A personal injury settlement can disqualify the recipient from government benefits if it pushes their countable assets above the eligibility threshold. A special needs trust (SNT) solves this by holding the settlement proceeds in a trust that supplements — rather than replaces — government benefits.
TL;DR.
An SNT holds settlement proceeds without disqualifying the beneficiary from Medicaid/SSI. First-party SNTs: funded by the beneficiary's own assets (settlement); require Medicaid payback at death. Third-party SNTs: funded by family; no payback. ABLE accounts: alternative for smaller amounts (<$100K).
Types of special needs trusts
| Type | Funded by | Medicaid payback? | Authority |
|---|---|---|---|
| First-party (d)(4)(A) | Beneficiary's own assets (settlement) | Yes — remaining funds reimburse Medicaid | 42 USC §1396p(d)(4)(A) |
| Third-party | Family, inheritance | No | General trust law |
| Pooled trust (d)(4)(C) | Beneficiary's assets, managed by nonprofit | Partial — depends on state and trust terms | 42 USC §1396p(d)(4)(C) |
| ABLE account | Beneficiary or family | Medicaid payback on death (balance) | 26 USC §529A |
Frequently asked questions
What is a special needs trust?
A special needs trust (SNT), also called a supplemental needs trust, holds settlement proceeds for a beneficiary with a disability without disqualifying them from means-tested government benefits (Medicaid, SSI). The trust supplements — not replaces — government benefits.
When is an SNT required?
An SNT should be established whenever a personal injury settlement recipient receives means-tested benefits (Medicaid, SSI, Section 8) and the settlement would otherwise push them over the asset limit (typically $2,000 for SSI). Courts often require SNTs for settlements involving minors or incapacitated adults.
What is the Medicaid payback provision?
A first-party (d)(4)(A) SNT requires that when the beneficiary dies, any remaining trust funds are used to reimburse Medicaid for benefits paid during the beneficiary's lifetime. This is called the Medicaid payback or state payback provision.
Sources
- 42 USC §1396p(d)(4)(A) — first-party SNT
- Social Security POMS SI 01120.203 — SNT guidance
- 26 USC §529A — ABLE Act
Editorial note. This guide explains SNT structures. It is not legal or financial advice. See our full disclaimer.
📌Cite this article: “Setting Up a Special Needs Trust from a Settlement.” MyClaimWorth.com, May 2026. https://myclaimworth.com/articles/special-needs-trust-from-settlement