We all want to provide for our children, and perhaps even leave a little something behind to help lighten their load after we're gone. But when you're the parent of a disabled child who may outlive you, the importance—and complexity—of putting financial safeguards in place takes on new meaning.
Indeed, the manner in which you distribute assets to a special needs beneficiary after you die not only impacts his or her eligibility for government benefits but also their quality of life going forward.
"Being well-intentioned is not enough," said Michael Duckworth, a Merrill Lynch financial advisor who specializes in estate planning for clients with a disabled loved one. "There are a lot of stories of grandparents who accidentally knocked their grandchild out of a needs-based program by leaving money to him or her outright."
Children and adults with significant disabilities, either physical or mental, are eligible for essential long-term nursing care under Medicaid, along with cash assistance under Supplemental Social Income—but only if they own no more than $2,000 in countable assets or $3,000 for a married applicant—and a number of state programs, including special education classes and vocational training.
Read MoreSandwich generation squeezed
"You may have a situation whereby Grandma writes a check out in her disabled grandson's name and he gets kicked out of the program that was giving him a better life experience," Duckworth said. To get back in, the beneficiary would have to spend down his assets and reapply for the program, which causes a lapse in service and disrupts continuity of care.
Unbeknownst to many, said Duckworth, many of the best state programs—including vocational training and those designed to service individuals with specific diagnoses, such as autism—are available only through Medicaid.
"No matter how much wealth you may have, there isn't a system whereby you can write a check and get in," he said.
Enter the special needs trust.
Such trusts, also called supplemental needs trusts, are designed to enable third-party individuals, generally family members, to leave an inheritance to disabled heirs without those assets counting against them for the purpose of securing public benefits.
Because assets are titled to the trust, they are not considered part of the estate.
There is no limit to how much you may contribute.
Elizabeth Roberts, senior vice president and chief fiduciary officer at Bryn Mawr Trust, said the language in such trusts should clearly indicate that distributions are to be made exclusively for supplemental expenses, or services not covered under Medicaid, such as medical and dental expenses, recreational therapy, specialist visits, dietary supplements, transportation, travel expenses and prosthetic devices.
"Frequently, the trust specifically states that funds are intended to supplement and not supplant," she said.
For maximum protection, the language within should also note that distributions are to be made only after other assets and governmental programs are considered, Roberts said.
Special needs trusts can be used to receive proceeds from litigation or a personal injury settlement on behalf of the disabled beneficiary, as well, in which case it would be structured as a "first person" or self-titled trust.
Money held in a self-titled trust is similarly excluded from public benefit calculations during the beneficiary's lifetime, but there is a payback provision.
Read MoreWorst marriage money mistakes
Any assets remaining in the trust when the beneficiary dies would be used to pay back Medicaid for expenses incurred by the state in administering care. In the event that excess money remains after the debt is repaid, those assets would pass to a designated heir. If there's not enough in the trust to make Medicaid whole, that debt dies with the special needs beneficiary.
Supplemental needs trusts that are set up by a third party have no such payback provision, and thus, any assets remaining in the trust after the beneficiary dies can be distributed to subsequent heirs free and clear.
Special needs trusts serve another important purpose, too, according to Minerva Vazquez, an attorney with Miami law firm Frye & Vazquez, who specializes in the area of special needs estate planning.
They protect the assets held within from creditors and claims against the estate.
"A lot of parents think it's OK to leave money to their other, non-disabled child who has agreed to care for their sibling, but they don't consider the possibility of a lawsuit or divorce settlement," Vazquez said.
If the non-disabled child gets sued, files for bankruptcy, causes a car accident or gets divorced, she said, those assets are vulnerable.
"Under a trust, that money is protected from creditors and settlements," Vazquez said.
Indeed, mistakes are common when dealing with the unique estate-planning needs of the disabled, said Duckworth at Merrill Lynch.
Some families, for example, create traditional life insurance trusts in the name of a disabled loved one but fail to stipulate that the proceeds should be directed to a special needs trust when it pays out. There again, the beneficiary would be bumped out of Medicaid as a result.
"If you buy an insurance policy, you need to leave that money to the special needs trust," said Duckworth, noting that a regular trust will not suffice. "Traditional estate planning is not the approach when you have a beneficiary with a meaningful disability."
Because the consequences of estate-planning missteps are so dire for disabled beneficiaries, Duckworth suggests all immediate and extended family members (parents, siblings, aunts, uncles and grandparents) who may be inclined to generosity be advised to enlist the help of a professional experienced in special needs estate planning, be it a lawyer or financial advisor.
"Individuals with special family members need to be present to the risks that are there," Duckworth said. "Everyone loves their child or grandchild, and the last thing they want is to do something that takes them out of a program they love and really benefits them."
—By Shelly Schwartz, special to CNBC.com