If you have a child with a disability, you already know the careful balancing act involved in their daily care. What many parents don’t realize — until it’s almost too late — is that a well-meaning inheritance can actually do more harm than good.
Here’s the difficult truth: if your child receives government benefits like MassHealth (Massachusetts Medicaid) or Supplemental Security Income (SSI), inheriting even a modest sum of money directly could disqualify them from those programs. SSI eligibility requires that a recipient have no more than $2,000 in countable assets. One inheritance check could wipe out years of carefully maintained eligibility — and the healthcare, housing assistance, and daily support services that come with it.
The good news is that this is an entirely solvable problem. With the right planning, you can leave your child a meaningful inheritance that enhances their quality of life without jeopardizing the benefits they depend on.
Why Direct Inheritances Are Dangerous for Benefit Eligibility
MassHealth and SSI are means-tested programs, meaning eligibility depends on the individual’s income and assets. When a person with a disability receives an inheritance outright — through a will, trust distribution, or even as a beneficiary on a life insurance policy or bank account — those funds become their personal assets.
Once their countable assets exceed $2,000, SSI benefits stop. And because SSI eligibility is what qualifies many individuals for MassHealth in Massachusetts, losing SSI can trigger a loss of healthcare coverage as well.
This isn’t a theoretical risk. It happens to families across Massachusetts every year, often because a well-intentioned grandparent or relative left money directly to the person with a disability without understanding the consequences.
The Solution: A Third-Party Special Needs Trust
The primary tool for protecting a disabled child’s inheritance is a special needs trust — specifically, a third-party special needs trust (sometimes called a supplemental needs trust).
A third-party special needs trust is created and funded by someone other than the beneficiary — typically a parent, grandparent, or other family member. Because the assets in the trust belong to the trust, not to your child, they are not counted when determining eligibility for MassHealth or SSI.
The key features that make this work include that the trust must be irrevocable (or become irrevocable at your death), distributions must be at the sole discretion of the trustee, your child cannot have the right to demand distributions or revoke the trust, and the trust must be drafted to supplement — not replace — government benefits.
When structured properly, a third-party special needs trust has a significant advantage over a first-party trust: there is no Medicaid payback requirement. That means when your child eventually passes away, any remaining funds in the trust can go to your other children, grandchildren, or any beneficiary you choose — rather than being clawed back by the state to reimburse MassHealth.
We’ve written a comprehensive guide on Massachusetts special needs trusts that covers the spending rules, trustee responsibilities, and administration details in depth.
What Can a Special Needs Trust Pay For?
The trust can cover a wide range of expenses that improve your child’s quality of life beyond what government benefits provide. Allowable expenditures typically include medical and dental expenses not covered by MassHealth, specialized therapies and rehabilitation services, education and vocational training, technology and adaptive equipment like wheelchairs or communication devices, transportation costs, recreation and entertainment, personal care attendants, legal and guardianship expenses, and burial and funeral costs.
However — and this is where careful trustee management becomes critical — the trust generally should not pay directly for food or shelter. Under SSI rules, payments for these basic needs can be treated as “in-kind support and maintenance,” which can reduce the beneficiary’s SSI payment. There are specific strategies for handling housing-related expenses, but they require careful coordination with an attorney who understands both federal SSI rules and Massachusetts-specific regulations.
Don’t Forget to Coordinate Your Entire Estate Plan
A special needs trust is only effective if your entire estate plan is coordinated around it. This means looking beyond just your will or trust document to include every asset that has a beneficiary designation.
- Life insurance policies. If you have a life insurance policy naming your disabled child as a beneficiary, those proceeds will go directly to them — not through the special needs trust. The beneficiary designation needs to be changed to name the trust.
- Retirement accounts. IRAs, 401(k)s, and other retirement accounts pass by beneficiary designation, not through your will. If your child is named directly, the same eligibility problem arises. Under the SECURE Act, special needs trusts for disabled beneficiaries can qualify for favorable “stretch” distribution treatment rather than the 10-year rule, but the trust must be properly drafted to meet IRS requirements. (We discuss this in detail in our article on naming a trust as your IRA beneficiary.)
- Joint accounts and payable-on-death designations. Bank accounts with POD designations or joint ownership can transfer directly to your child outside of probate — and outside of the protections of your special needs trust.
- Gifts from other family members. Make sure grandparents, aunts, uncles, and anyone else who might leave something to your child understands the importance of directing those gifts to the special needs trust rather than to your child directly. A well-meaning bequest in a grandparent’s will can undo your careful planning.
Choosing the Right Trustee
The person or institution you choose to manage the special needs trust is one of the most important decisions in the process. The trustee has a fiduciary duty to manage the funds prudently, comply with complex government benefit rules, and act in your child’s best interests.
Many families choose a trusted family member — often a sibling or close relative. But it’s important to be realistic about whether that person has the time, financial literacy, and emotional capacity to take on this role for what could be decades.
Professional trustees and trust companies are another option. They bring expertise in benefit coordination and investment management, but they charge fees that can add up over the life of the trust.
A hybrid approach — naming a family member as co-trustee alongside a professional — can offer the best of both worlds: someone who knows and loves your child, paired with someone who understands the rules.
What If Your Child Already Has Assets?
If your child already has assets in their own name — perhaps from a personal injury settlement, a prior inheritance, or accumulated savings — those funds may need to be placed into a first-party special needs trust (also called a “self-settled” or “(d)(4)(A) trust”). Unlike a third-party trust, a first-party trust does require a Medicaid payback provision, meaning any remaining funds at the beneficiary’s death must first reimburse MassHealth for benefits paid.
First-party trusts have additional restrictions and must be established before the beneficiary turns 65, though there are pooled trust alternatives for individuals over that age. Massachusetts also offers ABLE accounts — tax-advantaged savings accounts for people with disabilities — which can complement a special needs trust, though annual contribution limits apply.
The Massachusetts Angle: MassHealth and ABLE Accounts
Massachusetts has some unique considerations for special needs planning. MassHealth eligibility rules, the state’s estate recovery program, and the interaction between state and federal benefit programs all create complexity that generic planning documents don’t address.
For instance, Massachusetts recently reduced the scope of its Medicaid estate recovery program in 2024, limiting recovery to only what federal law requires — primarily nursing facility and home-and-community-based services. This is a meaningful change that can affect planning strategies for families with disabled beneficiaries who may eventually need long-term care.
Additionally, Massachusetts participates in the national ABLE account program, which allows eligible individuals with disabilities to save up to $19,000 per year (as of 2025) without affecting SSI or MassHealth eligibility, up to a balance threshold of $100,000 for SSI purposes. ABLE accounts and special needs trusts work well together, with the trust potentially funding the ABLE account for smaller, routine expenses.
Planning Today Protects Your Child’s Tomorrow
Every parent of a child with a disability worries about what will happen when they’re no longer here. The right estate plan can’t replace you — but it can make sure your child is financially protected, maintains access to critical benefits, and has a trustee in place who will advocate for their well-being.
At The Law Offices of Kimberly Butler Rainen, we help families throughout Massachusetts create special needs plans that account for every detail — from trust drafting and beneficiary coordination to trustee selection and benefit preservation. This is one area where getting it right matters more than almost anything else.
Contact us to schedule a consultation about protecting your child’s future.