Planning for a child with disabilities requires extra care. Parents want to ensure their child’s financial security while preserving eligibility for government benefits such as Supplemental Security Income (SSI) and Medicaid. A standard inheritance or direct gift, even one made with good intentions, can accidentally disqualify the child from these vital programs.
The solution is to build an estate plan that provides support without interfering with benefit eligibility. The most effective way to do this is through a Special Needs Trust (SNT), combined with careful coordination of other financial and legal tools.
Why Direct Gifts Can Be a Problem
Government benefit programs for individuals with disabilities are means-tested, which means eligibility depends on limited income and assets. For example, to qualify for SSI and Medicaid, a recipient generally cannot have more than $2,000 in countable assets in their own name.
If a parent or grandparent leaves an inheritance outright, that money immediately counts toward the asset limit. As a result, the child could lose SSI and Medicaid coverage until the funds are spent down—a situation that can leave them worse off in the long run.
The Role of a Special Needs Trust
A Special Needs Trust allows you to set aside money for a child with disabilities without giving them direct control of the funds. Because the assets in the trust are managed by a trustee and used solely for the beneficiary’s supplemental needs, they are not counted toward benefit eligibility.
First-Party vs. Third-Party Trusts
There are two main types of SNTs, each serving a different purpose:
- First-Party SNT: Funded with the beneficiary’s own assets, such as a personal injury settlement or inheritance they already received. Medicaid requires that any remaining funds at the beneficiary’s death reimburse the state for medical expenses paid.
- Third-Party SNT: Funded by someone else, usually parents or grandparents, using their own assets. This version does not include a Medicaid payback requirement, making it ideal for estate planning.
A third-party SNT can be created during life or through a will or revocable trust. It can hold various assets, including cash, investments, and life insurance proceeds.
What a Special Needs Trust Can Pay For
Funds from a Special Needs Trust can be used to enhance the beneficiary’s quality of life without replacing public benefits. Typical expenses include:
- Medical care not covered by Medicaid
- Education, tutoring, or training
- Transportation and travel
- Personal care attendants
- Entertainment, hobbies, and recreation
- Computers and assistive technology
To avoid benefit reductions, trustees must follow specific distribution rules. For example, payments made directly to the beneficiary for food or shelter may affect SSI benefits, while payments made to vendors generally do not.
Choosing the Right Trustee
Selecting a trustworthy and capable trustee is critical. The trustee must understand the complex rules governing public benefits and make careful decisions about when and how to distribute funds.
Options include:
- Family members: Often familiar with the beneficiary’s needs but may lack technical knowledge.
- Professional trustees: Such as attorneys or trust companies with experience managing SNTs.
- Co-trustee arrangements: Combine family involvement with professional oversight.
Coordinating Life Insurance and Retirement Accounts
Many parents use life insurance to fund a Special Needs Trust after their death. Rather than naming the child directly as the beneficiary, the policy should name the trust itself. This ensures the proceeds are protected and distributed properly.
Retirement accounts, such as IRAs and 401(k)s, can also be directed into a Special Needs Trust. However, this requires special tax planning to minimize income tax exposure when the funds are withdrawn by the trust.
Alternatives and Supporting Tools
While a Special Needs Trust is often the best solution, it can be paired with other planning tools:
- ABLE Accounts: Tax-advantaged savings accounts for individuals with disabilities. Up to $18,000 per year (in 2025) can be contributed without affecting eligibility for most benefits.
- Guardianships or Powers of Attorney: Ensure that trusted individuals can manage healthcare and financial decisions if the child cannot do so independently.
- Letter of Intent: A non-legal document describing the child’s medical needs, preferences, routines, and care instructions. It guides future caregivers when parents are no longer able to help.
When to Create a Plan
It is never too early to start planning for a child with disabilities. The earlier the plan is established, the more flexibility you will have to coordinate funding sources and educate future trustees or guardians.
Periodic reviews are also essential. Laws governing Medicaid, SSI, and tax planning change frequently, and the child’s needs may evolve over time.
Speak to an Attorney
Providing for a child with disabilities requires more than just financial planning—it requires a legal structure that protects both benefits and quality of life. At the Law Offices of Juliet Cohen, P.C., we help New York families create Special Needs Trusts and related plans tailored to their child’s specific circumstances. Our attorneys can help you coordinate benefits, manage assets, and ensure your child’s future remains secure for years to come.
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