Estate Planning When You Have a Child with Special Needs

Most public benefits that support a child or adult with a disability, including Supplemental Security Income (SSI), Medicaid (AHCCCS in Arizona), the Arizona Long Term Care System (ALTCS), and Section 8 housing, are means-tested. Owning more than $2,000 in countable resources (per the Social Security Administration's SSI rules) or receiving more than a small monthly amount can suspend or end those benefits. A standard inheritance, even a modest one, can do exactly that. Context matters here too: about 1 in 6 U.S. children ages 3 to 17 is diagnosed with a developmental disability (CDC), so the planning need is widespread, not exotic. SSI and AHCCCS rules are federal; ALTCS eligibility is administered in Arizona by AHCCCS, and the three programs all use means-testing that an unstructured inheritance can break in a single deposit.

A revocable living trust drafted for a typical family will not solve this. Distributions to or for the benefit of the child are still treated as the child's income or resources. The right tool is a third-party special needs trust (also called a supplemental needs trust), funded with parents', grandparents', or other family members' assets and never with assets that already belong to the child.

A third-party special needs trust is what parents and grandparents create. You name it as the beneficiary in your own will or trust, in your life insurance policy, and on retirement accounts where appropriate. There is no payback to the state when the beneficiary dies. Leftover funds can pass to siblings or charity. For a deeper walkthrough of Arizona-specific drafting choices, see the complete guide to special needs trusts in Arizona.

A first-party (or "self-settled") special needs trust is funded with assets that already belong to the person with disabilities. This is most often a personal injury settlement, an inheritance someone forgot to plan around, or back-due Social Security. First-party SNTs require a Medicaid payback at the beneficiary's death, so they are a fix, not a default.

An Arizona ABLE account (AZ ABLE) lets the person with disabilities save in their own name without losing SSI or Medicaid eligibility. For 2025, the SSA confirms that contributions are capped at $19,000 per year and the first $100,000 in the ABLE account is excluded from SSI resource counting. ABLE accounts cover education, housing, transportation, health, and basic living expenses. They work alongside an SNT: the SNT pays the big things, the ABLE account handles small recurring expenses without trustee involvement.

In Arizona, parental authority ends at 18, even if the young adult cannot safely manage finances or medical decisions on their own. That means parents lose automatic access to medical records (HIPAA), school records (FERPA), and bank accounts. For some families, the right answer is supported decision-making and a set of powers of attorney signed by the young adult. For families where capacity is more limited, a guardianship and conservatorship through the Arizona probate court is often necessary.

Start the conversation with an attorney 6 to 12 months before the 18th birthday. The court process takes time. SSI and ALTCS applications submitted right at 18 generally go more smoothly when the legal authority paperwork is already in place.

A special needs trust trustee has to do three jobs at once: invest the corpus prudently, document every distribution against SSA and AHCCCS rules, and know the beneficiary well enough to spot when needs change. Family members usually know the beneficiary best but can be overwhelmed by the rule set. Corporate trustees handle the rules but rarely know the beneficiary. The most common Arizona structure is a family trustee paired with a corporate or licensed professional fiduciary co-trustee, with succession built in.

When no family member is the right fit, Arizona has licensed professional fiduciaries regulated by the state who can serve. Build the choice into the trust at drafting; do not wait until a crisis to decide who serves.

The most common planning mistake is a well-meaning grandparent leaving money directly to a grandchild with disabilities. Loop grandparents in early so they can name the SNT, not the child, as beneficiary in their own documents. The same goes for godparents, aunts, and uncles who plan to leave a gift.

In practice: imagine a Mesa family whose grandfather names his autistic grandson directly on a $75,000 life insurance policy. The check arrives, the family deposits it in the grandson's name, and within a month his SSI is suspended and AHCCCS coverage stops. Redirecting the same gift to a third-party special needs trust costs nothing and preserves benefits the family had been building for years.

Retirement accounts deserve special attention. The SECURE Act forces most non-spouse beneficiaries to drain inherited IRAs within 10 years. But a properly drafted SNT for a disabled "eligible designated beneficiary" can stretch distributions over the beneficiary's lifetime. Coordinate beneficiary designations and trust language with your CPA and attorney; getting it wrong can mean a six-figure tax acceleration.

Pair the SNT with a non-binding letter of intent. It describes the beneficiary's medical providers, behavioral patterns, communication style, daily routines, what soothes them, what triggers them, and the people who matter most. A successor trustee a decade from now will not know any of this without it. Update the letter every two to three years.