Special Needs Trusts in California: Protecting SSI and Medi-Cal

Robert E. Williams, Attorney at Law · Updated October 4, 2026 · 6 min read

Parents and grandparents of a child or adult with a disability often want to leave an inheritance that improves their loved one's quality of life. But a direct gift can backfire. Many people with disabilities rely on means-tested public benefits such as Supplemental Security Income (SSI) and Medi-Cal, which have strict limits on how much a person may own. An inheritance received outright can cause those benefits to stop.

A special needs trust, sometimes called a supplemental needs trust, solves this problem. This guide explains how these trusts work in California, the main types, and what families should consider in 2026.

Why a Direct Inheritance Can Cause Problems

SSI is a needs-based federal program. An individual generally may not have more than $2,000 in countable resources and still qualify. Money left directly to an SSI recipient becomes a countable resource and can cause benefits to be suspended until it is spent down. Medi-Cal eligibility for many people with disabilities is linked to SSI, and other Medi-Cal programs for older adults and people with disabilities now have their own asset test again: California reinstated a limit of $130,000 for one person (plus $65,000 for each additional household member) effective January 1, 2026.

Simply disinheriting the person with a disability, or leaving their share informally to a sibling "to take care of them," is risky. The sibling has no legal obligation to use the money for that purpose, and the funds would be exposed to the sibling's own creditors, divorce or death.

How a Special Needs Trust Works

A special needs trust holds money for the benefit of a person with a disability, managed by a trustee who has discretion over distributions. Because the beneficiary cannot demand the money or direct how it is spent, the trust assets are generally not counted as the beneficiary's resources. The trustee uses the funds to supplement, not replace, public benefits, for example:

• Education, tutoring and job training.
• Therapies and medical or dental care not covered by Medi-Cal.
• Equipment, technology and a modified vehicle.
• Recreation, travel and companion care.
• Home modifications and furnishings.

Trustees usually pay providers directly rather than giving cash to the beneficiary, because cash payments can reduce SSI. Payments for shelter costs, such as rent or a mortgage, may reduce SSI under the in-kind support and maintenance rules, although paying for shelter can still be worthwhile when the benefit outweighs the reduction. Since September 30, 2024, the Social Security Administration no longer counts food as in-kind support and maintenance, which gives trustees more flexibility to pay for groceries.

Third-Party Special Needs Trusts

A third-party trust is created and funded by someone other than the beneficiary, typically parents or grandparents, through their estate plan or during their lifetime. Key features:

• No payback. When the beneficiary dies, remaining assets pass to whomever the creator chose, such as siblings or a charity. Medi-Cal has no claim against the trust.
• Flexible funding. It can receive gifts, inheritances, life insurance proceeds and retirement account distributions from family members.
• Part of your plan. It can be a stand-alone trust or a sub-trust within your revocable living trust that comes into being at your death.

A stand-alone third-party trust is useful when grandparents or other relatives may also want to leave gifts; they can name the trust as beneficiary rather than the individual. Remember to update beneficiary designations on life insurance and retirement accounts so they pay to the trust, not directly to the person with a disability. See our guide on funding a living trust.

First-Party (Self-Settled) Special Needs Trusts

Sometimes the money belongs to the person with a disability, for example from a personal injury settlement, an inheritance that was left outright, or accumulated savings. Federal law (42 U.S.C. section 1396p(d)(4)(A)) allows these funds to be placed in a first-party special needs trust if:

• The beneficiary is under age 65 when the trust is established and funded.
• The trust is established by the beneficiary, a parent, grandparent, legal guardian or a court.
• The trust provides that, at the beneficiary's death, Medi-Cal (and any other state Medicaid program) will be repaid for benefits provided, before any remaining funds go to others.

In California, when a first-party trust is funded with a court judgment or settlement, or for a person under a conservatorship, a court order is often required, and the trust may be subject to ongoing court supervision under Probate Code sections 3600 and following. Pooled trusts run by nonprofit organizations are another option for first-party funds, including for some people over 65.

ABLE Accounts: A Useful Companion

An ABLE account (CalABLE in California) is a tax-advantaged savings account for people with disabilities. Funds can be used for qualified disability expenses, and up to $100,000 in an ABLE account is disregarded for SSI. Annual contributions from all sources are generally limited to the federal gift tax annual exclusion, $19,000 for 2026. Beginning January 1, 2026, eligibility expanded to people whose disability began before age 46, up from age 26. ABLE accounts are simpler to use than trusts and let the beneficiary manage some funds directly, but they have contribution limits, and funds remaining at death may be subject to a Medicaid payback claim depending on current state rules, so many families use both an ABLE account and a third-party trust.

Choosing the Trustee

The trustee of a special needs trust has an ongoing, sometimes demanding job: understanding benefit rules, keeping detailed records, filing trust tax returns, and making thoughtful decisions about the beneficiary's needs. Families often choose:

• A sibling or other relative who knows the beneficiary well, sometimes with a professional co-trustee.
• A professional fiduciary or trust company.
• A nonprofit pooled trust.

Many parents also prepare a "letter of intent" describing the beneficiary's routines, medical history, preferences and goals. It is not legally binding, but it is invaluable to future trustees and caregivers.

Common Mistakes to Avoid

• Leaving an inheritance, life insurance or IRA directly to a beneficiary who receives SSI or Medi-Cal.
• Using a generic trust that gives the beneficiary a right to income or principal.
• Allowing the trustee to hand out cash routinely.
• Forgetting to tell grandparents and relatives to leave gifts to the trust rather than the individual.
• Not planning for guardianship or conservatorship decisions as the child reaches adulthood.

Conclusion

A special needs trust lets families provide a better life for a loved one with a disability without jeopardizing the public benefits they depend on. For most families, a third-party trust built into the parents' estate plan, coordinated beneficiary designations and, where appropriate, an ABLE account offer the most flexibility. Because benefit rules change, including the 2026 return of Medi-Cal asset limits, it is wise to review these arrangements regularly with a California attorney experienced in special needs planning.

Related Articles

• Will vs. Living Trust in California: Which One Do You Need?
• How to Fund Your Living Trust (and Why It Matters)
• Successor Trustee Checklist: Administering a Trust in California

This article provides general information about California and federal law as of October 4, 2026. It is not legal advice and does not create an attorney–client relationship.