Irrevocable Trusts · Special Needs
An inheritance can take everything away.
Money left outright to a person on SSI or Medicaid ends the benefits the month it arrives.
Supplemental Security Income and Medicaid are means-tested, and the resource limit is brutally low — a couple of thousand dollars for an individual, a figure unchanged for decades. A grandmother who leaves $30,000 to a grandson with a disability has, with the best intentions, just cost him his income, his health coverage, and often his housing and day program. The money is spent down on things the benefits were already paying for, and when it is gone he reapplies. A properly drafted special needs trust prevents all of that, and it has to exist before anyone leaves him anything.
The most urgent item on this page: check every relative’s will. The most common way this goes wrong is not the parents — it is a well-meaning grandparent, aunt or sibling who leaves an equal share to each grandchild without knowing what it will do. It is also a life insurance beneficiary form, a retirement account designation, or an intestate share where a relative died without a will. If someone in your family has a disability and receives means-tested benefits, the whole family’s documents need to point at the trust, not at the person. That conversation is awkward and it is the single most valuable thing on this page.
The three kinds
Whose money it was decides which trust you use.
Third-party special needs trust
Funded with someone else’s money — a parent’s, a grandparent’s — for the benefit of the person with a disability. No Medicaid payback. No age limit. No restriction on who receives what remains. This is the right answer whenever a family is planning ahead, and it is the one this page most wants you to have.
First-party (d)(4)(A) trust
Funded with the beneficiary’s own money — a personal injury settlement, an inheritance already received outright, back benefits. Governed by 42 U.S.C. § 1396p(d)(4)(A). Must be established before the beneficiary turns 65, and the state must be repaid at death for medical assistance provided.
Pooled (d)(4)(C) trust
A separate account for the beneficiary within a trust established and managed by a non-profit association, with accounts pooled for investment. § 1396p(d)(4)(C). No federal age limit. Practical for amounts too small to justify a private trustee.
First-party trusts
The rules Congress wrote, and the one it fixed in 2016.
A first-party trust holds the beneficiary’s own assets and is exempt from the ordinary rule that a self-settled trust counts as a resource. The statute is precise, and every element matters.
The trust must contain the assets of an individual under age 65 who is disabled as defined in the Social Security Act. Funding after 65 is generally treated as a transfer with a penalty.
It must be established by the individual, a parent, grandparent, legal guardian, or a court. That first item — the individual themselves — was added by the Special Needs Trust Fairness Act of 2016, enacted as part of the 21st Century Cures Act. Before that a competent adult with a disability could not create her own trust and had to find a parent or petition a court, which was both expensive and insulting. Older articles still describe the old rule.
The state must be repaid at death for the total medical assistance paid on the beneficiary’s behalf, up to the amount remaining in the trust. This is the price of the exemption and it cannot be drafted around.
Where these come from. Almost always a personal injury settlement, an inheritance that arrived outright before anyone could redirect it, accumulated back benefits, or a divorce award. If you represent or advise someone about to receive settlement funds, the trust must be in place before the money is disbursed.
The pooled alternative. A (d)(4)(C) account is established and managed by a non-profit, with a separate account for each beneficiary but pooled investment. It can be established by the individual, a parent, grandparent, guardian or court, and there is no age-65 limit in the federal statute. At death, amounts not retained by the trust go to the state up to the medical assistance paid. For sums under roughly a hundred thousand dollars it is frequently the sensible choice.
How the money is used
Supplement, never replace.
The governing principle is that the trust pays for things the benefits do not. Distributions of cash to the beneficiary reduce SSI dollar for dollar, and payments for food or shelter reduce it under the in-kind support and maintenance rules. Everything else is generally safe, and “everything else” is a long list.
Pay vendors, never the beneficiary
The trustee pays the provider directly. Cash handed to the beneficiary — or deposited in their account — is income, and reduces SSI dollar for dollar up to elimination. This is the rule trustees break most often, usually out of kindness.
What the trust can buy freely
Education and training, therapies and equipment benefits will not cover, a computer and phone, travel and holidays, entertainment and hobbies, clothing, personal care attendants beyond the covered hours, legal and accounting fees, and a vehicle or its adaptation.
