Special Needs Planning FAQs

Special needs planning is the process of structuring a family’s finances and legal documents so that a person with a disability can receive financial support from family members without losing eligibility for government benefits like Supplemental Security Income (SSI) and Medi-Cal.

Those programs impose strict limits on the assets a recipient may hold. An inheritance, a lawsuit settlement, or even a well-intentioned gift delivered the wrong way can disqualify a person overnight.

The need for planning extends beyond parents of children with disabilities. It applies to anyone who wants to provide for a sibling, grandchild, or other family member with a disability.

It also applies when a person with a disability receives money directly, whether from a personal injury settlement, a divorce judgment, or an unexpected inheritance, and needs to protect it without losing benefits.

A special needs trust is a legally structured trust designed to hold assets for a person with a disability without those assets counting toward the resource limits that govern SSI and Medi-Cal eligibility.

The trust is managed by a trustee who makes distributions for goods and services that supplement, rather than replace, what government benefits provide. Travel, recreation, education, technology, and personal care items are common examples.

California recognizes two primary types. A third-party special needs trust is funded by family members or others using their own money. It has no age restriction and requires no repayment to the state after the beneficiary’s death.

A first-party special needs trust is funded with assets that already belong to the person with a disability. Federal law requires it to include a Medi-Cal payback provision, meaning the state must be reimbursed for benefits paid during the beneficiary’s lifetime before any remaining assets pass to others.

The funding source is the defining distinction, and it determines everything else about how the trust works. A third-party trust is the right tool for estate planning by parents or other family members.

Assets flow from the family member into the trust, the beneficiary never owns them directly, and when the beneficiary dies, whatever remains passes to other family members or chosen beneficiaries without any Medi-Cal reimbursement requirement.

A first-party trust is used when the person with a disability already has or is about to receive assets in their own name. Personal injury settlements involving a person with a disability are among the most common situations.

In California, first-party trusts established through a litigation recovery typically require court approval under California Probate Code sections 3600 through 3613, with DHCS notified at least 15 days before the hearing. The payback obligation at death is built into the trust by federal law and cannot be waived.

Assets held in a properly structured special needs trust are not counted as the beneficiary’s resources for Medi-Cal eligibility purposes. California reinstated a Medi-Cal asset limit effective January 1, 2026, after temporarily eliminating it during 2024 and 2025. Assets inside a qualifying trust, as well as CalABLE accounts, do not count toward that limit.

Medi-Cal estate recovery in California is currently limited to assets that pass through probate. Assets held in a properly structured third-party special needs trust pass outside of probate and are not subject to estate recovery claims.

First-party trusts are different: because they are funded with the beneficiary’s own money, federal law requires the trust itself to include a payback clause that reimburses Medi-Cal upon the beneficiary’s death, regardless of the beneficiary’s age when benefits were received.

A CalABLE account is California’s version of the federally authorized ABLE account, a tax-advantaged savings account available to people whose disability began before a qualifying age.

Effective January 1, 2026, the ABLE Age Adjustment Act raised that qualifying onset age from 26 to 46, significantly expanding who can open an account.

CalABLE accounts can grow to a higher balance ceiling than accounts in most other states, and funds inside them do not count toward SSI or Medi-Cal asset limits as long as the balance stays within the SSI-exempt threshold.

A CalABLE account is not a substitute for a special needs trust. Annual contribution limits cap how much can be deposited each year, and there is no mechanism for receiving a large one-time sum, such as an inheritance or settlement, through a CalABLE account alone.

The two tools are most effective when used together, with the trust handling larger sums and the ABLE account providing flexible, easily accessible spending money for everyday qualified disability expenses.

An inheritance flows directly to the recipient, counts as their asset, and will typically push them over the resource limit for SSI and Medi-Cal. Benefits are lost until the money is spent down to the allowable limit, and that spending must happen carefully to avoid violating program rules.

The solution is straightforward but requires advance planning. Instead of leaving money directly to a family member with a disability, your will and any beneficiary designations should direct those assets to a third-party special needs trust established for that person’s benefit.

The trust receives the inheritance, the beneficiary’s eligibility is preserved, and the assets are used to improve their quality of life over time.