Establishing A Special Needs Trust For Your Child

A special needs trust, also sometimes called a “supplemental needs trust”,  is a trust created for someone with a disability – perhaps your child – so that assets can be managed and used for their benefit but without disqualifying them from means-tested public benefits (for example, Supplemental Security Income or “SSI,” or Medicaid) because of too many assets. 

In Texas, the relevant state rules for how trusts and assets interact with Medicaid eligibility are administered by the Texas Health and Human Services Commission (HHSC). For example, the “exception trust” rules for people under age 65 who meet SSI disability criteria are covered. Anyone looking to establish a special needs trust for their child should first think about connecting with an experienced firm like the Law Office of Troy M. Moore, PLLC at (281) 970-8039. 

Determining Which Type Of Special Needs Trust You Need

There are at least three common types of special needs trusts that parents should be aware of. They are as follows. 

• First-party (or self-settled) SNT: This type of trust is comprised of assets that belong to the person with a disability (the beneficiary). This can include an inheritance, a settlement, or savings. For these trusts, special rules apply, including a Medicaid pay-back requirement.
• Third-party SNT: These trusts are funded with assets that come from someone other than the main beneficiary, such as friends, parents, or grandparents. Because those assets never belonged to the disabled person, fewer restrictions about pay-back may apply.
• Pooled trust: A pooled trust is usually operated by a nonprofit, where many beneficiaries each have a sub-account, and the assets are managed collectively for investment and administration efficiency. Unlike other states, Texas has such options.

Additionally, understanding the impact of life insurance can also factor into discussions about special needs trusts. 

Ensuring That The Trust Document Is Drafted Properly

To effectively preserve eligibility for SSI/Medicaid, the trust must be drafted with care. Here are some of the key components of the trust that should be thought over.

• The beneficiary should not have the ability to withdraw funds at will, as having discretion is key. If the beneficiary is treated as the owner or has direct control, the assets might count against eligibility.

• According to the Texas Health and Human Services (HHSC), first-party trusts must include language that any remaining assets after death may be used to reimburse Medicaid for benefits received. In Texas, this aligns with HHSC rules under the estate recovery and “exception trust” provisions.

• For first-party trusts, federal law 42 U.S.C. § 1396p sets limits, such as the age under 65 requirement for funding in some cases. Although Texas uses the “exception trust” structure, the federal baseline still matters.

• Anyone who wants to establish a special needs trust for their child in Houston, Texas, needs to pick a trustee. This could be a family member, or sometimes a professional who understands how to handle funds under SNT rules, and can be trusted to invest prudently, keep records, and distribute appropriately.

Contacting an experienced Houston, Texas estate planning attorney from the Law Office of Troy M. Moore, PLLC is often the first step in ensuring legal compliance for a particular situation. 

Funding And Maintaining The Trust

Once the trust is drafted and signed, assets must be transferred into it. Common sources include life insurance proceeds, savings, inheritances, settlements, etc. The source of the funds helps determine whether it’s first-party or third-party. For example, if the beneficiary receives an inheritance directly in their name, the person leaving the inheritance likely wants a first-party SNT to avoid losing benefits. 

After funding, the trust must be administered so that the beneficiary’s eligibility for programs like SSI and Medicaid is preserved. This usually means that distributions should be made in a way that supplements benefits, rather than replaces them. For example,  perhaps funds from the trust could pay for extra items beyond what Medicaid/SSI covers. Detailed records of trust income, expenses, distributions, and investments must be kept. Some forms may need to be filed with the state (HHSC) for Medicaid eligibility verification. In Texas, it is important to understand “exception trusts” under the Medicaid handbook, which is applicable for people under 65 who meet SSI disability criteria. 

Understanding The Tax and Benefit Implications of Establishing A Special Needs Trust For Your Child

Understanding how taxes and benefits interact with an SNT is critical. Programs like SSI and Medicaid look at countable assets and income, and a well-structured SNT can exclude assets held in the trust from being counted as the disabled person’s own assets, preserving their eligibility. There could be consequences if the trust is poorly drafted or if distributions are made incorrectly. For example, giving cash directly to the beneficiary or paying basic support directly instead of through vendors may jeopardize benefits. Whether the trust is a “grantor trust” or “non-grantor trust” also affects how income is taxed. For instance, many first-party SNTs are treated as grantor trusts, meaning the beneficiary reports the income. If the trust is a non-grantor trust, the trust itself may need to file a U.S. Income Tax Return (Form 1041) and pay taxes at the trust tax rate. 

For third-party trusts, if the trust is structured as a grantor trust, the grantor may pay taxes; if not, the trust pays. Distributions to the beneficiary may have tax consequences depending on the nature of the trust and the income. Those thinking about establishing a special needs trust should be aware that trust income is taxed at higher rates and much lower thresholds than individuals (for example, estates/trusts hit higher tax brackets at lower income levels), so it’s vital to plan distributions carefully.

The Benefits Of An Experienced Houston, Texas Estate Planning Lawyer

For a parent in Houston, Texas, who is planning a special needs trust for a child, the trust is one of the most powerful tools to protect government-benefit eligibility (like SSI and Medicaid) while still providing resources for the child’s extra needs. However, it must be done correctly. Choosing the right type of trust, funding it properly, drafting the document with the proper provisions (including payback if required), selecting a competent trustee, and managing it with benefit and tax implications in mind is imperative.
Since Texas has specific Medicaid-related rules (such as “exception trusts” for under-65 disabled people and an estate-recovery regime), parents looking to establish such a trust will likely want an attorney familiar with Texas and special-needs law. Try getting in touch with a Texas estate planning lawyer from the Law Office of Troy M. Moore, PLLC at (281) 970-8039 to establish a special needs trust for your child today.