Leave Money Without Costing Them Their Benefits
How to Leave Money to a Child With Special Needs Without Costing Them Their Benefits
Having money set aside isn't the same as having it set up correctly. Here's where well-meaning families go wrong, and how to make sure every dollar reaches your child the right way.
Many benefits a person with a disability may rely on, like SSI and Medicaid, limit what they can own in their own name. Money left to them directly, through a will, life insurance, a retirement account, or a gift, can push them over that limit. The fix is to route money through a third-party special needs trust or, for smaller amounts, an ABLE account, and to check every beneficiary designation you have.
When families reach this part of their plan, I often hear the same sentence: "We already have a trust. We're covered."
Sometimes they are. Often they're closer than most families, but not finished. Because having a trust isn't the same as having money that actually reaches it. And the gap between the two usually shows up in places nobody thinks to look.
This is the third of the Six P's of Lifetime Care Planning: Protect. It comes after Picture and Price, because once you know what life you're planning for and what it costs, the next question is whether the money will actually get there.
Why money in your child's name can cause harm
Many benefits your loved one may depend on, now or in the future, are means-tested. That means there's a limit on what they can own or control and still qualify.
- For SSI, an individual generally can't have more than $2,000 in countable resources. That limit hasn't changed since 1989.
- In many states, including Massachusetts, SSI is tied to Medicaid, which often pays for the largest long-term supports: day programs, residential services, and help at home.
Source: Social Security Administration. Figures checked for 2026; confirm current rules at ssa.gov before acting.
So if your loved one inherits money directly, from a will, a life insurance policy, or a relative's estate plan, they can be pushed over that limit immediately. Support they rely on can stop until the money is spent down. Nobody intended that. It happens anyway, because nobody checked the path the money would take.
How good intentions go wrong
It rarely looks careless. It looks like normal, loving decisions:
- A grandparent updates their will to leave something to each grandchild, equally, because that feels fair.
- A parent lists all their children as equal beneficiaries on a retirement account, the way the form suggests.
- A life insurance policy bought years ago names each child directly, and nobody has looked at it since.
- A relative opens a savings or custodial account in the child's name for birthday money.
- A settlement or back payment of benefits arrives in the child's name.
Every one of these is a good intention. Every one can quietly undo years of benefits planning if the money isn't routed correctly.
Special needs trusts: the distinction that matters
A special needs trust holds money for your loved one without it counting as theirs. A trustee controls it and spends it on their behalf. But there are different kinds, and mixing them up causes real problems.
| Third-party trust | First-party trust | |
|---|---|---|
| Funded with | Someone else's money, usually parents or grandparents | Your loved one's own money, like a settlement or an inheritance left to them directly |
| Medicaid payback at death | None. What's left goes where your family directs. | Yes. The state can be repaid for care it provided, from what's left. |
| Best used for | Your family's planning: gifts, inheritances, life insurance, retirement accounts | Protecting money that has already landed in your loved one's name |
Both are legitimate tools. The danger is ending up in a first-party trust by accident, because money went directly to your loved one instead of into a third-party trust that was ready for it. Money you could have protected without payback becomes money the state may claim a share of later.
A trust is not the finish line. It needs a trustee who understands the rules, and it only works if the money actually flows into it. The document and the path to it are two different things.
Where ABLE accounts fit
An ABLE account is a tax-advantaged savings account your loved one owns. It works alongside a trust, not instead of one.
- For SSI, the first $100,000 in an ABLE account doesn't count as a resource. Medicaid doesn't count ABLE funds at all.
- Total contributions from all sources are capped at $20,000 for 2026.
- As of January 1, 2026, eligibility covers people whose disability began before age 46, up from 26.
Sources: ABLE National Resource Center; Internal Revenue Service. Limits change; confirm before contributing.
ABLE accounts are well suited to everyday spending and smaller gifts. Larger amounts, like inheritances and life insurance, usually belong in the trust.
Retirement accounts deserve their own look
For many professional families, retirement accounts are the largest asset they own. And they pass by beneficiary form, not by your will. If a 401(k) or IRA names your child directly, it can go to them directly, no matter what your will says.
The better approach usually names a properly drafted special needs trust as the beneficiary. There's also a rule change many families haven't absorbed. For most people who inherit a retirement account from someone other than a spouse, the full balance now has to come out within ten years. But a beneficiary who is disabled can be an exception, with withdrawals stretched over their lifetime, if the trust receiving the account is written correctly for that purpose.
This matters for almost any family with a retirement account, not only large ones. The balance doesn't decide whether this goes right. The structure does.
Life insurance: the fastest way to fund the plan
If something happens to a parent before there's been time to save, life insurance can fund a special needs trust at exactly the moment the money is needed. But only if the beneficiary form points to the trust, not to your child.
What this looks like for a real family
Consider the Johnsons, a composite family based on situations I see often. Mark and Sarah had a special needs trust for their daughter Mia. When we looked at their life insurance together, the beneficiary form named their two children equally. Mia and her brother. Directly. Not the trust.
Mark had looked at that page a dozen times over the years, every time a renewal notice came. The form never asks whether one of your children has special needs, so he never thought twice. That's not carelessness. It's what happens when a form doesn't prompt the right question.
The fix took a few minutes. Mia's share now goes to her trust, and her brother's share still goes to him. A few lines on a form, and an enormous difference in what it protects.
None of this is about having more money. It's about making sure the money you already have can actually do its job.
Where to start this week
- Pull every beneficiary form you have: workplace retirement plans, IRAs, life insurance, annuities, and bank or brokerage accounts with a payable-on-death or transfer-on-death name.
- Check each one. If your child with special needs is named directly anywhere, mark it for a conversation with your attorney.
- Find out what kind of trust you have: first-party or third-party, standalone or created in a will, and when it was last reviewed.
- Ask whether the trust can receive a retirement account and qualify for lifetime distributions for a disabled beneficiary.
- Look for money already in your child's name, like custodial accounts or savings bonds, and ask your attorney what to do with it.
Frequently asked questions
Can I leave money directly to my child with special needs?
What's the difference between a first-party and a third-party special needs trust?
Does my will control my life insurance and retirement accounts?
Should I name my child's special needs trust on my retirement account?
Is an ABLE account a replacement for a special needs trust?
Check every form, one page at a time
The free Lifetime Care Plan workbook includes a beneficiary audit, a trust inventory, wording to give relatives, and questions to bring to your attorney.
This article is for educational purposes only and is not legal, tax, or investment advice. Benefit, trust, and retirement account rules vary by state and change over time; figures are for 2026. Consult a qualified special needs attorney about your situation. The Johnson family is a composite created for illustration.