Food and shelter, carefully
Rent, mortgage, property tax, heating, electricity, water, sewer, rubbish collection and food are “in-kind support and maintenance” and reduce SSI by up to roughly a third of the federal benefit rate. Sometimes paying them anyway is the right trade — a better apartment is worth more than the reduction — but it should be a calculation, not an accident.
Housing owned by the trust
A home purchased and owned by the trust, with the beneficiary living there, is treated differently from the trust paying their rent. Frequently the better structure, and it needs to be planned rather than improvised.
Sole benefit
The trust exists for this beneficiary. Paying a sibling’s expenses, reimbursing a parent without documentation, or using trust funds for family purposes is a breach and can jeopardize the exemption.
Records, always
Receipts for every distribution, a clear separation from family finances, and annual accounting. Benefit agencies do review these, and a trustee who cannot document what was paid and why has a real problem.
ABLE accounts changed in 2026, and the change is a big one. An ABLE account under IRC § 529A lets a person with a disability save without losing benefits — the first $100,000 is disregarded for SSI resource purposes, and the beneficiary controls the account directly, which a trust never allows. Annual contributions are capped at the gift tax annual exclusion, $19,000 for 2026, with an additional amount permitted for a working beneficiary not in an employer retirement plan. The change: eligibility previously required that the disability began before age 26. Effective 1 January 2026, that becomes age 46 — a change made by the ABLE Age Adjustment Act, enacted as section 124 of the SECURE 2.0 Act of 2022 (P.L. 117-328). Millions of people whose disability began in their late twenties, thirties or early forties became eligible this year. An ABLE account and a special needs trust are complements, not alternatives: the ABLE account gives the beneficiary independence and covers food and shelter without the in-kind reduction; the trust holds the larger sums and has no contribution limit.
Meet Derek Haake
He has been the trustee, under audit, for beneficiaries like yours.
Derek spent three years as a Vice President and Estate Settlement Officer at Bank of America Private Bank — the country’s largest provider of managed personal trust services — where trusts for beneficiaries with disabilities were administered under institutional procedure and audit. Which distributions were safe, which reduced a benefit, how to document a payment so it survived review, and how to say no to a family member asking for something the trust could not do.
That experience shapes the drafting. A special needs trust that looks fine on paper and cannot actually be administered — no guidance for the trustee, no remainder plan, no coordination with an ABLE account — creates a problem for a family at the worst possible time, decades from now, when nobody is left to explain what was meant.
He also drafts and litigates, and has for almost fifteen years. The families he most wants to reach are the ones who do not yet know that a grandparent’s ordinary will is about to cause real harm.
Common questions
Special needs trusts, answered.
What happens if my child inherits money outright?
They lose benefits, quickly. SSI and Medicaid are means-tested with a resource limit of roughly two thousand dollars for an individual. An inheritance of any size puts them over it, and eligibility ends in the month the money is countable.
Then the money is spent down on things Medicaid was already paying for — medical care, therapies, support services — until it is gone, at which point they reapply and wait. A $40,000 inheritance can easily buy nothing the family did not already have while costing months of coverage and, in some programs, a place on a waiting list that took years to reach.
There are salvage options. A first-party trust under 42 U.S.C. § 1396p(d)(4)(A) can hold it if the beneficiary is under 65, at the cost of a Medicaid payback at death. A pooled trust account may work. A qualified disclaimer, made within nine months and before accepting any benefit, can redirect it. All three are worse than having had a third-party trust in the first place, and all three are time-sensitive.
What is the difference between a first-party and a third-party trust?
Whose money funded it, and the consequences are large.
A third-party trust holds money that was never the beneficiary’s — typically a parent’s or grandparent’s. There is no Medicaid payback, no age limit on funding, and you decide who receives what remains at the beneficiary’s death: other children, grandchildren, a charity. It can be created now and funded later by will, trust or beneficiary designation.
A first-party trust holds the beneficiary’s own assets and exists only by federal exemption under § 1396p(d)(4)(A). It must be established before age 65, by the individual, a parent, grandparent, guardian or court, and the state must be repaid at death for all medical assistance provided.
