If you have a loved one with a disability, establishing a special needs trust can ensure they are provided for after your death. There are two main special needs trust options: first-party and third-party.
Also called a “self-settled trust”, this format is ideal for when the special needs individual owns assets or funds. Government-based programs like Medicaid and Supplemental Security Income (SSI) provide benefits to the disabled based on income, so if an individual possesses their own assets, their benefits will be lowered accordingly. To avoid losing eligibility, someone with special needs will not want to have direct access to extra income. Instead, these assets can be placed in a first-party special needs trust, managed by a trustee, often a bank or trust company. That means the funds are no longer owned by the special needs person and therefore don’t change their income status.
A first-party trust often holds assets like inheritance or lawsuit settlements. It has more requirements than a third-party trust. For instance, the beneficiary must be younger than 65 when the trust is created, and upon their death, Medicaid must be reimbursed for benefits paid, using what is left in the trust. The trust must also be created by a parent or guardian, and is irrevocable, meaning it can’t be altered once it’s finalized.
This trust is commonly used in the estate plan of another individual, providing funds for a disabled beneficiary. Unlike a first-party trust, this format can be created by anyone, regardless of relationship to the beneficiary. Overall, it has fewer restrictions than a first-party trust, with no age limit and no reimbursement to Medicaid.
The donor (the third party) places assets in trust rather than passing them directly to the beneficiary. So, for example, instead of leaving an inheritance that would then need to be placed in a first-party trust and eventually reimbursed to Medicaid, the donor bypasses the beneficiary completely. The assets go straight into trust, were never owned by the special needs individual, and therefore can’t impact government benefit eligibility or require reimbursement.
A third-party trust is ideal for planning ahead, allowing family or friends to provide for a disabled loved one well in advance. However, assets or funds already owned by the beneficiary can’t be put in this trust— meaning if, in the future, a special needs individual benefits from an inheritance or lawsuit, they will need to use a first-person trust for those funds to avoid losing government benefits.
Which is Right For Me?
The estate planning attorneys at Bellah Perez can help you understand which special needs trust fits your situation. We’ll make sure your assets are protected and distributed properly, preserving government benefits, avoiding expenses where possible, and solidifying a comfortable future for the disabled loved one in your life.
Disclaimer: The answer is intended to be for informational purposes only. It should not be relied on as legal advice, nor construed as a form of attorney-client relationship.