Planning for a child with special needs involves more than deciding who receives an inheritance. You also have to think about housing, medical care, therapies, transportation, daily support, and the government benefits your child may rely on.
That can make estate planning feel overwhelming. As a parent of a child with special needs, Don Shaw understands that this is not just an abstract legal exercise. It is about protecting your child’s quality of life and creating a plan your family can rely on when you are no longer able to handle everything yourself.
For many Virginia families, a properly drafted special needs trust can be an important part of that plan.
What is a special needs trust?
A special needs trust is designed to hold money or property for a person with a disability without unnecessarily disrupting eligibility for needs-based benefits such as Supplemental Security Income (SSI) and Medicaid.
These benefits often have strict financial eligibility rules. If your child receives money directly, that inheritance or gift may count as a resource. The result could be a reduction in benefits, a suspension of SSI, or the loss of Medicaid eligibility until the money is spent down.
A special needs trust is intended to supplement public benefits: not replace them. Trust funds may help pay for expenses that SSI or Medicaid does not fully cover, such as:
- Clothing and personal items
- Education and vocational programs
- Transportation
- Recreation and travel
- Technology and communication devices
- Dental care and therapies
- Personal care and assistance
- Furniture and household expenses
- A phone, computer, or other adaptive equipment
The trustee manages the money. Your child does not own the trust assets outright and generally cannot demand that the trustee distribute the money for basic support.
That distinction is central to preserving benefits.
Why leaving an inheritance outright can create a problem
Suppose a Virginia parent leaves $100,000 directly to a child who receives SSI and Medicaid. The child may legally own that money, but owning it could place the child over the applicable resource limits.
The inheritance was intended to help. Instead, it could create a benefits problem.
The family may then need to spend the money, transfer it through a properly structured first-party trust, or take other corrective steps. Those options may be complicated, time-sensitive, and expensive. In some circumstances, an improper transfer can create additional eligibility issues.
A better approach is usually to plan ahead so the inheritance never belongs to your child personally. Instead, it can pass directly into a third-party special needs trust created as part of your estate plan.
Third-party and first-party special needs trusts
The source of the trust funds determines what type of special needs trust is involved.
Third-party special needs trust
A third-party trust is funded with assets that belong to someone other than the beneficiary. Common funding sources include:
- A parent’s or grandparent’s inheritance
- Lifetime gifts from family members
- Life insurance proceeds
- Investment accounts
- Property
- A portion of a parent’s estate
This is often the right structure when parents are planning for a future inheritance.
A properly drafted third-party trust can provide for your child while helping preserve eligibility for SSI and Virginia Medicaid. Because the funds never belonged to your child, a third-party trust generally does not require Medicaid payback at your child’s death.
The trust can also name remainder beneficiaries. For example, any remaining assets might pass to siblings, other relatives, or a charity: depending on your wishes.
First-party special needs trust
A first-party trust is funded with assets that already belong to the person with a disability. Examples may include:
- An inheritance already received outright
- A personal injury settlement
- Back-pay benefits
- Funds from a lawsuit
- Savings held in the beneficiary’s name
Federal law permits certain first-party special needs trusts to protect eligibility, but the rules are technical. In general, the beneficiary must meet the applicable disability requirements and must be under age 65 when the trust is established and funded.
A first-party trust also generally must include a Medicaid payback provision. When the beneficiary dies, Virginia Medicaid may be entitled to reimbursement from the remaining trust assets, up to the amount Medicaid paid on the beneficiary’s behalf.
That is an important difference between the two trust types:
- Third-party trust: Usually no Medicaid payback requirement
- First-party trust: Medicaid payback is generally required
If your child has already received an inheritance or settlement, do not move the money or give it away without legal advice. The timing and handling of those funds matter.
The trustee has an important job
A special needs trust is only as effective as its administration.
The trustee is responsible for managing investments, keeping records, making appropriate distributions, and coordinating with your child’s benefits. The trustee should understand that trust payments can affect SSI differently depending on what the money is used to purchase.
