A car accident leaves your adult son paralyzed. The insurance settlement arrives and should provide security. Instead, it threatens the Medicaid and SSI benefits keeping them alive. Without the right legal structure, that settlement money could strip away the very assistance they need most. An East Texas Estate Planning Attorney can prevent this outcome through proper Special Needs Trust Planning.
Ross & Shoalmire, P.L.L.C. helps families throughout Texas and Arkansas protect accident victims from losing critical government benefits. When someone sustains life-altering injuries, the financial planning becomes far more complicated than most families realize.
Settlement Funds Can Create a Benefits Crisis
Government programs like Medicaid and Supplemental Security Income (SSI) maintain strict asset limits. SSI is a federal program wherein an individual must not have more than $2,000 in countable resources, subject to certain exclusions. These resource thresholds have remained low for many years, even as medical costs have skyrocketed.
Medicaid eligibility rules vary by program and state, but most disability-related and long-term care Medicaid programs also impose resource limits. When an accident victim receives a personal injury settlement, that money typically counts as an available resource. Once those funds become available, benefits may be suspended or terminated after review.
SSI and Medicaid: Related But Different Programs
SSI provides federal cash assistance to individuals with long-term disabilities who meet income and resource requirements. It's administered by the Social Security Administration (SSA) and follows uniform federal rules nationwide.
Medicaid, by contrast, is a joint federal-state program that pays for medical care. While Medicaid eligibility often connects to SSI eligibility, the programs have distinct rules that vary by state and by specific Medicaid program category.
Some use Modified Adjusted Gross Income (MAGI) rules, while disability-related and long-term care Medicaid follow different resource methodologies. A special needs trust that protects eligibility for disability-based Medicaid won't automatically protect all Medicaid categories. Working with experienced Elder Law and Estate Planning Attorneys familiar with both programs is critical for accident victims who need both cash assistance and medical coverage.
First-Party Special Needs Trusts: When the Disabled Person Receives the Settlement
First-party trusts make sense when the disabled individual receives money directly. The trust holds and manages these assets without disqualifying the beneficiary from needs-based government programs, provided all requirements are met.
The Medicaid Payback Requirement
First-party special needs trusts must pay back the State(s) up to the total medical assistance paid under the State Medicaid plan(s) on the beneficiary's behalf during their lifetime. Texas Health and Human Services and Arkansas Department of Human Services both maintain records of these expenditures, which can total hundreds of thousands of dollars over years of care.
The Age 65 Rule
Federal law restricts who can establish these trusts. The disabled person (if under age 65), their parent, grandparent, legal guardian, or a court must create the trust. Contributions made to the trust after the beneficiary turns 65 can raise transfer penalty issues even if the trust was properly established earlier, so timing matters significantly.
Pooled Special Needs Trusts
When a beneficiary is over 65, has no suitable trustee, or receives a modest settlement that doesn't justify the cost of an individual trust, a pooled special needs trust may provide a viable solution. These trusts, managed by nonprofit organizations, pool resources from multiple beneficiaries for investment purposes while maintaining separate accounts for each person.
Third-Party Special Needs Trusts: When Family Members Want to Provide for a Loved One
Third-party special needs trusts hold assets that never belonged to the disabled beneficiary. A parent, grandparent, sibling, or even an unrelated friend can create this type of trust and name a disabled individual as beneficiary. These trusts don't require the Medicaid payback that first-party trusts mandate, making them more flexible for Estate Planning purposes.
Third-party trusts must be properly drafted as supplemental needs trusts and administered carefully to avoid jeopardizing benefits. Families typically fund third-party special needs trusts through life insurance proceeds, estate planning documents that direct bequests to the trust, retirement account beneficiary designations, or direct gifts from family members who want to provide for a disabled loved one without jeopardizing benefits.
Unlike first-party trusts, third-party special needs trusts have no age limitations. When the beneficiary dies, remaining trust assets pass to whomever the trust creator designated. The state has no claim to these funds because they never belonged to the beneficiary directly.
Key Differences Between First-Party and Third-Party Trusts
Both first-party and third-party special needs trust types preserve government benefits, but they serve different situations:
- Source of funds. First-party trusts hold the disabled person's own assets. Third-party trusts hold someone else's assets designated for the disabled person's benefit.
- Medicaid payback. First-party trusts must pay back the State(s) for medical assistance. Third-party trusts have no such requirement.
