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What Does Estate Planning Look Like When a Dependent Has Special Needs?

The CDC reports that approximately 1 in 31 eight-year-old children studied across 16 U.S. communities had been identified with autism spectrum disorder. These children will become adults, and some will continue to need financial, legal, or care support long after their parents are gone. For their families, planning for that future is not optional, and it cannot wait.

One of the most common assumptions I hear is, “Their brother or sister will take care of them.” Love may make that possible, but good planning makes it sustainable. A sibling should not be expected to assume a lifetime of responsibility without clear instructions, appropriate resources, and a support system of their own.

The Benefits Eligibility Risk

Leaving an inheritance directly to a person who receives means-tested public benefits may affect eligibility for programs such as Supplemental Security Income or Medicaid. The outcome depends on the individual’s circumstances, the benefits involved, and how the inheritance is structured.

A well-intentioned bequest of $200,000 left directly to a special needs adult could trigger an immediate review of their benefits eligibility. Depending on the program and the state, it could interrupt or eliminate coverage they depend on for housing, medical care, and daily support. The inheritance that was meant to help them can instead create a gap in services that costs far more than the bequest was worth.

The Special Needs Trust

A properly designed special needs trust may allow assets to be used for a beneficiary’s supplemental needs while helping preserve eligibility for certain public benefits. The appropriate trust structure depends in part on whose assets will fund it, so families should coordinate the plan with an attorney experienced in special needs planning.

There are two primary types of special needs trusts. A first-party or self-settled trust holds the beneficiary’s own assets, such as a personal injury settlement. A third-party trust holds assets contributed by family members. The rules differ, and the right structure depends on the family’s specific situation.

The Trust Is Only the Beginning

The trust is only one part of the plan. Families should also consider who will serve as trustee and successor trustee, how future caregivers will understand the dependent’s routines and preferences, and how housing, transportation, medical care, advocacy, and financial support will be coordinated over time. A detailed letter of intent can help communicate information that legal documents alone cannot capture.

This is not a one-time legal transaction. It is an ongoing planning process that should evolve with the dependent, the family, and the available support system. The families who navigate it best are the ones who build a team early, document thoroughly, and revisit the plan as circumstances change.

Is It Better to Gift Assets During Your Lifetime or Leave Them at Death?

One of the most meaningful conversations in estate planning involves knowing when it makes sense to transfer assets during your lifetime versus allowing them to pass at death. This is a planning question, not a generosity question, and the answer depends heavily on the type of asset involved.

The Stepped-Up Basis Rule

Assets passed at death generally receive a stepped-up cost basis, resetting the capital gains clock to the fair market value at the date of death. A piece of property purchased for $200,000 that is worth $800,000 at death transfers to heirs with an $800,000 basis. If they sell it immediately, generally little or no taxable gain is attributable to the earlier appreciation.

If the same property had been gifted during life, the recipient inherits the original $200,000 basis and a $600,000 embedded capital gain. When they eventually sell, they owe capital gains tax on that entire amount. The gift that was meant to be generous may cost the recipient significantly more in taxes than it would have had they simply inherited the asset.

When Gifting During Life Makes Sense

Gifting during life is not always the wrong strategy. For assets that have not appreciated significantly, the basis issue is less consequential. For families who want to see the impact of their generosity during their lifetime, strategic gifting can be deeply meaningful. For estates that still have federal estate tax exposure even at the current $15 million exemption level, lifetime gifting reduces the taxable estate. And for certain assets such as cash or low-basis investments where the recipient has a lower tax rate than the donor, gifting may still produce the better overall outcome.

The right answer depends on the type of asset, the current and expected future value, your income, your estate size, the recipient’s tax situation, and your goals. A financial planner can model both scenarios before you make an irreversible transfer.

Frequently Asked Questions

What is a special needs trust and who needs one?

A special needs trust is a legal vehicle designed to hold assets for a beneficiary who receives means-tested government benefits such as Medicaid or Supplemental Security Income. A properly structured special needs trust may allow those assets to supplement the beneficiary’s care without affecting benefits eligibility. Any family with a dependent who has a disability or chronic condition that requires ongoing government support should consult an attorney experienced in special needs planning.

