Referral For parents of a child or adult child with a disability, one of the most urgent planning questions is this: how do you leave money to that person without accidentally taking away the government benefits they depend on? The answer is a Special Needs Trust — a specific legal structure designed to hold assets for a disabled beneficiary in a way that supplements government benefits without replacing them or disqualifying the beneficiary from receiving them. Getting this wrong has immediate, serious consequences. Getting it right can mean the difference between a child who retains medical
Medicaid and Supplemental Security Income (SSI) — the two main government programs serving people with significant disabilities — are needs-based programs. To qualify, a recipient's assets must generally stay below $2,000. If a parent leaves money directly to a disabled child — whether through a will, a beneficiary designation, or a direct gift — that inheritance counts as the child's asset. If it pushes their total assets above $2,000, the child can lose their Medicaid coverage and SSI payments immediately. They would be required to spend down the inherited funds on their own care before qualifying for benefits again. The irony: the parent's intention was to provide for the child. The result is that the inheritance cancels the benefits the child needed most, until the money is gone. A direct inheritance of even $2,001 can cause a person receiving Medicaid and SSI to lose their benefits immediately. A Special Needs Trust allows that same money to improve the beneficiary's life — paying for things government benefits don't cover — without counting toward the $2,000 asset limit.
A Special Needs Trust holds assets for the benefit of a disabled person. The trustee — a person or institution managing the trust — has discretion to use those funds for the beneficiary's needs. Critically, the trust is structured so that the assets inside it are not counted as the beneficiary's own property under Medicaid and SSI rules. The trustee can use the trust to pay for goods and services that government programs do not cover: specialized equipment, recreational activities, education, travel, personal care items beyond what Medicaid provides, and quality-of-life enhancements. The trustee cannot simply hand cash to the beneficiary for general living expenses — that would typically reduce SSI payments dollar for dollar. The trustee is a fiduciary, meaning they are legally required to act in the beneficiary's interest. Choosing the right trustee — someone who understands both the beneficiary's needs and the legal requirements of the trust — is one of the most important decisions in SNT planning.
There are two distinct types of Special Needs Trusts, and they operate differently in one critical way.
A Third-Party SNT is funded with assets that were never owned by the disabled person — typically a gift or inheritance from a parent, grandparent, or other family member. This is the most common structure in estate planning for parents of disabled children. The defining advantage of a Third-Party SNT: when the disabled beneficiary dies, any remaining assets in the trust do not have to be paid back to the state. The remainder can pass to other family members — siblings, grandchildren, whoever is named as the remainder beneficiary in the trust document. The family's wealth continues to the next generation rather than being seized as Medicaid reimbursement.
An estate planning attorney with experience in special needs trusts
ACTEC — Understanding Special Needs Trusts; Littman Krooks; 42