Special Needs Trusts: Protecting Your Child's Government Benefits

Our team often sees parents paralyzed by a single, terrifying question: how do you leave money to a child with disabilities without destroying the safety net they rely on? You likely know that a direct inheritance can be disastrous, instantly disqualifying your loved one from essential support.

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We have found that the solution isn’t to disinherit your child, but to use a tool designed specifically for this dilemma through special needs planning. A special needs trust (SNT) acts as a protective shield, allowing you to secure your child’s financial future while keeping their government benefits intact.

Let’s break down the 2026 rules, the exact limits you need to know, and the strategy we recommend to most families.

The Government Benefits Dilemma

Most families we work with are focused on protecting two specific means-tested programs: Supplemental Security Income (SSI) and Medicaid.

These programs have incredibly strict financial ceilings. For 2026, the resource limit remains frozen at just $2,000 for an individual. Even a small gift or inheritance that pushes a beneficiary’s bank balance to $2,001 can trigger a complete loss of benefits.

This “benefits cliff” puts your child’s access to the following at risk:

• Supplemental Security Income (SSI): The 2026 maximum federal payment is $994 per month for an individual.
• Medicaid: Comprehensive health coverage that often includes waivers for home-based care and therapies.
• Section 8 Housing: Subsidized housing vouchers.
• SNAP (Food Stamps): Essential nutritional assistance.

We tell clients that the $2,000 limit is the most critical number to watch. While the monthly benefit amount adjusts for inflation, the asset cap has not changed in decades, making it easier than ever to accidentally disqualify a loved one.

What Is a Special Needs Trust?

A special needs trust acts as a separate legal entity that holds assets for the benefit of a person with disabilities. Because the assets technically belong to the trust, not the individual, government agencies like the Social Security Administration (SSA) generally do not count them toward the $2,000 limit.

The golden rule here is “supplement, not supplant.” The trust funds are meant to pay for extras that government programs don’t cover, enhancing your child’s life without replacing their basic support.

What Can the Trust Pay For?

A trustee can use funds for almost anything that benefits the beneficiary, as long as they pay the provider directly. Common permissible expenses include:

• Technology & Electronics: Computers, tablets, and specialized software.
• Travel & Recreation: Vacations, companion tickets, and hobby supplies.
• Medical Gaps: Therapies, dental work, or eyeglasses not covered by Medicaid.
• Professional Services: Attorney fees, care managers, and tax preparation.
• Transportation: Purchasing a vehicle, insurance, and gas cards.

The “Sole Benefit” and Food/Shelter Rules

We always warn families about the “In-Kind Support and Maintenance” (ISM) rule. If the trust pays directly for food or shelter costs (like rent or groceries), the SSA considers this “income” and will reduce the beneficiary’s SSI check.

For 2026, this reduction is capped at approximately $351 per month (the “Presumed Maximum Value”). Sometimes paying the rent is worth taking this cut, but it is a strategic decision your trustee must make carefully.

Insider Tip: Avoid Cash Distributions

Never give cash directly to the beneficiary. Even a $50 cash allowance counts as income and will reduce their SSI benefit dollar-for-dollar. Instead, buy the item they need or use a credit card paid directly by the trust.

Types of Special Needs Trusts

Choosing the right vehicle depends entirely on whose money is funding the trust. We use this comparison to help families decide:

Feature	First-Party (Self-Settled)	Third-Party (Family Funded)	ABLE Account
Source of Funds	The beneficiary’s own money (lawsuit settlement, inheritance)	Money from parents, grandparents, or others	Anyone can contribute
Payback Rule	Yes. Must repay Medicaid upon death.	No. Remaining funds go to family/heirs.	Yes. Medicaid may claim some funds.
Establishment	Parent, Grandparent, Court, or Individual (if capable)	Parent, Grandparent, or Donor	Beneficiary or family
Best Used For	Protecting a settlement or unexpected inheritance	Long-term inheritance planning	Small, daily expenses

First-Party Special Needs Trust

This trust is often a “rescue” tool used when a person with disabilities receives a direct lawsuit settlement or inheritance. It protects the money immediately, but the government requires a “payback provision.” This means that when the beneficiary passes away, the state must be reimbursed for all Medicaid expenses paid during their lifetime before any heirs receive a dime.

Third-Party Special Needs Trust

We consider this the gold standard for estate planning. You set this up with your money for your child’s benefit. Because the funds never belonged to the child, there is no Medicaid payback requirement. You can designate exactly where any remaining funds go—such as to siblings or a charity—after your child passes away.

Incorporating Special Needs Planning Into Your Estate Plan

The “Grandma’s Gift” Danger

Consider a common tragedy we see: Grandma leaves $100,000 directly to her grandson who has autism and receives SSI. That generous gift instantly disqualifies him from benefits. He must then “spend down” the money to below $2,000 before he can reapply, effectively wasting the inheritance on basic costs that the government would have covered.

Grandma’s good intentions caused a crisis because her will wasn’t coordinated with the special needs plan.

Steps to Protect Your Loved One

1. Direct Bequests to the Trust: Update your will and beneficiary designations (life insurance, IRAs) to name the “Third-Party Special Needs Trust” as the beneficiary, not the individual.
2. Write a Letter of Intent: This non-legal document guides the trustee on your child’s preferences, routines, and history. It is the “instruction manual” for your child’s care.
3. Educate the Family: Ensure aunts, uncles, and grandparents know not to leave money directly to your child. Give them the trust’s details instead.

Choosing the Right Trustee

Selecting the person who manages the money is arguably the hardest decision. The trustee has absolute discretion over distributions and must navigate complex reporting rules.

You generally have three options:

• Family Member: They know and love the beneficiary but often lack legal/tax expertise.
• Corporate Trustee: A bank or trust company offers professional management and neutrality but comes with fees (typically 1% to 1.5% annually) and often requires a minimum trust size (e.g., $500,000).
• Pooled Trust: Managed by a non-profit, these pool funds from many families for investment purposes while maintaining individual sub-accounts. This is an excellent option for smaller trusts that don’t meet corporate minimums.

ABLE Accounts: The 2026 Expansion

The ABLE account (Achieving a Better Life Experience) is a powerful partner to a special needs trust. It functions like a checking account for disability-related expenses.

Major changes for 2026 make these more accessible than ever:

• Higher Contribution Limits: The annual contribution limit has risen to $20,000 (up from $18,000).
• Expanded Eligibility: Starting in 2026, the age of disability onset increased from 26 to 46. This opens the door for millions more people, including veterans and those disabled later in life, to open accounts.
• Asset Shelter: The first $100,000 in an ABLE account does not count toward the $2,000 SSI resource limit.

We often recommend using a Special Needs Trust for long-term security and large assets, while using an ABLE account for daily autonomy and smaller expenses.

Don’t Wait to Plan

Procrastination is the enemy of protection. Establishing a trust now creates a vessel that is ready to receive gifts or inheritances at a moment’s notice. It ensures that if something happens to you unexpectedly, your child’s safety net is already in place.

How We Can Help

At Skokie Probate Lawyer, we specialize in helping families throughout Cook County navigate these complex rules. Our team ensures your plan protects your child’s benefits while maximizing their quality of life.

We assist families by:

• Reviewing current government benefits to ensure no gaps in coverage.
• Drafting customized Third-Party or First-Party Trusts.
• Advising on trustee selection and Letter of Intent preparation.

Call (847) 410-9131 to schedule a consultation. Let’s build a plan that gives you peace of mind and your child a secure future.