Special Needs Trusts are useful estate planning tools used to improve the lives of those who are disabled or have special needs. If a disabled individual receives government benefits, or may be eligible to receive them in the future, owning too much property can jeopardize their eligibility. A special needs trust can help the disabled maintain their eligibility for need-based government benefits, while still providing for their continued care. So, who can be a first party trust beneficiary?
What is a First Party Special Needs Trust
The most common purpose of a trust is to protect assets you want to set aside for your heirs, to ensure they are used the way you intend. For example, parents or grandparents may use a trust to set aside money for children or grandchildren to receive once they reach a certain age. A trust can direct how the money can be used and when. A “Special Needs Trust,” created for the benefit of someone who is disabled, allows for future planning, in the event the caregiver is no longer able to provide care.
The difference between a first party special needs trust and a third party special needs trust is who the owner of the property happens to be. A first party special needs trust is funded by property that is actually owned by the person with special needs. For instance, if a person with special needs acquires property from a lawsuit, divorce settlement, retirement plan, life insurance policy or inheritance, that property belongs to them. However, a third party special needs trust is funded by one person for the benefit of another.
How is a first party special needs trust created?
There are certain requirements that must be met, when establishing a first party special needs trust. Otherwise, the trust may not protect the eligibility of the beneficiary for need-based government benefits. Also, the beneficiary of the trust must be under the age of 65 at the time the trust is funded and must be “disabled” as defined by the Social Security Act.
The law requires that a special needs trust be irrevocable, and only for the benefit of the individual with disabilities. It must be established by either a parent, grandparent, legal guardian of that person’s property, or the court. The trust agreement must also provide a Medi-Cal payback provision, which means, the state Medi-Cal agency must be reimbursed when the beneficiary dies.
Does it matter whether a trust is first party or third party?
Yes. As stated above, a first party trust requires a “payback” provision, for reimbursing Medi-Cal. However, a third party trust does not. Usually, first party trusts are scrutinized more closely to make sure the funds are being used for the right types of expenditures. Third party trusts generally do not cause problems with government benefits programs. Many times, first party trusts are supervised by the court, depending on the requirements in your state.
If you have questions regarding a first party trust, or any other estate planning needs, please contact the Schomer Law Group either online or by calling us at (310) 337-7696.