Supplemental Security Income (SSI) and Medicaid benefits provide a vital safety net for children and adults with serious physical and/or intellectual disabilities. However, these programs have strict income and asset requirements for beneficiaries.
Setting up a special needs trust allows you to provide your disabled loved one with a higher quality of life while protecting his or her eligibility for important government benefits. Because of the way a trust is set up, the assets in the trust are not considered for the purpose of determining eligibility for need-based government programs.
There are two types of special needs trusts: first-party trusts and third-party trusts. Both types of trusts provide the same general benefits, but there are significant differences in how they are funded.
First-Party Special Needs Trusts
A first-party special needs trust is funded using the disabled person’s own assets. Personal injury awards are a common source of income to fund a first-party special needs trust since a serious car accident or medical malpractice can leave the victim with lifelong disabilities. However, these trusts can also be funded by a retirement plan, divorce settlement, life insurance proceeds, or inheritance.
When assets are placed in a trust, the disabled person is no longer considered to legally own them. This helps preserve eligibility for government benefits, as long as strict requirements are followed. For example, the trust must be irrevocable (unchangeable), and the beneficiary must be under age 65 at the time the trust is established. If the beneficiary is a child, a parent, guardian, or court representative can create the trust on his or her behalf.
Different names for first-party special needs trusts you may hear include:
- Payback special needs trust
- Litigation special needs trust
- Miller trust
- (d)(4)(A) SNT
- (d)(4)(C) SNT
Trust proceeds can only be used for supplemental expenses not covered by any government program. This means, education or hobby-related costs are allowed, but using the funds for food or shelter is not permissible.
Note that first-party special needs trusts are generally subject to rules that require the trust to repay the state for the value of benefits received after the disabled individual has passed away.
Third-Party Special Needs Trusts
Third-party trusts are the most common type of special needs trust. Under this arrangement, trust assets are provided by a parent, grandparent, sibling, or another concerned party. Often, the trust is part of the estate plan of the person who is funding it. The goal is to ensure that the special needs beneficiary will have the financial resources necessary to enjoy the highest possible quality of life when his or her caretakers are no longer living.
Under a third-party special needs trust, the beneficiary does not legally own the assets in the trust and can’t make spending decisions. The trust is managed by someone selected as a trustee. This could be a family member, friend, or neutral third party.
Trust disbursements can’t be used for cash gifts because this would make the beneficiary ineligible for need-based government programs. However, trust funds can be used to fund personal services, entertainment, travel, transportation, and medical costs not covered by insurance.
Unlike first-party special needs trusts, there are no age limits associated with creating a third-party special needs trust.
When the person with special needs dies, the funds remaining in a third-party special needs trust are not used to repay the state for benefits previously received. Alternative family members can be chosen to receive the benefits of the trust.
Do You Have A Family Member Or Loved One Who Requires Special Needs Legal Planning?
The process of setting up a special needs trust to protect the interests of someone with disabilities can be complex. There are multiple variables that must be considered, and every person’s situation is unique. To make sure the trust is structured correctly, you need experienced legal assistance.
To learn more about how the special needs planning attorneys at Alperin Law can help you create a first-party or third-party special needs trust, call our office at 757.490.3500, or fill out the contact form on this page. Our Virginia Beach, Norfolk, Newport News, Suffolk, and Chesapeake office locations are conveniently located for residents throughout the state.