Leaving Money to a Child with a Disability Without Ending Their Benefits

There is a version of generosity that does real harm here, and it is worth understanding the mechanics before anyone signs anything. Leaving money directly to a person with a disability can cost them the benefits that pay for their care.

Why a direct inheritance is a problem

Supplemental Security Income and Medicaid are means-tested. Eligibility depends on what the person owns, not only on their disability.

The Supplemental Security Income resource limit is $2,000 for an individual and $3,000 for a couple. That number has not changed since 1989. Countable resources include cash, bank accounts, and most investments, though a primary residence and a vehicle generally do not count.

An inheritance of any real size lands on the wrong side of that line immediately. Benefits stop, and in many cases Medicaid coverage goes with them, which is often the part that was actually paying for services. The money then gets spent down on the care the benefits were covering, and when it is gone the person reapplies.

Not every program works this way. Social Security Disability Insurance and Medicare are based on work history rather than assets, so they are not affected by resources the same way. Knowing which programs a person actually receives is the first step, and families are frequently unsure.

Two kinds of special needs trust, and the difference matters

A special needs trust holds money for someone's benefit without that money counting as theirs. There are two kinds, and which one applies depends entirely on whose money it was.

Third-party. Funded with someone else's money, typically a parent or grandparent, and never with assets belonging to the person with the disability. This is what an estate plan sets up. When the beneficiary dies, whatever is left goes wherever you directed, usually to siblings. There is no obligation to reimburse Medicaid.

First-party, sometimes called self-settled. Funded with the person's own money: a personal injury settlement, back benefits, or an inheritance that reached them directly. These are permitted, but two conditions matter. The state must be repaid for Medicaid benefits from whatever remains at death. And this kind of trust can only be set up for someone under 65, which is exactly the wrong news for the most common version of this problem, where an inheritance lands on a person with a disability who is already past that age.

Pooled trusts. There is a third option that gets left out of most explanations. A non-profit can hold many families' funds in one trust while keeping a separate account for each person. It is usually cheaper to run than a trust set up from scratch, it will take a modest inheritance that no individual trust would justify, and it can be used after 65 where a first-party trust cannot. For a lot of families this is the actual answer rather than the fallback.

The practical takeaway is that the same dollar produces a very different outcome depending on how it arrives. Money routed through a third-party trust as part of a plan is fully protected. The identical money left outright and then moved into a first-party trust afterward carries a payback obligation for the rest of that person's life.

That is the whole argument for planning this in advance rather than fixing it later.

ABLE accounts

An ABLE account is a savings account for a person whose disability began before a set age, and money in it is disregarded for benefits purposes up to program limits.

That age just changed, and it is the biggest development in this area in years. As of January 2026 the disability has to have begun before 46, where the cutoff used to be 26. A large group of people were told no under the old rule and now qualify, including anyone whose disability started in their thirties or forties. If you were turned away before, ask again.

It is genuinely useful, particularly for the person's own money and for everyday expenses, because they can control it directly in a way trust money is not designed for. The contribution limits are modest and adjust over time, so it complements a trust rather than replacing one for any significant sum.

Two things to know before treating it as the simple option. An ABLE account carries a Medicaid payback of its own: on the account holder's death the state may claim against what is left, for assistance paid after the account was opened. That is the same catch described above for a first-party trust, and it is the reason an ABLE account is not a way around it. Separately, if the balance climbs past program limits, SSI cash payments are suspended rather than ended, and Medicaid continues. Going over the line is a problem to fix, not a cliff you fall off.

The arrangement families reach for, and why it fails

The most common informal plan is to leave a sibling the money with the understanding that they will take care of their brother or sister.

Once that money is legally theirs, it is exposed to their divorce, their creditors, their bankruptcy, and their own estate if they die first. The obligation is moral, not enforceable, and even the most devoted sibling cannot protect the money from their own circumstances. It also puts a lifelong administrative burden on a family relationship.

Beneficiary forms, again

If a trust is created and the retirement account or life insurance policy still names the person with a disability directly, the money goes around the trust and straight at the problem. Beneficiary designations have to be updated to name the trust. This is where otherwise careful plans come apart.

One exception, and it is important. Retirement accounts are the most technical corner of this work. Pointing an IRA or a 401(k) at a special needs trust can be exactly right, and it can also trigger compressed trust tax rates and a much faster payout, depending on how the trust is written. Done correctly a trust for a person with a disability can still stretch payments over their lifetime, which is a large advantage and easy to lose by accident. Do not change a retirement beneficiary form to name a trust without asking first.

The same applies to well-meaning relatives. A grandparent who leaves a gift directly, not knowing, can undo the structure. It is worth telling the family that gifts should be directed to the trust.

Write the letter of intent

No legal document tells a future trustee or caregiver how this person communicates, what a bad day looks like, which routines matter, who their doctors are, what they love, and what frightens them.

A letter of intent is where that goes. It is not binding and it is not filed anywhere. It is the most useful thing in the file for whoever comes after you, and it should be updated as things change.

Review it when things change

Benefits programs, family circumstances, and the law all move. A trust drafted years ago, or beneficiary forms filled out before the trust existed, should be looked at rather than assumed.

Our special needs planning page covers how we handle this work for Alabama families.