CHAPTER 8:
PLANNING FOR CHILDREN OR GRANDCHILDREN WITH DISABILITIES
After a post-retirement five-year stint as a special education substitute para-educator, I am convinced this topic deserves its own chapter. There are many, many more families with intellectually or physically disabled children than I ever imagined. For decades they were marginalized or simply ignored. Even today, the need for services to this community far exceeds the supply.
Planning for these kids involves the harsh reality that their primary caregivers – parents or grandparents – will not be around forever. And even while alive, these caregivers will age and almost inevitably become too infirm to provide the necessary level of care.
Rule One in Estate Planning for Children with Disabilities – Think Ahead
If you plan on leaving money to a child with a disability, think carefully. Without proper planning, your child’s inheritance could very easily destroy their eligibility for public assistance.
We are in an era of increasing government debt and decreasing public resources. Considering the high cost of care for children with disabilities, parents and grandparents who lack enormous wealth certainly want the benefit of whatever assistance society provides now and in the future.
Disability planning is highly state-specific, so we only deal with generalities here. This is not a comprehensive guide to disability planning. We are only addressing a very limited aspect of that issue – how to handle the transfer of family funds to a disabled child.
Your state certainly has programs and rules of great importance to your family’s situation that won’t be covered here. This is absolutely not do-it-yourself stuff, and online document-preparation services can’t handle it. You need a lawyer who regularly practices in this area.
In a nutshell, the challenge is this: Parents of children with disabilities want to provide as much as possible for their lifelong needs, care, and comfort.
But public benefit programs impose very strict – and very low – limits on the family or personal resources available to these children. As a general rule, if a child, young or adult, has too much money available to them, they won’t qualify for – or will quickly be kicked off – means-based public assistance, like SSI and Medicaid.
Government assistance is indispensable to a great many disabled Americans, but it is means-tested. Fortunately, there are some tools, workarounds, and legal exceptions to the rules. Parents and grandparents can use these to maximize assistance for disabled loved ones, while maintaining eligibility for government benefits.
Caregivers should be aware of them and their strict requirements.
The Two Primary Modes of Government Assistance for Disabled Children
The brief descriptions below are greatly oversimplified but suffice for our purposes.
Supplemental Security Income (SSI)
SSI is a federal, means-based income supplement program that provides a monthly payment to help meet the basic needs of qualifying disabled (and elderly) citizens. In almost all states, people who qualify for SSI also qualify for Medicaid, although the rules and application procedures vary by state.
Medicaid
Medicaid is a state-administered system of medical care for low-income people. It is jointly funded by the federal government and the states.
Within federal guidelines, each state sets its own eligibility requirements and determines the services offered. These include an array of health-related benefit programs known by a variety of names. Medicaid is one of the most comprehensive payers for services for disabled children.
These children typically receive (among other services): physician and hospital care, prescription medications, medical equipment (e.g., wheelchairs, tablet devices for communication, feeding tubes), physical therapy and behavioral health and autism-related services.
Everyone recognizes the advantages to the government and all parties if care can be provided at home rather than in an institution. So, in addition to basic Medicaid, there is also an irregular patchwork of state-based services and rule-bending (i.e., rule “waivers”).
These allow some services to be provided to some children in some states in situations where these people might not otherwise be covered. Since almost all the details depend on your state, this Crash Course is not intended to provide information on these topics.
Understanding the Two Basic Types of Special Needs Trust (SNT) – Powerful Tools in Estate Planning for Disabled Children and the Elderly
The primary focus of this Crash Course is helping people plan for the next generation. But if you have an elderly loved one who will be requiring state assistance for long term care, the SNT is definitely of importance to you, too. So read on.
These are sometimes called “supplemental needs trusts;” we use the acronym SNT here.
The word “supplement” is key to understanding this estate and financial planning tool. The beneficiary of an SNT is a disabled person receiving government assistance.
The SNT document directs the trustee to use trust funds to enhance the beneficiary’s quality of life by supplementing – not replacing – whatever benefits federal and state governments provide. Precise language in the trust document as to this purpose is legally crucial.
