Special Needs Trusts are an integral part of almost every estate plan, yet, most people do not realize this. Typically, those who consult us on the applicability of Special Needs Trusts are either disabled or closely involved with a disabled child or other adult. In these instances, the need for a Special Needs Trust might be obvious. Less apparent, is the need for Special Needs Trusts in nearly every estate plan. Consider that a beneficiary of your estate may become disabled at any time. As discussed below, I use them in most of my estate planning documents to deal with unforeseen disabilities.
The purpose of a Special Needs Trust is to provide a pool of assets that can be used to supplement, not replace, government benefits or assistance for which the disabled person may be entitled to receive. The assets of the trust are commonly used for things like medical equipment, transportation, vacations and other recreational items, personal care and other types of expenditures that are not covered by government programs. There are two types of Special Needs Trusts: First Party and Third Party. Let’s spend some time discussing both.
The First Party Special Needs Trust
A First Party Special Needs Trust is a trust created with the assets of a disabled person who is under 65 years of age. Often, this type of trust is used where a disabled person is already receiving government benefits such as SSI or Medicaid and receives assets, for instance, by inheritance. If this trust is properly utilized, the disabled beneficiary’s government benefits will not be discontinued.
Until recently, only a parent, grandparent or Court could establish a First Party Special Needs Trust for the benefit of a disabled beneficiary. Earlier this year, the law changed, now allowing a disabled person, who has capacity, to establish a First Party Special Needs Trust on their own.
Upon the death of the disabled person, a First Party Special Needs Trust must name the State as a remainder beneficiary for any benefits paid to the disabled individual during his lifetime. This is called a “payback provision”. If the trust does not include this provision, the assets of the trust will be considered available assets for the disabled individual, thereby discontinuing any government benefits.
A Third Party Special Needs Trust is a trust that can be created by any person, with that person’s assets, for the benefit of a disabled person. Consider a parent who has a disabled child. If assets are to be set aside for the disabled child, a properly drafted estate plan would include a Third Party Special Needs Trust for the benefit of the disabled child.
The Third Party Special Needs Trust
Unlike a First Party Special Needs Trust, a Third Party Special Needs Trust does not have a “payback provision”, thus, you can name any individual or entity as beneficiary of the trust after the death of the disabled person.
I use Third Party Special Needs Trust in most of the estate planning documents I create for clients. As I mentioned above, anyone can become disabled at any time. For this reason, we provide in our documents that where assets are being left to a beneficiary who is disabled at the time of distribution, a Third Party Special Needs Trust shall trigger and be used to hold the disabled child’s inheritance, thereby preserving the disabled beneficiary’s inheritance where there is an unforeseen disability. This is called a “trigger trust”.