A special needs trust is a great estate planning tool that can be used for providing valuable resources for your loved ones with special needs, even after your death. It is also an important way to protect individuals with disabilities who may own too much property so that they can remain eligible for need-based government benefits programs such as SSI or Medi-Cal. A third-party special needs trust is the most widely-used type of trust for individuals with special needs. Typically, family members use this type of trust as part of their overall estate planning.
What makes it a “third-party” trust?
Part of creating a trust is funding the trust, which means transferring funds or assets to the trust. Where those funds come from depends on the type of trust you have created. If you fund the trust with your own property for the purpose of benefiting a loved one with special needs, then it is considered a third-party trust.
The benefit of using this type of trust is that it will not jeopardize your loved one’s eligibility for government benefits. On the other hand, if your loved one with special needs received the property directly, as opposed to through a trust, then that additional property could put government benefits at risk.
How do Third-Party Special Needs Trusts work?
A trustee has a fiduciary duty to comply with all of the requirements and directives set out in the trust document. For example, the trustee must be cautious that the trust funds are not used for any purpose that would result in the beneficiary losing their government benefits. The reason a third-party special needs trust protects government benefits is because the recipient of those benefits does not actually own the property in the trust and does not have direct access to those funds.
How First-Party Special Needs Trusts are different?
The primary difference between a first-party special needs trust and a third-party special needs trust is who actually owns the assets in the trust. A first-party special needs trust is the most often used to protect assets owned by the person with special needs. This type of arrangement is most often necessary when the individual with special needs acquires funds or assets from a lawsuit, divorce settlement, retirement plan, life insurance policy or inheritance, for example. The property that is obtained is placed in the trust in order to protect those assets.
The trust must comply with government requirements in order to protect benefits
There are many federal and state rules governing third-party special needs trusts. These types of trusts are generally subject to “payback” rules. The payback rule means the estate of the beneficiary must reimburse the state government for any medical expenses after the trust beneficiary passes away. The exact rules for each state are different and continually changing. As such, it is very wise to consult with a special needs planning attorney to create a proper trust.
You may not be able to rely entirely on family
An assumption that many parents of special needs children make is that their family will automatically step in and provide the care and financial resources their loved one needs if the parents are no longer able to provide the care. Whether or not that is actually the case, parents should not disregard the need to provide a foundation for that care, at the very least. In order to guarantee continuity of care, your special needs child should have the security that a special needs plan can provide since special needs care can often prove to be difficult and costly, depending on the nature of the disability or incapacity.
Don’t put off the creation of your special needs plan
The worst mistake you can make when it comes to special needs planning is putting it off. Procrastination, in this case, is your worst enemy. The truth is that every individual with special needs can benefit greatly from having a special needs plan in place. This should be done as quickly as possible before something that happens which results in incapacitation, and takes away your opportunity to complete your special needs planning. If this were to happen, your loved one may be left to rely on others who may or may not be prepared to do so properly. That is certainly not something a parent would want to happen, so plan accordingly.
If you have questions regarding special needs planning, or any other estate planning needs, please contact the Schomer Law Group either online or by calling us at (301) 337-7696.
- Red Flags That Might Indicate Your Parent’s Executor Needs to Be Replaced - September 26, 2023
- How Can an Incentive Trust Help Me Achieve My Estate Planning Goals? - September 4, 2023
- How Do I Prove Undue Influence in a California Will Contest? - September 2, 2023
