Leaving Money to a Disabled Loved One Can Cost Them Their Benefits—Unless You Plan It Right
Here's a scenario that comes up more than most people realize.
A parent spends years carefully building an estate plan. They want to make sure their adult child with a disability is taken care of after they're gone. So they do what feels natural: they leave that child an equal share of the estate, just like their other kids.
Six months after the parent dies, the disabled child loses their Medicaid coverage and Supplemental Security Income (SSI). The inheritance—meant to help—triggered a disqualification. The family spends years trying to sort it out.
This is not a rare edge case. It's one of the most predictable and preventable problems in Oregon estate planning. And the solution has been around for decades. It's called a special needs trust.
Why a Direct Inheritance Can Backfire
Medicaid and SSI are means-tested programs. That means eligibility depends on having limited income and assets. In Oregon, the asset limit for SSI is $2,000 for an individual. Medicaid follows similar rules.
When a person with a disability receives a direct inheritance—even a modest one—it may push them over these limits. Once they exceed the threshold, they lose benefits until the inherited money is spent down. And that spending has to be on approved expenses. Paying rent, buying food, covering utilities—these things can disqualify spending because they duplicate what the benefit programs already cover.
The result: the inheritance doesn't actually improve the person's quality of life. It just temporarily replaces the government benefits that were already meeting basic needs—and when it's gone, those benefits may not return smoothly.
What a Special Needs Trust Does
A special needs trust (also called a supplemental needs trust) is specifically designed to hold assets for a person with a disability without disqualifying them from Medicaid, SSI, or other public benefits.
The key is that the trust supplements the benefits—it doesn't replace them. The trust can pay for things those programs don't cover: a computer, travel, education, hobbies, entertainment, personal care items, therapies not covered by Medicaid, and other quality-of-life expenses. The trustee manages and distributes funds, and the person with the disability typically doesn't have direct control over the assets, which is what allows the trust to remain outside the Medicaid and SSI asset calculations.
Done correctly, the result is a meaningful improvement in the beneficiary's quality of life—funded by the family's estate—without costing them the public benefits they depend on.
The Two Main Types
There are two common types of special needs trusts in Oregon, and which one applies depends on where the money is coming from.
Third-party special needs trusts are funded with someone else's assets—typically a parent's, grandparent's, or sibling's estate. This is what most families are setting up when they do estate planning. These trusts don't have a Medicaid payback requirement, which means when the beneficiary dies, the remaining assets can pass to other family members or heirs.
First-party special needs trusts (also called self-settled or (d)(4)(A) trusts) are funded with the disabled person's own assets—often from a personal injury settlement, inheritance received without a trust in place, or other windfall. These trusts require a Medicaid payback provision: when the beneficiary dies, the state of Oregon must be reimbursed for Medicaid benefits paid during the person's lifetime before anything passes to other heirs.
For estate planning purposes, most families are focused on third-party trusts. If you're leaving assets to a disabled loved one, this is the structure you want.
It Needs to Be Set Up Correctly
Special needs trusts are technical documents. They need to meet specific federal and state requirements to preserve benefits eligibility. A poorly drafted trust—or a trust that gives the beneficiary too much direct control—can be treated as a countable asset and defeat the entire purpose.
A few things that matter:
The language must be right. The trust should explicitly state that it is intended to supplement, not replace, public benefits. It should restrict the trustee from making distributions that would cover food or shelter in ways that could trigger an SSI reduction (or handle those distributions carefully if they're unavoidable).
Trustee selection matters. The trustee manages distributions and has significant discretion. This role requires someone who understands the rules around public benefits—or is willing to work with professionals who do. Many families name a trusted family member as trustee, sometimes alongside a corporate co-trustee for continuity and compliance support.
Coordination with your broader estate plan is essential. If your will or revocable trust leaves assets directly to a disabled beneficiary, the special needs trust won't help. Your other estate planning documents need to direct assets into the special needs trust—not around it. This is a common mistake when families have an existing estate plan and add a disabled beneficiary later without updating the full picture.
ABLE accounts are a related but separate tool. Oregon participates in the ABLE program, which allows qualified individuals with disabilities to hold up to $100,000 in a tax-advantaged account without losing SSI. ABLE accounts can work alongside a special needs trust, but they have contribution limits and other restrictions that make them a complement to—not a substitute for—a properly drafted SNT.
Who Needs to Think About This
If any of the following apply to your family, a special needs trust deserves a place in your estate planning conversation:
You have a child or adult dependent with a physical or developmental disability who receives or may receive Medicaid or SSI
You have a family member with a mental health condition that affects their ability to manage finances
You're a grandparent or other relative who wants to leave something to a disabled family member without jeopardizing their benefits
Your disabled loved one recently received or is expecting a personal injury settlement or inheritance
Even if the person with the disability is currently young or benefits eligibility seems far off, planning now is almost always easier and cheaper than trying to fix a direct inheritance after the fact.
The Bottom Line
Leaving money to a loved one with a disability is an act of care. But without the right structure, it can inadvertently take away the services they depend on most. A special needs trust preserves the inheritance and the benefits—letting the two work together instead of canceling each other out.
If your estate plan doesn't account for a disabled beneficiary, that's a gap worth closing. It's not a complicated conversation to have. It just needs to happen before it becomes an emergency.
Track Town Law helps Oregon and Idaho families build estate plans that protect the people who matter most. Have questions about special needs planning or trusts? Contact us or book a consultation.
The information in this post is for general informational purposes only and does not constitute legal advice. No attorney-client relationship is formed by reading this content.
