Caring for someone with special needs is a full-time responsibility. But what happens if the caregiver dies or becomes incapacitated? Who will continue providing care for the person with special needs? Provisions can be made in your estate plan that address this unfortunate situation. One of the best ways to handle this situation is to create a Third Party Special Needs Trust.
A special needs trust is useful, not only for ensuring future care of disabled loved ones, but also in making sure those loved ones maintain their eligibility for need-based government benefits programs, such as Medi-Cal.
Why is it called a “third party” trust?
Once a trust is created, the next step is to fund it. Depending on the source of those funds, your trust may be considered a “third party” trust. This means that the trust is being funded with your property, for the benefit of a loved-one with special needs. On the other hand, if the special needs trust is funded by the property of the individual with special needs, it would be considered a first party trust.
The benefit of a “third party” trust is that it will not jeopardize the eligibility of the person with special needs for government benefits. If the person with special needs receives property directly, from a court settlement, inheritance or insurance proceeds, that property is not protected from Medi-Cal, and could interfere with eligibility.
How does a Third Party Special Needs Trusts work?
A third party special needs trust is usually created by family members create as part of an overall estate plan. A trustee is appointed and given the authority to use the funds in the trust for the continued support of the person with special needs. The trustee, as a fiduciary, must comply with all of the terms set out in the trust document. For example, the trustee must be sure that the trust funds are not used for any purpose that would result in the beneficiary becoming ineligible for government benefits.
How is a First Party Special Needs Trusts Different?
The difference between a first party special needs trust and a third-party special needs trust is simply who owns the property that has been placed in the trust. A first party special needs trust is used to protect any property actually owned by the person with special needs. A first party special needs trust, also serves the important purpose of protecting eligibility for government benefits, because the property will no longer be owned by that person directly.
Be sure to comply with the rules regarding trusts
There are federal and state rules that control the creation of third-party special needs trusts. These rules are designed to prevent applicants for government benefits from improperly sheltering their property. Unfortunately, third-party special needs trusts are generally subject to “payback” rules, which require the estate of the beneficiary to reimburse the state for medical expenses after the trust beneficiary dies. The particular rules for each state are different and are constantly changing. So, it is a important to consult with a special needs planning attorney to properly create your trust.
If you have questions regarding special needs trusts, or any other estate planning needs in California, please contact the Schomer Law Group either online or by calling us at (310) 337-7696.
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