Special Needs Trusts and Personal-Injury Settlements: Preserving Medicaid and SSI

The Bottom Line

A Special Needs Trust (SNT) is the single most important benefit-preservation tool when a Medicaid or SSI recipient receives a personal-injury settlement. It lets the claimant hold the proceeds for supplemental needs without those funds counting as a disqualifying "resource." But it has to be built into the settlement itself — created and funded before the client ever takes possession — or constructive receipt can cost them their benefits. Settlement checks and structured-settlement payments should be payable directly to the trustee, never to the client.

The Problem an SNT Solves

SSI and Medicaid are needs-based. A single person generally cannot hold more than $2,000 in countable resources (the SSA confirms the 2026 limit remains $2,000 for an individual and $3,000 for a couple), and Medicaid eligibility is frequently tied to it. That ceiling has not risen since 1989. A personal-injury settlement received outright is a countable resource that pushes the beneficiary over the limit and terminates benefits.

Under 42 U.S.C. §1396p(d), trust assets are normally treated as available resources — but §1396p(d)(4) carves out exceptions. A properly drafted SNT holds funds for the beneficiary's supplemental needs without those funds being counted.

The Three Structures

First-party / self-settled (d)(4)(A). Per the statute, this is "a trust containing the assets of an individual under age 65 who is disabled… established for the benefit of such individual by the individual, a parent, grandparent, legal guardian… or a court if the State will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid." The "the individual" language was added by the Special Needs Trust Fairness Act (Section 5007 of the 21st Century Cures Act), effective December 13, 2016, finally letting competent adults establish their own. This is the default vehicle when a Medicaid/SSI recipient's own settlement funds the trust.

Pooled (d)(4)(C). Must be "established and managed by a non-profit association," with a separate account maintained for each beneficiary but funds pooled for investment. Valuable when there's no suitable individual trustee, the settlement is modest, or the beneficiary is 65 or older (the only first-party option after 65, though many states treat post-65 deposits as a transfer triggering a penalty). The statute's "not retained by the trust" language means the nonprofit may keep some or all of the remainder for its charitable mission instead of paying the State.

Third-party SNT. Funded with someone else's money — a parent's or grandparent's gift, inheritance, or life insurance, never the beneficiary's own funds. No Medicaid payback, so the grantor controls the remainder. (A drafting trap worth flagging: never insert a Medicaid-payback clause into a third-party trust — it forces unnecessary repayment and can expose the drafter to malpractice.)

What the Trust Can and Cannot Pay For

SNTs supplement, not supplant, public benefits. They can pay for education, therapies not covered by Medicaid, electronics, travel, a vehicle, personal-care attendants, and recreation.

The historical limit was food and shelter, treated as "in-kind support and maintenance" (ISM) that reduces SSI. That changed for food: under SSA's final rule "Omitting Food From In-Kind Support and Maintenance Calculations" (effective September 30, 2024), SSA no longer counts food as ISM, so trustees can buy groceries and meals without an SSI reduction. Shelter (rent, mortgage, property taxes, utilities) still triggers ISM, capped at the Presumed Maximum Value — roughly $351.33 in 2026, netting about a $331.33 reduction after the $20 general income exclusion.

SNT vs. ABLE Account — Use Both

An ABLE account (Achieving a Better Life Experience Act; IRC §529A) is a tax-advantaged account the individual owns and controls directly. Key 2026 figures: the annual contribution limit is $20,000, and the disability-onset age rose from 26 to 46 effective January 1, 2026 (ABLE Age Adjustment Act). Up to $100,000 is excluded from the SSI resource limit.

The decisive advantage: ABLE funds can pay qualified disability expenses — including food and shelter — without an ISM reduction, something an SNT cannot do cleanly. The best practice is to use both: the SNT as the "vault" for the large settlement, funding the ABLE account annually for day-to-day and housing costs.

Coordinating With Structured Settlements and MSAs

Structured settlements. Rather than a lump sum, the SNT can be funded with periodic payments from a structured-settlement annuity paid directly to the trustee. The benefits: tax-free annuity growth, guaranteed lifetime income, lower trust administration fees (only trust assets bear fees), protection from dissipation, and the option of a "rated age" to buy more income where life expectancy is diminished. A commutation clause should be included so the remaining annuity value flows into the trust at death for orderly wind-up and payback. Adequate up-front "seed" funding is prudent so the trustee can meet immediate needs before annuity payments begin.

Medicare Set-Asides. Because an MSA is itself a countable resource, for a dual-eligible client (Medicare + Medicaid/SSI) it should be "nested" inside a first-party SNT, with separate accounting so the MSA pays only Medicare-covered injury-related costs. SNTs and MSAs address different programs — competent settlement planning addresses both, plus lien resolution.

Choosing a Trustee

The trustee must invest prudently, make benefit-sensitive distributions, keep meticulous records, file tax returns and accountings, and understand SSI/Medicaid rules — a single mistake (cash to the beneficiary, an unplanned shelter payment) can cost benefits. Family members offer intimacy and low cost but often lack expertise and face conflicts. Professional or corporate trustees bring compliance, objectivity, and continuity but charge fees. A common best practice is a hybrid: a professional trustee paired with a family member as co-trustee or "trust protector."

Process and Timing

The SNT must be established and funded as part of the settlement, before disbursement. If the claimant — or even the claimant's attorney's trust account, if funds are held too long — takes the money, constructive receipt can be imputed and benefits lost. For minors and incapacitated adults, the trust is typically established by court order, and principal is spent with court approval. There is no transfer-of-assets penalty for funding a (d)(4)(A) trust before 65.

Failing to do this has produced legal-malpractice exposure — the Texas Grillo cases, where a child's lump-sum settlement was dissipated and the firm and guardian ad litem paid a combined $4.1 million, are the canonical warning.

What to Do

1. Screen every PI client for means-tested benefits at intake. If the client receives or may need SSI/Medicaid and the net recovery would exceed ~$2,000, plan for an SNT before settlement is finalized.
2. Bring in a special-needs/settlement planner early — before signing — so payment is directed to the trust.
3. Match the structure to the facts, pair the SNT with an ABLE account, and use a professional or hybrid trustee for any substantial trust.

We build SNT coordination, structured funding, and lien resolution into the settlement as an independent fiduciary — and we work alongside your special-needs counsel. Talk to us about protecting a recovery or read more on government-benefit preservation.

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SNTs are highly technical, benefit-critical instruments, and state law varies significantly. Figures cited are 2025/2026 and change annually — verify current values. This is educational information, not legal advice; engage qualified special-needs counsel for any specific matter.