When someone loves a child or adult with special needs, they naturally want to make sure that person is taken care of. A grandparent may open an investment account for a grandchild. A parent may name a child as a beneficiary of life insurance. An aunt or uncle may include a niece or nephew in a will. Someone may decide to make a substantial gift during their lifetime rather than waiting to leave an inheritance.
The intention is generous. The problem is that the way the gift is made can have consequences no one anticipated.
I have seen firsthand how a gift intended to provide security can instead create significant legal and practical problems for a family. That is why special needs planning is not simply about deciding how much to leave someone. We also need to decide how that person will receive and own the assets, who will manage them, and whether a Special Needs Trust should be part of the plan.
For a person who receives means-tested government benefits or who may need them in the future, those decisions can make a significant difference.
A Direct Gift or Inheritance Can Affect Government Benefits
One of the first things I look at in special needs planning is which government benefits the person receives now and which benefits they may need later.
Not every person with a disability receives means-tested benefits, and not every public benefit has the same financial eligibility rules. Social Security Disability Insurance, or SSDI, for example, is different from Supplemental Security Income, commonly called SSI.
SSI has strict resource limits. In 2026, an individual generally may have no more than $2,000 in countable resources to remain financially eligible for SSI. Money in a bank or investment account, a substantial cash gift, or an inheritance received outright may therefore affect eligibility.
Medi-Cal requires a separate analysis. California reinstated asset limits on January 1, 2026, for certain Medi-Cal eligibility categories, including many people who qualify based on disability. For an individual subject to those rules, the current asset limit is $130,000, with additional amounts permitted for larger households. Not every Medi-Cal recipient is subject to exactly the same rules, and some assets are excluded, so the particular Medi-Cal program and the beneficiary’s circumstances matter.
This is why I would not tell a family simply, “Never leave money directly to someone with a disability.” The better question is: What benefits does this person receive, what benefits may become important in the future, and how should the gift or inheritance be structured?
A UTMA Account Is Not a Long-Term Special Needs Plan
Custodial accounts established under the California Uniform Transfers to Minors Act, commonly called UTMA accounts, deserve particular attention.
A parent or grandparent may open a custodial account when a child is young because it seems like an easy way to set money aside for the child’s future. While the child is a minor, the custodian manages the account. What families may not realize is that the custodian does not have permanent authority to manage those assets.
Under California Probate Code section 3920, custodial property generally must be transferred to the beneficiary at age 18 unless the transfer has been validly delayed under other provisions of California’s UTMA law. Depending on how the custodianship was created, California law allows certain transfers to be delayed to a later age. But even when distribution is delayed, a UTMA custodianship eventually ends.
A UTMA account is not designed to provide lifetime financial management for a person with a disability.
That distinction can become extremely important when the beneficiary reaches adulthood. If a substantial account legally belongs to an adult who cannot independently manage significant financial assets, the family cannot simply decide that a parent or other relative will continue controlling the money indefinitely. Once the custodianship ends, additional legal proceedings may be necessary to establish who has authority to manage those assets.
For some families, that can mean dealing with conservatorship issues that might have been avoided if the gift had originally been structured differently.
This is why the planning question should not stop at, “How do we save money for this child?” We also need to ask who will legally own and control that money when the child becomes an adult.
A Third-Party Special Needs Trust Can Provide a Better Structure
When a parent, grandparent, sibling, or other family member wants to provide for a person with special needs using their own assets, a third-party Special Needs Trust can often provide a much better framework.
A third-party Special Needs Trust is funded with assets belonging to someone other than the beneficiary. The beneficiary does not own the trust assets outright. Instead, a trustee manages the property under the terms of the trust and makes distributions for the beneficiary as permitted by the trust and the rules governing any benefits the beneficiary receives.
When properly designed and administered, the trust can provide additional resources for the beneficiary without simply handing that person a large sum of money or unnecessarily interfering with means-tested government benefits.
It is also important to distinguish a third-party Special Needs Trust from a first-party Special Needs Trust.
A first-party Special Needs Trust contains assets belonging to the person with the disability or assets to which that person was already legally entitled. These trusts are subject to specific federal and California requirements, including Medi-Cal reimbursement provisions after the beneficiary’s death.
A third-party Special Needs Trust is funded with someone else’s assets. California’s Department of Health Care Services specifically distinguishes these trusts from first-party Special Needs Trusts and states that third-party Special Needs Trusts are not subject to DHCS recovery in the same manner.
This is one reason planning before the gift is made can be so valuable. If a grandparent wants to leave $300,000 to a grandchild with special needs, I would much rather coordinate that inheritance before the grandparent dies than try to correct the situation after the grandchild has already become legally entitled to the money.
Coordinate Family Gifts and Beneficiary Designations With the Special Needs Trust
Parents sometimes do everything correctly in their own estate plan but forget that other people may also leave assets to their child.
They create a Special Needs Trust. Their own estate plan directs the child’s inheritance into the trust. Their beneficiary designations are coordinated, and they carefully choose the person or professional who will serve as trustee.
