Special Needs Trusts: Preserving Benefits for Disabled Beneficiaries

A $2,000 Inheritance That Cost $200,000 in Benefits

A well-meaning grandmother left $75,000 to her disabled grandson in her will — a straightforward bequest from a loving grandparent. The grandson received Supplemental Security Income (SSI) of $943 per month and Medicaid coverage for his substantial medical expenses. Within 60 days of receiving the inheritance, the grandson was disqualified from both programs. He spent the money on legitimate living expenses over 18 months. When the money ran out, reapplying took eight months. The lost Medicaid coverage during that gap — for a person with significant medical needs — cost far more than the original $75,000 inheritance was worth. A Special Needs Trust (SNT) would have preserved both the inheritance and the benefits.

SSI and Medicaid are means-tested programs with strict asset limits: generally $2,000 in countable resources for an individual SSI recipient. Any asset above that limit — including gifts, inheritances, personal injury settlements, and savings — disqualifies the recipient until the excess is spent down. A properly structured Special Needs Trust holds and manages those assets without counting them toward the SSI/Medicaid resource limit, allowing the beneficiary to receive trust-funded supplemental support without losing essential government benefits.

First-Party vs. Third-Party: A Critical Distinction

The most important classification in special needs trust law separates first-party trusts from third-party trusts. The distinction determines where the trust funding comes from, who controls it, and what happens to remaining trust assets when the beneficiary dies.

First-Party SNT: When the Money Is Already the Beneficiary's

A first-party SNT — technically called a "(d)(4)(A) trust" from its location in the Social Security Act — is used when a person with disabilities has their own assets that would otherwise disqualify them from benefits. The most common situations: a personal injury settlement (a car accident victim who also receives SSI), an inheritance received directly by the disabled person, or retroactive Social Security disability back-pay exceeding the asset limit.

• The trust must be irrevocable
• The beneficiary must be under age 65 at the time of creation
• The trust must be for the sole benefit of the disabled individual
• Upon the beneficiary's death, the state Medicaid agency must be paid back for all Medicaid benefits provided to the beneficiary during their lifetime before any remainder goes to other beneficiaries
• Pooled trusts — administered by nonprofit organizations that pool assets for investment purposes while maintaining separate accounts — are an alternative to individual (d)(4)(A) trusts and are available without age restriction

Third-Party SNT: Planning Ahead for Inheritance

A third-party SNT is funded with assets belonging to someone other than the beneficiary — typically parents or grandparents planning their estate for a disabled child or grandchild. Because the assets were never the beneficiary's, there is no Medicaid payback requirement at death. Remaining assets can go to siblings, charities, or any other named remainder beneficiary.

Third-party SNTs are the appropriate tool when parents update their estate plan to ensure a disabled child receives an inheritance without losing benefits. The trust can be created during life (a stand-alone SNT) or through a will or revocable trust (a testamentary SNT that comes into existence only at the parent's death). Stand-alone trusts are generally preferred because they can receive assets from multiple sources over time — grandparents can contribute to the same trust the parents established, avoiding the need for separate trust documents for each family member's contribution.

What the Trust Can (and Cannot) Pay For

SSI rules prohibit a trust from providing the beneficiary with food or shelter — payments for those items count as "in-kind support and maintenance" (ISM) and reduce the SSI payment dollar-for-dollar, up to a maximum reduction of one-third of the Federal Benefit Rate plus $20. To preserve the full SSI amount, the trust is typically limited to "supplemental" needs — goods and services beyond what SSI and Medicaid provide.

• Allowable trust expenditures: education, transportation (vehicle purchase and maintenance), vacations, entertainment, electronic devices, clothing above basic needs, dental care beyond Medicaid coverage, companion services
• Restricted (ISM-generating) expenditures: rent, mortgage payments, food, utilities for the beneficiary's primary residence
• Trustees must document all distributions carefully to defend against SSI/Medicaid reimbursement claims or challenges to benefit eligibility
• Some states treat specific expenditures differently; a competent SNT trustee tracks SSA and state Medicaid guidance updates continuously

ABLE Accounts: The Alternative for Smaller Amounts

The Achieving a Better Life Experience (ABLE) Act of 2014 created tax-advantaged savings accounts for people with disabilities that do not count against SSI/Medicaid asset limits (up to $100,000; above that, SSI is suspended but not terminated). ABLE accounts are simpler to establish and manage than SNTs — they function like 529 education savings accounts and are available from most states.

ABLE accounts and SNTs are not mutually exclusive. Many families use both: an SNT for the large inheritance or settlement proceeds, and an ABLE account for ongoing contributions and disability-related day-to-day expenses. The ABLE account's self-directed spending feature — the account owner can pay for qualifying expenses without trustee approval — provides autonomy that a traditional SNT structure may not.

This article is for informational purposes only and does not constitute legal advice.