Families in North Beach caring for a child or family member with disabilities face a specific planning question: how do you leave an inheritance without disqualifying that person from the government benefits they depend on? The answer is a special needs trust. Here is how it works and why every family in this situation needs one.
North Beach is a community that takes care of its own. Families who live along the bay raise their children, support their neighbors, and look out for each other across generations. For families caring for a child with a disability, a sibling with special needs, or an elderly parent with cognitive decline, the question of long term financial security sits close to the surface at all times.
One of the most important tools for these families is the special needs trust. At The Law Offices of Haskell and Dyer, we help North Beach families build plans that provide for their loved ones without disrupting the government benefits that make daily life possible. Here is what you should know.
The Problem Special Needs Trusts Solve
Many people with disabilities depend on government benefits to cover medical care, housing, and daily living expenses. The most common programs include:
- Supplemental Security Income (SSI), which provides monthly income for disabled individuals with limited resources
- Medicaid, which covers medical care and, in many cases, long term supports and services
- Section 8 housing assistance
- Home and community-based services waivers
Most of these programs have strict income and asset limits. A person with assets exceeding $2,000 typically loses eligibility for SSI and Medicaid. An inheritance of $50,000, given outright, can wipe out years of benefits eligibility.
Special needs trusts solve this problem. Properly drafted, a special needs trust holds assets for the benefit of the disabled beneficiary without those assets counting against program eligibility.
The Two Main Types of Special Needs Trusts
Third Party Special Needs Trust
Created and funded by someone other than the beneficiary, typically a parent, grandparent, or other family member. Assets in a third party trust never belonged to the beneficiary. The trust can be funded during the donor’s lifetime or through their will or trust at death.
Key features of a third party trust:
- No Medicaid payback at the beneficiary’s death
- The remainder can pass to other family members, charities, or anyone else the donor chooses
- Can be used for supplemental needs that government benefits do not cover
- Can include provisions for care coordination, quality of life activities, and specialized services
First Party Special Needs Trust
Created with assets that belong to the beneficiary, typically from a personal injury settlement, inheritance received outright before the trust was created, or social security back payments. These trusts are authorized under specific federal law (42 U.S.C. § 1396p(d)(4)(A) for trusts created by parents, grandparents, guardians, or courts; § 1396p(d)(4)(C) for pooled trusts).
Key features of a first party trust:
- Must include a Medicaid payback provision at the beneficiary’s death
- Must be for the sole benefit of the disabled individual
- Typically requires specific language to meet federal requirements
- Can preserve eligibility for SSI and Medicaid
Important distinction: If you are planning for a disabled child, grandchild, or sibling, a third party special needs trust is almost always the right tool. If you are dealing with money that already belongs to the disabled person (for example, from a legal settlement), a first party special needs trust may be necessary.
What a Special Needs Trust Can Pay For
A properly drafted trust can pay for a wide range of goods and services that enhance the beneficiary’s quality of life without replacing government benefits:
- Education and vocational training
- Recreation, entertainment, and travel
- Personal care beyond what Medicaid provides
- Technology and adaptive equipment
- Pet care for service or companion animals
- Furniture, clothing, and personal items
- Professional services such as financial advisors or case managers
- Medical expenses not covered by Medicaid
- Private therapies and specialists
The trust cannot pay for food or shelter directly without affecting SSI in specific ways, though workarounds exist (such as the trust paying for vacation housing). Careful trust administration avoids these pitfalls.
Choosing a Trustee
The trustee of a special needs trust has significant responsibility. The choice affects the beneficiary’s quality of life for decades. Options include:
- A family member who knows the beneficiary well
- A professional fiduciary with experience in special needs administration
- A bank or trust company
- A pooled trust (where assets are managed collectively by a nonprofit organization with individual accounts for each beneficiary)
- Co trustees combining family knowledge with professional expertise
Many families choose a family member as trustee during the parents’ lifetimes, with a professional trustee or co-trustee taking over after the parents’ deaths.
The Letter of Intent
A letter of intent is not legally binding but provides essential guidance for the trustee and future caregivers. It typically includes:
- The beneficiary’s daily routines, preferences, and habits
- Medical information, including doctors, medications, and treatment history
- Educational and vocational background
- Social and family relationships that matter to the beneficiary
- Religious or spiritual practices the beneficiary values
- The parents’ hopes and expectations for the beneficiary’s future
Writing a thorough letter of intent is often one of the most emotionally significant parts of the planning process. It is also one of the most valuable gifts parents can leave.
Funding Sources
Special needs trusts can be funded through a variety of sources:
- Life insurance policies with the trust named as beneficiary
- Retirement account beneficiary designations
- Specific bequests in parent wills
- Lifetime gifts from family members
- Investment accounts retitled to the trust
Life insurance is often the single most efficient funding source for young parents. The premium is relatively small compared to the ultimate death benefit, which can fund care for a disabled child for decades.
Coordinating with Other Family Members
Grandparents and other relatives often want to contribute to the support of a disabled family member. Without coordination, a well-meaning gift from a grandparent can disqualify the beneficiary from benefits. Family members should be told:
- Not to leave money directly to the disabled beneficiary
- To direct bequests to the special needs trust instead
- To check with the family before making major gifts
- That the trust can accept contributions from anyone
For the broader framework of how special needs planning fits into Maryland estate planning, see our cornerstone: Calvert County Estates and Probate: A Complete Guide.
The ABLE Account Alternative
ABLE accounts (Achieving a Better Life Experience) are a newer option that can supplement or partially replace a special needs trust for some beneficiaries. ABLE accounts allow tax-advantaged savings for qualifying disabled individuals, with contribution limits and eligibility rules. For many families, a combination of an ABLE account and a special needs trust offers the most flexibility.
When to start planning: Special needs planning is not a conversation to postpone. A family that sets up the trust when the disabled child is young has decades for funding to grow, and every family member knows the plan. Starting early is always better.
Planning for a Loved One with Special Needs?
We help North Beach families build special needs trusts and coordinate plans with government benefits. Free consultation.
This article is for general information only and does not constitute legal advice. Contacting our firm does not create an attorney-client relationship until a formal agreement is signed.