- Age restrictions. First-party trusts must be established for individuals under 65, and funding after 65 can create problems. Third-party trusts have no age limitations.
- Who creates it. First-party trusts can only be established by the disabled person (if under 65), their parent, grandparent, legal guardian, or a court. Third-party trusts can be created by anyone except the disabled beneficiary.
For a car accident victim with long-term disabilities receives a substantial settlement, a first-party trust likely makes more sense. If the car accident victim is the caregiver for a family member with disabilities, a third-party trust would be more relevant.
What These Trusts Can and Cannot Pay For
Both types of special needs trusts operate under similar spending rules. The trust can pay for goods and services that supplement, but don't replace, what government benefits provide.
A properly administered special needs trust can cover:
- Medical and dental care. The trust can pay for better quality wheelchairs, specialized medical equipment, and home modifications that exceed what government programs provide.
- Entertainment and hobbies. Concert tickets, hobby supplies, and vacation travel give beneficiaries experiences their government benefits alone couldn't provide.
- Transportation. Vehicle purchase, maintenance, insurance, gas, and modifications for accessibility all count as appropriate expenses.
The trust cannot give cash directly to the beneficiary; that would count as income and jeopardize SSI. Similarly, when a trust pays for food or shelter (called in-kind support and maintenance or ISM), SSI applies reduction rules. SSA may use the Presumed Maximum Value (PMV) or the Value of the One-Third Reduction (VTR), depending on the living arrangement and how support is provided.
Under PMV, ISM is typically valued at one-third of the Federal Benefit Rate plus $20, which for 2026 means approximately $351 per month (based on the $994 individual FBR). The actual reduction depends on the specific circumstances. While this is better than losing all benefits, the beneficiary still receives less SSI than they otherwise would.
ABLE Accounts: A Complementary Planning Tool
Achieving a Better Life Experience (ABLE) accounts provide another option for disability planning. These tax-advantaged savings accounts allow disabled individuals to save up to $19,000 annually (2026 limit) without affecting SSI or Medicaid eligibility. As of January 1, 2026, individuals whose disability began before age 46 can open ABLE accounts.
If the ABLE account balance exceeds $100,000, SSI cash benefits are suspended, though Medicaid eligibility generally continues. ABLE accounts work well alongside special needs trusts for smaller expenses and shorter-term savings goals. They offer more flexibility than trusts for routine purchases, but have annual contribution limits and balance caps that make them unsuitable as the sole planning tool for substantial settlements.
When Settlement Timing Matters Most
Personal injury attorneys should involve Special Needs Trust Planning counsel before finalizing settlements for disabled clients in accident cases. The legal structure must be ready before the settlement funds transfer. Courts generally cooperate with requests to deposit settlement proceeds directly into properly drafted special needs trusts, but this requires advance preparation.
Structured settlements are often used in special-needs planning. The settlement creates an annuity stream that pays directly into the trust over time. This approach can produce excellent outcomes for catastrophically injured plaintiffs who will need care for decades, providing steady income to the trust and helping to avoid an eligibility gap when properly structured.
Common Mistakes That Threaten Benefits
Even with properly drafted trusts, administrative errors can jeopardize government benefits:
- Giving the beneficiary cash or checks. Any direct distribution of money counts as income for SSI purposes. The trustee must pay vendors directly or use trust debit cards that the beneficiary doesn't control.
- Paying for food or shelter without understanding ISM rules. These expenses trigger SSI reductions under PMV or VTR rules. Trustees must carefully structure housing and food arrangements to minimize benefit impacts.
- Keeping poor records. When benefit programs request documentation, trustees must produce detailed records showing how every dollar was spent. Missing records can lead to benefit terminations.
- Failing to report the trust. Families must report special needs trusts to SSI and Medicaid and provide copies of trust documents when requested. The programs need this information to properly determine ongoing eligibility.
If someone in your family has sustained life-changing injuries in an accident, contact Ross & Shoalmire, P.L.L.C. before settlement funds are distributed. Our Elder Law and Estate Planning Attorneys are devoted to helping families manage their wealth, health, housing, and legal needs.
Special Needs Trust Planning requires both technical legal knowledge and deep familiarity with government benefit programs. Our attorneys focus specifically on Asset Protection, Medicaid Planning, and Special Needs Trust Planning. Don't let a settlement that should provide security instead create a crisis.
