By: Hinkle, Fingles & Prior, Attorneys at Law

Many parents know that special needs trusts play a critical role in planning for the financial future of their child with disabilities. If a person with disabilities has too much money in his own name he will become ineligible for important government benefits, like SSI and Medicaid. A special needs trust can help to avoid this problem because assets that are held in a properly drafted special needs trust are not considered when determining eligibility for these and other “means-tested” government benefits.

This Q&A explores the two types of special needs trusts, and the differences between them:

Q: What is a third-party special needs trust?

A: A third-party special needs trust is used to hold assets for a person with disabilities that are set aside by other family members – usually the person’s parents. The individual never “owns” the money directly, and does not have access to the funds. Typically, parents create a third party trust for a child and then fund the trust with cash, stocks, bonds, life insurance or other assets left through their estate plan when they die.

Q: What is a first-party special needs trust?

A: A first-party trust – sometimes called a “payback trust” – is designed to hold assets that are owned by an individual with disabilities. These funds might include a personal injury award, or gifts and inheritances from family that were given directly to the individual. A first-party trust can only be created by a parent, a grandparent, a guardian or a court.

Q: What can the trust money be used for?

A: Trust assets in either type of trust can be used for the benefit of the individual, including special classes, hobbies, luxury items, personal services, furniture, professional fees, computer equipment, transportation, vacations, alternate treatment, and second professional opinions, to name a few.

Q: What is the difference between a third-party trust and a first-party trust?

A. The major difference between a third-party special needs trust and a first-party special needs trust is what happens to any assets left over in the trust after the person with a disability dies.

In the case of a third-party trust, funds remaining in trust after the person dies are distributed to people or charities selected by the parents when they created the trust. Typically, the remaining funds go to other siblings, or charitable organizations providing disability-related services to your child.

In contrast, any assets remaining in a first-party special needs trust must be paid back to the government in order to reimburse various government agencies who have paid for care over the course of your child’s life.

Moreover, unlike a third-party special needs trust, a first party trust is also subject to more stringent federal and state reporting requirements. The trustee must file an annual accounting of the administration of the trust’s assets, income, and expenses. In addition, New Jersey state law requires advance written notice of expenditures by the trust in excess of $5,000.

Q: What type of trust is preferred?

A: Because of the payback and reporting requirements, a first-party trust should be used only when there is no other choice.

Regardless of the form of special needs trust, it is important for families to take care of this sooner rather than later. Now, more than ever, states are mandating individuals to be eligible for Medicaid and other means-tested government assistance benefits as a condition of the receipt of services.

Families should not wait until services are needed to start planning. To do so will likely result in substantial delays in the receipt of services or in the worst case scenario, families may find that they are not able to receive vital services at all.

Published on Aug 19th, 2013. © Copyright 2013 Hinkle, Fingles & Prior, P.C., Attorneys at Law. All rights reserved.
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