Your daughter receives SSI and Medicaid. You want to leave her an inheritance, but you've heard that receiving money could disqualify her from these vital programs. A Pennsylvania estate planning lawyer can help you create a special needs trust that provides additional support without threatening those benefits. When you work with a special needs lawyer in Paoli who understands how these trusts function, you can create a plan that truly serves your child's best interests.
How Do Special Needs Trusts Differ From Regular Inheritance?
Supplemental Security Income (SSI) restricts how much an individual can own. The general federal resource limit is $2,000 for an individual, but SSA excludes certain assets, including a primary residence, one vehicle, household goods, and personal effects.
Receive a $10,000 cash inheritance through a traditional will, and it counts as unearned income in the month received, which can reduce that month's SSI to $0. Any amount kept into the next month becomes a countable resource that exceeds the $2,000 limit, causing loss of SSI eligibility. In Pennsylvania, a §1634 state, SSI eligibility generally confers Medicaid automatically, so loss of SSI can interrupt Medicaid coverage unless another pathway applies.
A properly drafted special needs trust (SNT) holds assets for your child's benefit without counting toward SSI or Medicaid limits. The trust becomes a protective container where a trustee manages and distributes funds according to rules that maintain eligibility.
What Can Special Needs Trust Funds Pay For?
The trustee should pay third-party vendors whenever possible. Cash distributed directly to the beneficiary counts as unearned income and reduces SSI dollar-for-dollar after a $20 monthly exclusion. Third-party payments may be counted as in-kind support (for shelter) or not counted as income at all, depending on what's purchased.
Allowable expenses when paid directly to vendors include:
- Enhanced medical care beyond Medicaid coverage. This includes dental work, specialized therapies, premium equipment, or vision care that government programs won't fund.
- Education and enrichment. The trust can pay for tuition for special programs, adaptive technology, vocational training, or educational trips when the trustee pays vendors directly.
- Recreation and entertainment. Streaming services, hobby supplies, vacation expenses, and gym memberships can be purchased on the beneficiary's behalf to improve quality of life.
- Personal care assistance. The trust can cover additional attendant services beyond what Medicaid waiver programs may provide when payments go directly to caregivers.
- Transportation. This can cover the costs of owning a vehicle, particularly one modified for accessibility, including insurance, maintenance, and gas when the trustee pays these expenses directly.
As of September 30, 2024, SSA no longer counts food as in-kind support for SSI purposes. Shelter requires careful planning. When the trust pays housing costs, SSI may be reduced under the Presumed Maximum Value (PMV) rule. For 2025, the maximum monthly SSI reduction for shelter in-kind support is about $342, not the full amount paid.
Should You Create a First-Party or Third-Party Trust?
Two types of special needs trusts serve different situations, each governed by federal law. The source of the money determines which type you need.
Third-Party Trusts Protect Family Assets
When parents, grandparents, or relatives want to leave money to someone with disabilities, they establish a third-party special needs trust. The money comes from family assets, never from the beneficiary.
These trusts are often drafted as discretionary and irrevocable once the settlor's estate plan takes effect. When properly drafted under Pennsylvania law, third-party special needs trusts may provide strong protection. No Medicaid payback applies.
When your child passes away, the remaining funds in the trust can go to other family members or charities. Your will directs that your child's inheritance flows into the trust instead of passing directly to them.
First-Party Trusts Hold the Beneficiary's Own Money
A first-party special needs trust protects a beneficiary's own assets, like a personal injury settlement, while maintaining benefit eligibility. The beneficiary must be under 65 when the trust is established, and no additions can be made after age 65 except for certain earnings or interest.
Since the Special Needs Trust Fairness Act passed into law, an adult beneficiary can establish their own first-party trust, in addition to establishment by a parent, grandparent, guardian, or court. When the beneficiary dies, Medicaid must be reimbursed up to the amount of medical assistance paid under the state Medicaid plan(s), after allowable taxes and administrative expenses, before remaining funds pass to other beneficiaries.
Who Should Serve as the Trustee?
The trustee manages investments, approves distributions, maintains records, and files tax returns. Family members bring intimate knowledge of your child's needs, but special needs trust administration demands specialized knowledge.
Key qualities to seek:
- Understanding of benefit programs. The trustee must recognize which expenses preserve eligibility, pay vendors directly, and maintain documentation.
- Financial management ability. Trust funds require investment to last decades.
- Relationship with your child. Someone who knows your child's personality makes better decisions about quality-of-life enhancements.
Professional trustees bring institutional knowledge and continuity. Many Pennsylvania families combine a corporate trustee for administration with a family member as co-trustee for personal insight.
How Does the Special Needs Trust Fit Your Estate Plan?
Your will or revocable living trust must direct assets correctly. Pennsylvania estate planning lawyers draft provisions that send your child's inheritance into a protective trust instead of passing it directly to them.
Life insurance provides an efficient funding method. Naming the special needs trust as the beneficiary means that death benefits protect rather than harm your child. Even modest policies provide substantial long-term support when properly managed.
Extended family often wants to help. Pennsylvania estate planning lawyers counsel grandparents to name the existing trust as the beneficiary rather than leaving money directly to their grandchild. Grandparents can also make lifetime contributions if the trust document allows additional funding.