The practical lesson: never let money reach the beneficiary in the first place. A third-party trust costs nothing extra to have and avoids the payback entirely.
Who should be trustee?
The hardest question on this page, because the job is long, technical, and emotionally loaded.
A family member knows the beneficiary and cares about them, and usually does not know the SSI in-kind support rules — and this trust may need to run for fifty years, longer than any sibling can promise. A professional or corporate trustee brings systems, permanence and audit, and charges a fee that may be significant on a small trust. A pooled trust non-profit is designed for exactly this and is often the best value for modest sums.
The structure many families settle on is a corporate trustee for the money and a family member as trust protector or care advocate — someone who knows the beneficiary, communicates with the trustee, and can remove and replace them.
Whoever serves, name multiple successors and write a letter of intent describing your child’s routines, preferences, medical history, and what a good life looks like for them. It is not a legal document and it may be the most useful thing in the file.
Should we use an ABLE account instead?
Alongside, usually — they do different jobs.
An ABLE account under IRC § 529A is controlled by the beneficiary, grows tax-free, and can pay for food and shelter without the in-kind support reduction that hits trust distributions. Up to $100,000 is disregarded for SSI resources. Contributions are capped at $19,000 for 2026, with more allowed for a working beneficiary.
Eligibility expanded this year. The onset-of-disability age moved from 26 to 46 effective 1 January 2026, under the ABLE Age Adjustment Act enacted as § 124 of the SECURE 2.0 Act of 2022. If someone told you a few years ago that your family member did not qualify, ask again.
A trust has no contribution limit, no cap on what it can hold, and can receive an inheritance of any size — but the trustee controls it and food and shelter distributions carry a benefit reduction. The common design uses the trust as the reservoir and funds the ABLE account annually for the beneficiary’s own use. Note that at death, ABLE balances may be subject to a Medicaid claim in some circumstances, while a third-party trust is not.
Can the trust buy my child a house or a car?
Yes to both, and how you do it matters.
A house is generally better owned by the trust with the beneficiary living in it, rather than the trust paying rent on their behalf. Trust-paid rent is in-kind support and reduces SSI; trust ownership of the residence they occupy is treated differently. It also protects the asset from being counted and from being lost.
A vehicle is straightforward — the trust can buy, insure, adapt and maintain one. One vehicle is generally an excluded resource for SSI even when owned by the beneficiary.
What the trust must not do is give the beneficiary cash to buy either, or reimburse them after they paid. Pay the seller, the dealer or the contractor directly, and keep the documentation. And confirm the current treatment before a large purchase — these rules are detailed and they change.
How much should we put in the trust?
Enough to fund the gap between what benefits provide and the life you want your child to have — which is a budgeting exercise, not a legal one.
Start by pricing the gap annually: therapies not covered, a phone and internet, transport, holidays, hobbies, clothing, dental care, additional attendant hours, and a housing supplement if needed. Multiply by life expectancy, adjust for inflation, and you have a target. It is frequently larger than families expect and smaller than they fear.
Life insurance is the usual funding mechanism, and a second-to-die policy on both parents is often the most efficient — it pays when the need arises, and costs less than two individual policies. Name the trust as beneficiary, never the child.
Then decide how the rest of the estate is divided. Equal shares are not always fair, and an honest conversation with your other children about why one sibling’s share is held in trust prevents a great deal of later resentment.
What happens to the money when my child dies?
Depends entirely on which trust it is, and this is the clearest argument for planning ahead.
A third-party trust distributes to whoever you named — siblings, grandchildren, a charity, a disability organization. No payback to the state, because the money was never the beneficiary’s.
A first-party trust must reimburse the state for the total medical assistance paid on the beneficiary’s behalf under § 1396p(d)(4)(A), up to the amount remaining. Over a lifetime of Medicaid-funded care that claim frequently consumes the entire balance. Only what is left after the state is paid goes to your family.
A pooled trust either retains the remainder for the non-profit’s charitable purposes or pays the state, depending on the program — read the joinder agreement before signing.
Does my child have to be legally declared disabled?