There are two broad categories of supplemental needs trusts:
Trusts Created with the Beneficiary’s Own Funds
These are “first-party” trusts; in legalese, the beneficiary is the “first party.” When disabled people eligible for means-based public assistance receive a large sum of money, their lives get more complicated. There are two situations in which this regularly occurs: first, an inheritance without proper planning, and second, the payout from insurance or a lawsuit after a catastrophic personal injury.
In these situations, the law allows the family of the disabled person to establish an SNT, provided that public funds expended for the beneficiary are paid back if anything is left in the trust after the disabled beneficiary dies. These trusts are sometimes called “payback” SNTs. Note that in some states, court approval is required to establish a first-party SNT.
Also note that first-party special needs trusts cannot be created by anyone age 65 or older. But if a qualifying trust was established before the beneficiary turned 65, reaching age 65 later does not invalidate the trust.
You can see an effort in the law to balance the interests of the taxpayer with those of the disabled citizen “lucky” enough to come into such a windfall. On paper, these folks can appear suddenly wealthy and would otherwise be completely ineligible for public assistance.
Without the help of the law, their “fortunes” would have to be (almost) totally depleted before they could receive public benefits. Many would quickly become destitute and helpless during the lengthy application process. On the other hand, if the SNT has money remaining upon the beneficiary’s death, it seems only fair that the taxpayer be repaid.
Trusts Created by a Third Party Using Their Own Funds
The third party in these situations is usually the disabled person’s parents or grandparents. Such SNT money spent to provide a disabled person with things other than the essentials of life generally does not reduce their SSI benefits.
Note two important points:
- Providing food on behalf of a disabled beneficiary is now treated differently. It is an essential of life, but an SNT that provides food does not reduce the beneficiary’s SSI benefits.
- Shelter is also an essential of life, but if the SNT pays for that, it may, indeed reduce the disabled child’s SSI benefits.
In many cases, government programs become the primary source of a disabled adult child’s basic care, rather than by the third party. But with this kind of SNT – if it is properly written – no payback is generally required.
After all, the assets in the trust belonged to the third party, not to the disabled person. (Of course, most parents and grandparents would feel a moral duty to help their child or grandchild as much as possible. Note, as well, that many states impose a duty on parents to provide some level of support to disabled children after the age of adulthood.)
When the disabled person dies, anything left in the trust can be paid to someone else. It may be designated to go to family members, a charity, or others.
All distributions or payments from the trust are generally made at the sole discretion of the trustee, directly to providers of goods and services to the beneficiary.
It’s essential that the SNT is worded so that the beneficiary has no right to demand that the trust pay for any goods or services.
But the “Food Penalty” is now gone: Before September 30, 2024, if an SNT paid for a beneficiary’s groceries or meals, the SSA treated it as income. This could have drastically reduced the beneficiary’s monthly SSI check. Today, trustees can pay vendors – but not the beneficiary themselves – directly for food, with no impact on SSI payments.
Otherwise, if the beneficiary’s basic needs (other than food) – shelter, for example – are provided by a trust, the trust payments can reduce the beneficiary’s SSI benefits.
NOTE: Reconsider pre-October 2024 SNTs and advice saying that a trustee must avoid paying for food to preserve SSI eligibility. That advice became outdated on September 30, 2024. Review any SNT drafted around that time period to ensure it acknowledges the new rule on payment for food.
What Can a Special Needs Trust Provide?
There is a long list of “almost” necessities and small luxuries that most of us enjoy and would like to provide for disabled loved ones.
Without unnecessarily jeopardizing the beneficiary’s eligibility for needs-based benefits, an SNT should allow – but not require – the trustee, in their sole discretion, to use funds for such goods and services.
Your state rules might differ slightly, but a partial list of examples usually includes:
- Eyeglasses and other out-of-pocket medical and dental expenses
- Transportation to and from daily activities
- Travel (including the expenses of a companion, with some qualification) to visit relatives, for example
- Entertainment, such as movies and recreational activities
- Food, including special dietary preferences or food “treats”
- Materials or other costs of a hobby or educational activity
- A computer, television, telephone, internet and cable TV
Generally, the trustee should be prohibited from making direct payments of cash to the disabled beneficiary, except maybe a small “pocket money” allowance – if permitted by SSI rules and state regulations. The trust document should state that the disabled beneficiary has no power to compel the trustee to make any distribution of any kind to any party.
