The Importance of a Special Needs Trust and The Difference Between First Party and Third Party Special Needs Trusts

If you have a loved one, usually a child, who requires special needs such as in-home care or a lifetime of medical treatment, you need to consider setting up a special needs trust.

Before going into what exactly is a special needs trust is, you may be asking yourself, “Why do I need special needs planning?” Well, because properly organizing and caring for a loved one with needs that may last well beyond your lifetime is absolutely critical. It is heartbreaking to see someone with special needs who had a loved one taking care of them, but then that loved one passes away. The special needs individual is basically left with nothing and becomes a ward of the state. This is where special needs planning comes in. It is estate and financial planning designed to provide for, and protect, a beneficiary with special needs while preserving entitlement to needs-based public assistance programs.

So what exactly is a special needs trust? It is a trust designed to receive and manage assets for beneficiary with a disability while maintaining eligibility for needs-based benefits. What are the advantages of a special needs trust? First, the funds in a properly drafted special needs trust will not count as resources for most public benefit programs. This is extremely important to ensure your loved one still has access to public benefit programs available while still having access to use trust funds to help supplement or buttress their needs. Second, the trust can provide continuing management when family is no longer available. Third, there is greater potential for independence by maximizing private and public resources for your loved one.

Another distinction to keep in mind is a first party special needs trust and third party special needs trust. What is the difference? Basically, a first party special needs trust is funded with the disabled persons assets (aka a “self-settled” trust). An important aspect of the first party special needs trust is the requirement of a “pay-back” clause. A pay-back clause comes into play upon the death of the trustee. Your State Medicaid agency must be reimbursed for the costs of medical assistance that was provided by Medicaid during the trustee’s lifetime.

Also, distribution rules are more restrictive than third party special needs trusts. This leads to the next question, “What is a third party special needs trust?” This trust is created by, and funded with, assets of anyone other than the trust beneficiary (examples: parent, grandparent, etc.). This is routinely included in classic estate plan trust. The special needs beneficiary may be designated which means there is no “Medicaid payback” required (unlike the first party special needs trust).

For more information about special needs trusts, consider contacting an experienced estate planning attorney.