© 2026 Wealth Care Lawyer — Klaus Gottlieb, Esq. Serving the California Central Coast.
Jurisdiction: California (state Medi-Cal); Federal (Medicaid/SSI)
Primary Statutes: 42 U.S.C. § 1396p(d)(4)(A) (first-party SNT); 42 U.S.C. § 1396p(d)(4)(C) (pooled SNT); Cal. Welf. & Inst. Code § 14006.3 (asset test elimination); Cal. Welf. & Inst. Code §§ 14009.5–14009.6 (estate recovery); Cal. Prob. Code §§ 3600–3605 (court-established SNTs); Cal. Prob. Code § 3626 (SNT petitions)
Key Cases: None controlling
Last Reviewed: March 2026
Category: Estate Planning — Public Benefits and Special Needs
Special needs trusts (SNTs) allow a disabled or elderly beneficiary to hold and use trust assets without those assets counting as available resources for Medicaid eligibility purposes. California administers Medicaid as Medi-Cal. Effective January 1, 2024, California eliminated the asset test for non-MAGI Medi-Cal programs, which dramatically changes the eligibility analysis — but does not eliminate the need for SNT planning. Estate recovery survives the asset test elimination: Medi-Cal retains the right to recover from a beneficiary’s probate estate for services rendered to individuals age 55 or older who received long-term services and supports. Assets held in a properly structured trust at death pass outside of probate and are not subject to estate recovery. The two primary instruments are the first-party SNT (funded with the beneficiary’s own assets, subject to a payback requirement and a hard age-65 cap) and the third-party SNT (funded with third-party assets, no payback requirement, no age restriction). Understanding which instrument applies — and why — remains the core planning decision.
A trust containing the assets of an individual with a disability who is under age 65 is excluded from Medi-Cal’s countable resource calculation if: (1) the trust is established for the benefit of an individual with a disability under age 65 by a parent, grandparent, legal guardian, court, or — since the Special Needs Trust Fairness Act of 2016 — the individual herself; (2) the trust is irrevocable; and (3) the trust instrument provides that the state will receive all amounts remaining in the trust upon the beneficiary’s death, up to the total amount of Medicaid benefits paid on the beneficiary’s behalf.
Several restrictions are absolute. The beneficiary must be under age 65 at the time the trust is funded; transfers after age 65 do not qualify and may be treated as disqualifying transfers. The beneficiary must meet the Social Security Act’s definition of disability. The payback provision runs to the state Medicaid agency — in California, the Department of Health Care Services (DHCS) — and is not optional. Practitioners who draft first-party SNTs without a Medi-Cal payback provision have drafted a non-compliant trust.
⚠️ CRITICAL ISSUE: The age-65 restriction under § 1396p(d)(4)(A) is a hard cap. A first-party SNT funded on or after the beneficiary’s 65th birthday does not qualify for resource exclusion. Transfers into a non-qualifying trust may be treated as disqualifying transfers subject to a transfer penalty period. Unlike other Medicaid planning tools, there is no cure once the age threshold is crossed.
A sub-account established in a trust maintained by a nonprofit association is excluded from countable resources if: (1) each sub-account is maintained for the benefit of an individual with a disability; (2) the account is established and managed by the nonprofit organization; and (3) amounts remaining in the sub-account upon death are retained by the nonprofit or used to reimburse the state Medicaid agency. Pooled trusts administered by a qualified nonprofit are available to beneficiaries of any age, including those over 65, which makes them the principal alternative when the § 1396p(d)(4)(A) age cap has been crossed.
A trust funded entirely with the assets of a third party — a parent, sibling, grandparent, or other person who is not the Medi-Cal beneficiary — is not governed by § 1396p(d)(4)(A). Because the trust assets were never the beneficiary’s property, they are not counted as available resources under Medicaid’s general resource rules, and no payback provision is required. Third-party SNTs are not subject to an age restriction. They are the primary instrument used in estate plans for families with a disabled child or adult dependent.
Third-party SNTs may be created as standalone trusts or as sub-trusts within a revocable living trust (a “testamentary” SNT activated at the grantor’s death). For court involvement, Cal. Prob. Code §§ 3600–3605 governs court-established SNTs, and § 3626 governs petitions to establish or modify SNTs.
