The Differences Between First-Party and Third-Party Special Needs Trusts
Special needs trusts are set up to provide for the care of loved ones with special needs and to ensure that they remain eligible for government assistance. The federal government has strict rules about how much property a person with special needs is allowed to own and still collect benefits, but creating a trust can remove the ownership of any property from a person with special needs and maintain his or her eligibility for government programs. Special needs trusts can either be first-party or third-party, and each type has its benefits and drawbacks, depending on what purpose you would like the trust to serve. An experienced trusts and estates attorney can work with you to determine which special needs trust best fits your situation.
First-Party Special Needs Trusts
A first-party special needs trust, also known as a self-settled trust, is a type of special needs trust used to manage that person’s own assets or property. Medicaid, Social Security Income, and other government programs that provide benefits to individuals with special needs have income cutoffs that could bar a person from receiving benefits if they have too many assets. A first-party trust removes the person as the owner of the property and makes it the property of the trust.
Using a first-party trust requires that a trustee manage the trust who is not the person with special needs. Typically, the trustee is a bank, trust company, or close family member. Assets or property that might be maintained through a first-party trust include settlements from personal injury awards, retirement plans, divorce settlements, life insurance policies, or an inheritance.
In order to establish a first-party trust, federal and state guidelines require that the person with special needs be younger than 65 years old when the trust is created. It must also be created by a parent or legal guardian and is irrevocable, which means that the terms of the trust cannot be changed once established. Medicaid and similar government benefit programs also require that any remaining funds in a first-party special needs trust be used to reimburse the programs after the beneficiary passes away.
Third-Party Special Needs Trusts
A third-party special needs trust can be established by anyone for the benefit of a person with special needs. Typically, a third-party trust is created by the family members or close friends of a person with special needs and is ideal for future planning or for paying for the current expenses of the beneficiary. A third-party trust is similar to a first-party trust where the person with special needs is the beneficiary, and the trust is managed by a bank, trust company, or close loved one.
However, third-party trusts have far fewer restrictions than a first-party trust. A third-party trust may be created by anyone, and there is no age restriction on the beneficiary. The terms of the trust can be altered, and there is no reimbursement requirement to Medicaid or other government programs.
Contact a Lawyer Today
Christopher B. Johnson, located in Pasadena, California, has years of experience in all aspects of estate planning, and works with clients from all walks of life to create estate planning tools that reflect their needs and those of their beneficiaries. To request an immediate consultation, contact him today at (877) 755-9178.