A properly drafted SNT contains special language to deal with unknown future legal developments; it basically prohibits the trustee from making expenditures that would become problematic if state rules change.
The trustee can even be authorized to amend (“doctor up”) the trust solely for the purpose of maintaining the beneficiary’s qualification for government aid. This allows the trust to adjust to larger, unforeseen shifts in the legal landscape.
The bottom line: An SNT should be prepared only by a lawyer with thorough knowledge of your state rules and experience in this area.
But what can people do if they can’t afford the several thousand dollars it costs to hire that attorney? What about the time, effort, and ability to perform the multiple, ongoing duties of the SNT trustee? Fortunately, there’s a good alternative.
Pooled Special Needs Trusts – A Good Option for Families of Ordinary Means
A pooled trust is an SNT managed by a nonprofit organization. Beneficiaries of any age may use pooled trusts. (But note that if you are age 65 or older, funding a pooled trust with your own money can trigger significant Medicaid transfer penalties in many states).
These organizations combine (“pool”) the funds contributed by multiple, unrelated beneficiaries. Each individual beneficiary has their own sub-account and receives their proportional share of the funds as they are professionally invested and managed.
Beneficiary distributions are determined separately based on individual needs. This is a huge advantage. Nonprofit organizations that offer pooled trusts have extensive experience in this field. They handle all compliance details regarding the disabled beneficiary’s income and resources.
The Arc of the United States is one of the best and most reputable organizations to look to for a pooled special needs trust. Its regional and state chapters run some of the oldest, largest, and most stable pooled special needs trusts in America. The national headquarters is an advocacy and valuable resource center.
All good pooled trust sponsors closely follow the applicable laws and financial regulations. This ensures you are following the complex Medicaid and other legal rules and guidelines if and when they change.
In addition to these compliance responsibilities, the trustee must know how to invest money wisely. Managing an SNT for a loved one can be a long-term, complex, and time-consuming task. All this is simply too much for most families. Realistically, there may be no one ready, willing and able to fulfill all the trustee’s duties.
Costs associated with a pooled trust often include a one-time enrollment fee, a monthly administrative fee, and an annual renewal fee. But the upfront cost in joining a pooled trust will usually be less than setting up an individual SNT using your own attorney.
Another big advantage of the pooled SNT is the low minimum funding requirement – generally only a few thousand dollars. No bank or trust company will give you the time of day for that size account.
In a pooled trust, administrative services, management, and investment fees are split among a large group of trust beneficiaries. This saves money and provides broader investment opportunities than a smaller, individual SNT has. Yet each member’s sub-account is created and designed to fit their specific needs.
So, in sum – for those of us of ordinary means – pooled trusts can be a practical and better alternative to an individual SNT.
ABLE Accounts
“ABLE” stands for Achieving a Better Life Experience. This is an important benefit-planning feature for the disabled. ABLE accounts are tax-advantaged savings accounts designed for people who became disabled before reaching age 46.
To be clear, the account can be opened by the beneficiary or a loved-one regardless of the beneficiary’s current age. The law only dictates that the qualifying disability must have begun before their 46th birthday.
If the account beneficiary is already receiving SSI or SSDI benefits, they generally qualify automatically for an ABLE account, provided their condition began before age 46. Note that the age-46 rule is new for 2026 – previously it was age 26.
If the individual does not receive federal benefits – maybe because their income or assets are too high – they can still open an ABLE account. In this situation, they must obtain a statement from a physician establishing that they have a qualifying disability that began before age 46.
These accounts are particularly useful in planning for people with disabilities. An ABLE account provides an important exception to the strict financial resource limit that ordinarily applies to somebody receiving SSI.
These accounts allow an individual with a disability to hold up to $100,000 in an account in their own name, with huge tax advantages, without jeopardizing their SSI or Medicaid eligibility. In other words, up to $100,000 in an ABLE account is not counted when calculating the SSI resource limit, although the account can be larger.
Likewise, Medicaid eligibility generally is not lost merely because of the money in an ABLE account. An eligible person can have an ABLE account into which they, family members, or others can contribute money.
As such, ABLE accounts can provide an excellent, low-cost benefit in addition to the benefits provided by a third-party special needs trust.