For the trust to serve its purpose under the federal exemptions, the beneficiary must be disabled as defined in the Social Security Act — ordinarily established by an SSI or SSDI determination.
But a third-party trust does not depend on any determination. You can create one for a child whose condition is not yet formally adjudicated, or whose future need is uncertain, and it simply operates as a discretionary trust until and unless benefits are involved.
That flexibility matters for younger children and for progressive conditions. Many families draft a trust with special needs provisions that lie dormant — the trustee administers it as an ordinary discretionary trust, and the protective terms engage if the beneficiary ever receives means-tested benefits. It costs nothing to include and it removes a decision nobody wants to make prematurely.
What is a pooled trust and when is it right?
A trust established and managed by a non-profit association that maintains a separate account for each beneficiary while pooling the accounts for investment and management. Authorized by 42 U.S.C. § 1396p(d)(4)(C).
It is right when the amount is too small to bear a private trustee’s fee — commonly under roughly a hundred thousand dollars — when no suitable family trustee exists, or when the money must be sheltered quickly. Joining is usually a matter of signing a joinder agreement rather than drafting a trust from scratch.
Two points in its favor: the federal statute imposes no age-65 limit on (d)(4)(C) accounts, and the non-profits that run them generally understand benefit rules better than any individual trustee will. Two cautions: some states impose a transfer penalty on funding a pooled account after 65 as a matter of state policy, so check before relying on it; and read what happens to the remainder at death, which varies by program.
Can I just leave everything to my other children and trust them to take care of their brother?
Families do this constantly and it fails in ways that have nothing to do with anyone’s good faith.
Money left to a sibling is that sibling’s money. It is reachable in their divorce, exposed to their creditors, part of their bankruptcy estate, and passes under their will if they die first — possibly to a spouse with no connection to your child. It is also countable against their eligibility for any benefit, and if they hold it for their brother without documentation it can create problems for both.
There is no enforceable obligation. A moral understanding is not a fiduciary duty, and the person who would enforce it is the person with the disability.
A third-party special needs trust does the same job with none of the exposure: a named trustee with legal duties, funds that belong to nobody else, protection from every one of the risks above, and a remainder that can still go to the siblings afterward. It costs less than the problem it prevents.
What should we tell the rest of the family?
That anything intended for this person should go to the trust rather than to them, and here is the exact wording. This is the highest-value conversation in the entire plan.
Give grandparents, aunts, uncles and siblings the trust’s full name and date, and the language to use in their own wills, trusts, life insurance beneficiary forms and retirement account designations. A one-page instruction sheet works well.
Also address the accidental routes: an intestate share if a relative dies without a will, a payable-on-death account, a gift given directly during life. And be aware that a well-meaning cash gift for a birthday can count as income in the month received.
It is an uncomfortable conversation, and every family who has been through the alternative wishes they had had it earlier.
How much does this cost and how quickly can it be done?
A third-party special needs trust drafted as part of a parent’s estate plan is a flat fee quoted before work begins, and it is a modest addition to the plan you were doing anyway. A standalone trust, or a first-party trust involving settlement funds, court approval or coordination with a structured settlement, costs more.
Timing depends on urgency. A first-party trust needed before settlement funds are disbursed can be prioritized, and pooled trust joinder can be arranged quickly where the situation is genuinely time-critical.
If money is already on its way to a person receiving benefits — a settlement about to fund, an estate about to distribute, a relative who has just died — call rather than wait. There are options while the money is in transit and considerably fewer once it lands.
Money on its way?
Call before it arrives, not after.
Twenty minutes, no commitment. Bring what benefits your family member receives, what is coming and from where, and who else in the family has a will. You will leave knowing which trust applies, what it protects, and which relative’s documents need changing this month.
Schedule a Free Consultation(314) 732-1547
Email derek@haakelawgroup.com · Offices in Wildwood, MO & St. Louis, MO (by appointment)
This page is general information about federal and Missouri law, not legal advice, and does not create an attorney-client relationship. Public benefit rules are detailed, change over time, and are applied by the administering agency to particular facts. Consult a licensed attorney about your situation before making any transfer affecting eligibility.