For example, paying for certain food or shelter expenses may affect SSI. Other expenses may be treated differently. The trustee must also be careful about making payments directly to your child versus paying a provider or vendor on your child’s behalf.
You may choose a family member, professional fiduciary, bank, or trust company as trustee. There is no single right answer. A relative may understand your child well, while a professional trustee may bring more experience with recordkeeping and benefits administration.
Some families use co-trustees or name a family member as trustee with a professional available for guidance. The right choice depends on your family relationships, the size of the trust, and the level of ongoing support your child may need.
How a revocable living trust fits into the plan
A special needs trust is often only one part of a larger estate plan.
A revocable living trust (RLT) is like a box with no lid. You can put assets into the box, take them out, and change the instructions while you are alive and capable. After your death or incapacity, the box can help organize how assets are managed and distributed.
For a Virginia family, the RLT may hold and manage your assets during your lifetime while providing instructions for what should happen later. It can direct your share of the estate into a third-party special needs trust for your child instead of distributing those assets outright.
We also recommend pairing the RLT with a pour-over will where appropriate. The pour-over will acts as a backstop, directing certain assets left outside the box into the trust at death. It cannot replace proper funding and beneficiary designations, but it can help ensure that assets do not remain unprotected simply because they were overlooked.
Your estate plan may also include powers of attorney, an advance medical directive, beneficiary designation reviews, and a plan for who will manage your child’s trust and care-related decisions.
What about an ABLEnow account?
Virginia families may also consider a Virginia ABLEnow account. An ABLE account is not a special needs trust, but it can provide another way for an eligible person with a disability to save and pay for qualified disability expenses while maintaining access to certain benefits.
ABLEnow may be useful for:
- Smaller savings goals
- Regular contributions
- Certain employment-related savings
- Qualified expenses such as housing, education, transportation, and support services
A special needs trust may be better suited for a larger inheritance, life insurance proceeds, or long-term family funds. Some families use both tools, with the trust holding larger assets and the ABLEnow account handling certain day-to-day expenses.
ABLE rules, contribution limits, and benefit treatment can change. Review current information through ABLEnow and coordinate the account with your overall plan.
Practical next steps for Virginia families
You do not have to solve every issue at once. Start with a clear review of your family’s situation.
1. Gather important information
Collect copies of:
- Your child’s benefit award letters
- Medicaid information
- Existing wills and trusts
- Life insurance policies
- Retirement account beneficiary designations
- Investment and bank account statements
- Any settlement or inheritance documents
- Your child’s care and support information
2. Identify future funding sources
Think about what your child may receive in the future. Include life insurance, retirement accounts, real estate, business interests, and gifts from grandparents or other relatives.
Each family member who plans to leave something to your child should understand that an outright gift or inheritance may create complications.
3. Choose the right trust structure
A Virginia attorney can help determine whether a third-party trust, first-party trust, pooled trust, ABLEnow account, or combination of tools makes sense.
Virginia recognizes trusts for beneficiaries with disabilities, including trusts designed to avoid being treated as countable resources for government-benefit purposes. You can review Virginia Code § 64.2-779.10 for the statutory language.
4. Review the trustee and successor plan
Name someone who can manage the trust carefully. Also name successor trustees in case the first choice cannot serve.
5. Review the plan regularly
Your child’s benefits, living arrangements, medical needs, family circumstances, and the law may change. Review your plan after major events and periodically even when nothing obvious has changed.
The Social Security Administration’s guidance on trusts and the Virginia Department of Medical Assistance Services eligibility manual provide useful background, but they do not replace individualized legal advice.
A thoughtful plan can bring real peace of mind
Planning for a child with special needs is not about assuming the worst. It is about giving your child more stability and giving your family clearer instructions for the future.
A properly prepared special needs trust can help protect access to benefits while providing resources for a fuller, more supported life. When combined with a revocable living trust, pour-over will, appropriate beneficiary designations, and a carefully chosen trustee, it can become an important part of your family’s long-term plan.
We would be glad to learn more about your situation and discuss options for your Virginia family. Visit our estate planning services page or contact Don Shaw Law to get started.
