It Starts with Love… But Can Lead to Unintended Consequences

It usually starts with the best intentions.

A parent or grandparent sits down to create or update their estate plan and naturally thinks about the child or grandchild who may need the most support. Maybe that child has a disability. Maybe they rely on government benefits. The instinct is simple and heartfelt: I want to make sure they're taken care of.

So they leave money directly to that child.

What many families do not realize is that this well-meaning decision can create serious and immediate problems. In some cases, it can even cause that child to lose critical benefits like Supplemental Security Income (SSI) or Medicaid.

At The Law Office of Susan A. Katzen, this is one of the most common and most heartbreaking mistakes I see families make. Not because they did something wrong, but because no one explained the rules to them before it was too late.

So what actually happens when a child with disabilities inherits money directly? And more importantly, how can you avoid creating a situation that puts their care at risk?

How Government Benefits Really Work

When a child or adult with disabilities receives SSI or Medicaid, those programs are based on financial need. That means there are strict limits on how much income and how many resources a person can have.

For SSI, the resource limit is typically $2,000 for an individual. It does not take a large inheritance to exceed that threshold.

If a child inherits money outright, that inheritance is usually counted as a resource. And the impact is immediate.

• SSI payments may be reduced or stopped

• Medicaid eligibility may be jeopardized

• Benefits may not automatically restart

Families are often left scrambling to fix a problem they never intended to create.

Why Losing Medicaid Is a Much Bigger Issue Than Most Realize

Many people assume that losing SSI is the primary concern. In reality, Medicaid is often the more critical piece.

Medicaid can cover:

• Ongoing medical care

• Therapies and medications

• In-home support services

• Long-term care needs

• Programs that support independence

When Medicaid is lost, it is not just a financial inconvenience. It can disrupt daily routines, limit access to care, and significantly impact quality of life.

This is why a direct inheritance, even when given with love, can unintentionally do more harm than good.

A Better Approach: Special Needs Trusts

The good news is that this situation is entirely avoidable with the right planning.

Instead of leaving money directly to a child with disabilities, families can use a special needs trust, sometimes called a supplemental needs trust.

This type of trust is designed specifically to:

• Hold assets for the benefit of a person with disabilities

• Preserve eligibility for SSI and Medicaid

• Provide financial support without direct ownership

Here is the key distinction. The funds are not legally owned by the beneficiary. That difference alone can protect access to critical benefits.

A trustee manages the funds and can use them to enhance the individual's quality of life, including:

• Education and training

• Transportation

• Personal care items

• Technology

• Travel and experiences

This allows your loved one to live a fuller life while still maintaining the benefits they depend on.

Understanding the Types of Special Needs Trusts

Not all trusts are the same, and choosing the right one matters.

Third-Party Special Needs Trust

This is the most common and preferred option for estate planning.

• Funded by parents, grandparents, or other loved ones

• Assets never belong directly to the beneficiary

• Often avoids Medicaid reimbursement requirements after death

This type of trust is typically built into a comprehensive estate plan from the beginning.

First-Party Special Needs Trust

This type of trust is funded with the beneficiary's own assets.

• Often used after an inheritance or settlement has already been received

• Can help restore eligibility for benefits

• Comes with stricter rules

• May require Medicaid repayment later

While helpful, this is often a corrective strategy rather than a proactive one.

What If the Inheritance Already Happened?

If your loved one has already received money directly, it does not mean all is lost.

There may still be options, including:

• Transferring funds into a properly structured first-party special needs trust

• Implementing a compliant spend-down strategy

• Reorganizing assets in a way that aligns with program rules

However, timing is critical.

The longer funds remain in the individual's name, the greater the risk to their benefits. This is not an area where trial and error works in your favor. Working with experienced professionals can make all the difference.

Where ABLE Accounts Fit In

ABLE accounts can also play a supporting role in planning.

These are tax-advantaged savings accounts designed for individuals with disabilities. They allow funds to be used for qualified expenses without immediately affecting SSI eligibility.

They can be useful for:

• Day-to-day expenses

• Smaller savings goals

• Supplementing a broader plan

However, they are not a replacement for a properly structured trust. They work best as part of a coordinated strategy.

The Most Common Mistake Families Make

This issue comes up more often than most people expect.

Many families name a child with disabilities as a direct beneficiary on:

• Life insurance policies

• Retirement accounts

• Payable-on-death accounts

It feels natural. It feels right.

But without proper planning, that simple decision can create avoidable and significant problems.

At The Law Office of Susan A. Katzen, estate planning is not just about passing on assets. It is about making sure those assets actually help the people you love.

When a child with disabilities is involved, that means protecting both financial resources and access to essential benefits.

The Takeaway

A direct inheritance can unintentionally cause harm. The right plan can protect your loved one while still providing meaningful support.

If you have a child or family member with disabilities, your estate plan should be carefully aligned to reflect that reality.

• Beneficiary designations matter

• Trust structure matters

• Timing matters

And most importantly, getting it right matters.

If you are not completely confident that your plan would hold up under real-life circumstances, now is the time to address it by requesting a consultation.