Special-Needs Trusts and Benefits Planning in Texas: A Guide for Families

What Is a Special-Needs Trust and Why Does It Matter in Texas?

A special-needs trust (SNT) is a legal arrangement that holds assets for a person with disabilities without counting those assets toward eligibility for means-tested public benefits like Medicaid and Supplemental Security Income (SSI). In Texas, families raising children with autism or other developmental disabilities often rely on these programs for essential services, including applied behavior analysis (ABA) therapy, medical care, and respite. Without an SNT, even modest savings, an inheritance, or a personal injury settlement could disqualify a child from life-sustaining benefits. By placing funds into a properly drafted trust, families can ensure their child has financial resources for the future while preserving access to health coverage and support services.

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Types of Special-Needs Trusts in Texas

First-Party (Self-Settled) Trusts

A first-party SNT is funded with the beneficiary's own money, such as a personal injury settlement, inheritance, or back payments from Social Security. These trusts must include a payback provision to the state Medicaid program upon the beneficiary's death for any medical assistance received. Texas law allows first-party SNTs for individuals under age 65. After age 65, only pooled trusts (discussed below) are an option for self-settled funds.

Third-Party Trusts

Third-party SNTs are created and funded by someone else, typically parents, grandparents, or other relatives. These trusts do not require Medicaid payback; remaining assets can go to other family members or charities after the beneficiary's death. Third-party trusts are often used for life insurance proceeds, gifts, or inheritances intended for a child with disabilities. They can be set up as standalone trusts or as part of a will or revocable living trust.

Pooled Trusts

A pooled trust is managed by a nonprofit organization that pools resources from many beneficiaries for investment purposes while maintaining separate accounts for each individual. In Texas, pooled trusts are available through organizations like The Arc of Texas Master Pooled Trust. These can be a cost-effective solution for smaller amounts or for beneficiaries over age 65 who need a first-party SNT. Pooled trusts also offer professional administration, which can relieve family members of trustee duties.

Benefits Planning in Texas: Key Programs to Know

Benefits planning involves understanding how assets and income affect eligibility for programs your child may rely on. In Texas, the most critical programs for children with autism and other special needs include:

• Medicaid - Provides health coverage, including ABA therapy, through fee-for-service or managed care plans like STAR Kids. Medicaid has strict income and resource limits, but many children qualify regardless of family income through waivers or disability-based eligibility.
• Supplemental Security Income (SSI) - A federal cash benefit for children with disabilities from low-income families. The child's own resources must be below $2,000 (or $3,000 if a couple). A special-needs trust can shelter assets above that limit.
• Texas Medicaid Waivers - Programs like the Home and Community-based Services (HCS) waiver, Texas Home Living (TxHmL) waiver, and the Community Living Assistance and Support Services (CLASS) waiver provide funding for respite, day habilitation, and other supports. Many of these waivers have long waiting lists, so early application is crucial.
• CHIP (Children's Health Insurance Program) - For families with higher incomes, CHIP may cover some therapies, though coverage for ABA is limited compared to Medicaid.

Because eligibility rules differ by program, a benefits planner or special-needs attorney can help you coordinate trust provisions with each program's asset and income tests.

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How to Fund a Special-Needs Trust

Funding a trust requires careful planning to avoid unintended tax or benefits consequences. Common funding sources include:

• Life insurance policies - Naming the trust as beneficiary can ensure proceeds don't disqualify your child from benefits.
• Cash gifts or inheritances - Relatives can contribute directly to the trust rather than to the child.
• Personal injury settlements - A first-party trust can hold settlement funds without affecting Medicaid or SSI.
• 529 college savings plans - These can be rolled into an ABLE account (up to annual limits) or transferred to a special-needs trust.
• Retirement accounts - Naming the trust as beneficiary requires careful review of required minimum distributions (RMDs) and tax implications.

It's essential to title assets properly and update beneficiary designations on life insurance, retirement accounts, and payable-on-death accounts to avoid accidentally giving assets directly to your child.

Using Trust Funds for ABA Therapy and Other Services

One of the most practical uses of a special-needs trust is paying for ABA therapy and related treatments. ABA therapy is medically necessary for many children with autism, and Texas Medicaid covers it when prescribed by a doctor. However, out-of-pocket costs for copays, deductibles, or services not covered by insurance can be significant. Trust funds can cover those expenses without counting as income to the child. Additionally, the trust can pay for extracurricular activities, specialized equipment, transportation, and legal or advocacy fees. The key rule is that disbursements from a third-party trust should go directly to the service provider, not to the beneficiary, to avoid affecting benefits. For first-party trusts, distributions for food and shelter can reduce SSI payments, so they should be used carefully for other needs first.

If you are looking for a vetted, BCBA-led ABA provider in Texas, ABA Therapy Now offers a free matching service to connect your family with providers who accept Medicaid and major insurance plans. Once your special-needs trust is in place, you can use trust funds to supplement therapy costs or pay for additional hours not covered by insurance.

Steps to Set Up a Special-Needs Trust in Texas

1. Consult a Special-Needs Planning Attorney

Only an attorney experienced in Texas trust law and public benefits should draft your SNT. Look for a Certified Elder Law Attorney (CELA) or member of the Special Needs Alliance. Expect costs between $1,500 and $5,000 for a standalone trust, depending on complexity.

2. Choose a Trustee

The trustee manages the trust assets and makes distributions. Options include a family member, a professional trustee (such as a bank or trust company), or a nonprofit (pooled trust). A professional trustee may charge annual fees of 1-2% of assets but provides expertise and reduces family conflict.

3. Determine Funding and Tax Strategy

Work with your attorney to decide how to fund the trust and whether to make it revocable or irrevocable. If you are funding with life insurance, consider an irrevocable life insurance trust to keep the proceeds out of your estate. You'll also need a tax identification number (EIN) for the trust and may need to file annual tax returns.

4. Coordinate with Benefits Counselors

After the trust is created, update your child's benefits caseworker and include a copy of the trust in your benefits file. A benefits counselor can help you understand how distributions will affect SSI or Medicaid and can assist with reporting.

5. Review and Update Periodically

Laws and family circumstances change. Review the trust every few years or after major events like a death in the family, a change in your child's medical needs, or new legislation. In Texas, the Uniform Trust Code gives beneficiaries certain rights to information, so keep good records.

Common Mistakes to Avoid

• Naming the child as a direct beneficiary of an inheritance or insurance policy - This can disqualify them from benefits. Instead, name the trust or use a disinheritance strategy with an SNT.
• Using a general power of attorney instead of a trust - A power of attorney ends at incapacity or death and does not protect assets from being counted.
• Forgetting to fund the trust - A trust is useless without assets. Follow through on titling and beneficiary designations.
• Distributing funds directly to the child - Cash or gift cards given to the beneficiary count as income and can reduce SSI. Always pay providers directly.
• Overlooking Texas community property laws - In Texas, marital property rules can affect how assets are owned and transferred. Your attorney should address this in the trust.
• Failing to plan for adulthood - Transition planning should begin years before age 18 to ensure guardianship, benefits redetermination, and trust modifications are handled properly.

How ABA Therapy Now Can Support Your Family

Navigating special-needs trusts and benefits planning is complex, but you don't have to do it alone. Once you have your financial and legal foundation in place, you need a trusted ABA provider who understands your child's needs. ABA Therapy Now is a free matching service that connects Texas families with vetted, BCBA-led ABA therapy providers. We help you find providers who accept your insurance, including Texas Medicaid, and we can discuss how your special-needs trust may cover any remaining costs. Start by visiting our website to complete a short form, and we will match you with providers in your area who meet your family's specific needs.