This is one of the most important questions in special needs estate planning, and the answer surprises many families: the instinct to simply name your child in your will or on a life insurance policy is exactly the wrong approach when that child receives Medicaid or SSI.
Why a direct inheritance creates a problem
Medicaid and SSI both have asset limits for individual recipients. When a person with a disability receives an inheritance directly, those assets become countable resources. If the total exceeds the applicable limit, the individual may lose eligibility until the excess is spent down. Given that Medicaid covers healthcare costs that can run to tens of thousands of dollars per year for someone with significant support needs, losing that coverage even temporarily can cause serious harm.
The same problem applies to beneficiary designations. A life insurance policy that names a child with a disability directly will pay out to them at death. That payout becomes a countable resource. The same is true of retirement accounts, payable-on-death bank accounts, and any other asset that names the child as a direct beneficiary.
The right approach: a third-party special needs trust
A third-party special needs trust receives assets on behalf of the beneficiary without those assets becoming the beneficiary's property. The trust is established during the parent's lifetime and funded at death through the estate plan. Life insurance policies and retirement accounts can name the trust as beneficiary rather than the child directly.
Key features of a third-party special needs trust include no Medicaid payback requirement at the beneficiary's death, the ability to name remainder beneficiaries who receive whatever is left, and full flexibility in how trust assets are used for the beneficiary's benefit during their lifetime.
What about leaving money to a sibling to hold?
Some families consider leaving assets to another child with an informal understanding that they will use the money for their sibling with a disability. This approach provides no legal protection. The sibling owns the assets outright and can use them for any purpose. If the sibling faces divorce, bankruptcy, creditor claims, or their own death, those assets may be lost entirely. The arrangement also has no tax or benefit program protection.
A properly drafted special needs trust is the only reliable solution.
