Special Needs Planning in California

The Two Types of Special Needs Trusts

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Third-Party Special Needs Trust

This is the trust most families need. You—the parent, grandparent, or sibling—fund it with your own money. The assets in the trust belong to the trust, not to your family member. They don't count toward SSI or Medi-Cal eligibility.

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When the beneficiary dies, whatever is left in the trust goes to whoever you named as remainder beneficiaries. There is no Medi-Cal payback requirement. The state has no claim on the funds.

Third-party trusts are set up as part of a broader estate plan. They can be funded now, at death, or both. Every family member who wants to leave money to a person with disabilities—grandparents, aunts, uncles, siblings—needs to know this trust exists and direct gifts and bequests to it, not to the individual.

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A will that leaves $50,000 "to my granddaughter, Sarah" destroys her benefits. A will that leaves $50,000 "to the Sarah Johnson Special Needs Trust" preserves them.

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First-Party Special Needs Trust (d)(4)(A) Trust)

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This trust holds the beneficiary's own money: a personal injury settlement, an inheritance received directly before a trust was in place, or assets accumulated before disability. Under 42 U.S.C. § 1396p(d)(4)(A) and California Probate Code §§ 3600-3605, these trusts protect those assets from affecting Medi-Cal eligibility.

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The trade-off: when the beneficiary dies, California's Department of Health Care Services (DHCS) has a right to recover Medi-Cal costs paid on the beneficiary's behalf before remaining funds go to the family. This is the Medi-Cal payback provision, and it's required by federal law.

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First-party trusts also require formal notification to DHCS—at least 15 days before a court hearing and again at trust termination. Courts must approve them under California Probate Code § 3626. And the beneficiary must be under 65 when the trust is established.

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If the beneficiary is over 65, a pooled trust managed by a qualified nonprofit is the alternative. California has several established pooled trust operators, though a portion of remaining funds may be retained by the nonprofit at death.

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2026 Changed the Rules. Here's What Matters.

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California ran a two-year experiment. From 2024 through 2025, the state eliminated Medi-Cal asset limits entirely. Families relaxed. Some stopped funding trusts. Some left money in regular accounts.

That window closed January 1, 2026.

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What's back:

• Medi-Cal asset limit: $130,000 for individuals, $195,000 for married couples

• A 30-month look-back period for nursing facility Medi-Cal, phasing in gradually through July 2028

• Assets held outside a trust now count against eligibility

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If your family member accumulated savings during 2024-2025 outside of a properly structured trust, those assets need protection now. The strategies available today are narrower than they were 18 months ago.

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What's new (and helpful):

Food is no longer counted as ISM. Since September 30, 2024, trusts can pay for groceries, restaurant meals, and food costs without reducing SSI. Before this change, paying for food triggered an ISM deduction of up to $331 per month. That rule is gone. Trustees can now pay for food directly to providers without worrying about benefit reduction.

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Housing costs still count. Rent, mortgage payments, utilities, and property taxes still trigger ISM and can reduce SSI by up to one-third of the Federal Benefit Rate. Trustees should not pay these directly without understanding the impact.

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The ABLE age limit expanded. As of January 1, 2026, CalABLE accounts are available to individuals whose qualifying disability began before age 46, up from the prior cutoff of 26. This opens access to millions of Californians who were previously excluded, including veterans and adults with later-onset conditions like traumatic brain injury or multiple sclerosis.

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Blended Families and Second Families: This Gets More Complicated

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Standard estate planning assumes a straightforward family structure. Special needs planning rarely works that cleanly.

Riverside and Orange County families with complex family situations—remarriage, children from prior relationships, stepchildren, or significant assets from before the marriage—face a layer of issues that standard SNT templates don't address.

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California's community property rules create real problems. Everything you and your current spouse earned during the marriage is presumed to be owned 50/50, regardless of whose name is on the account. If you try to fund a first-party SNT with community assets without a proper transmutation agreement, you risk invalidating the trust or creating eligibility problems. An attorney has to sort out which assets are community and which are separate before anything goes into the trust.

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Children from prior relationships need specific coordination. If you have a disabled child from a prior marriage and a new spouse with separate assets, your estate plan has to address how the SNT is funded at your death without inadvertently triggering community property claims or disinheriting other children.

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Grandparents and extended family can contribute—but only if the trust exists first. One of the most practical things a third-party SNT does is give extended family a legal mechanism to leave money to your child. Without it, a well-meaning bequest from a grandparent can cause more harm than good. Once the trust is in place, the grandparent's will simply directs funds there instead.

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Sibling caregivers need their own protection. Many families assume an older sibling will manage their disabled sibling's care after the parents are gone. That arrangement—without a properly structured trust, trustee succession plan, and letter of intent—leaves both siblings financially and legally vulnerable.

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What a Special Needs Trust Can Pay For

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A properly administered SNT supplements what public benefits provide. Distributions should improve the beneficiary's quality of life beyond what SSI, Medi-Cal, and Regional Center services cover.

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