Where do you people want to draw the line? If a disabled person gets a birthday card with a $20 in there, should they report it to lower the amount the government puts in? How about living in a room in their parent's house? Should the amount be reduced then? Can they have a car? A game system? Clothes newer than a decade old?
The government you are all trying to protect so much has made a set of rules to consider what a countable asset is or is not. Just like in many programs, need and ability are partial determinants, but the real issue is how we care for those less fortunate. Personally, I think we'd save more by denying people who smoke or who overeat from getting medicaid. Means test social security and deny the mortgage interest deduction as it only benefits the relatively rich. Don't get me started on how much extra money is put into education to assure equal chance to succeed when it is clear society will benefit more from a monetary standpoint from removing it from those who need extra help and put it towards those who will excel. By the way, when do we start kicking people out of their homes before they can start medicaid? It is ridiculous the government gives them money when they have assets already.
But, that is cost/benefit from a monetary standpoint. As a society, we have determined we have a greater duty than to just look at the financial balance sheet. Government policy has tried to deal with this balance through the concept of countable assets and the fact special needs trusts have to be filed (and approved) by Social Security and Medicaid administrators to be successful.
Still, why a trust? Unlike what some have said, a person has to reapply when they lose benefits due to exceeding countable assets. (It requires more than a call to a guy to tell him you are below $2,000.) One example of the problems this could cause is mentioned at http://www.hooklawcenter.com/publications/special-needs-planning/using-self-settled-special-needs-trusts-to-protect-public-benefits/
Upon settling his lawsuit, John received $500,000 in net proceeds. He immediately lost his SSI and Medicaid because he had more than $2,000 in countable assets. John began paying for services out of his own pocket at the rate of $7,700 per month, using up his entire $500,000 in 64 months. John then reapplied for SSI and Medicaid. He received SSI immediately, but since there were a limited number of slots for his type of Medicaid waiver, he was put on a waiting list and told that it would likely be two or three years before he received a slot. In the meantime, John�s medical services stopped.
Good times, that. Remember too, such trusts protects the person from himself. Is that fair? Say the disabled person becomes agitated and knocks a caregiver backwards, causing damages, is it fair to not have that caregiver compensated by the person causing the damages? If you think so, forget about most irrevocable trusts and the theory of corporations and other limited liability entities. They are hardly fair--well, unless society thinks there are other benefits to the situation.
The bottom line is that special needs trusts (aka supplemental needs trust) have been around a very long time through case law and over twenty years by federal statute. It is completely legal to create one and I feel it is more than just moral, it is an expression of love to handle the situation to the disabled person's benefit. I have heard no politician or special interest group complain about the issue and it is not going to go away in our lifetimes and does not seem to bring havoc to the public fisc. If a client came in with a situation like the OP has presented and he did not create such a trust, I would think him an idiot.