An OBRA trust is a first-party special needs trust, authorized by the Omnibus Budget Reconciliation Act of 1993, that lets a person under 65 with a disability hold their own assets without losing Supplemental Security Income or Medicaid. Money that would otherwise blow past SSI’s $2,000 resource limit, such as a personal injury settlement, back-pay award, or inheritance, sits in the trust instead of the beneficiary’s bank account.1Social Security Administration. Understanding Supplemental Security Income SSI Resources The trustee spends it on the beneficiary’s behalf during their lifetime. When the beneficiary dies, whatever is left first reimburses the state for Medicaid benefits paid on the person’s behalf, and only then can pass to family.
Who Can Use One
Federal law limits these trusts to people who meet two conditions, and both are strict.
The beneficiary must meet Social Security’s definition of disability: a medically determinable physical or mental impairment that prevents substantial gainful activity and is expected to last at least 12 continuous months or result in death.2Social Security Administration. 20 CFR 404.1505 – Basic Definition of Disability
The beneficiary must also be under 65 when the trust is established and funded.3Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets There is no workaround for the age cutoff. Assets added later, after the beneficiary turns 65, may also be treated as a disqualifying transfer, depending on how the state applies its Medicaid rules. If the deadline has already passed, a pooled special needs trust is usually the next option to look at.
What the Trust Document Has to Say
The statute at 42 U.S.C. § 1396p(d)(4)(A) is short, and every word matters.3Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets Miss any of these, and the whole trust becomes a countable resource.
Medicaid Payback
The document must say that when the beneficiary dies, the state Medicaid agency is repaid from remaining trust assets, up to the total amount Medicaid spent on the person’s care. The state’s claim comes ahead of any inheritance to family. If the trust has been spent down entirely during the beneficiary’s life, there is nothing for the state to recover. This clause is the price of admission; skip it, and the shelter disappears.
Sole Benefit
The statute requires the trust to be “established for the benefit of” the disabled individual, and the Social Security Administration reads that as a sole benefit rule. Every expenditure should primarily benefit the beneficiary, not other family members. The standard is practical rather than absolute: if the trust buys a television for the beneficiary’s apartment, nobody expects other household members to leave the room. But paying a sibling’s car loan from trust funds would violate the rule and can disqualify the trust entirely.
Who Can Set It Up
The trust can be established by the disabled individual, a parent, a grandparent, a legal guardian, or a court.3Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets Whoever signs the document, the assets inside must belong to the beneficiary. Money from a third party, such as an inheritance a parent leaves in a separate fund, belongs in a third-party special needs trust instead, which follows different rules and has no Medicaid payback.
Setting It Up and Funding It
The work happens in two phases, and both must be finished before the beneficiary turns 65.
First, an attorney drafts the trust instrument. It names the beneficiary, designates a trustee, identifies the source of the assets, and includes the payback and sole benefit language. The grantor and the initial trustee sign in front of a notary. Legal fees vary widely based on complexity and the attorney’s experience with public benefits law.
Once the document is signed, the trustee opens a bank account in the trust’s name. That account typically needs an Employer Identification Number from the IRS, though some trustees use the beneficiary’s Social Security number for grantor trust purposes.4Internal Revenue Service. Understanding Your EIN Assets then move from the beneficiary’s personal accounts into the trust account. Real estate and investment accounts have to be retitled in the trust’s name.
After funding, notify the state Medicaid agency and the Social Security Administration. Provide a copy of the signed trust and proof that assets were transferred so the agencies can confirm the trust qualifies as an exempt resource. Late reporting can cause temporary benefit disruptions while the agencies work out whether the person still qualifies.
What the Trust Can Pay For Without Hurting SSI
This is where the trust either protects benefits or quietly reduces them. The rule that governs almost every disbursement: pay the vendor directly, not the beneficiary.
Cash handed to the beneficiary counts as unearned income and reduces SSI dollar for dollar.5Social Security Administration. Spotlight on Trusts A trustee who gives the beneficiary $500 has just cut their SSI check by $500 that month. There is almost never a reason to do it.
Payments made directly to a third party for non-shelter goods and services do not reduce SSI at all.5Social Security Administration. Spotlight on Trusts This covers most of what an OBRA trust is designed to buy: medical care not covered by insurance, phone and internet service, clothing, education, entertainment, personal care items, adaptive equipment, and transportation. As long as the trustee writes the check to the provider, these purchases leave SSI untouched.
