A grandparent updates a will and names every grandchild equally. It feels fair. For a grandchild who receives SSI or Medicaid, that equal share can be the most expensive gift they ever receive.
This is one of the most common problems I see in consultations, and it is almost always a surprise to the family. The grandparent meant well. The attorney who drafted the will may never have been told that one grandchild has a disability. The money arrives, benefits stop, and the family spends months trying to undo it.
This article explains why direct gifts cause the problem, what a third-party special needs trust does about it, and the exact instructions to give a grandparent and their attorney.
Why a direct inheritance ends benefits
Supplemental Security Income (SSI) has a resource limit of $2,000 for an individual. In most states, Medicaid eligibility for an adult with a disability is tied to SSI or uses the same limit. Resources are counted on the first day of each month. If your son or daughter has more than $2,000 in countable assets on that day, SSI stops for the month, and Medicaid can stop with it.
An inheritance paid directly to your child is a countable resource the moment they have the legal right to it. So is a life insurance payout, a payable-on-death bank account, or a share of a retirement account where your child is the named beneficiary. The size of the gift does not matter once it crosses $2,000.
The damage goes beyond the monthly check. In many states, Medicaid is the door to waiver services: day programs, personal care, supported employment, and residential support. Losing eligibility, even briefly, can mean losing a place in a program with a waiting list.
What a third-party special needs trust does
A third-party special needs trust is a trust funded with money that belongs to someone other than the beneficiary. Parents, grandparents, aunts, uncles, and family friends can all give to it, during life or at death. A trustee holds the money and spends it for the benefit of your child on things that public benefits do not cover: therapies, travel, a phone, a computer, clothing, recreation, education, and much more.
Because the beneficiary does not own the money and cannot demand it, the trust does not count toward the $2,000 limit. SSI and Medicaid continue.
Two features make the third-party trust the right vehicle for grandparent gifts specifically:
- No Medicaid payback. When the beneficiary dies, whatever remains in a third-party trust goes to the people the person who created the trust chose, often siblings or a charity. That is different from a first-party trust, which must repay Medicaid first.
- One destination for everyone. Once the trust exists, every relative can name it. Grandparents, godparents, and friends do not each need their own trust. They only need the trust’s name.
The instructions to give a grandparent
Once your third-party trust is signed, the message to grandparents is short. Here is the language I suggest:
“Please do not leave anything directly to [name]. Instead, leave [name]’s share to the [Family Name] Supplemental Needs Trust dated [date]. Your attorney can add that to your will or trust in a few minutes. The same applies to life insurance and any account with a beneficiary form.”
Give them a copy of the first page and the signature page of the trust so their attorney can confirm the name and date. They do not need the whole document.
Gifts during life work the same way
The same rule applies to birthday and holiday checks. A $500 check written to your adult child is income in the month received and a resource the next month if unspent. A $500 check written to the trust is neither. If grandparents like to give cash, ask them to write it to the trust, or to an ABLE account, which allows up to $20,000 in contributions per year in 2026 from all sources combined without affecting SSI.
What if the money has already been left directly?
If a grandparent has already passed away and the will names your child directly, do not spend the money before you get advice. Two tools may still protect it:
- A first-party special needs trust can hold the beneficiary’s own money, including an inheritance, and preserve eligibility. It requires a Medicaid payback at the end, but it keeps benefits in place now.
- An ABLE account can absorb up to the annual contribution limit, and the first $100,000 in an ABLE account is excluded from the SSI resource limit.
Timing matters. Contact us or your attorney before the estate distributes the funds.
A conversation worth having this fall
Many families see grandparents over the holidays. It is a natural time to have this conversation, and it is easier when the trust already exists and you can hand over a name and a date. Our Will and Third-Party Special Needs Trust package is $299 and is drafted by a disability-law attorney. Private firms typically charge $3,000 or more.
If you are not sure which trust fits your situation, book a free consultation. Education is always free. That is the reason the nonprofit exists.
This article provides general legal information, not legal advice. Rules vary by state. Questions? Email tom@specialneedstrustsonline.com or call 508-690-0012.