Trusts and Benefit Eligibility?

Quick answer: A properly drafted special needs trust lets a disabled person keep means-tested benefits like SSI and Medi-Cal while the trust pays for extras the government does not cover. A direct inheritance, or a trust set up the wrong way, can push someone over the asset limit and cut off those benefits. A revocable living trust holding your own money does not protect those assets, because the government still counts them as yours.

A mom called me a while back, half in a panic. Her father had just died and left $40,000 to her adult son, who has cerebral palsy and lives on Supplemental Security Income and Medi-Cal. Grandpa meant it as a gift. What it actually did, the way it was written, was threaten to knock her son off the very benefits that pay for his care. She wanted to know if she had to turn the money down.

She did not. But the situation she was in is one I see all the time, and it is worth understanding before it lands on you. “Means-tested” benefits are programs you only qualify for if your income and assets stay under a set limit. Supplemental Security Income (SSI) is a monthly cash benefit for people who are aged, blind, or disabled and have very little money. Medi-Cal is California’s version of Medicaid, the health coverage program. Both look at what a person owns. Hand a disabled beneficiary money the wrong way and you can disqualify them. Set things up the right way and you can give them more than the government ever would, without touching their eligibility.

Here is how trusts fit into that, in plain terms.

First, what a trust actually is

A trust is a legal arrangement where someone (the trustee) holds and manages property for the benefit of someone else (the beneficiary). Think of it as a set of written instructions attached to money or property, telling the trustee what they can and cannot do with it. The two features that matter most for benefits are whether the trust is revocable or irrevocable, and whose money funded it. Those two questions decide almost everything.

Why a revocable living trust does not shield your assets

A revocable living trust is the workhorse of California estate planning. You move your house and accounts into it, you stay in control, and you can change or cancel it whenever you want. It keeps your estate out of probate and lets your family skip a slow, public court process. For most people, that is exactly what they need, and it is the foundation of a solid estate plan.

But because you keep full control, the government treats the assets inside a revocable trust as still yours. If you are applying for a means-tested program, money in your own revocable trust counts against you just as if it were sitting in your checking account. So if your goal is protecting your own benefits, a revocable trust does not do that job. It was never built to. If you want to understand how a living trust works and what it is good for, our living trust attorney page walks through it.

How a special needs trust protects benefits

This is the tool that solves the problem the mom called me about. A special needs trust (sometimes called a supplemental needs trust) holds money for a disabled person without that money counting as theirs for SSI or Medi-Cal. The trustee can spend it on things the benefits do not cover, like therapy, a wheelchair-accessible van, education, travel, a computer, or care above what the state pays for. The beneficiary never controls the money directly, which is the whole point. Because they cannot demand the cash, the government does not count it.

There are two main kinds, and the difference matters.

Third-party special needs trust

This is funded with someone else’s money, usually a parent or grandparent who wants to leave something to a disabled loved one. In the case above, that is the answer: instead of leaving $40,000 directly to the grandson, the inheritance goes into a third-party special needs trust for him. He keeps SSI and Medi-Cal, and the trust pays for the extras. When he dies, whatever is left can pass to other family members. A third-party trust has no payback requirement, which is its big advantage. Money the family put in stays in the family.

First-party special needs trust

This is funded with the disabled person’s own money, often from a personal injury settlement, back-due benefits, or an inheritance that already landed in their name. Federal law allows this under 42 U.S.C. section 1396p(d)(4)(A). A few rules come with it. The trust has to be created before the beneficiary turns 65, and it cannot be set up by the beneficiary acting alone. It has to be established by a parent, grandparent, legal guardian, or a court. In California, if the trust is funded with the beneficiary’s own money, a judge usually has to approve it under Probate Code section 3604, and the Department of Health Care Services gets notice before the hearing.

