Special Needs Trusts

Special needs trusts exist to help families with disabled individuals ensure that individual is cared for and supported in every circumstance. There are two types: first-party and third-party special needs trusts. The type used is dictated by whether the funding for the trust is from the beneficiary themself or from another party.

First-Party Special Needs Trusts

A first-party special needs trust is used when the disabled individual is the one funding the trust. There are two common cases where this can happen:

1. The disabled individual receives an inheritance, settlement, or other asset in their own name, but they cannot care for it themselves.
2. The person involved in the trust has their own assets and then becomes disabled later in life. Their own assets fund the trust.

In both cases, these special needs trusts can serve as an excellent way to limit income to qualify for public benefits such as disability or Medicaid. These solutions can make navigating health insurance benefits for disabled individuals much easier.

The assets and income of a special needs trust can only be used for the “sole benefit” of the beneficiary. The individual named in the trust has to meet the government definition of disabled to qualify for this type of trust. As of December 13, 2016, either the legal guardians of a disabled individual or the individual themselves can create a first-party special needs trust, providing they are mentally and legally competent.

There are other restrictions governing first-party special needs trusts depending on the circumstances, so if you are considering this as a solution, please contact us with more information about your circumstances. We offer free consultations that can help point you in the first direction.

Third-Party Special Needs Trusts

Third-party special needs trusts are used when a family is ensuring the financial needs of a disabled individual will be fully met in the event of the death of a caretaker. These trusts are usually funded upon the death of the grantor as part of their estate, mostly in cases where the trust is part of a will or as part of a living trust. You can also create a standalone third-party trust that can be funded prior to death and/or by multiple individuals.

Tax and Medicaid Planning

A special needs trust can be a great way to help preserve a disabled individual’s eligibility for means-tested public benefits, but it needs to be set up correctly in order to do so. If a beneficiary retains the ability to revoke the trust, for instance, the trust assets may be considered assets available to the disabled individual by programs such as Medicaid and Supplemental Security Income.