Colorado Special Needs Trust Attorney

A living trust, such as a Special Needs Trust in Colorado, can be established by a parent, grandparent, legal guardian, or the court for the benefit of a person with disabilities. In some cases, the individual with special needs can also establish the trust themselves, but only for a first-party Special Needs Trust and only if they have legal capacity. These trusts must follow federal and Colorado Medicaid rules to ensure the beneficiary remains eligible for needs-based benefits. Families often work with an attorney to ensure the trust is drafted correctly, funded properly, and structured to protect access to essential services and long-term support.

Yes, Colorado recognizes multiple types of Special Needs Trusts designed to meet different financial and legal needs. The two most common are first-party Special Needs Trusts, funded with the beneficiary’s own money, and third-party Special Needs Trusts, funded with assets belonging to others, such as parents or family members. Colorado also allows pooled Special Needs Trusts, which are managed by nonprofit organizations and combine multiple beneficiaries’ funds for investment purposes. Each trust type has specific rules regarding funding, administration, and Medicaid payback requirements.

A Special Needs Trust protects government benefits by holding assets so they do not count toward eligibility limits for programs like Medicaid and Supplemental Security Income (SSI). Instead of giving funds directly to the beneficiary — which could disqualify them—a trustee controls the assets and uses them to pay for approved supplemental expenses. These may include education, therapies, personal care, transportation, housing enhancements, or recreational activities.

The key difference is the source of the funds. A first-party Special Needs Trust is funded with the beneficiary’s own assets, such as a personal injury settlement, inheritance received directly, or accumulated savings. Federal law requires that, upon the beneficiary’s death, the remaining funds must first be used to repay Medicaid for services provided. A third-party Special Needs Trust, however, is funded with assets belonging to someone else — usually parents or family members — and does not require Medicaid reimbursement after the beneficiary’s death.

Court approval is not always required for a Special Needs Trust in Colorado, but it depends on the trust type and who is creating it. Third-party trusts created by family members typically do not need court involvement. However, first-party Special Needs Trusts — which use the beneficiary’s assets—often require court approval, especially if the beneficiary is a minor or an adult under guardianship. Courts review the trust to ensure it meets federal and state Medicaid rules.

After the beneficiary of a first-party Special Needs Trust dies, remaining trust assets must be used to reimburse Medicaid for the cost of services provided during the beneficiary’s lifetime. This requirement is mandated by federal law and applies to all first-party trusts created with the beneficiary’s own funds.

Any money left after Medicaid is repaid may be distributed to the trust’s heirs or designated beneficiaries, according to the trust’s instructions. Because of this mandatory payback provision, families often use first-party trusts only when the beneficiary already owns assets, such as lawsuit settlements or direct inheritances, that must be protected.

Unlike first-party Special Needs Trusts, a third-party Special Needs Trust has no Medicaid payback requirement upon the beneficiary’s death. Because the trust is funded with assets belonging to parents or other loved ones — not the beneficiary — remaining funds may be distributed according to the trust’s terms. This often includes passing assets to siblings, other family members, or charitable organizations. The flexibility of third-party trusts makes them ideal for long-term estate planning, allowing families to transfer assets while also supporting a loved one with disabilities . Families use them to support a loved one with disabilities while preserving control over how remaining assets are handled once the beneficiary passes away.

No, the beneficiary cannot control the funds in their Special Needs Trust. If they had control or direct access, the assets would be counted as their own and could disqualify them from Medicaid or SSI. Instead, a trustee manages the trust and makes all distribution decisions. The trustee may use funds to pay for supplemental needs such as education, therapies, personal services, travel, and quality-of-life expenses — anything that does not interfere with eligibility rules. This separation ensures the beneficiary receives additional support while maintaining access to essential government programs.

Distributions from a Special Needs Trust may be taxable depending on how the funds are used and the trust’s structure. Generally, payments made directly to service providers — such as for medical care, education, or transportation — are not counted as taxable income to the beneficiary. However, cash distributions given directly to the beneficiary can reduce SSI benefits and may create taxable income. The trust itself may also have its own tax obligations and annual filing requirements.

Yes, a Special Needs Trust can own a home or vehicle for the beneficiary without jeopardizing eligibility for Medicaid or SSI programs. The trust holds title to the property, and the beneficiary may live in the home or use the vehicle as needed. However, there are specific rules governing how housing expenses and ownership are treated for SSI. Improper handling of mortgage payments or utilities may reduce benefits. A trust-owned vehicle is typically permitted if used for the beneficiary’s transportation.