If you have a child, sibling, spouse, or parent with a disability, this article is written with your family in mind. The decisions involved in planning for a loved one with special needs are among the most consequential in estate planning, and they deserve more than a passing mention in a general overview.
A special needs trust is a specific legal structure designed to hold assets for a person with a disability in a way that does not disqualify them from the government benefits they depend on. Done correctly, it gives your loved one financial resources to draw on for the rest of their life without jeopardizing the healthcare coverage and income support that forms the foundation of their care.
Done incorrectly, or not done at all, even a well-intentioned inheritance can cause serious harm.
To understand why a special needs trust matters, you first need to understand how programs like SSI and Medicaid treat assets.
SSI (Supplemental Security Income) is a federal program that provides monthly income to people who are disabled, blind, or elderly and have very limited income and resources. The 2026 SSI resource limit is $2,000 for an individual. Any countable resource above that threshold, including cash, bank accounts, and most investments, will reduce or eliminate SSI payments.
In Illinois, families use special needs trusts to leave money to a disabled child or loved one without accidentally ending their Medicaid or SSI coverage. Without a special needs trust, even a $10,000 inheritance can cause a person to lose health insurance and monthly income support, sometimes for months while they reapply and wait for benefits to be reinstated.
This is not a hypothetical risk. It happens regularly, often because a grandparent, aunt, or uncle leaves money directly to a loved one with a disability out of genuine love and care, without understanding the consequences. A special needs trust is how you make sure that generosity lands the way it was intended.
A special needs trust holds money or property for a person with disabilities. The trust is managed by a trustee, who uses the funds for the beneficiary's needs that are not covered by government programs, such as education, therapy, transportation, or recreation.
The key is that the money is held by the trust, not owned by the beneficiary directly. Because the beneficiary does not legally own the assets, they generally do not count toward SSI or Medicaid resource limits. The trust supplements what government programs provide rather than replacing them.
What the trust can pay for matters. Distributions should cover goods and services beyond what benefits already provide: technology, travel, personal care items, entertainment, hobbies, education, and similar expenses that improve quality of life. Distributions that substitute for what SSI or Medicaid would otherwise cover can reduce benefits, which is why trustee education and careful administration are essential.
One recent change worth noting: as of September 2024, SSI no longer counts food in In-Kind Support and Maintenance calculations. This gives trustees somewhat more flexibility in how they use trust funds for everyday support, though housing-related payments still require careful handling.
Illinois recognizes three types of special needs trusts, each suited to different situations. For most families doing estate planning, the distinction that matters most is between first-party and third-party trusts.
A third-party special needs trust is funded with assets belonging to someone other than the beneficiary, typically a parent, grandparent, or other family member. This is the type most commonly used in estate planning. When the beneficiary passes away, whatever remains in the trust can pass to other named beneficiaries. There is no requirement to reimburse Medicaid.
A first-party special needs trust is funded using money that belongs to the person with a disability, for example from a personal injury settlement or an inheritance received before a trust was in place.
These trusts are allowed under federal law but come with an important condition: the beneficiary must be under age 65 when the trust is created. When the beneficiary passes away, Medicaid must be reimbursed for benefits paid during the beneficiary's lifetime before any remaining funds pass to others.
For families currently doing estate planning, a third-party trust is almost always the appropriate vehicle.
The straightforward answer is: any family with a loved one who has a disability and receives or may receive means-tested government benefits. That includes physical disabilities, intellectual and developmental disabilities, serious mental illness, and certain chronic health conditions that affect a person's ability to work and support themselves.
It also includes families whose loved one does not currently receive benefits but may need them in the future. Establishing a trust now, before a need becomes urgent, gives you time to structure it carefully and fund it properly.
A special needs trust is also worth considering if you are the person with a disability yourself and want to plan for a future in which you may need government assistance. Working with an attorney who understands both the benefits landscape and estate planning is essential in that situation.
If you pass away without a special needs trust and leave assets directly to a loved one with a disability, those assets will likely count against their benefit eligibility. They may have to spend down what you left them before they can requalify for the programs that cover their healthcare and basic support.
The same is true if other family members, including grandparents or siblings, leave assets directly to your loved one without understanding the implications. One of the most practical things you can do as part of your own estate planning is communicate to the rest of your family that any gifts or inheritances intended for your loved one should flow through the trust, not to them directly.
The trustee of a special needs trust carries significant responsibility. Beyond the general fiduciary duties that apply to any trustee, they need to understand the specific rules governing distributions so that trust spending does not inadvertently reduce benefits. For many families, a combination of a trusted family member and a professional advisor, or a pooled trust managed by a nonprofit organization, provides the right balance of personal knowledge and administrative expertise.
Planning for a loved one with a disability is one of the most loving and consequential things a family can do. It deserves careful attention, the right legal structure, and an attorney who understands both the emotional weight of the decision and the technical requirements that make it work.
If you would like to talk through whether a special needs trust belongs in your family's plan, we are here for that conversation.
This article is for informational purposes only and is not intended as legal advice. Please consult a qualified estate planning attorney with experience in special needs planning regarding your specific situation.