Understanding the Two Types of Special Needs Trusts

Thu Feb 28, 2019 | Trust Challenges |

Individuals with special needs — such as those who are disabled, chronically ill, or suffer from a mental illness — often are unable to provide for themselves the same way that others can. When that is the case, the government provides financial assistance through various programs, such as Supplemental Security Income (SSI) and Medicaid. However, these programs often fall short of covering an individual’s total living expenses, but at the same time are income-restricted, meaning that an individual can lose these benefits if he or she has too much income. One way to avoid this problem is to establish a Special Needs Trust (SNT), which allows for the payment of certain expenses for the beneficiary without the assets of the trust being considered income for benefits eligibility purposes.

There are two main types of SNTs: first-party SNTs and third-party SNTs.

First-Party Special Needs Trusts

First-party SNTs can be established by the beneficiary or by the beneficiary’s parent, grandparent, legal guardian, or a court, and are funded with assets that belong to the beneficiary. These can be assets that are owned in the beneficiary’s own name or assets received through inheritance or court settlements. A first-party SNT is irrevocable, and the assets in it may be used only for the sole benefit of the beneficiary. Any amounts remaining at the beneficiary’s death must be paid back to the state, up to the total lifetime benefit the beneficiary received.

First-party SNTs generally are advantageous for special needs individuals who:

  • Owned assets prior to becoming disabled and need to qualify for government benefits
  • Receive or expect to receive an inheritance
  • Receive or expect to receive life insurance proceeds
  • Receive or expect to receive a settlement from a lawsuit or divorce.

Third-Party Special Needs Trusts

Third-party SNTs are established by a person other than the beneficiary, most often the beneficiary’s parents or guardians who wish to plan in advance for his or her lifetime needs. These SNTs can be either revocable or irrevocable and can be created through a will, a revocable living trust, or as stand-alone trusts independent of any other instrument. Third-party SNTs established as part of an estate plan (e.g., a will or revocable living trust) many not receive gifts until the death of the person who created it. An independent third-party SNT, however, can be funded at any time, and may even receive funds from multiple sources. The main advantage of third-party SNTs is that, unlike first-party SNTs, any amounts remaining in them upon the beneficiary’s death do not have to be paid back to the state as compensation for the beneficiary’s public benefits.

Third-party SNTs are thus helpful for individuals who:

  • Have special needs children or other dependents and want to provide for them
  • Want to fund the trust through multiple sources (for stand-alone third-party SNTs)
  • Want to retain control of the distribution of assets remaining after the death of the beneficiary

Contact a Boca Raton Special Needs Trust Attorney

This post is merely a brief overview of SNTs; actually establishing one in the real world is significantly more complex and involves many more intricacies than we can cover here. If you are considering establishing an SNT, you should seek the counsel of an experienced attorney who can help you decide if this is the best option for you. For more information about special needs trusts, contact a Boca Raton special needs trust attorney at the Ellis Law Group by contacting us online or calling 561-910-7500.