What Is a Special Needs Trust in Texas?

 Posted on August 22, 2026 in Estate Planning

A special needs trust in Texas is a legal tool that lets you leave money or assets to a loved one with a disability. This can be done without hurting their eligibility for government benefits like Medicaid or Supplemental Security Income (SSI).

If you're considering this type of planning in 2026, our Denton County, TX estate planning lawyer can help you understand how a special needs trust might work for your family.

Why Do Special Needs Trusts Exist?

Programs like Medicaid and Supplemental Security Income have financial eligibility rules. A properly structured special needs trust can allow a person with a disability to benefit from trust assets without having those assets automatically counted against eligibility.

Under 42 U.S.C. Section 1396p, certain trusts funded with the beneficiary's own assets can qualify for special treatment under Medicaid rules. SSI has separate rules for deciding whether a trust counts as a resource. How the trust is written and how money is paid from it can affect SSI benefits.

How Does a Special Needs Trust Protect Government Benefits?

The trust works by having a trustee – rather than the beneficiary directly – control and manage the assets. These assets generally aren't counted when determining eligibility for needs-based government programs. This is because the beneficiary doesn't have direct access to or control over the trust funds.

The trustee can then use trust funds to pay for expenses that supplement, rather than replace, what government benefits already cover. This might include things like specialized equipment, therapies not covered by Medicaid, recreational activities, or other quality of life expenses that benefits alone wouldn't provide.

What Types of Special Needs Trusts Are Available?

Several types of special needs trusts exist, each designed for different situations. A first-party special needs trust is funded with the beneficiary's own assets. It's often used when someone receives a settlement or inheritance directly and needs to protect their benefit eligibility going forward.

A third-party special needs trust is funded with assets from someone other than the beneficiary. This might be parents or grandparents planning for a child's future care. This type of trust offers additional flexibility. It isn't subject to certain repayment requirements that apply to first-party trusts after the beneficiary passes away.

What Expenses Can a Special Needs Trust Cover?

A properly structured special needs trust can pay for many expenses that improve the beneficiary's quality of life. These can include medical equipment or therapies, education, transportation, personal care, entertainment, and home modifications.

However, the type of expense and the way the trustee pays for it can affect government benefits. For example, cash paid directly to an SSI recipient generally counts as income. Payments for shelter can also reduce SSI benefits. The trustee should understand these rules before making distributions.

What Happens to a Special Needs Trust When the Beneficiary Passes Away?

First-party trusts are funded with the beneficiary's own money. When the beneficiary dies, Medicaid usually has to be paid back first. This payback covers the benefits Medicaid gave during the beneficiary's life. Only after that can any money left in the trust go to other family members.

Third-party trusts work differently. These trusts don't need to pay Medicaid back at all. Any money left in the trust can go straight to family members or other beneficiaries, following the trust's instructions.

Who Should Consider Setting Up a Special Needs Trust?

Several situations commonly call for this type of planning. Parents of a child with a disability often set up third-party special needs trusts as part of their overall estate planning. This makes sure their child will be provided for after they pass away without losing access to essential benefits.

Someone who receives a personal injury settlement or inheritance directly may need a first-party special needs trust. This is especially true if they currently receive or plan to apply for needs-based government benefits. This protects their eligibility going forward while still allowing them to benefit from these newly acquired assets.

Contact Our Flower Mound, TX Estate Planning Attorney Today

Colbert Law Group PLLC has been helping clients plan their estates since 1992. Attorney Colbert’s experience also includes having served as an administrative law judge as well as a tribal judge for the Chickasaw Indian Nation. He understands how much thought and care goes into planning for a loved one's future. So, he works closely with families to create trusts that truly protect long-term interests.

Contact Colbert Law Group PLLC at 972-724-3338 to talk to our Denton County estate planning lawyer today.