How to Leave Money to a Loved One with Special Needs

A grandparent writes their grandchild with autism into the will for $75,000. At death, the money arrives in the grandchild's name. By the end of that month, the grandchild loses SSI and Medicaid — benefits that were providing $994/month in cash and tens of thousands per year in medical and residential support. The family scrambles. A crisis that a two-page trust document could have prevented entirely.

This happens constantly. Not from carelessness — from not knowing. If you are a grandparent, sibling, aunt, uncle, or anyone else who cares about a person with special needs and has money to leave them, this page explains exactly what to do instead.

Why a Direct Gift or Inheritance Destroys Benefits

SSI (Supplemental Security Income) has a hard resource limit: $2,000 in countable assets for an individual.¹ That limit has not changed since 1989. Medicaid eligibility is tied to SSI in many states, with similar resource thresholds.

When someone on SSI receives a direct inheritance, a joint bank account distribution, a payable-on-death account, or a life insurance payout — money that lands in their name — it counts against the $2,000 limit the moment it arrives. An inheritance of $75,000 makes them ineligible for that month and every month until the balance falls below $2,000. The beneficiary must either spend the money down on their own needs (losing the benefit of the gift) or work with an attorney to retroactively establish a first-party Special Needs Trust — a corrective structure that comes with a Medicaid payback obligation at death.

A third-party SNT — funded with your money, not theirs — avoids all of this. Assets in a properly drafted third-party SNT are not counted as the beneficiary's resources.² The beneficiary retains SSI and Medicaid. At death, the trust remainder passes to whoever you specify — no Medicaid payback required.

Scenario 1: Updating Your Will or Living Trust

This is the most common situation. You have a will or revocable living trust, and you want to include your special-needs grandchild, sibling, or other family member.

The change is straightforward: instead of leaving a specific dollar amount or percentage directly to the person, you leave it to their Special Needs Trust. If an SNT already exists, your attorney adds a single bequest line naming the trust as beneficiary. If no SNT exists yet, your attorney can draft a testamentary SNT — a trust written into your will that comes into existence at your death and receives the inheritance at that point.

Testamentary SNT vs. standalone SNT: A testamentary SNT is simpler — it lives inside your will and costs nothing to administer until you die. The limitation is that it can only receive assets that pass through your estate at death; it cannot be pre-funded during your lifetime. A standalone (inter vivos) SNT can be funded at any point, is not tied to your estate, and can receive contributions from multiple family members over many years. If the special-needs beneficiary's parents already have a standalone SNT established, you can direct your bequest there rather than creating a new one.

Scenario 2: Beneficiary Designations (The Asset That Bypasses Your Will)

Life insurance policies, retirement accounts (IRAs, 401(k)s, 403(b)s), annuities, and payable-on-death bank accounts all pass by beneficiary designation — they go directly to the named beneficiary regardless of what your will says. A perfectly drafted will that directs assets to an SNT does nothing for these assets if the designation still names the person directly.

The fix: change the beneficiary designation on each such account to name the SNT, not the individual. The designation should read something like: "John Doe Special Needs Trust, dated [date], [trustee name], trustee."

Common mistakes:

• Naming the special-needs person directly. Results in a direct inheritance — SSI and Medicaid disqualification immediately.
• Naming the special-needs person's parents with the expectation they'll route the money to the SNT. Parents could predecease you; the arrangement isn't legally binding; the surviving parent may not know what to do.
• Naming a sibling "to take care of" the special-needs person. No legal obligation to use the funds for their sibling. Creates family tension. Subject to sibling's creditors and divorce.

The correct approach: name the SNT directly as beneficiary on every policy or account you intend to benefit the special-needs person. If no SNT exists yet, this is one more reason to have one established before you update your estate documents.

Scenario 3: Annual Lifetime Gifts

You want to give money now — not wait until your estate settles. Annual gifts to a special-needs person can be made to their third-party SNT. Contributions are invested and managed for their benefit while preserving benefits eligibility.

For gift tax purposes, contributions to an irrevocable SNT are generally treated as completed gifts. The 2026 federal gift tax annual exclusion is $19,000 per recipient — but whether contributions to a trust qualify for the per-recipient exclusion depends on whether the trust has "Crummey" withdrawal provisions (a drafting detail your estate attorney handles).³ Even without the annual exclusion, the 2026 federal lifetime gift and estate exemption is $15,000,000 — meaning most donors won't pay any gift tax regardless.⁴

For smaller amounts — particularly from multiple family members making modest contributions — an ABLE account can be a simpler vehicle (see below).

What you should not do: give cash, checks, or assets directly to the special-needs person, even for a specific purpose like a vacation or medical equipment. Even a $500 gift in a month where their existing resources are already near $2,000 can trigger a disqualification. Route all contributions through the SNT or ABLE account.

