Special Needs Trusts - First Party or Third Party?

What is a Special Needs Trust? 

A special needs trust is a written legal agreement that allows an individual with a disability to qualify or remain qualified for means tested government benefits, such as medicaid, SSI or even medicaid waivers.  Because the beneficiary (the person with a disability) of a special needs trust (SNT) has no control over the assets in the trust, the assets are not counted for the purpose of eligibility. But there is a big distinction between a “First Party” SNT and a “Third Party” SNT.

What is First Party Special Needs Trust (SNT)? 

A First Party SNT is a trust that is funded with the assets of the beneficiary. These assets may come from having savings from prior work, from an inheritance, life insurance, or from a personal injury settlement.  Without the ability to place the funds into a First Party SNT, the beneficiary would have to spend this money down to under $2,000 in order to apply or reapply for government benefits.  This type of trust is sometimes called a (d)(4)(a) trust after the section of the US Legal Code that authorizes this type of trust. 

There are several drawbacks to this type of trust:

1) There is a Medicaid payback if the beneficiary should die with funds still in the trust.  Medicaid will recover whatever amounts were spent by Medicaid on the beneficiary during his or her lifetime.  The beneficiary or their family has no say in where the money will go. 

2) The funds in the First Party SNT may only be used for the primary benefit of the beneficiary and no one else.

3) The First Party SNT can only be set up for beneficiaries under the age of 65.

What is a Third Party Special Needs Trust (SNT)?

The Third Party SNT is usually set up by the family of an individual with a disability and, unlike the First Party SNT, is funded with assets of individuals other than the beneficiary. Because the assets were never the property of the beneficiary, it is the money from a third party that is used to fund the trust, the Third Party SNT has certain advantages. 

The advantages of this type of trust are: 

1) The Third Party SNT does not have a Medicaid payback provision.  The person setting aside the funds for the beneficiary maintains control over where the remaining funds, if any, will go. 

and 

2) The trust need not be for the sole benefit of the beneficiary.  The standard is much more relaxed, and the trustee of the Third Party SNT does not have to worry if funds are used that benefit others, such as the family of the beneficiary, travel companions and caretakers.  Expenditures can be made for goods and services for the beneficiary that individuals other than the beneficiary may also enjoy.

The Third Party SNT requires some proactivity on the part of the trust creators.  It is usually set up as part of a comprehensive estate plan.  If the Third Party SNT is not set up, the First Party SNT is there to save the day, but not without the Medicaid payback for funds not spent during the beneficiary’s lifetime.