Effective January 1, 2024, California eliminated the asset test for all Non-MAGI Medi-Cal programs, including programs serving aged, blind, and disabled individuals and programs covering long-term services and supports (LTSS). Applicants are no longer required to report bank accounts, real property, vehicles, or other assets as a condition of eligibility. This reform was the most significant structural change to California Medi-Cal eligibility in decades.
⚠️ CRITICAL DISTINCTION: The elimination of the asset test does not eliminate the need for SNT or estate planning. It affects eligibility. It does not affect estate recovery. A Medi-Cal beneficiary who dies with probate assets is still subject to DHCS estate recovery. The asset test elimination means more Californians can qualify for Medi-Cal; it does not mean their estates are insulated from recovery after death.
California retains the right to recover Medi-Cal expenditures from the estate of a deceased beneficiary who: (1) was age 55 or older at the time services were rendered; and (2) received long-term services and supports (LTSS), nursing facility services, or certain other covered services. Recovery is limited to assets that pass through the beneficiary’s probate estate. Assets that pass outside of probate — through a funded revocable trust, joint tenancy, a beneficiary designation, or an irrevocable trust — are not subject to estate recovery under current California law.
California’s estate recovery program was narrowed significantly by AB 1 (2017), which limited recovery to the minimum required by federal law. This means recovery applies only to the specific services listed above and is not a general lien against all Medi-Cal expenditures.
📌 PLANNING NOTE: Estate recovery is the primary remaining Medi-Cal planning issue for most California clients post-2024. The instrument of choice for avoiding estate recovery for the primary residence and other significant assets is a funded revocable living trust. Assets titled in the trust at death avoid probate and are not subject to DHCS recovery. This is separate from, and should not be confused with, SNT planning for a disabled beneficiary.
| Feature | First-Party SNT § 1396p(d)(4)(A) | Third-Party SNT |
|---|---|---|
| Funded with | Beneficiary’s own assets | Third party’s assets |
| Age restriction | Beneficiary must be under 65 at funding | None |
| Disability requirement | Yes (SSA definition) | Not required (but typically present) |
| Payback provision | Required — DHCS recovers remaining balance at death | Not required |
| Established by | Parent, grandparent, guardian, court, or (post-2016) beneficiary | Anyone — typically parent or grandparent in estate plan |
| Asset test exclusion basis | § 1396p(d)(4)(A) statutory exception | General rule: third-party assets not beneficiary’s resources |
| Common use case | Personal injury settlement; inheritance received by disabled person; own savings | Parent estate planning for disabled child; bequest to disabled heir |
These are independent questions that require separate answers:
Axis 1 — Eligibility: Does the client currently qualify for Medi-Cal? Post-January 1, 2024, California has no asset test for non-MAGI programs. Income tests remain applicable, and share-of-cost requirements apply for LTSS. For most clients, eligibility is no longer the primary planning problem.
Axis 2 — Estate Recovery: Will DHCS have a claim against the client’s estate after death? Recovery applies to probate assets of recipients age 55 or older who received covered LTSS. Trust-based estate planning — a funded revocable trust — is the standard instrument for avoiding this exposure. An SNT is not required for this purpose; the revocable trust serves it.
The two axes converge in the case of a disabled beneficiary under 65 who has received or expects to receive their own assets (a settlement, inheritance, or savings). In that case, both questions arise simultaneously, and a first-party SNT may address both.
Before January 1, 2024, first-party SNTs served a dual function: they excluded assets from Medi-Cal’s resource count (eligibility) and protected those assets from immediate spend-down. With the asset test eliminated, the eligibility function is no longer necessary for most clients. The age-65 restriction under § 1396p(d)(4)(A) is now primarily relevant only where the practitioner is planning for future estate recovery avoidance or where federal rules impose a look-back period.
⚠️ COMMON ERROR: Practitioners who continue to recommend first-party SNTs as an eligibility tool without recognizing that the California asset test has been eliminated are offering planning that may be unnecessary and, if the client is over 65, harmful. The correct analysis post-2024 is to evaluate whether the client’s primary concern is (a) current eligibility, (b) estate recovery, or (c) preserving assets for a disabled beneficiary across multiple programs (Medi-Cal, SSI, IHSS). These require different instruments and different analyses.
