special needs trusts

Understanding the Differences Between First-Party and Third-Party Special Needs Trusts

Special Needs Trusts can be extremely beneficial, but they require planning. Many individuals with disabilities or long-term medical needs depend on Medicaid or other government assistance programs to provide medical and other necessary care. Many of these programs are means-tested and allow the individual to own a minimal amount (often $2,000!) of countable resources to become and remain eligible for these essential services.  This small asset limit means that even a modest inheritance or family support can jeopardize these life-changing benefits.

One way to accommodate this dire financial constraint is to create what is known as a Special Needs Trust or Supplement Needs Trust (SNT). The trustee of the SNT receives the property, rather than the person with special needs, who we will refer to as “Ruth”.  The trustee owns the property for the benefit of Ruth.  The trustee has full discretion to make distributions that benefit Ruth, but generally will not give money or other trust assets directly to Ruth.  Because Ruth does not own the property in the SNT, its value is not counted against Ruth when determining her eligibility for Medicaid or most other means-tested government programs.

There are two kinds of SNTs, which depend on the source of the assets: first-party and third-party. If Ruth’s property or assets fund the SNT, then it is a first-party SNT because the person receiving the benefits and the person whose assets funded the trust are the same.   A third-party SNT, in contrast, is funded by assets belonging to someone other than Ruth, perhaps Ruth’s family members.

First-Party Special Needs Trusts

Two common circumstances may lead Ruth to create a first-party Special Needs Trusts.   First, Ruth may have had a disabling  accident or illness that led to her need to qualify for government benefits except that she already owned too much property.  Second, Ruth may already be receiving needs-based government benefits but she now stands to receive or inherit an asset that would make her “too rich”—recall that the countable asset limit for many programs is only $2,000!   Perhaps a family member left Ruth an inheritance but did not adequately plan to protect Ruth’s benefits, Ruth receives a personal injury award, or Ruth is the beneficiary of a life insurance policy.

By placing her assets in a first-party SNT, Ruth can preserve her government benefits.  The ability to preserve benefits through the use of a first-party SNT means that SNTs are strictly regulated under federal and state law and failure to follow the rules can jeopardize Ruth’s benefits.

Third-Party Special Needs Trusts

A third-party special needs trust provides a legal mechanism for others to provide support to Ruth without affecting her eligibility for needs-based government benefits. Third-party SNTs are essentially an estate planning tool. Instead of leaving Ruth a direct inheritance, her parents (or aunts, uncles, siblings, next door neighbor, etc.) can create a third-party SNT to help provide for Ruth’s future needs and allow her to experience the “extras” that government benefits do not provide.

One Key Difference

Although first-party and third-party SNTs work in similar ways, there is one key difference–namely, what happens to any property remaining in the SNT after Ruth dies. With a third-party SNT, Ruth’s parents can specify who receives any assets remaining after Ruth dies.  First-party SNT rules require that after Ruth’s death any assets remaining in the SNT must be used to reimburse Medicaid for any benefits it paid on Ruth’s behalf; if after Medicaid is reimbursed the SNT still has assets, then the remaining assets will be distributed as Ruth specifies.

SNTs are an important–but complex–tool for helping individuals who have disabilities or other special needs. If you need additional information or legal advice on how to get started with a special needs trust, please call Promise Law today at (757) 690-2470 or contact us here.


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