What is a Third-Party Special Needs Trust?

A special needs trust is an invaluable estate planning device that can be used to provide for your loved ones with special needs, even after your death.  It is also an important tool for those with disabilities who may own too much property, making them ineligible for need-based government benefits programs (e.g., SSI or Medicaid).

Why is it called a “third-party” trust?

When a trust is created, it has to be funded somehow.  The source of those funds determines what type of trust it will be.  If the trust is funded with your own property, with the purpose of benefiting a loved one with special needs, then it is considered a third-party trust.  This type of trust will not interfere with your loved one’s eligibility for government benefits.  However, if your loved one receives any property directly, for example from an inheritance, court settlement or insurance proceeds, that property will not be protected from, for instance, Medicaid.

How does a Third-Party Special Needs Trusts work?

A third-party special needs trust is the most common type of trust used to benefit those with special needs.  Usually family members create this type of trust, as part of their overall estate planning.  The trustee who is appointed, will use the funds in the trust to ensure the continued support of the person with special needs.

A trustee is required, as part of his or her fiduciary duty, to comply with all of the requirements and instructions set out in the trust document.  For instance, the trustee must be careful that the trust funds are not used for any purpose that would make the beneficiary ineligible for government benefits.  What makes a third-party special needs trust a valuable tool is the fact that the beneficiary does not own the property in the trust and does not have direct access to those funds.

How is a First-Party Special Needs Trusts Different?

The main difference between a first-party special needs trust and a third-party special needs trust is who owns the property in the trust.  A first-party special needs trust is the estate planning instrument used to protect property actually owned by the person with special needs. Some examples of situations where this would be needed are when a person with special needs acquires property from a lawsuit, divorce settlement, retirement plan, life insurance policy or inheritance.

The reason these proceeds are placed in a first-party trust is to allow the person with special needs to remain eligible for government benefits, as the property will no longer be owned by that person directly.

Trusts Must Comply With Government Rules

There are numerous federal and state rules governing first-party special needs trusts.  The rules for trusts are designed for the purpose of preventing applicants for government benefits from improperly sheltering their property. Third-party special needs trusts are generally subject to “payback” rules. This rule requires the estate of the beneficiary to reimburse the state for medical expenses after the trust beneficiary passes away. The particular rules for each state differ and are constantly changing.  Therefore, it is a good idea to consult with a special needs planning attorney to create a proper trust.

If you have questions regarding a power of attorney, or any other estate planning needs, please contact Wilcox Attorneys, PA online, or by calling us at (479) 443-0062.