Many SNT beneficiaries receive Supplemental Security Income (SSI) in addition to Medi-Cal. SSI is means-tested under a separate federal framework (42 U.S.C. § 1382b) with a $2,000 individual resource limit. The California asset test elimination does not affect SSI. A trust that qualifies for the Medi-Cal resource exclusion under § 1396p(d)(4)(A) may or may not satisfy the SSI trust rules — the analyses are parallel but distinct. Practitioners drafting SNTs for clients who receive SSI must confirm compliance with both frameworks.
A Medicare Set-Aside (MSA) arrangement is frequently mentioned in the same breath as special needs trust planning. It is a different instrument serving a different purpose, and the two should not be conflated.
An MSA is an administrative mechanism, not a trust established under § 1396p(d)(4). Its authority derives from the Medicare Secondary Payer Act (42 U.S.C. § 1395y(b)), which prohibits Medicare from paying for items or services when a primary payer — including a liability or workers’ compensation settlement — is responsible. When a personal injury or workers’ compensation settlement includes compensation for future medical expenses that Medicare would otherwise cover, CMS requires that a portion of the proceeds be segregated and exhausted on Medicare-covered items before Medicare resumes payment. That segregated fund is the MSA.
The purposes of the two instruments are entirely distinct:
| Special Needs Trust | Medicare Set-Aside | |
|---|---|---|
| Governing authority | 42 U.S.C. § 1396p(d)(4) | 42 U.S.C. § 1395y(b) (MSP Act) |
| Program protected | Medi-Cal / Medicaid / SSI | Medicare |
| Purpose | Preserve beneficiary’s eligibility for means-tested public benefits | Protect Medicare’s interest as secondary payer |
| Direction of protection | Keeps assets from counting against the beneficiary | Ensures settlement funds are spent before Medicare pays |
| Payback | First-party SNT: required to DHCS at death | MSA funds spent down during life; no post-death payback |
| CMS approval required? | N/A | No — CMS review is voluntary above threshold amounts |
The two instruments arise together only in a narrow circumstance: a catastrophically injured plaintiff who is (a) disabled and under age 65, making a first-party SNT available, and (b) a Medicare beneficiary or reasonably expected to become one, triggering MSA considerations. In that scenario, the MSA allocation is carved out of the settlement proceeds first to protect Medicare’s future interest; the remaining proceeds are then placed into the first-party SNT to protect Medi-Cal and SSI eligibility. They are nested instruments with distinct functions, not alternatives to each other.
📌 PLANNING NOTE: An attorney who structures a personal injury settlement involving a disabled Medicare beneficiary using only an SNT — without addressing the MSA — has protected the client’s Medi-Cal eligibility while leaving Medicare’s secondary payer interest unaddressed. Conversely, an attorney who sets up only an MSA has protected Medicare but has not addressed whether the remaining settlement proceeds will disqualify the client from Medi-Cal or SSI. Both questions must be answered independently.
At the federal level, Medicaid has been under increasing fiscal pressure. Proposals circulating in 2025 would, if enacted, reimpose asset tests at the federal level, extend or modify look-back periods for transfers into trusts, or expand estate recovery beyond probate assets. As of the date this article was last reviewed, none of these proposals had been enacted into law. California’s current rules remain operative. However, because Medicaid is a federal-state cooperative program, federal legislation could override California’s more favorable rules on a prospective basis without prior state action.
Practitioners advising clients on long-horizon Medi-Cal planning should document the current state of the law at the time of engagement and advise clients that rules in this area have been subject to legislative change and may change again.
Federal Medicaid law under 42 U.S.C. § 1396p(c) imposes a transfer penalty for asset transfers made within 60 months of applying for Medicaid long-term care benefits at less than fair market value. California, however, has not yet implemented a transfer penalty program for Medi-Cal LTSS, notwithstanding the federal requirement. This means that, as of the last review date, California does not penalize Medicaid applicants for transferring assets, even to irrevocable trusts, within the look-back window. This is a significant difference from nearly all other states. Practitioners should verify current DHCS guidance before advising clients that no look-back penalty applies, as federal compliance pressure on this issue has increased.
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This article is provided for educational purposes and reflects California law as of March 2026. It does not constitute legal advice. Readers should verify current statutory text, DHCS guidance, and federal Medicaid regulations before advising clients. The interaction between SSI, Medi-Cal, and trust law is highly fact-specific; consult qualified benefits counsel for individual matters.
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