[Living Trust] What is a Special Needs Trust?

A Special Needs Trust is a type of trust designed for individuals with disabilities or special needs. It allows them to receive financial support without jeopardizing their eligibility for government benefits like Supplemental Security Income (SSI) or Medicaid.

There are two types of Special Needs Trusts. The first is a First-Party Special Needs Trust, and the second is a Third-Party Special Needs Trust. The difference between the two depends on who provides the assets for the trust. If the trust is funded by the assets of the beneficiary (the person with special needs), it is called a First-Party Special Needs Trust. If the trust is funded by someone else, such as a parent or guardian, it is a Third-Party Special Needs Trust.

If the beneficiary has the authority to revoke the Special Needs Trust, the assets in the trust may be considered part of their income or assets, which could disqualify them from receiving public benefits.

To avoid this, it is crucial that the Special Needs Trust be irrevocable. However, the trust document should allow limited modifications by the person who created the trust or the trustee if laws or the beneficiary's situation changes in the future. By allowing these adjustments, the trust can continue to protect the beneficiary's access to government assistance while addressing changes in circumstances and challenges posed by government agencies.

Question: What is the difference between a Third-Party Special Needs Trust and a First-Party Special Needs Trust?

The most significant difference between a Third-Party Special Needs Trust and a First-Party Special Needs Trust lies in what happens to the trust’s assets after the beneficiary's death. In a Third-Party Special Needs Trust, the remaining assets do not need to be used to reimburse government programs like Medicaid for the benefits the beneficiary received during their lifetime.

However, in a First-Party Special Needs Trust, after the beneficiary’s death, the remaining assets must be used to repay state government agencies for the total lifetime medical assistance provided to the beneficiary, including Medicaid. This repayment obligation can deplete the entire trust if necessary.

Special Needs Trusts are highly complex, and the language used can vary from trust to trust and from state to state. It is crucial to work with a legal professional experienced in special needs planning. This expert can ensure that the trust is properly structured to meet the needs of the person funding the trust, the trustee managing the trust, and most importantly, the beneficiary with special needs.