Setting Up a Special Needs Trust in Colorado

Nicole McGann

Jul 20 2026 12:00

A special needs trust can help a child, grandchild, or other loved one with a disability receive financial support without unnecessarily putting needs-based public benefits at risk. The details matter: the source of the funds, the trust language, the trustee’s decisions, and beneficiary designations can all affect the plan. At McGann Law Group, we help Colorado families coordinate these pieces into an estate plan that reflects both practical needs and long-term care goals.

This article provides general educational information, not legal advice for a particular family. Because benefit rules and family circumstances can change, special needs planning should be tailored before documents are signed or assets are transferred.

What Is a Special Needs Trust?

A special needs trust—also called a supplemental needs trust—is a trust designed to hold and manage assets for a person with a disability. Its purpose is generally to supplement, not replace, benefits and services that may be available through programs such as Supplemental Security Income (SSI) and Medicaid.

The trustee controls the trust property and makes distributions under the terms of the document. When drafted and administered properly, a trust may allow a beneficiary to enjoy resources for quality-of-life needs while preserving eligibility for means-tested programs where possible.

That outcome is not automatic. SSI and Medicaid use different rules, and the effect of a distribution can depend on how it is made and what it pays for. A carefully prepared trust is only one part of the plan; conscientious trust administration is equally important.

The Main Types of Special Needs Trusts

The first question is usually: Whose assets will fund the trust? The answer affects the type of trust, who may create it, and what happens to money left at the beneficiary’s death.

Third-party special needs trusts are funded with assets belonging to someone other than the beneficiary—often a parent, grandparent, sibling, or other relative. They may be created during the grantor’s lifetime or under a will or revocable living trust at death. When properly structured, remaining assets can pass to the remainder beneficiaries chosen by the person who created the trust. They are generally not subject to a Medicaid payback requirement because the assets never belonged to the beneficiary.

First-party special needs trusts are funded with assets that belong to the beneficiary. Common examples include an inheritance received outright, personal-injury settlement proceeds, or accumulated assets. Federal law imposes specific requirements for these trusts, including that they be established by a parent, grandparent, legal guardian, or court and funded while the beneficiary is under age 65. They generally include a Medicaid payback provision at the beneficiary’s death.

Pooled trusts are another option, particularly when a stand-alone trust may not be economical. A nonprofit organization manages pooled funds for investment and administration, while maintaining a separate account for each beneficiary. A pooled trust funded with the beneficiary’s own assets is also subject to federal requirements, including the under-age-65 rule for transfers of the beneficiary’s assets and potential state reimbursement at death.

How Trust Distributions Can Affect Benefits

A trustee should not assume that every payment from a special needs trust is harmless. Direct cash payments to a beneficiary can reduce SSI, and payments for shelter expenses may also affect SSI. Under current SSI rules, food is no longer treated the same way as shelter for this calculation, but benefit rules remain technical and can change.

Often, a trustee can make payments directly to a provider for appropriate supplemental items or services. Examples may include uncovered medical and dental care, therapy, transportation, education, adaptive technology, recreation, personal-care services, electronics, travel, furnishings, and professional services. Whether a particular expense is appropriate depends on the trust terms, the beneficiary’s circumstances, and the applicable benefit program.

For that reason, trustees should keep clear records, retain invoices and receipts, and seek guidance before making unusual or substantial distributions. Good recordkeeping can make a major difference if a benefits agency asks how trust funds were used.

Choosing the Right Trustee and Support Team

The trustee has a demanding role. This person or institution must understand the trust document, prudently manage assets, communicate with the beneficiary and family, make careful distribution decisions, maintain records, and coordinate with advisors when necessary.

A family member may be a wonderful choice when they have the time, judgment, and willingness to serve. In other situations, a professional trustee or co-trustee may provide needed experience and continuity. The best choice is not always the person who loves the beneficiary most; it is the person or team most able to carry out the responsibilities over time.

Families may also consider a care manager, trust protector, or advisory committee. These individuals do not necessarily control the money. Instead, they can help the trustee understand the beneficiary’s routines, medical needs, goals, preferences, and support network.

Create a Letter of Intent

A letter of intent is not usually legally binding, but it can be one of the most helpful planning documents a family creates. It gives future caregivers and trustees practical information that formal estate-planning documents may not capture.

Consider including information about daily routines, health-care providers, medications, housing preferences, education or employment goals, religious or cultural practices, friendships, communication needs, behavioral supports, benefits currently received, and the people who should be consulted. Review this letter regularly so it stays useful as circumstances change.

Coordinate Life Insurance, Retirement Accounts, and the Rest of Your Estate Plan

A special needs trust should not stand alone. Your will, revocable trust, beneficiary designations, powers of attorney, and life insurance policies should all work together. Naming the special needs trust—not the individual beneficiary—may be appropriate for assets intended to support that person after your death.

Retirement accounts deserve particularly close attention. Federal distribution rules for inherited IRAs and qualified plans are complex. Disabled and chronically ill beneficiaries may qualify as eligible designated beneficiaries in some situations, and special rules can apply when a qualifying trust is named. The trust language, the account type, and the beneficiary designation must be coordinated carefully.

At McGann Law Group, we work with families in Longmont, Boulder, Weld County, Larimer County, and surrounding Colorado communities to review how wills, trusts, beneficiary designations, and practical care instructions fit together.

When Should You Review the Plan?

Review special needs planning after a diagnosis, a change in benefits, a settlement, an inheritance, a death in the family, a move, or a change in the people available to serve as trustee or caregiver. Even without a major event, a regular review helps ensure the plan still matches the beneficiary’s needs and your family’s goals.

FAQ

Can I leave an inheritance directly to my child with a disability?

You can, but an outright inheritance may affect eligibility for SSI, Medicaid, or other means-tested benefits. Before making a gift or changing a beneficiary designation, consider whether a properly structured third-party special needs trust would better support the person’s long-term needs.

Does every special needs trust require Medicaid payback?

No. Third-party trusts funded only with someone else’s assets generally do not require Medicaid reimbursement at the beneficiary’s death. First-party trusts funded with the beneficiary’s own assets generally do include a payback requirement.

Can a parent serve as trustee?

Yes, a parent may serve if the trust permits it and the parent is prepared for the responsibilities involved. Many families also name a successor trustee or use a professional co-trustee to provide continuity and administrative support.

Can trust funds pay for housing?

They may be used for housing-related expenses, but payments for shelter can affect SSI. Trustees should understand the potential impact before making those payments and should document their decisions carefully.

When is the best time to start planning?

Earlier is usually better. Planning before an inheritance, settlement, or health crisis gives your family more options and reduces the risk of an unintended disruption to benefits. McGann Law Group can help you evaluate the next steps as part of a thoughtful Colorado estate plan.