How a Special Needs Trust for Your Child Can Fall Apart
One woman's struggle to keep a roof over her head and food on the table for herself and her disabled daughter shows what can happen when an ex or other family members fail to properly shelter assets. The child's Medicaid and SSI benefits could be in jeopardy.

Parents of disabled children must juggle a lot of responsibilities: work, bills and of course caregiving. But one ball they can’t afford to drop is special needs planning. One wrong move in this complicated ballet balancing benefits and services with asset rules could be disastrous.
While every family’s situation is unique, the laws regulating special needs trusts are complex and can require some strategizing by families and trust companies — and if necessary, utilization of available government and nonprofit support programs.
Some Background on Trusts and Benefits Tests
One such law is the Omnibus Reconciliation Act of 1993, which established rules that trusts — revocable and irrevocable, established by an individual or by court order — must be included as income or available resources, which can reduce or eliminate eligibility for means-tested benefits unless certain rules are followed. Most government benefit programs, including Medicaid and Supplemental Security Income (SSI), will exempt a special needs trust as a resource if the beneficiary cannot compel distributions from the trust and the trust can only be used for the beneficiary’s supplemental needs and not for support.
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A properly drafted special needs trust can qualify for exemption by following several guidelines:
- It must be limited to only one lifetime beneficiary.
- It must be irrevocable.
- It can only pay for medical and dental care not paid by other sources, although it may pay for private rehabilitation training, services or devices, supplementary education assistance, entertainment, hobbies, transportation and other personal property and services.
An Illustration of One Woman’s Trust Struggles
Consider this fictional scenario: Recently, “Jean,” the mother of a disabled child, “Beth,” sought out a replacement for a resigning trustee. Beth, age 5, has Medicaid coverage through her SSI benefit and requires near constant care and monitoring.
Jean is struggling with many more issues in addition to the resigning trustee. The child’s father and Jean’s ex-spouse, “Ron,” whose salary was Jean’s main source of income through child support payments, passed away about 18 months before. Although the child support partially counted to offset Beth’s SSI benefit, Jean relied on it for rent and living expenses, since working outside the home is not possible with Beth’s medical needs.
Ron apparently failed to include a proper beneficiary designation for Beth’s share of his company retirement plan or to make a proper disposition in his last will to shelter Beth’s share of his estate. The result is that those funds may count as income, as well as resources that will diminish Beth’s SSI benefit.
Struggling with the loss of the child support, the resigning trustee and the news that Ron’s simple estate plan may further derail her financial support, Jean consulted with an attorney who is well versed in special needs and means-tested public benefit programs.
The attorney learned that Beth received a medical malpractice structured settlement that included a court-ordered special needs trust about three years before. Other than the trust distributions to cover out-of-pocket medical costs, the trustee and the drafting attorney, who were both selected by the structured settlement company, had not provided Jean or Ron any planning services or advice. This trust is subject to Medicaid reimbursement at Beth’s death to repay those public benefits.
Beth is on a waiting list for special services through two federal waiver programs: the Michelle P. Waiver and the Supports for Community Living Medicaid Waiver. These programs can provide many highly beneficial services to adults and children with intellectual or developmental disabilities: physical therapy, speech therapy, case management, consultative clinical and therapeutic services, residential support, respite care, financial management services, goods and services, specialized medical equipment and supplies, transportation and vehicle adaptations. However, in Beth’s home state, the programs are limited to 15,441 enrollees, combined, and there are currently about 8,181 applicants on the waiting list.
The funds in the special needs trust can be used to pay Beth’s costs other than housing, food, utilities and medical care and medicines covered by Medicaid. So, those funds aren’t available to Jean for rent, household and other essential needs.
An Attorney’s Advice for Jean
Jean’s attorney is investigating a strategy to place the funds from her father’s estate by court order into a new special needs trust for Beth, that won’t be subject to federal reimbursement rules, and, possibly, set up an inherited rollover IRA and Qualified Income Trust, so Ron’s retirement plan won’t affect Beth’s SSI payment. But, even if successful, these remedies won’t address Jean’s unmet housing, support and maintenance costs for herself and Beth.
Jean has been advised to pursue eligibility for several other public assistance programs: the Supplemental Nutrition Assistance Program (SNAP), the Special Supplemental Food Program for Women, Infants, and Children (SSFP/WIC), Temporary Assistance for Needy Families (TANF) and the Housing Choice Voucher Program.
If Jean and Beth qualify, SNAP and SSFP/WIC can provide food or food vouchers. TANF may provide basic assistance, work supports and childcare. The Housing Choice Voucher Program may pay a subsidy to limit Jean’s rent costs to no more than 30% of her total income.
Distributions from Beth’s trust should not affect eligibility for these programs, but, sadly, the recent changes to these federally backed programs are likely to further erode basic assistance and health care coverages available for struggling families, like Jean’s.
Jean may be forced to seek a reformation of Beth’s trust to a fully discretionary trust that can provide Beth, and Jean — as Beth’s guardian and caregiver — with funds for housing, support and maintenance, even at the risk of lost eligibility for those public benefits. After all, Beth’s medical needs cannot be met if she is homeless.
Advice for Any Parent of a Child with Special Needs
The key takeaway from this story is that it is essential that parents of a disabled child learn about federal, state, local community, charitable and other nonprofit support programs that may help. They must also discuss eligibility rules with relatives who may want to make gifts for the child, leave a share of their estate, include the child in a beneficiary designation for a retirement plan or life insurance or provide other types of in-kind support and maintenance.
Finally, setting up a special needs trust requires planning, legal and financial expertise, and the proper and compassionate administration of a professional trustee.
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Timothy Barrett is a Senior Vice President and Trust Counsel with Argent Trust Company. Timothy is a graduate of the Louis D. Brandeis School of Law, past Officer of the Metro Louisville Estate Planning Council and the Estate Planning Council of Southern Indiana, Member of the Louisville, Kentucky, and Indiana Bar Associations, and the University of Kentucky Estate Planning Institute Committee.
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