Special Needs Trusts: Protecting Benefits Eligibility While Providing Support

Families planning for a loved one with a disability often run into a counterintuitive problem: a well-meaning inheritance can actually hurt the person it's meant to help, by disqualifying them from benefits they depend on.

The Problem with a Direct Inheritance

Programs like SSI (Supplemental Security Income) and Medi-Cal are needs-based — eligibility depends on having limited income and resources. If a person with a disability receives an inheritance or gift directly, in their own name, it can push their resources over the eligibility limit, cutting off benefits they may rely on for healthcare and basic support, sometimes until the inheritance is spent down.

How a Special Needs Trust Solves This

A special needs trust (SNT) holds assets for the benefit of a person with a disability, without those assets counting as the person's own resources for benefits eligibility — as long as the trust is properly drafted and administered. The trustee controls distributions, typically for "supplemental" needs: things benefits programs don't already cover, like specialized equipment, therapies, education, transportation, or quality-of-life expenses.

Two Main Types

Third-party SNTs are funded with someone else's money — most often a parent or grandparent including provisions in their own estate plan for a child or grandchild with a disability. These generally don't have a "payback" requirement to the state after the beneficiary's death.

First-party (self-settled) SNTs hold the disabled person's OWN assets — commonly from a personal injury settlement or an inheritance received before an SNT was in place. These are subject to additional legal requirements and typically do include a payback provision, reimbursing Medi-Cal from remaining trust assets after the beneficiary's death.

Common Situations That Call for an SNT

• A parent wants to leave an inheritance to a child with a disability without disqualifying them from benefits
• A person with a disability is about to receive a settlement or inheritance directly and needs to protect ongoing eligibility
• Grandparents or other relatives want to contribute to a loved one's support without disrupting their benefits

Why Drafting Matters

Benefits rules are detailed and specific. An informally written trust, or one that gives the beneficiary too much direct control or access, can fail to protect eligibility — defeating the entire purpose. This is not a document to adapt from a generic template.

The Takeaway

If someone in your family receives, or is likely to receive, an inheritance or settlement while depending on needs-based benefits, that's worth addressing before the money changes hands — a special needs trust is specifically built for exactly this situation.