Recall that while an SNT can now pay for food, it should still generally not be used to pay for the beneficiary’s shelter. Doing so can jeopardize means-tested government benefits. There is no such limitation on expenditures to the beneficiary from an ABLE account.
The account can be used for the beneficiary’s qualified disability expenses, which can include a much broader list of benefits than a special needs trust (SNT) – including basic living expenses.
In planning for their child’s lifetime, a family can coordinate an ABLE account and a third-party SNT the family has set up – or with a pooled special needs trust. If the SNT is adequately funded by life insurance or otherwise, parents can ensure the maximum in benefits and quality of life to their child long after the parents are gone.
This kind of planning depends on state rule details and requires a lawyer with disability law expertise.
Miller Trusts – When Ongoing Income is an Obstacle (Elderly Folks Who Need Long-Term Care Assistance – This is for You Too!)
As we have discussed, the rules on government assistance are complicated and vary widely by state. So this section is very short and general – intended just to alert you of a planning tool useful to some. Miller Trusts are useful in states (about 25) that use a strict, flat monthly “income-cap” to determine eligibility for Medicaid.
A Miller Trust (also called “qualified income trust”) and a special needs trust (SNT) may be used separately or, in some scenarios, together in a plan to qualify for government assistance – both for children (young or adult) and the elderly, wishing to qualify for Medicaid long-term care.
These two kinds of trusts address two sides of the financial coin: first, a person’s ongoing monthly income and, second, their money and property already on hand. Both these issues present distinct financial problems for an individual with disabilities or one who simply needs long-term care as part of the normal aging process.
We’ve seen how SNTs can be used when a disabled person has too much money available now to qualify for government assistance (i.e., sudden money from a lawsuit settlement or inheritance). But be aware of how one can deal with excess regular monthly income in those states that have strict income limits for people applying for benefits.
That income might come from monthly lawsuit payouts, pension payments, Social Security, etc. In these situations, the Miller Trust can be used.
The name “Miller” comes from a 1990 federal court case in Colorado in which Ms. Miller was a party. The court approved the use of the technique we’re talking about here, and it became known as a “Miller Trust.”
The recipient’s excess (over the state limit) monthly income is deposited into a Miller Trust, which is irrevocable – it cannot be undone. The trustee then uses these funds to pay for state-approved medical expenses, health insurance, and a small personal needs allowance. When the beneficiary passes away, the state Medicaid agency’s care costs are paid back from any funds remaining in the trust.
Miller Trusts can also be used by elderly people with incomes a bit too high to qualify for Medicaid, but who still need state-provided long-term care – either in a nursing facility or, in some states, at home.
When it comes to government assistance, the devil is always in the state details. We can’t go into them all here. But even folks who have an income that seems too high to qualify for benefits might have the Miller Trust to help them get those benefits anyway. Just keep this tool in mind if you’re in that situation.
A Final Word About Planning for Disabled Children with Either an Individual or Pooled Special Needs Trust
Maintaining eligibility for government assistance is almost always a major consideration in financial and estate planning for families of children with disabilities.
True, remember that if parents leave assets directly to a child who is receiving some forms of government benefits, they seriously risk causing the child’s immediate disqualification. But this consideration should not obscure all others.
Many disabled individuals have normal life expectancies, but will never be able to fully provide for their own support. Meanwhile, parents want them to have all the “extras” the law will allow.
So parents must make comprehensive arrangements for good long-term care of their disabled children after they are not here to do so themselves. That takes money.
Life insurance is an ideal way to provide that money – free of income taxes – long after the parents are gone.
An individual or pooled special needs trust can be the best means of providing money management and support services for these children throughout their lives. In other words, these trusts are long-term planning tools, not simply a matter of qualifying for government assistance today.
A final critical planning issue deserves mention. When a child with a disability turns 18, they become a legal adult — and parents automatically lose the legal authority to make medical and personal decisions on their behalf, regardless of the severity of the disability.
This requires a medical evaluation, a legal proceeding, and perhaps ongoing court oversight. Families should consult a disability law attorney well before their child’s 18th birthday. During the meeting, parents can determine whether formal adult guardianship or another, more limited, legal arrangement best fits their child’s situation and degree of independence.
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