Special Needs Planning: Trusts, ABLE Accounts, and Preserving Benefits

Providing for a child or sibling with a disability means planning around strict benefit rules, so that a well-meaning inheritance does not cost them the support they rely on.

Families that include a person with a significant disability face a planning problem that ordinary estate documents do not solve. Leaving assets outright to that person, or naming them on a beneficiary form, can disqualify them from means-tested programs such as Supplemental Security Income and Medi-Cal. For a Bay Area household with home equity and vested company stock, even a modest share of the estate would far exceed those limits. Special needs trusts and ABLE accounts address this, and each has distinct rules, costs, and roles.

Why the resource limits matter

According to the Social Security Administration, the limit on countable resources is $2,000 for an individual and $3,000 for a couple, and countable resources include cash, bank accounts, stocks, and digital currencies. A home the person lives in, one vehicle, household goods, and up to $100,000 in an ABLE account do not count. In California, SSI eligibility is closely linked to Medi-Cal, which for many people with disabilities provides long-term services that private insurance does not. Losing SSI over a $50,000 inheritance can mean losing coverage worth far more.

Special needs trusts

A special needs trust holds assets for the benefit of a person with a disability without those assets being counted as the beneficiary's resource. The trustee pays for things that enhance quality of life, such as education, travel, technology, and services beyond what benefits cover, while avoiding distributions that would reduce benefits, such as cash or, in some cases, food and shelter.

There are two broad types. A third-party trust is funded with assets from parents, grandparents, or others, typically through a will, living trust, or life insurance policy. Because the assets never belonged to the beneficiary, no Medi-Cal payback is required at the beneficiary's death, and remaining funds can pass to siblings. A first-party trust holds the beneficiary's own assets, such as a settlement or an inheritance left outright by mistake. The Social Security Administration's guidance on trusts explains that a trust generally counts as a resource for SSI, with exceptions for trusts under Section 1917(d)(4)(A) of the Social Security Act, commonly called special needs trusts, and pooled trusts under Section 1917(d)(4)(C). First-party trusts must repay Medi-Cal at death from what remains, one reason families try to avoid the outright-inheritance mistake.

Trusts have costs. Drafting requires an experienced attorney, trustees must understand the distribution rules, and the trust files its own tax returns. Choosing a trustee is often the hardest decision, since the role may last decades after the parents are gone.

ABLE accounts

ABLE accounts, offered in California through CalABLE, are tax-advantaged accounts the person with a disability can own and control. The IRS describes ABLE accounts as accepting annual contributions up to the gift tax exclusion amount, which is $19,000 for 2026, with additional contributions permitted from a working beneficiary's own earnings, tax-free distributions for qualified disability expenses, and limited rollovers from a 529 plan. Eligibility now extends to people whose disability began before age 46, per the ABLE National Resource Center, a substantial expansion from the earlier age-26 rule, and up to $100,000 in the account is disregarded for SSI.

ABLE accounts are simpler and cheaper than trusts and give the beneficiary independence, but contributions are capped, balances above $100,000 affect SSI, and Medi-Cal recovery may apply to remaining funds at death. Many families use both: a trust for the bulk of the inheritance and an ABLE account for day-to-day spending.

Coordinating the whole plan

The most common failures are mechanical. A grandparent's will leaves a share outright to the grandchild. A 401(k) or life insurance beneficiary form names the child directly. A sibling is informally asked to hold money, with no protection if that sibling divorces, is sued, or dies. Every account and document in the extended family needs to route the beneficiary's share to the trust rather than the person. A letter of intent describing routines, providers, and preferences gives future trustees information no legal document captures.

Life insurance is often the funding vehicle for a third-party trust, because it converts premiums into a lump sum at the moment the trust needs it. Parents should also consider guardianship or supported decision-making arrangements for when the child reaches 18, since parental authority does not continue automatically.

This article is educational only and is not legal, tax, or investment advice; benefit rules are detailed and change frequently, so consult a licensed special needs planning attorney and a qualified tax professional about your family's situation.

Important Disclosures

Important Disclosures: Propulsion Capital Management is an investment adviser registered with the State of California Department of Financial Protection and Innovation. Registration does not imply a certain level of skill or training. This article is provided for general informational and educational purposes only and does not constitute investment, tax, legal, or accounting advice, nor an offer or solicitation to buy or sell any security or to adopt any particular investment strategy. The information is believed to be accurate as of the date of publication but is subject to change without notice; tax laws and regulations change frequently and their application depends on individual facts and circumstances. Nothing herein should be relied upon as a substitute for personalized advice from a qualified professional. Investing involves risk, including the possible loss of principal, and past performance is no guarantee of future results. Diversification does not ensure a profit or protect against loss. Any examples are hypothetical, are for illustrative purposes only, and do not reflect the experience of any client. Links to third-party websites are provided for convenience; Propulsion Capital Management does not endorse, and is not responsible for, the content of third-party sites. Propulsion Capital Management does not provide tax or legal advice; please consult your tax adviser or attorney regarding your specific situation.