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Wednesday, September 1, 2021

What Is the Difference Between a First and Third Party Special Needs Trust?

Everyone should have an estate plan in place. It is a plan that helps protect your best interests and those of the ones you love in the face of an otherwise uncertain future. Because estate plans are such a reflection of a person and family’s circumstances and situation, every estate plan can and should look different. For instance, sometimes a person or a loved one has special needs that need to be considered in planning. In this situation, an estate planning tool such as a special needs trust can be a great way to serve a person with special needs far into the future. Here, we will discuss special needs trusts and the different types of special needs trusts in more detail. The distinctions can be important to make sure you are putting the right type of trust in place.

What Is the Difference Between a First and Third Party Special Needs Trust?

A special needs trust provides a way to provide financial support to a person with special needs without the assets held in the trust being counted against the person for purposes of government need based benefits. Also referred to as a supplemental needs trust, the funds held within the special needs trust can go to covering expenses of the special needs beneficiary that are not covered by government benefits which may provide critical financial support but do not necessarily cover all of a person’s expenses.

There are two main types of special needs trusts, one of which is the first-party special needs trust. A first party special needs trust is one that is funded by the disabled individual and for the disabled individual’s benefit. One common scenario for the establishment of a first-party special needs trust is when a person sustains debilitating injuries in an accident. With special care needs, the injured individual may go on to get a settlement or jury award compensating him or her for harm suffered in the accident. While this compensation is often much-needed, it can jeopardize the individual’s ability to qualify for other needed benefits such as Medicaid or Supplemental Security Income. To avoid disqualifying for these government benefit programs, the disabled individual can put the proceeds from the personal injury claim in a special needs trust.

The other type of special needs trust is a third-party special needs trust. Instead of being funded by the individual by special needs, a third-party special needs trust is funded by someone else, such as a family member or loved one of the disabled individual. Third-party special needs trusts are commonly set up as part of a person’s estate plan so that he or she can leave the disabled individual an inheritance without jeopardizing the continued receipt of government benefits.

Whether it be a first-party special needs trust or a third-party special needs trust, these trusts offer a variety of benefits. There is no limit placed on the amount of assets that can be held within the trust. Furthermore, the government has no claim against the contents of the trust, including reimbursements for Medicaid payments made. Last, but not least, the trust allows for another source of financial support for a special needs individual without the risk of that person losing out on government benefits.

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For trusted legal counsel in developing a unique and comprehensive estate plan, talk to the team at Merlino & Gonzalez. Contact us today.


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