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What is the difference between first- and third-party special needs trusts?

On Behalf of | May 27, 2023 | Estate Planning |

Parents of children with disabilities often utilize a special needs trust to plan for the financial future of their child. These SNTs are able to manage the beneficiary’s assets while still allowing them to remain eligible for public benefits.

Medicaid and Supplement Security Income have strict income and resource eligibility requirements, and a beneficiary who receives additional funding or resources could face changes in their benefit eligibility. An SNT provides the opportunity to maximize benefits while still utilizing or gaining additional assets to provide for a better quality of life.

First-party special needs trusts

A first-party SNT receives funds from assets received by a special needs beneficiary. Often these funds come through an unexpected inheritance or through a settlement payment. These trusts have Medicaid payback provisions. For funds remaining in the trust following the death of the beneficiary, Medicaid can lay a claim against the estate for reimbursement for assistance paid on behalf of the beneficiary.

Third-party special needs trusts

With a third-party SNT, a third party creates the trust rather than the beneficiary. Typically, the use is for a third-party donor’s assets to supplement the government benefits received by the beneficiary. Since the estate plan for the third party provides the assets, the beneficiary has no prior ownership concerning the funding. This distinction prevents a Medicaid payback provision. Any remaining assets left after the beneficiary’s death can pass to another individual.

Planning the financial future of a special needs child is important. The differences in these trusts can guide you in protecting their financial and legal interests.

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