What happens if I leave money directly to a special needs dependent?

Depending on the program and the amount, a direct inheritance may affect the dependent’s eligibility for means-tested benefits such as Medicaid or SSI. The outcome depends on individual circumstances, the specific benefit programs involved, and applicable state rules. In some cases, the inheritance can temporarily or permanently disrupt coverage the dependent relies on for daily care and housing. A special needs trust is designed to prevent this outcome.

What is the stepped-up basis and why does it matter?

When you inherit an asset, the tax basis is generally reset to the fair market value at the date of the original owner’s death. This eliminates the capital gain that accumulated during the decedent’s lifetime. If you sell the asset shortly after inheriting it, you typically owe little or no capital gains tax. If you had received the same asset as a gift during the owner’s lifetime, you would have inherited the original low basis and owed tax on the full appreciation when you eventually sell.

Should I gift assets to my children now or leave them at death?

It depends on the asset, its current value and basis, your income, the recipient’s tax situation, and your goals. Highly appreciated assets such as real estate or long-held investments are often better candidates for inheritance than for lifetime gifts, because of the stepped-up basis benefit. Cash and low-appreciation assets are more straightforward candidates for lifetime gifting. A financial planner can model the scenarios before you make a transfer that cannot be undone.

Does the annual gift tax exclusion affect this decision?

The annual gift tax exclusion, $19,000 per recipient in 2026 and indexed for inflation, allows you to make gifts up to that amount per person per year without using any of your lifetime estate and gift tax exemption. But the gift tax exclusion does not change the basis rules. A gift of $19,000 of appreciated stock still carries over your original basis to the recipient. Tax-free for gift tax purposes does not mean tax-free for capital gains purposes when the recipient eventually sells.

How do I find an attorney experienced in special needs planning?

Start with a financial planner who works with families in similar situations. A planner who has built relationships with special needs planning attorneys, trust companies, and other specialists can help you identify the right team and ensure everyone is working from the same understanding of your family’s goals. Ask any attorney you interview how many special needs trusts they have drafted and whether they stay current on changes to benefits eligibility rules.

What is a letter of intent and why is it important for special needs planning?

A letter of intent is a non-legal document written by parents or family members that describes the special needs dependent’s daily routines, medical history, preferences, relationships, and wishes for their future care. It is not legally binding, but it provides essential guidance to a trustee, guardian, or caregiver who may not know the dependent personally. It is one of the most important documents a family can prepare, and it should be updated regularly as the dependent grows and circumstances change.

Bringing It All Together

Across all three parts of this series, the underlying message is the same. Estate planning is not a task you complete once and set aside. It is an ongoing process that should reflect your life, your family, and your values at every stage.

The four foundational documents protect you and the people you love in a crisis. A plan that is regularly reviewed protects against the changes that life inevitably brings. Thoughtful planning for adults without children, for out-of-state property, for special needs dependents, and for the gift vs. inherit decision protects against the gaps that most people never see coming.

The families who navigate life’s most difficult moments with the least disruption are rarely the ones who had the most assets. They are the ones who had the clearest plan.

If you would like to talk through where your plan stands and what a review might address, that conversation starts at theerskinegroup.net.

Sources

• Centers for Disease Control and Prevention, Autism Prevalence Report, ADDM Network, 2025
• Social Security Administration, SI 01120.203, Special Needs Trusts
• Internal Revenue Code Section 1014, Basis of Property Acquired from a Decedent
• Internal Revenue Code Section 2503, Taxable Gifts
• IRS Publication 559, Survivors, Executors, and Administrators
• One Big Beautiful Bill Act, Public Law No. 119-21, signed July 4, 2025
• Texas Estates Code, Chapter 1301, Management of Property of Minor or Incapacitated Person

LPL Financial representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial. Limited partnerships are subject to special risks, such as potential illiquidity, and may not be suitable for all investors. Securities and advisory services offered through LPL Financial, a registered investment advisor, member FINRA/SIPC. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for individualized legal or tax advice. Please consult your estate planning attorney and tax advisor regarding your specific situation. The Erskine Group, LLC is a separate entity from LPL Financial.