Shelter and Food
Shelter is the category that costs the beneficiary some SSI, but with a cap. When the trust pays a third party for the beneficiary’s rent, mortgage, property taxes, utilities like electricity or heating fuel, or homeowner’s insurance, the Social Security Administration counts that as in-kind support and maintenance.6Social Security Administration. Understanding Supplemental Security Income Living Arrangements The SSI check is reduced, but the reduction is limited by the Presumed Maximum Value: one-third of the federal benefit rate plus $20. In 2026, the federal benefit rate is $994 per month for an individual, so the maximum shelter-related reduction is roughly $351 a month.7Social Security Administration. SSI Federal Payment Amounts for 2026 Even if the trust pays $2,000 a month in rent, the SSI reduction never exceeds that cap. For most beneficiaries, the math still favors having the trust pay: lose $351 in SSI, gain $2,000 in housing.
Food changed recently. As of September 30, 2024, food no longer counts as in-kind support and maintenance.6Social Security Administration. Understanding Supplemental Security Income Living Arrangements The trust can pay for groceries, meal delivery, or similar food expenses without any SSI reduction. Before the change, food and shelter were treated the same way.
Taxes and Ongoing Duties
An OBRA trust is a grantor trust for federal income tax purposes because the assets belong to the beneficiary. Interest, dividends, and capital gains earned inside the trust are reported on the beneficiary’s personal return, not on a separate trust return. That means tax rates match individual rates, including preferential rates for long-term capital gains and qualified dividends.
Trustees have two filing options. One is to obtain an EIN for the trust and file an informational Form 1041 each year with a grantor trust information letter pointing the IRS to the beneficiary’s return.4Internal Revenue Service. Understanding Your EIN The other is to use the beneficiary’s Social Security number on all trust accounts so that 1099s come in under that number and no Form 1041 is required. Either works; pick one and stay consistent. The filing deadline is April 15.
Recordkeeping is the trustee’s daily job. Keep receipts, invoices, and bank statements for every transaction, along with correspondence with attorneys, accountants, and benefit agencies. Many state Medicaid agencies also require periodic financial reports on what came in and what went out. Frequency and format vary by state; some want annual accountings, others review only on request. Falling behind can trigger an agency review or a freeze on Medicaid services while the state investigates.
What Happens When the Beneficiary Dies
The payback clause activates. The state Medicaid agency is reimbursed from whatever remains in the trust, up to the total amount Medicaid paid for the beneficiary’s care during their lifetime.3Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets Anything left after the state’s claim is satisfied passes according to the terms of the trust. If the trust was fully spent down during the beneficiary’s life, the state recovers nothing and there is nothing to distribute. This is the trade for keeping SSI and Medicaid intact while the beneficiary was alive.
If You’re Already 65, or Want More Day-to-Day Control
An individual OBRA trust is off the table once the beneficiary reaches 65. A pooled special needs trust under 42 U.S.C. § 1396p(d)(4)(C) may still work.8Office of the Law Revision Counsel. 42 US Code 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets A nonprofit organization runs a master trust that holds a separate account for each beneficiary; the money is pooled for investment but tracked individually. The pooled trust statute has no age cap, though some states treat contributions after 65 as transfers that trigger a Medicaid penalty period. Check state rules before moving assets. When the beneficiary dies, the account balance either stays with the nonprofit, reimburses the state, or splits between the two, depending on the trust’s terms.
An ABLE account, formally a 529A account, can sit alongside an OBRA trust for beneficiaries who want to make everyday purchases without going through a trustee. ABLE accounts let the beneficiary hold and spend money directly on qualified disability expenses like education, housing, transportation, health care, and assistive technology.9Social Security Administration. Spotlight on Achieving a Better Life Experience (ABLE) Accounts Total contributions cannot exceed $19,000 per year in 2026, and a trustee can distribute from the OBRA trust into the ABLE account within that cap. The first $100,000 in an ABLE account is disregarded for SSI resource purposes; above $100,000, SSI is suspended rather than terminated until the balance drops back down. ABLE accounts carry their own Medicaid payback at the beneficiary’s death, so the state recovery exposure is not eliminated, only rearranged.