Three Types of Trust
Texas families work with three structures. The right one is decided almost entirely by whose money is funding the trust.
First-Party Trusts
A first-party trust is funded with money that belongs to the person with the disability. Common sources are personal injury settlements, retroactive Social Security payments, and direct inheritances. Federal law requires that the beneficiary be under 65 when the trust is created, meet the Social Security Administration’s definition of disabled, and that the trust be established by the individual, a parent, grandparent, legal guardian, or a court.2Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets The Texas Health and Human Services Commission uses the same criteria to decide whether trust assets are excluded for Medicaid.3Texas Health and Human Services. Medicaid for the Elderly and People with Disabilities Handbook – F-6700, Exception Trusts
The trade-off is Medicaid payback. When the beneficiary dies, funds left in the trust must first reimburse the state for Medicaid paid during the beneficiary’s lifetime, up to the total Medicaid spent.2Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets Only what remains after that goes to other named beneficiaries.
Third-Party Trusts
A third-party trust is funded entirely with assets that never belonged to the person with the disability. Parents, grandparents, and other relatives create these through their estate plans or with lifetime gifts. Because the beneficiary never owned the money, no Medicaid payback is required at death. The person who created the trust decides who gets whatever is left.
There is also no age restriction. A family can set one up for a beneficiary who is already past 65, which makes third-party trusts a much more flexible planning tool. They can be revocable during the creator’s lifetime and become irrevocable at death, or be irrevocable from the start. The critical drafting point: the beneficiary can have no legal right to demand distributions. If they can compel the trustee to hand over trust assets, agencies will treat the entire trust as a countable resource.
For families with a choice, funding a third-party trust with your own assets is almost always better than letting an inheritance flow to the beneficiary and then into a first-party trust. If the money never touches the beneficiary’s hands, Medicaid payback is avoided entirely.
Pooled Trusts
A pooled trust is managed by a nonprofit that keeps a separate sub-account for each beneficiary while pooling the money for investment.2Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets Unlike a standalone first-party trust, there is no upper age limit for enrollment, though Texas Medicaid may impose a transfer-of-assets penalty for funds placed in the trust after age 65.
Joining is simpler than drafting an individual trust. You sign a joinder agreement with the nonprofit and pay an enrollment fee, and the organization handles investment, tax filings, and compliance. When the beneficiary dies, remaining funds are either retained by the nonprofit for its charitable mission or used to reimburse the state, depending on the trust’s terms.2Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets The Arc of Texas is one of the widely used providers.
What the Trust Can Pay For
The whole point is to pay for things government benefits don’t cover. Trustees routinely spend trust funds on dental and vision care, therapies Medicaid doesn’t cover, education and tutoring, computers and adaptive technology, home modifications, vehicles or vehicle modifications, recreation, travel, personal care attendants, legal fees, and insurance premiums.
The working rule is simple: if Medicaid or SSI would already pay for it, the trust probably shouldn’t. Spending trust money on covered services wastes resources that could improve quality of life in ways benefits won’t. The trustee should also confirm each purchase benefits the beneficiary, not other family members, and that the trust can afford it without shortchanging future needs.
Shelter, Food, and In-Kind Support
Shelter is where trustees get tripped up most. When a trust pays a beneficiary’s rent, mortgage, or utilities, the Social Security Administration treats that as in-kind support and maintenance, which reduces the monthly SSI check. As of September 30, 2024, SSA no longer counts food in those calculations, so a trust can pay for groceries without any benefit reduction.4Federal Register. Omitting Food From In-Kind Support and Maintenance Calculations
Shelter still counts. If the trust covers all of a beneficiary’s shelter costs and someone in the household also provides all their meals, SSA applies a flat one-third reduction to the federal benefit rate. For 2026, that’s a reduction of about $331.33 off the $994 maximum monthly SSI payment.5Social Security Administration. SSI Federal Payment Amounts In other shelter situations, SSA uses the “presumed maximum value” rule, capping the reduction at one-third of the federal benefit rate plus $20, or $351.33 in 2026.6Social Security Administration. Understanding Supplemental Security Income Living Arrangements Many trustees accept this reduction when housing needs are significant. It should be a deliberate choice, not an accidental one.
Cash to the Beneficiary
Direct cash distributions count as unearned income and can reduce or eliminate SSI. If the beneficiary receives more than $20 in cash during a month, after the general income exclusion, SSI is cut dollar-for-dollar. Pay vendors directly instead of handing cash to the beneficiary.
Keeping SSI and Medicaid in Place
The $2,000 SSI resource limit has not changed in decades and remains in place for 2026.7Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet A properly drafted and administered trust keeps assets outside that limit. But if the trustee distributes funds directly to the beneficiary, or spends trust money on someone else, the state can reclassify the entire trust as a countable resource and terminate Medicaid immediately.
