A grandmother leaves $800,000 to her disabled grandson in her will. Three months later, he loses his Medicaid, his SSI, and the support network that kept him alive. The inheritance destroyed the safety net it was meant to supplement.
Means-tested programs would otherwise force families to disinherit disabled relatives just to preserve lifetime care funding. Congress authorized special needs trusts (SNTs) so that private wealth can supplement, never replace, public benefits. Special needs trusts hold assets for a disabled beneficiary without disqualifying them from means-tested benefits. The two critical programs: Supplemental Security Income (SSI) with a $2,000 individual resource limit, and Medicaid. A properly drafted trust is not counted as the beneficiary's resources because the beneficiary has no right to demand distributions.
The trust must supplement, not supplant government benefits. Distributions should cover things SSI and Medicaid do not: recreation, travel, education, personal care items, electronics. SSI's base benefit is calibrated to cover food and shelter, so any third party providing those items duplicates the program's purpose.
Common mistakes
- Using a first-party SNT when the money comes from someone else. If parents or grandparents fund the trust, it is third-party. Choosing first-party unnecessarily triggers Medicaid payback. Trap: "Establish a d4A trust for the parents' bequest to their disabled child", d4A is for the beneficiary's own money.
- Thinking ABLE accounts replace special needs trusts. ABLE accounts have a $19,000 annual contribution limit and the $100,000 SSI threshold. A $1.2 million settlement cannot be sheltered in an ABLE account alone. Trap: "Fund an ABLE account with the full settlement proceeds."
- Confusing Medicaid payback rules. First-party SNTs and ABLE accounts require payback at death. Third-party SNTs do not. Trap: "The third-party SNT requires Medicaid payback."
Bottom line
- First-party (d4A) SNT: funded with the beneficiary's own assets, requires Medicaid payback, and must be established before age 65.
- Third-party SNT: funded with someone else's assets, with no Medicaid payback and no age limit.
- Never mix first-party and third-party funds in a single trust.
- ABLE accounts: tax-free growth, $19,000 annual limit, balances up to $100,000 disregarded for SSI, Medicaid payback at death.
Exam shortcut
When a disabled beneficiary receives money, ask two questions. First: whose money? Beneficiary's own = first-party (payback). Someone else's = third-party (no payback). Second: what benefits? SSDI is not means-tested (assets irrelevant). SSI has the $2,000 limit. Remember: "D = Disability history, I = Income/resources." ABLE threshold: "100 Suspends, Medicaid Stands."
The full lesson (about 2,264 words, 15 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- G.64
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