Leaving An Inheritance To A Beneficiary With Special Needs

Estate Planning is always important, but when a loved one has special needs, it becomes absolutely crucial. Many families do not realize that leaving money directly to a child or relative with a disability can unintentionally cause more harm than good. Even a modest inheritance can jeopardize eligibility for critical government benefits such as Supplemental Security Income (SSI) and Medicaid, programs that often make the difference between stability and hardship for individuals with disabilities.

These means-tested benefits have strict asset limits. For example, to qualify for SSI and Medicaid, a beneficiary typically cannot have more than $2,000 in countable assets. If they receive a lump sum inheritance outright, even from the best intentions, that inheritance is counted as an available resource, immediately pushing them over the limit. The government may reduce or terminate benefits until the excess funds are spent down, often forcing families into the heartbreaking situation of watching an inheritance get consumed rapidly by basic care costs the government would otherwise have covered.

Fortunately, with careful planning, you can provide financial security and enrich your loved one’s life without risking their benefits. The key tool for this is a Special Needs Trust (SNT), sometimes called a Supplemental Needs Trust. A properly drafted SNT holds assets for the benefit of a disabled person but does so in a way that keeps the assets legally separate from their personal resources. Because the trust owns the assets, they are not counted against the beneficiary’s eligibility for government programs.

A Special Needs Trust is designed to pay for goods and services that public benefits do not cover, what are known as “supplemental” needs, which includes educational opportunities, therapies not paid for by insurance, transportation, travel, recreation, hobbies, and other quality-of-life expenses that help your loved one live with dignity and joy. The trustee manages the trust assets and makes distributions directly for the benefit of your family member, never giving cash outright that could jeopardize means-tested aid.

There are different types of Special Needs Trusts, and the right one depends on the situation. A Third-Party Special Needs Trust is the most common type for parents and grandparents doing estate planning. It’s funded with assets belonging to someone other than the disabled beneficiary, for example, a parent’s savings or life insurance proceeds. This type of trust does not require a payback provision, so if any funds remain after the beneficiary’s death, they can pass to other family members or charitable causes you choose.

Another option is a First-Party or Self-Settled Special Needs Trust, which is funded with the disabled person’s own assets, for instance, from a personal injury settlement or a direct inheritance accidentally left to them. These trusts are subject to federal law and must contain a “Medicaid payback” clause: when the beneficiary dies, any remaining funds must first be used to reimburse Medicaid for services provided during their lifetime before passing to other heirs. Because of this, it’s preferable for parents and grandparents to use a Third-Party SNT if planning ahead.

In addition to setting up a trust, it’s important to coordinate all beneficiary designations carefully. Well-meaning relatives sometimes name a child with special needs directly on life insurance or retirement account paperwork, not realizing this can undermine your plan. Be sure to review all accounts and policies with your attorney so that the funds flow properly into the trust, not directly to the individual.

Choosing a trustee is another critical decision. Managing a Special Needs Trust requires not only typical financial skills, but also an understanding of public benefits rules and how distributions affect eligibility. Many families appoint a trusted relative, but increasingly, people are turning to professional trustees or corporate trust companies with experience in this specialized area. Some families opt for a co-trustee arrangement, pairing a family member who knows the beneficiary personally with a professional who handles compliance and administration.

Communication is also key. Make sure other family members know about the Special Needs Trust and understand not to give cash gifts directly to the beneficiary or leave outright bequests in their wills. Even a small oversight can unravel carefully laid plans and cause stress for your loved one.

An experienced Estate Planning and Elder Law attorney can guide you through creating a Special Needs Trust that aligns with your goals and your family member’s needs. They can also help coordinate your entire plan—from titling assets properly, to setting up powers of attorney, to explaining your wishes to your family so everyone understands your intentions.

Providing for a loved one with special needs is an act of love and responsibility that goes beyond everyday care. It is a way to offer lifelong security, dignity, and opportunities that can make life richer and more fulfilling, while protecting access to vital programs. With the right plan in place, you can rest easier knowing your family member will be supported and protected, today and tomorrow.

To learn how to protect you and your family visit HaasZaltz.com or call 516-979-1060. You can also email them at [email protected]. 

Since 1982, Haas & Zaltz, LLP has delivered peace of mind to New Yorkers and beyond, ensuring your loved ones and assets receive the proper care, attention, and protection. During your consultation, we will explain your best options and develop a comprehensive and personalized plan tailored to your specific needs. Haas & Zaltz, LLP conveys a thorough, caring approach to your Elder Law, Special Needs Planning, and Estate Planning needs. Call us to learn about the variety of legal tools and techniques we use to meet your specific goals and objectives. To learn how to protect you and your family visit HaasZaltz.com or call 516-979-1060, or send us an email to [email protected].