Planning for a loved one with special needs requires careful legal and financial considerations. A special needs trust (SNT) is an essential tool that ensures financial support for individuals with disabilities without jeopardizing their eligibility for government benefits like Supplemental Security Income (SSI) and Medicaid.
There are two main types of special needs trusts: first-party SNTs and third-party SNTs. Each serves a distinct purpose and has different funding sources, rules, and benefits. Understanding these differences can help families make informed decisions that protect their loved one's future.
If you need legal assistance in setting up a special needs trust, contact Heritage Law Office at 414-253-8500 or use our online form.
What Is a Special Needs Trust?
A special needs trust is a legal arrangement designed to hold assets for a beneficiary with disabilities. The funds in the trust supplement but do not replace public assistance programs like Medicaid and SSI. The trustee manages the trust assets and distributes funds to cover expenses that improve the beneficiary's quality of life, such as:
- Housing and home modifications
- Education and training
- Medical care not covered by Medicaid
- Transportation
- Recreational activities and vacations
However, the trust must be structured carefully to comply with Medicaid and SSI rules. Otherwise, the assets could be counted as available resources, disqualifying the beneficiary from receiving public benefits.
First-Party Special Needs Trust
A first-party special needs trust, also called a self-settled SNT, is funded with the disabled individual's own assets. This trust is often used when a person with disabilities receives:
- A personal injury settlement
- Inheritance left directly to them
- Back pay from Social Security Disability Insurance (SSDI)
- Any other financial windfall that exceeds asset limits for public benefits
Key Features of a First-Party Special Needs Trust
- Must Be Irrevocable - Once created, the terms of the trust generally cannot be changed.
- Established Before Age 65 - The beneficiary must be under 65 years old when the trust is established and funded.
- Medicaid Payback Provision - Upon the beneficiary's passing, any remaining funds in the trust must first be used to reimburse Medicaid for benefits paid during their lifetime.
- Controlled by a Trustee - The disabled individual cannot directly control the funds, which must be managed by an appointed trustee.
When to Use a First-Party SNT
A first-party SNT is appropriate when a disabled individual unexpectedly acquires significant assets but still requires Medicaid or SSI benefits. It allows them to retain their financial resources while continuing to receive necessary public assistance.
Third-Party Special Needs Trust
A third-party special needs trust is funded with assets belonging to someone other than the disabled individual, typically parents, grandparents, or other family members. This type of trust is commonly used in estate planning to provide financial security for a loved one with disabilities.
Key Features of a Third-Party Special Needs Trust
- No Medicaid Payback Requirement - When the beneficiary passes away, the remaining assets can be distributed to other heirs or charities.
- Can Be Funded Anytime - Unlike a first-party trust, a third-party SNT can be funded during the grantor's lifetime or through an inheritance or life insurance policy.
- More Flexible Terms - The trust creator (grantor) has control over how funds are managed and distributed.
- Trustee Management - The trustee ensures funds are used to enhance the beneficiary's life while maintaining public benefit eligibility.
When to Use a Third-Party SNT
A third-party SNT is ideal for parents or family members who want to set aside funds for a disabled loved one without risking their eligibility for government benefits. It allows for long-term financial planning without requiring Medicaid reimbursement.
Key Differences Between First-Party and Third-Party Special Needs Trusts
While both types of special needs trusts (SNTs) serve the same fundamental purpose-preserving a disabled individual's eligibility for government benefits-there are critical differences in how they are funded, managed, and distributed.
Comparison of First-Party vs. Third-Party Special Needs Trusts
| Feature | First-Party SNT (Self-Settled) | Third-Party SNT |
|---|---|---|
|
Funding Source |
Beneficiary's own assets (e.g., inheritance, settlement) |
Family members or loved ones |
|
Who Can Create It? |
Beneficiary, parent, grandparent, guardian, or court |
Anyone except the beneficiary |
|
Age Limit for Creation |
Must be established before beneficiary turns 65 |
No age restrictions |
|
Medicaid Payback Required? |
Yes, remaining assets must reimburse Medicaid |
No, funds can be distributed to other heirs |
|
Control Over Trust |
Managed by a trustee, beneficiary has no direct access |
Managed by a trustee, often more flexible |
|
Funding Timeline |
Can only be funded during the beneficiary's lifetime |
Can be funded anytime, even after grantor's death |
|
Best Used For |
Protecting public benefits when the disabled person receives assets |
Long-term estate planning for a disabled loved one |
Choosing the Right Special Needs Trust
Selecting the right trust depends on who owns the assets and long-term financial planning goals.