The catch with a first-party trust is the payback. When the beneficiary dies, whatever is left in the trust has to reimburse Medi-Cal for what it paid out during their life before any of it goes to family. That is federal law, not a choice the lawyer makes. It is the trade for letting someone shelter their own money and still qualify for benefits.

There is also a third option worth knowing: a pooled trust, run by a nonprofit, which can take a disabled person of any age, including those over 65. That can be a fit when the under-65 rule for a first-party trust gets in the way.

The numbers that actually trigger a problem

SSI has a hard asset limit. As of 2026, a person can have no more than $2,000 in countable resources, or $3,000 for a couple, and still qualify. Some things do not count, like the home you live in, one vehicle, and up to $100,000 in an ABLE account. But a $40,000 inheritance dropped straight into someone’s name blows past the $2,000 line in one stroke, and the SSI checks can stop until the money is spent down or properly sheltered.

Medi-Cal is where things changed recently, and a lot of older articles online are now wrong about this. For the programs that serve seniors and people with disabilities (the Non-MAGI programs), California eliminated the asset test entirely in 2024. As of January 1, 2026, the asset limit is back. It is now $130,000 for one person, with another $65,000 added for each additional household member. So Medi-Cal looks at assets again, and the planning that fell out of fashion for a couple of years matters once more. For a disabled person trying to protect long-term coverage, a special needs trust keeps sheltered money from counting toward that limit.

The look-back period for long-term care Medi-Cal

If the issue is long-term care, like a nursing home, there is a separate trap worth flagging. Medi-Cal reviews asset transfers you made before applying, to catch people who give money away just to qualify. If you transferred assets for less than they were worth during the look-back window, Medi-Cal can impose a penalty period, meaning a stretch of time where it will not pay for your care even though you otherwise qualify. The penalty length depends on how much you moved and the average cost of care. The practical takeaway: this kind of planning works best done early, not in a crisis. Moving money the month before you need a nursing home rarely ends well.

What this means for you

If you have a disabled child, grandchild, sibling, or spouse who relies on SSI or Medi-Cal, do not leave them money directly, and do not let a well-meaning relative do it either. A direct gift or inheritance is the single most common way people accidentally cut off the benefits they were trying to help with. The fix is usually a third-party special needs trust built into the giver’s estate plan, set up in advance, so the money flows into the trust instead of into the beneficiary’s hands. If money has already landed in a disabled person’s name, a first-party trust may still save the day, but the rules are tighter and the clock matters.

Frequently Asked Questions

Will an inheritance make my disabled child lose SSI?

It can, if it goes directly to them. SSI cuts off once countable resources pass $2,000 for an individual, and a typical inheritance clears that in one deposit. The way to prevent it is to route the inheritance into a special needs trust instead of to your child directly. Done in advance through your estate plan, the money supplements their life without counting against the limit.

Does putting my house in a living trust protect my own Medi-Cal eligibility?

No. A revocable living trust holds your own assets and keeps you in control, so the government still counts everything in it as yours. A living trust is great for avoiding probate and organizing your estate, but it is not an asset-protection tool for your own benefits. Protecting your own eligibility takes different planning, and it depends on your situation.

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

A third-party trust is funded with someone else’s money, like a parent’s, and has no payback requirement, so whatever is left can go to other family members. A first-party trust is funded with the disabled person’s own money, has to be set up before age 65, often needs court approval in California, and has to repay Medi-Cal at death before anything passes to family. When you have a choice, the third-party trust is almost always the better deal.

Can I set up a special needs trust myself?

I would not. These trusts have to track specific federal and California rules to actually protect benefits, and a small drafting mistake can make the trust countable, defeating the whole purpose. A first-party trust may also need a judge’s sign-off under Probate Code 3604. This is one area where a do-it-yourself form can quietly fail at the worst possible moment.

If you are worried about how a trust or an inheritance might affect someone’s benefits, let’s talk it through. I have been helping California families with this since 2010, and I am happy to look at your specific situation. Call me at (805) 244-5291 or reach out online for a free consultation.