Special needs planning

Leaving money to a person with a disability who receives means-tested support requires specific planning, because a straightforward inheritance can do serious harm.

The problem

Several important support programmes are means-tested, with strict limits on countable assets.

Supplemental security income and, in many states, Medicaid eligibility linked to it, are subject to asset limits that have not been increased in decades and are very low.

An inheritance received outright can push a beneficiary above the limit, resulting in loss of both income support and — frequently more important — health coverage and services that are not otherwise purchasable.

The beneficiary then spends the inheritance on services previously covered, and reapplies once it is exhausted.

The net result can be that a well-intentioned bequest leaves the person worse off than if nothing had been left at all.

The main solution

A third-party special needs trust.

Funded with someone else's assets — typically a parent's or grandparent's — for the benefit of the person with a disability.

Because the beneficiary has no right to demand distributions and no control over the assets, the trust is generally not counted for eligibility purposes.

The trustee makes discretionary distributions for the beneficiary's benefit, supplementing rather than replacing public support.

Crucially, there is no requirement to repay the state on the beneficiary's death — the remainder passes to whoever the settlor named.

This is the structure to use where planning is done in advance, and it should be named as beneficiary of any bequest, insurance policy or retirement account intended for the person.

The first-party version

Where the assets belong to the person with the disability — an inheritance received directly, a personal injury settlement, or accumulated savings.

A first-party special needs trust can hold these without affecting eligibility, subject to specific conditions.

The critical difference: on the beneficiary's death, the state must generally be repaid for Medicaid benefits provided before anything passes to other beneficiaries.

Which is why third-party planning in advance is substantially better, and why an outright bequest that then has to be redirected is an expensive correction.

Pooled trusts, administered by non-profit organisations, provide a similar function with lower administrative cost for smaller amounts.

What the trust can pay for

The distinction that governs trustee decisions.

Distributions for food and shelter can reduce certain benefits, under rules that treat such support as in-kind income.

Distributions for other purposes generally do not — education, therapies not otherwise covered, travel, technology, recreation, a vehicle, personal care, and a great many things that improve quality of life.

Cash paid directly to the beneficiary is generally counted, which is why distributions are typically made to providers rather than to the person.

The rules are detailed and the trustee needs to understand them, which is an argument for a trustee with relevant experience.

ABLE accounts

A more recent and much simpler option worth knowing about.

These are tax-advantaged savings accounts for individuals whose disability began before a specified age, with annual contribution limits and an overall balance threshold below which the account is disregarded for benefit purposes.

The beneficiary can control the account directly, which is a significant advantage in terms of autonomy.

Funds must be used for qualified disability expenses, which is a broad category.

ABLE accounts complement rather than replace a trust. They suit modest amounts and day-to-day flexibility; a trust suits larger sums and long-term provision.

Many families use both.

Choosing a trustee

A decision with a long horizon.

The trustee may need to serve for decades, understand benefit rules, manage investments, and know the beneficiary well enough to exercise discretion sensibly.

Options include a family member, a professional trustee, or a combination with a corporate trustee handling administration and a family member advising on the beneficiary's needs.

Naming successors matters more here than anywhere, since siblings and parents may not outlive the beneficiary.

The letter of intent

A non-legal document of considerable practical value.

It sets out everything a future trustee or carer would need to know: medical history, providers, medications, routines, preferences, what distresses the person, what they enjoy, who matters to them, and the family's hopes for their life.

It should be updated periodically and kept with the legal documents.

Telling the wider family

An essential and frequently omitted step.

Grandparents and other relatives who leave a bequest directly to the person, without knowing about the trust, undo the planning entirely.

Everyone likely to leave anything should be told to direct it to the trust instead. This is a short conversation that prevents a serious and expensive problem.

General information only, not legal advice. Benefit rules and trust requirements are technical and vary by state — consult an attorney specialising in special needs planning.