Setting up a special needs trust without losing Medicaid

If you are raising or caring for someone with a disability, every estate planning decision runs through a single constraint: do not accidentally disqualify them from the programs they rely on.

Medicaid, Supplemental Security Income (SSI), housing assistance, and waiver programs are almost all means-tested. A single ill-considered bequest — even a kind one — can knock a family member off benefits they've spent years qualifying for.

A properly drafted special needs trust is the structural fix. Here's what it does and what to avoid.

The problem, stated plainly

SSI eligibility, in most cases, requires the recipient to have under $2,000 in countable assets. Medicaid waiver programs layered on top of SSI inherit that limit. A $50,000 inheritance — even one intended specifically to help — immediately lifts the recipient over the threshold and terminates benefits. They are then required to spend down the inheritance before re-applying, which consumes the very money that was supposed to help.

The trust solves this by ensuring the money is never counted as the beneficiary's asset, while still being available for their benefit.

Two trusts, two sources of funds

"Special needs trust" is a category, not a single document. There are two structures, and which you need depends on where the money comes from.

Third-party special needs trust

Funded with assets that never belonged to the beneficiary — typically parents, grandparents, or other family members planning ahead. This is the trust most families set up as part of estate planning.

Key features:

• No requirement that remaining funds repay Medicaid on the beneficiary's death
• You choose what happens to leftover funds (other children, charity, etc.)
• Can hold nearly any kind of asset
• Should be named as beneficiary on life insurance, retirement accounts, and any inheritances from extended family

First-party (self-settled) special needs trust

Funded with assets that already belong to the beneficiary — a personal injury settlement, a direct inheritance that came before the trust was set up, accumulated savings, or back-owed SSI.

Key features:

• Must be established by a parent, grandparent, legal guardian, or court (or the beneficiary themselves, if over 18 and competent, under federal law since 2016)
• Must include a Medicaid "payback" provision — at the beneficiary's death, any remaining funds first repay Medicaid for benefits paid
• Must be irrevocable
• Beneficiary must be under 65 at the time of creation

In practice, most families need the third-party trust during lifetime planning and occasionally set up a first-party trust in response to a specific event.

What the trust can pay for

A properly structured special needs trust pays for supplemental needs — things that improve quality of life without replacing the benefits SSI and Medicaid are already providing. Examples:

• Therapies and equipment not covered by Medicaid
• Education, tutoring, and vocational training
• Transportation — including modified vehicles
• Travel and recreation
• Personal care attendants beyond what Medicaid funds
• Home modifications for accessibility
• Technology and communication devices
• Clothing, grooming, and personal items

Trustees should not give cash directly to the beneficiary. Direct cash counts as income and can reduce or eliminate SSI. Instead, the trustee pays vendors directly or reimburses out-of-pocket expenses.

What to avoid

Three mistakes we see repeatedly:

1. Leaving an inheritance directly to a family member with disabilities

Even a small bequest — "a little something from grandma" — can terminate benefits. A common well-meaning mistake is naming the person directly in a will "to be fair." Always direct inheritance to the third-party special needs trust established for their benefit.

2. Setting up a trust that isn't actually a special needs trust

A generic revocable trust is not a special needs trust. A trust that gives the trustee discretion to distribute "for the beneficiary's benefit" is not automatically a special needs trust. The trust language must be specifically drafted to preserve eligibility — Medicaid reviewers are trained to look for that language, and they will disqualify a trust that doesn't have it.

3. Funding the trust with the wrong assets

Retirement accounts (IRA, 401(k)) are generally poor choices as direct trust assets because the required distribution rules interact badly with trust tax rates. A careful review of asset categories should be part of the planning — not an afterthought at signing.

Special Needs Trust vs. ABLE account

Families often ask whether an ABLE account is a substitute for a special needs trust. It isn't — but they work well together.

An ABLE account is a tax-advantaged savings account for people who became disabled before age 26 (age 46 starting in 2026). Contributions up to $18,000 per year (2024) don't count against SSI asset limits, and up to $100,000 in the account is ignored for SSI.

ABLE accounts are excellent for day-to-day needs. Special needs trusts are the right container for larger sums, inheritances, and long-term planning. Most families benefit from having both.

Choosing a trustee

Who administers the trust is as important as the trust language. A trustee needs to:

• Understand SSI and Medicaid rules well enough to avoid disqualifying distributions
• Keep meticulous records of every payment
• Coordinate with the beneficiary's case manager or support system
• Invest trust assets prudently
• Be able to serve for potentially decades

Family members often want to serve, which is admirable — but administering a special needs trust is a skilled job. A common solution is a family co-trustee with a professional or corporate co-trustee who handles the compliance side.

Why this gets its own package

At GoldBridge, special needs trust work is part of our advanced planning package, starting at $35,000. That cost reflects the care required: proper drafting, asset review, trustee coordination, and in many cases Medicaid qualification work to position the family correctly. It is not a form exercise.

This article provides general information for Virginia and New Hampshire residents and is not legal advice. Special needs planning depends on facts unique to your family, the beneficiary's eligibility status, and current state and federal rules — please consult an attorney before acting.