Special needs trusts are essential when a person with disabilities has assets to protect. Whether the person with the disability has funds, receives funds from a personal injury settlement, or receives funds and property as a gift, the money must be managed carefully. It also has to be owned in an appropriate manner so the assets do not prevent or threaten Medicaid eligibility or eligibility for other important means-tested government benefits. Special needs trusts are the tool to use for asset protection for those with disabilities. When special needs trusts are created, it is important to know what specific type of trust must be used. There are two primary kinds of special needs trusts: first party and third party trusts. They work differently and you need to know how each type works and which type is the right type.
Special needs trusts are used to preserve a disabled person’s access to benefits which might otherwise be lost when resources are acquired. A person who is disabled may be receiving Supplemental Security Income (SSI) on a monthly basis and may have Medicaid coverage to pay for the costs of healthcare and nursing home care. Medicaid and SSI are means-tested and impose limits on resources, so an influx of money such as from an injury settlement or inheritance could result in a loss of benefit access.
A special needs trust makes it possible to avoid this loss of benefits. When appropriately created in accordance with the law and when properly structured and maintained, special needs trusts allow money to be used for the benefit of someone who is disabled without jeopardizing benefits access. The assets held in the trust are not counted as resources, but can be used to enrich the quality of life of and provide goods and services for the person who is disabled.
There are different kinds of special needs trusts, depending upon the source of the funds that are used to fund the trust. If the money or property being put into the trust comes from the person who is disabled, the trust is a first party trust. If the money or property comes from a third party donor, like a grandparent or parent of the disabled person, then the trust is a third party trust.
Both first and third party special needs trusts can make it possible for a trustee to be named, who must follow instructions in the trust document to provide for the person who is disabled. However, there are major differences between them.
A first party special needs trust can be established only by a grandparent, parent, guardian or court. They must be established for someone under aged 65. In some situations, courts monitor these trusts. When the person with special needs dies, the state can also try to recover money from the trust which was paid out for the disabled person during his lifetime.
A third party special needs trust can be created by anyone who wants to leave money to someone who is disabled. Third party special needs trusts can be funded up to any amount, and the trust can be a beneficiary of a life insurance policy. The trust can be used for virtually any purposes to benefit the person with special needs.
Upon the death of the disabled beneficiary of the third party special needs trust, the money and property can transfer to any other relatives or beneficiaries that the trust creator chooses. Because the money and assets in the trust never belonged to the person who was disabled, the state has no ability to try to take this money. This is a big benefit, because someone with disabilities can be provided for during his life and the remaining funds can then go to other relatives or friends of the trust creator’s choosing.
Special needs trusts can provide very important protections for someone with disabilities, as long as you know how these trusts work and follow the rules and processes for trust creation. Sinclair Prosser Gasior provides comprehensive help with both first party and third party special needs trusts.
- Can a Beneficiary Be the Trustee of an Irrevocable Life Insurance Trust? - May 9, 2023
- What is a Letter of Instruction? - November 15, 2022
- Power of Attorney Basics - October 7, 2022