How Does a Special Needs Trust Work in Texas?

If you have a child with a disability, the natural instinct when estate planning is to leave them as much of your estate as you can. But, in Texas, doing so can actually end up costing them benefits they rely upon. A special needs trust, sometimes called a supplemental needs trust, can solve this problem by holding money for your child’s benefit without it counting against their benefits. That matters because programs like SSI and Medicaid are "means-tested," so a direct inheritance can end up pushing your child past the income eligibility limit, interrupting their coverage at the worst possible time. Below, Dallas estate planning attorney Caleb Patterson will explain how a Texas special needs trust works, what it can pay for, and how to set one up to protect both the money and the benefits.

What is a special needs trust, and why does a Texas family need one?

A special needs trust is a legal arrangement in which a trustee holds and manages money for a person with a disability. The key factor is who actually owns the assets. Because the trust owns the assets and the trustee decides how they are spent within the rules, and the child cannot demand the money, assets in this trust do not count as the child’s personal resources.

That distinction is the whole ball game. Benefits like SSI and Medicaid are means-tested, meaning a person qualifies only if their countable resources stay under a low limit. If a person exceeds that low threshold, they can lose SSI and similar benefits. For many families, that’s twice as damaging because enrollment in a program like that also opens a doorway to additional Medicaid-funded services, therapies, and care. These resources are usually very expensive to replace with private money, so unless the inheritance is substantial, the child can accidentally be left in a worse position. They’ll have more cash on hand, but lose a source of income and much of their insurance coverage. A special needs trust lets your child benefit from your money while staying under that limit, so the support they rely upon keeps flowing.

What happens if you leave money directly to a child with a disability?

This is the part many families don’t consider. If money passes straight into your child’s name, whether through your will, a direct beneficiary designation, or a loving gift from anyone else, it becomes their resource the moment it arrives. If it pushes them over the resource limit (and it usually does not take much to do that), their benefits can be suspended or terminated until the money is spent down.

The timing is what makes it particularly painful. The inheritance shows up, the benefits stop, and the family is left spending down the very money meant to make life easier, only to get back to where they started. That is exactly why this is worth planning for before it happens, not after.

What is the difference between a third-party and a first-party special needs trust?

This is another key distinction for benefits purposes. A third-party special needs trust is funded with someone else’s money who isn’t the beneficiary, such as a parent or grandparent funding a trust for a child. The beneficiary’s own assets never go into it. Because the money never belongs to the child, it’s not considered their resource. As a result, it doesn’t interrupt benefits, and the trust has no obligation to repay the state after the beneficiary’s death if they received public benefits. Whatever is left in the trust after the beneficiary dies, if anything, can then pass as the parent instructs in the trust instrument, such as to siblings or a charity. A third-party trust is usually what families use when they think ahead.

A first-party special needs trust, sometimes called "self-settled", is funded with the trust beneficiary’s own money. The classic example is a disabled person who receives a personal injury settlement or a direct inheritance. Though it’s too late to direct that money into a third-party special needs trust, it can still go into a self-settled one. Federal law allows this money to go into a special needs trust and stop counting as a resource, which helps preserve the child’s benefits. But there’s a catch: when the child dies, the state must be repaid for the Medicaid it provided to them out of whatever remains in the trust before anything passes to anyone else. That payback provision can often wipe out any remaining assets in the trust.

A third option is a pooled trust, in which a nonprofit organization manages one large trust with a separate account for each beneficiary. It "pools" the funds for investment while tracking each beneficiary’s respective share. It can hold third-party or first-party money and is often the practical choice for smaller amounts or when there is no good individual trustee.

How does an ABLE account compare, and do you need both?

Many families have heard that ABLE accounts are an alternative to a special needs trust. In reality, they are better understood as a complement. An ABLE account is a tax-advantaged savings account for a person whose disability began before a certain age. Its balance is disregarded up to a limit when SSI counts resources, and it can pay for a broad range of disability expenses, including some food and shelter costs that a trust cannot cover directly.

The catch is the annual contribution cap, which is tied to the federal gift-tax exclusion, plus an overall account limit on top of that. That makes an ABLE account excellent for everyday spending and a modest cushion, but insufficient on its own to hold a meaningful inheritance. Most well-built plans use both: the trust holds the larger assets and does the long-term protecting, and the ABLE account handles day-to-day flexibility. The table below compares these options, including where an ABLE account fits.

What can a special needs trust actually pay for?

The overall idea is simple: the special needs trust supplements the beneficiary’s existing benefits; it does not replace them. Public benefits are meant to cover basics like food and shelter, while the trust is meant to pay for everything beyond that which makes the beneficiary’s life fuller. In practice, that covers a wide category of expenses. However, there are still categories a trustee has to handle carefully, because paying for the wrong thing the wrong way can reduce your child’s benefits.

The rules around food and shelter have shifted in recent years, so a trustee needs current guidance rather than outdated advice. This is a big part of why who you choose as trustee matters so much.

Who should serve as trustee?

This is the hardest practical decision in the whole plan, because it is not really about paperwork. It is about who will manage money for your child, correctly, for decades, possibly long after you are gone. There are three general options, each with its own pros and cons.

A family member, often a sibling, knows and loves your child, which is worth a lot. But administering a special needs trust means understanding SSI and Medicaid rules well enough not to accidentally trip over them, keeping clean and accurate financial records, and staying neutral even when family emotions run high. That can be a real burden to hand a grieving brother or sister. A professional trustee, such as a bank or trust company, brings expertise and continuity. But their fees are generally higher, and they lack a personal relationship with your child. A pooled trust run by a nonprofit sits in between and can be a good fit for smaller amounts.

Many families split the difference: a professional trustee handles the money and the compliance, while a family member serves as an advisor or trust protector who knows what your child actually needs. What you want to avoid is the most common shortcut of all, which is leaving money to a sibling with an informal understanding that they will use it for your child. With no trust behind it, that money is legally the sibling’s. It is exposed to their divorce and their creditors; it carries no enforceable duty to your child, and it does nothing to protect their eligibility for benefits.

How does a special needs trust fit into the rest of a family’s estate plan?

A special needs trust does not stand alone; it needs to work hand in hand with your will or revocable living trust. You also need to consider beneficiary designations, because a retirement account or life insurance policy that still names your child directly will route money straight to them and around the trust you carefully built, undoing the whole thing.

There is also the question of decision-making once your child is an adult. Parents often assume that once a disabled child reaches adulthood, a guardianship is both automatic and required. But in Texas, a guardianship is not the only option, and the law favors less restrictive alternatives where they fit, including supported decision-making agreements that let your child keep more independence. Part of your plan may include a letter of intent to accompany the special needs trust, so future trustees and caregivers understand your child’s routines, preferences, and needs in a way no legal document captures.

Another important question is when to set up the special needs trust, and the answer is almost always sooner than families think. The trust needs to be in place before an inheritance arrives and before anyone names your child as a direct beneficiary, not after.

To see how a special needs trust fits into the bigger picture, our comparison of wills versus trusts is a good starting point, and our guide to estate planning for complex and nontraditional families explains how these plans come together when a family’s needs aren’t one-size-fits-all. When you are ready, you can book a free video consultation with Caleb Patterson directly on our booking calendar.

---

This page is provided for general informational purposes only and does not constitute legal advice. Reading this page does not create an attorney-client relationship. For advice about your specific situation, please consult a licensed Texas estate planning attorney. Content reviewed by P. Caleb Patterson.