The ABLE Account: A Simpler Supplement for Smaller Amounts

An ABLE account is a tax-advantaged savings account for individuals whose disability began before age 46 (the age expanded from 26 to 46 under the ABLE Age Adjustment Act, effective January 1, 2026).⁵ Funds in an ABLE account are excluded from SSI countable resources up to $100,000, and distributions for qualified disability expenses — housing, education, transportation, healthcare, assistive technology, and more — are tax-free.

The annual contribution limit to an ABLE account is $20,000 in 2026 (across all contributors combined).

ABLE accounts are easier to open and use than an SNT. A grandparent who wants to contribute $2,000/year for a grandchild's expenses can direct that money to the ABLE account without involving an attorney or trustee. For larger amounts — or for assets that need professional investment management and trustee oversight — a third-party SNT is the right vehicle. Many families use both in combination: the ABLE account for current-year spending, the SNT for long-term accumulation.

What If No SNT Exists Yet?

If the special-needs person's parents have not yet established an SNT, you have a few options:

• Coordinate with the parents to establish one. A standalone third-party SNT typically costs $1,500–$5,000 in attorney drafting fees. If you are planning to leave a meaningful sum, this investment protects many times that amount in future benefits. Offer to help fund the setup if needed.
• Use a testamentary SNT in your own will. Even if no SNT exists today, your will can create one at your death. The trust won't exist while you're alive, but it ensures assets don't pass directly to the beneficiary when you die.
• Use the ABLE account for annual gifts in the meantime. Not a substitute for an SNT for large amounts, but appropriate for modest annual contributions while the family gets the SNT structure in place.
• Do not wait and name the person directly as a placeholder. There is no safe "we'll figure it out later" on a beneficiary designation form. An SNT that doesn't exist yet cannot receive a beneficiary designation — and a direct designation is dangerous. Update the designation only after the SNT is established.

Communicating the Plan to the Whole Family

One of the most overlooked aspects of special needs planning is making sure every family member who might ever give money to or for the special-needs person knows about the trust structure. One uninformed aunt who sends a $10,000 check directly for "whatever you need" can cause a month of SSI disqualification and a scramble to get the money into a first-party SNT before Medicaid clocks the resource.

Practically:

• Ask the parents for the full legal name, EIN, and trustee contact for the SNT. Keep it somewhere findable in your own estate files.
• If you send birthday or holiday gifts, ask the parents what the appropriate amount and vehicle is. Many SNT trustees welcome contributions directly.
• Tell your own estate attorney about the SNT when updating your documents. Hand them the trust details so the bequest or beneficiary designation is worded correctly on the first draft.
• If you are coordinating a family gift (e.g., a lump sum from multiple grandchildren or siblings), route it through one person to the SNT rather than having each family member send separate amounts in ways that could be mishandled.

Why a Specialist Advisor Makes a Difference Here

A fee-only financial advisor specializing in special needs planning coordinates the full picture: trust structure, beneficiary designations across your accounts, ABLE account integration, and communication across the extended family. They work alongside your estate attorney — who handles the legal drafting — and ensure the financial strategy (how much to direct where, how to fund the SNT, how to structure retirement account designations) is coherent.

Most general estate attorneys and financial advisors know the basics of SNTs but have limited experience with the distribution rules, ISM calculations, and SSI/Medicaid interactions that determine whether a trust actually works in practice. A specialist has seen these edge cases and knows where the mistakes happen.

1. SSA — Understanding SSI Resources. Individual countable resource limit: $2,000. Established under 42 U.S.C. § 1382(a)(3)(B), unchanged since 1989.
2. SSA POMS SI 01120.203 — Third-Party Trusts. Assets contributed by a third party to an SNT are not the beneficiary's resources and do not count toward the SSI resource limit.
3. IRS — Frequently Asked Questions on Gift Taxes. 2026 annual exclusion: $19,000 per recipient. Annual exclusion applies to present-interest gifts; trust contributions require Crummey provisions to qualify per-recipient.
4. IRS Rev. Proc. 2025-xx — 2026 Tax Adjustments (OBBBA). Lifetime gift and estate exemption: $15,000,000 per person (permanent under OBBBA, July 2025). Annual exclusion for gifts to non-citizen spouses: $194,000.
5. ABLE National Resource Center — 2026 ABLE Rules. Annual contribution limit: $20,000 (2026). ABLE Age Adjustment Act (effective January 1, 2026): eligibility expanded to individuals whose disability onset occurred before age 46 (previously 26). SSI exclusion: first $100,000 in ABLE account not counted as SSI resource.

SSI resource and Medicaid rules vary by state. ABLE contribution limits and state plan investment options vary by plan. This page reflects federal rules as of 2026. Work with a special needs attorney and fee-only financial advisor for your specific situation.