Then a grandparent names the child directly as beneficiary of a retirement account. An aunt names the child on a life insurance policy. A relative opens a custodial investment account because they want to help.
Now there are two different plans operating at the same time.
Special needs planning should therefore include communicating with family members who are likely to make significant gifts or leave an inheritance. They do not need every detail of your estate plan, but they should know that special planning is in place and that they should speak with their own estate planning attorney before naming your loved one directly.
Beneficiary designations are particularly important because life insurance, retirement accounts, annuities, and many financial accounts pass according to the beneficiary designation rather than the terms of a will or living trust. A carefully drafted third-party Special Needs Trust cannot control assets that were never directed into it.
Retirement accounts require additional care because naming a trust as beneficiary can also have income tax consequences. Those decisions should be coordinated with the family’s estate planning, tax, and financial professionals rather than handled by simply changing the name on a beneficiary form.
Leaving the Money to a Sibling Is Not the Same as Creating a Trust
Another solution I sometimes hear is, “I’ll just leave the extra money to my other child and tell her to use it for her brother.”
That may sound easier than creating a trust, but legally it is very different.
If the money is left outright to the sibling, it belongs to the sibling. It may become subject to that person’s creditors, divorce, lawsuits, incapacity, or estate plan. If the sibling dies unexpectedly, the money does not automatically become the protected inheritance you intended for your child simply because everyone understood what you wanted.
It also places a significant responsibility on the sibling without giving that person the legal framework a properly drafted trust provides.
A Special Needs Trust creates that framework. It identifies who will manage the assets, how they may be used for the beneficiary, who will act if the original trustee can no longer serve, and what happens to any remaining property after the beneficiary’s death.
What If the Money Has Already Been Given or Inherited?
Sometimes a family does not discover the problem until after a gift has been completed or someone has died.
The beneficiary may have already inherited money. A UTMA account may be approaching the age when the assets must be distributed. A life insurance policy may name the individual directly, or a payable-on-death beneficiary designation may have been completed years before anyone thought about special needs planning.
Once the beneficiary owns the asset or has a legal right to receive it, the planning options change.
Depending on the circumstances, a first-party Special Needs Trust, pooled trust, ABLE account, spend-down strategy, or another planning option may be appropriate. The available choices depend on the amount and type of asset, the beneficiary’s age and capacity, and the government benefits the beneficiary receives.
What we generally cannot do is treat the asset as though it never belonged to the beneficiary.
A first-party Special Needs Trust can be an extremely useful planning tool when appropriate, but it is not interchangeable with a third-party trust. Because a first-party trust contains the beneficiary’s own assets, additional legal requirements apply, including provisions addressing reimbursement to Medi-Cal after the beneficiary’s death.
Families usually have more flexibility when the planning occurs before the beneficiary becomes legally entitled to the assets.
The Person You Choose as Trustee Matters
Creating the Special Needs Trust is only part of the planning. Someone has to administer it.
A Special Needs Trustee may be responsible for managing and investing assets, maintaining records, making distributions, working with benefit agencies and other professionals, and understanding how decisions involving the trust may affect the beneficiary.
For someone receiving SSI, those distribution decisions can matter. Social Security treats cash paid directly to the beneficiary differently from many payments made by the trustee directly to third parties. Payments for shelter can also affect the beneficiary’s SSI payment. The rules change over time as well. For example, beginning September 30, 2024, Social Security stopped including food in its calculation of in-kind support and maintenance.
The trustee does not need to know every benefit rule from memory, but the trustee should understand that these rules exist, know the beneficiary and the purpose of the trust, and recognize when professional guidance is needed.
Choosing the right trustee deserves its own careful consideration. The person providing the beneficiary’s day-to-day care does not necessarily have to be the person managing the trust, and for some families separating those responsibilities creates a more sustainable long-term plan.
Good Intentions Need the Right Legal Structure
Most families do not run into these problems because someone did not care enough. Usually, the exact opposite is true. Someone wanted to help.
A grandparent wanted to put money aside for a grandchild. A parent wanted to make sure a child received life insurance proceeds. A sibling wanted to leave an inheritance. Each decision came from a good place, but without understanding how ownership of those assets could affect the person receiving them.
That is why special needs planning should extend beyond the parents’ estate plan. We need to consider how other family members may make gifts, how beneficiary designations are structured, whether custodial accounts already exist, and whether the Special Needs Trust is actually positioned to receive the assets intended for the beneficiary.
When those pieces are coordinated in advance, families generally have far more options. When they are not, we may be trying to correct the problem after the beneficiary already owns the asset, when the available solutions can be more complicated and restrictive.
If you have a child or another loved one with special needs, I created a Special Needs Planning Guide to help you understand the legal and financial decisions that should be considered as part of a comprehensive plan. The guide covers Special Needs Trusts, government benefits, decision-making, and planning for your loved one’s future.
You can download my Special Needs Planning Guide to learn more. If you would like help creating or reviewing a Special Needs Trust, or want to make sure gifts, inheritances, beneficiary designations, and other assets align with your family’s overall plan, contact Cheever Law or schedule an introductory call. We can look at the entire situation and create a plan designed around the person you are trying to protect.