When you’re planning for your family’s future, every detail matters. The choices you make today will shape the way your children and loved ones carry on your legacy. These decisions become even more crucial when you have a special needs child who will need lifelong assistance.
Without the right structure for your estate and retirement accounts, those decisions can unintentionally create bigger, more expensive problems down the road. If your child receives government assistance or may rely on it later, the way you leave assets could determine whether they stay eligible. Thoughtful planning now helps ensure they’ll have the care they need, without risking access to the benefits that matter most.
The Risk of Simply Designating Your Special Needs Children as Beneficiaries
When a parent lists a special needs child as a direct beneficiary of an IRA, 401(k), life insurance policy, or even a bank account, it may feel like the most straightforward path. But in practice, this decision can create long-term financial consequences for the child. A direct inheritance could disqualify a child from critical public benefits, such as Supplemental Security Income (SSI) and Medicaid, which often have strict income and asset limits.
Once those funds are depleted, the process of requalifying for benefits is neither immediate nor automatic. During that time, the child may be without essential services, housing support, or access to health care.
Some parents attempt to sidestep this problem by omitting the special needs child entirely from beneficiary designations, thinking other siblings will care for them. That approach relies too heavily on others doing the right thing and lacks enforceability. It also removes control from the child’s own support structure. Estate plans should never rely solely on good intentions.
Structuring Your Retirement Accounts to Care for Special Needs Children
A more secure and sensible approach involves naming a properly drafted special needs trust as a beneficiary to your accounts, or designating your revocable trust “for the benefit of” your special needs child as the whole or partial beneficiary of your accounts. A stand-alone special needs trust, or revocable trust with special needs provisions, can hold assets for the benefit of your child without causing disqualification from means-tested government programs. The trust doesn’t give the child direct ownership of the funds, but allows a trustee to make distributions that supplement, rather than replace, government support.
If you’re the parent of multiple children, a beneficiary designation might look like this: your spouse as the primary beneficiary, and your children as contingent beneficiaries in equal shares. For the child with special needs, the share can be directed to a trust “for the benefit of” (FBO) that child. This approach allows you to treat your children equally while protecting eligibility for vital services.
Choosing the right type of trust is essential. A standalone third-party special needs trust, funded by your retirement accounts or other estate assets, gives you flexibility and control. It can be customized to include instructions, appoint reliable trustees, and preserve the child’s dignity and comfort in the long run.
Retirement accounts require careful coordination due to their tax implications. Naming a trust as a retirement account beneficiary used to allow stretched distributions across the child’s life. While recent tax law changes (like the SECURE Act) have altered some rules, trusts can still play a pivotal role in long-term planning. What matters is working with legal counsel who understands the rules and how to make them work for your family.
Protecting Your Legacy and Your Family
The decisions you make today shape the life your child will live tomorrow. You deserve a legal strategy that protects your business, supports your loved ones, and honors your intentions. We work with California families and business owners who want more than a one-size-fits-all plan for their estate and their legacy. Contact Dahl Law Group to start building the right structure for your family.
Dahl Law Group
