Mainstreet Financial Education · Family & Legacy · 2026
An inheritance left the ordinary way can cut off the SSI and Medicaid an adult child depends on. Here is how a special needs trust and an ABLE account keep the benefits intact, and what federal families need to know about survivor benefits and FEHB.
Supplemental Security Income and Medicaid are needs-based. An adult who receives them can hold no more than $2,000 in countable assets. Leave that child $50,000 outright, or name them on a life insurance policy or an IRA, and the benefits stop until the money is spent down. Medicaid is usually the bigger loss, because it is often the only coverage for the supports and services the child needs every day.
Two bad fixes are common. The first is disinheriting the child and leaving everything to a sibling "to take care of" them. The sibling can divorce, be sued, go bankrupt, or die, and the money follows the sibling, not the child. The second is doing nothing and hoping. The right tools are below, and they have been settled law for decades.
A special needs trust holds assets for the child's benefit without the assets counting as the child's. The trustee pays for things the benefits do not cover: therapy, travel, a phone, a vehicle, a better place to live. There are two kinds, and the difference matters.
| Third-party trust | First-party trust | |
|---|---|---|
| Funded with | Your money: a bequest, a life insurance policy, a retirement account, gifts from grandparents | The child's own money: a settlement, a back-pay award, an inheritance that was left outright by mistake |
| Medicaid payback at death | None | Required. The state is repaid for Medicaid spent before anything goes to other heirs |
| Age limits | None | Must be created before the child turns 65 |
| Who sets it up | You, in your will or as a standalone trust, drafted by a special needs attorney | The child, a parent, grandparent, guardian, or court; or a pooled trust run by a nonprofit |
The planning lesson is simple: everything you intend for the child should flow into a third-party trust, so none of it ever becomes the child's own money and triggers the payback. That means the trust, not the child, is the named beneficiary on every account and policy.
Since the SECURE Act, most non-spouse heirs must empty an inherited IRA within ten years. A disabled or chronically ill beneficiary is an exception and can still stretch withdrawals over their life expectancy, but only if the IRA is left to them directly (which breaks the benefits) or to a trust drafted to qualify, sometimes called an applicable multi-beneficiary trust. A general-purpose trust can lose the stretch and force the whole IRA out, and its tax, in ten years. This is a drafting detail that the special needs attorney and I need to coordinate, because the beneficiary form on the IRA has to match the trust language exactly.
Many families fund the trust with a life insurance policy payable to the trust, because it arrives as a known amount, income tax-free, at exactly the moment the child loses a parent. A second-to-die policy on both parents is the common structure. It is one of several ways to fund the trust and the plan should decide whether it fits before any product does.
An ABLE account is a tax-advantaged savings account owned by the person with the disability. The first $100,000 is ignored for SSI, and the entire balance is ignored for Medicaid. Contributions from all sources are capped at $20,000 in 2026, and starting January 1, 2026 the disability must have begun before age 46 rather than 26, which opened the account to many more adults.
Federal families have benefits for a disabled child that most people, including many advisors, do not know exist. Each has a deadline or a filing step.
An unmarried child whose disability began before 18 can receive a FERS or CSRS survivor annuity for life, not just until 22. OPM needs a request and a physician's statement, and the Special Needs Alliance recommends filing it at least 90 days before the child turns 18. Under FERS the annuity is reduced by any Social Security survivor benefit for the same month, and it is counted as income for SSI. Current rules do not allow it to be paid into a special needs trust.
A child incapable of self-support because of a disability that began before 26 can stay on your FEHB plan past 26 and after your death, as long as you held Self and Family coverage. Keep that enrollment when you retire. Dropping to Self Plus One to save on premiums ends the child's eligibility.
Once a parent retires, becomes disabled, or dies, an adult child disabled before 22 can draw Childhood Disability Benefits on the parent's record, often far more than SSI, with Medicare after two years. This benefit is not needs-based and it changes the whole picture, so time it with the parent's claiming decision.
Name the special needs trust, not the child. The TSP pays a trust in a lump sum, so the trustee should be ready to move it to an inherited IRA promptly to keep the tax deferral.
Alongside the trust, write a letter of intent: who the child is, daily routines, doctors, medications, what calms them, what they love, who should never be involved. It is not a legal document. It is the instruction manual the trustee and the next caregiver will actually use, and it is the part families most often put off.
The trust is the plan. Everything else is a beneficiary form.
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