If you plan to leave money or property to a family member with a disability, how you do it matters as much as how much you leave. A gift or inheritance given directly, even with the best intentions, can interrupt Supplemental Security Income (SSI) or Medicaid coverage that your loved one relies on. A special needs trust is the tool most Maryland families use to avoid that problem. It lets you provide for someone’s care and quality of life while keeping the assets from counting against the strict limits that govern those benefits. This post walks through how an inheritance can put benefits at risk, the difference between the two main types of special needs trusts, how a trust fits into a broader estate plan, and a few things that are specific to planning in Maryland.
Why an Inheritance Can Accidentally Disqualify Someone From Benefits
SSI and Medicaid are both means-tested programs, which means eligibility depends on how much a person owns, not just how much they earn. Both programs set a resource limit that is very low, low enough that a modest inheritance, a life insurance payout, or even a savings account opened with good intentions can push someone over it. These limits are set by federal and state rules that change from time to time, so rather than quote a number here that might be out of date by the time you read this, we will confirm the current SSI and Medicaid figures with you directly when we talk.
The problem usually isn’t a lack of planning. It’s planning that doesn’t account for how these programs work. Common ways a family accidentally disqualifies a loved one from benefits include:
- Naming the disabled family member directly as a beneficiary on a will, life insurance policy, or retirement account.
- Adding the person’s name to a bank account, deed, or other asset as a way of “keeping it simple.”
- Assuming a small inheritance is too modest to matter, when even a few thousand dollars can cross the resource limit.
- Leaving money to a sibling on a handshake understanding that they will use it to care for their disabled brother or sister. That money legally becomes the sibling’s property, exposed to the sibling’s creditors, divorce, or own estate, with no obligation to spend it on the intended person.
Once someone’s countable resources exceed the limit, benefits can stop until the excess is spent down or otherwise resolved. That process is disruptive, and it can mean a gap in Medicaid-funded medical care or a loss of income at exactly the time a family is grieving or adjusting to a new financial reality. A properly drafted special needs trust avoids this because the beneficiary never legally owns the trust assets. The trustee owns and manages them for the beneficiary’s benefit, which is what keeps the funds from counting against SSI and Medicaid resource limits.
First-Party and Third-Party Special Needs Trusts, Explained
Not every special needs trust works the same way. Which kind a family needs depends mostly on where the money came from.
A third-party special needs trust is funded with someone else’s money, usually a parent’s, grandparent’s, or other family member’s. Because the money never belonged to the person with the disability, there is no requirement to repay the state for Medicaid benefits the beneficiary received during their lifetime. Whatever is left in the trust when the beneficiary passes away can go to other family members, exactly as directed in the trust document. For parents and grandparents doing estate planning, this is usually the trust set up through a will or a standalone trust document, funded now or at death.
A first-party special needs trust (sometimes called a self-settled trust) is funded with the beneficiary’s own money. This comes up most often after a personal injury settlement, an inheritance the person received directly before anyone thought to redirect it, or a lump sum of retroactive Social Security benefits. Federal law requires these trusts to include a payback provision: when the beneficiary dies, the state must be reimbursed from the remaining trust funds for the Medicaid services it paid for during their life. Only after that reimbursement is satisfied can any remaining funds go to other heirs.
There’s also a third option worth knowing about: a pooled special needs trust, managed by a nonprofit organization that combines the resources of many beneficiaries for investment purposes while keeping each person’s account separate for spending. Pooled trusts can be a practical option for families managing a smaller amount of money, or who want professional trust administration without setting up an individual trust from scratch.
The distinction matters because choosing the wrong structure, or failing to plan at all and leaving assets to someone directly, can force money into a first-party trust with a payback requirement when a properly planned third-party trust would have avoided that entirely. This is one of the most common, and most avoidable, mistakes we see.
How a Special Needs Trust Fits Into a Broader Estate Plan
A special needs trust rarely works well as a document that stands on its own. It has to be coordinated with the rest of an estate plan, and with the plans of any other family members who might leave money to your loved one.
A few things worth thinking through:
- Beneficiary designations. Life insurance policies, retirement accounts, and payable-on-death bank accounts pass outside of a will. If any of these still name your family member with a disability directly, the money will go straight to them and bypass the trust entirely, no matter what the will says. These designations need to be updated to name the trust instead.
- Other family members’ plans. Grandparents, aunts, uncles, and siblings sometimes want to leave something to your loved one too. If they aren’t aware a trust exists, they may unintentionally leave a direct gift that causes the exact problem you worked to avoid. It’s worth having that conversation and sharing the trust’s information with anyone who might include your family member in their own will or policy.
- Choosing a trustee. The trustee manages the money, keeps records, files any required tax returns, and makes distributions that stay within the rules that protect benefits eligibility. Some families choose a family member for this role, others choose a professional or corporate trustee, and some do both by naming a co-trustee or a trust protector who can step in if there are ever concerns about how the trust is being managed.
- A letter of guidance. Alongside the legal document, many families write down the day-to-day details a future trustee or caregiver would need to know: routines, preferences, medical history, favorite activities, and the people involved in the person’s care. It isn’t a legal document, but it’s often what makes the difference between a trust that actually improves someone’s quality of life and one that just sits as an account balance.
- Your own long-term care planning. If you might need Medicaid to help cover long-term care for yourself later in life, that planning needs to happen alongside your special needs trust planning, not separately. Otherwise the cost of your own care could reduce what’s available to fund your loved one’s trust.
These pieces work together. A trust by itself, without updated beneficiary designations and a plan for how the rest of the family fits in, leaves gaps that can undo the protection you’re trying to build.
A Few Maryland-Specific Considerations
Special needs trusts are shaped by a combination of federal law, which governs SSI and sets the baseline Medicaid rules, and state law and practice, which can vary. A few things that come up specifically in Maryland planning:
- Maryland’s Medicaid program has its own resource and eligibility rules that run alongside the federal SSI rules, and the two don’t always line up perfectly. We’ll go through both with you rather than assume one set of rules covers everything.
- Depending on how a first-party trust is structured, there can be additional state-level review involved before it’s finalized. The details of this depend on your specific situation, so it’s something we’ll walk through together rather than something we’d want to generalize here.
- Maryland participates in the ABLE account program, which allows a person with a disability to save money in a tax-advantaged account without it counting against benefit limits, subject to its own separate rules and contribution limits. An ABLE account is not a substitute for a trust, since it’s designed for smaller, more accessible savings rather than holding an inheritance or a settlement, but the two can work well together as part of the same plan.
- Maryland trust law continues to evolve, including rules around trustee duties and how a trustee can resign or be replaced. If a trust was drafted some years ago, it’s worth having it reviewed to make sure it still reflects current law.
Because both the federal and Maryland rules in this area change, and because the details depend heavily on a family’s specific circumstances, we would rather sit down with you and confirm exactly where things stand than have you rely on figures or rules that may be out of date.
If you’re starting to think about how to provide for a family member with a disability, or if you already have a trust in place that hasn’t been reviewed in a while, we’re glad to talk it through with you. Call us at (800) 355-1504 or request a free initial consultation, and we can walk through your family’s situation and what makes sense for you.