Reporting matters just as much as careful spending. When the trust is funded, the trustee must notify the Social Security Administration and the Texas Health and Human Services Commission. Changes in the trust’s financial status, including new deposits, must be reported within 10 days after the end of the month the change occurred. If the beneficiary receives housing assistance, the trust may need to be disclosed at annual recertification. Providing a copy of the trust document and an inventory of assets to each agency administering needs-based benefits is standard practice. Late reporting can trigger overpayment notices and suspensions that take months to resolve.
Setting Up and Funding the Trust
The drafting phase is where nearly everything gets decided. The document names the beneficiary, designates a trustee and at least one successor, spells out what the trust can pay for, and sets the trustee’s powers over investments and distributions. A first-party trust must include the Medicaid payback language required by federal law. A third-party trust should explicitly state that the beneficiary has no right to demand distributions.
Legal fees for drafting typically run from $2,000 to $10,000 or more depending on complexity. Pooled trust enrollment costs less but offers less customization. Professional trustees who manage the account on an ongoing basis generally charge 0.75% to 1.5% of trust assets each year.
Executing and Funding
Texas allows trusts to be created through a written instrument acknowledged before a notary, and notarization is standard practice because financial institutions and government agencies will expect it. Once the trust is signed, the trustee applies to the IRS for an Employer Identification Number, which is the trust’s tax ID and is separate from the beneficiary’s Social Security number.8Internal Revenue Service. Understanding Your EIN
With the EIN, the trustee opens a fiduciary bank account and transfers the funding assets. Cash transfers are straightforward. Real estate requires filing a new deed with the county clerk. Vehicles must be retitled through the Texas Department of Motor Vehicles.9Texas Department of Motor Vehicles. Get a Copy of Your Vehicle Title Document every transfer thoroughly. Agencies will want a clear paper trail showing when assets left the beneficiary’s name and entered the trust, and delays in funding create a dangerous window where the beneficiary technically owns assets above the $2,000 limit.
ABLE Accounts as a Companion
An ABLE account is a tax-advantaged savings account for people whose disability began before age 26. It works alongside a supplemental needs trust, not instead of one. In 2026, an ABLE account can receive up to $19,000 in total annual contributions, and the first $100,000 in the account is completely excluded from the SSI resource limit.10Social Security Administration. Spotlight on Achieving a Better Life Experience (ABLE) Accounts Working beneficiaries can contribute additional amounts above the $19,000 cap, up to the lesser of their annual compensation or the federal poverty level for a one-person household in Texas.
The practical advantage is speed. The beneficiary or their representative can spend from an ABLE account directly, without trustee involvement, which suits everyday expenses. The trust handles larger assets and long-term planning. Some families fund the ABLE account from the trust itself, giving the beneficiary autonomy for routine spending while the trustee manages the rest. Once the ABLE balance passes $100,000, SSI is suspended until the balance comes back down.
Inheriting Retirement Accounts Through the Trust
Retirement accounts like IRAs and 401(k)s are often the largest asset a family wants to pass to a disabled loved one, and the SECURE Act made the rules both more favorable and more complicated. Ordinarily a non-spouse beneficiary must empty the account within 10 years. Disabled individuals are “eligible designated beneficiaries,” so they can stretch withdrawals over their own life expectancy instead.
This stretch treatment is also available when a properly drafted supplemental needs trust is named as the retirement account’s beneficiary. The trust must qualify as a “see-through” trust, meaning the IRS can look through it to identify the actual beneficiary. When it works, the trustee takes only required minimum distributions each year and uses those distributions for the beneficiary’s care while the account continues to grow tax-deferred. If your trust was drafted before the SECURE Act took effect in 2020, have an attorney review it. An older trust that doesn’t meet current see-through requirements could force a full 10-year payout, generating a large tax bill and possibly jeopardizing benefits.
Tax Filing for the Trust
A supplemental needs trust is a separate taxpaying entity and generally must file IRS Form 1041 each year. First-party trusts are typically treated as grantor trusts, so income is reported on the beneficiary’s personal return rather than at trust rates. Since most beneficiaries have little other income, the overall tax bill is usually lower.
A third-party trust that gives the trustee full discretion is usually a complex trust, taxed at compressed trust rates that hit the top bracket quickly. If it qualifies as a “qualified disability trust,” it gets a much larger exemption: $5,300 for 2026, compared with $100 for a standard complex trust.11Internal Revenue Service. Estimated Income Tax for Estates and Trusts To qualify, all beneficiaries must meet SSA’s disability criteria, and the trust must be established under the same federal statute that governs first-party special needs trusts. Work with a tax professional who understands these classifications, because the wrong one can cost thousands each year.