- If the individual with disabilities owns the assets, a first-party SNT is required to maintain government benefits.
- If family members or loved ones want to provide financial support, a third-party SNT is the better option since it avoids Medicaid reimbursement.
For families engaged in estate planning, a third-party SNT is often the preferred choice, as it allows for greater flexibility and protection of assets.
Can You Have Both Trusts?
Yes, it is possible to have both a first-party and a third-party special needs trust. Some families set up a third-party SNT for long-term financial planning, while a first-party SNT is used if the beneficiary acquires their own assets unexpectedly.
The Role of the Trustee in a Special Needs Trust
Regardless of the type of SNT, choosing the right trustee is crucial. The trustee must:
- Ensure compliance with Medicaid and SSI rules.
- Distribute funds appropriately to enhance the beneficiary's quality of life.
- Keep accurate records to avoid jeopardizing benefits.
- Invest trust assets wisely to preserve financial stability.
Many families choose a professional trustee or corporate fiduciary to manage the trust and ensure it adheres to legal requirements.
How to Set Up a Special Needs Trust
Steps to Establish a First-Party or Third-Party Special Needs Trust
- Consult an Attorney - Special needs trusts must follow strict legal guidelines. An experienced estate planning attorney can help determine the best trust type.
- Select a Trustee - Choose a responsible person or institution to manage the trust.
- Draft the Trust Document - The trust agreement must comply with federal and state laws governing Medicaid and SSI eligibility.
- Fund the Trust - Transfer assets into the trust while ensuring they do not disqualify the beneficiary from public benefits.
- Maintain Compliance - The trustee must carefully manage distributions to avoid affecting government aid.
Contact an Attorney for Special Needs Trusts
Planning for a loved one with disabilities requires careful legal and financial guidance. Whether you need a first-party special needs trust to protect existing assets or a third-party trust to plan for the future, working with an attorney who understands special needs planning is essential.
At Heritage Law Office, we help families create customized estate plans that protect their loved ones while ensuring continued access to government benefits. Call us today at 414-253-8500 or use our online form to schedule a consultation.
Frequently Asked Questions (FAQs)
1. What is the main difference between a first-party and third-party special needs trust?
A first-party special needs trust is funded with assets belonging to the beneficiary, such as an inheritance or personal injury settlement. It requires a Medicaid payback provision, meaning any remaining funds must be used to reimburse Medicaid upon the beneficiary's death. A third-party special needs trust, on the other hand, is funded by family members or loved ones and does not have a Medicaid reimbursement requirement.
2. Can a special needs trust be used for housing expenses?
Yes, a special needs trust can pay for housing-related expenses such as rent, home modifications, and utilities, but there are SSI rules that may reduce benefits if the trust directly pays for these costs. It's important to structure payments carefully to minimize any potential impact on government assistance.
3. Who can serve as a trustee for a special needs trust?
A family member, friend, professional trustee, or corporate fiduciary can serve as a trustee. The trustee must ensure that the trust is properly managed and that distributions comply with Medicaid and SSI regulations. Many families choose a professional trustee to avoid conflicts of interest and ensure compliance with legal requirements.
4. Can a special needs trust be revoked or modified?
A first-party special needs trust is irrevocable, meaning it generally cannot be changed or revoked once established. A third-party special needs trust can offer more flexibility, allowing the grantor to modify certain terms. However, any changes must comply with state and federal regulations.
5. How do I fund a third-party special needs trust?
A third-party special needs trust can be funded through gifts, inheritances, life insurance policies, or other assets provided by family members. Unlike a first-party SNT, it does not require Medicaid reimbursement, making it a preferred option for estate planning.