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Setting Up A Special Needs Trust for a Family Member with Disabilities
Published May 31, 2017
By: Bernard A. Krooks, Certified Elder Law Attorney
Generally speaking, there are two kinds of special needs trusts. Those set up to handle money owned by the beneficiary (like a personal injury or medical malpractice settlement, for instance) are usually called first party special needs trusts. Those set up by someone other than the beneficiary, to handle money not belonging to the beneficiary, are usually called third party special needs trusts. These are the kind of special needs trusts that a parent, grandparent or other relative sets up for a family member with disabilities and these types of trusts will be the focus of this article.
What kind of property can go in to a third party special needs trust?
Any property someone wants to leave or give to a person with a disability can (and usually should) be placed in a third party special needs trust. Homes, cash, stock and bonds are all common third party special needs trust assets. Keep in mind that there will likely be tax consequences of contributing different kinds of assets to a trust. It is important for you to understand the tax and other ramifications prior to transferring assets to a third party special needs trust.
Are all inheritances properly viewed as third party trusts, since they come from someone other than the beneficiary?
This is one of the common misconceptions for those not closely familiar with special needs planning. An inheritance can be left outright to someone, or in a trust for their benefit. In the case of a trust, it can be designated for the support and maintenance of the beneficiary, or for their special and/or supplemental needs.If an inheritance is left outright to a person with a disability, it might be transferable to a trust — but probably only to a first party special needs trust, since the beneficiary had an absolute right to possess the property outright. If an inheritance is left in a support trust, it may be a third party trust but not necessarily a third party special needs trust. Only if a trust contains money from someone other than the beneficiary and includes language limiting its use to special or supplemental needs will it be considered a third party special needs trust.
Can an inheritance which is not left to a third party special needs trust be fixed?
Sometimes. Each case is different and must stand on its own facts. This is an important question which should be asked of a qualified attorney. Expect the response to be “let me ask you a few more questions.” The likelihood is high enough, though, that the possibility should definitely be addressed. Failure to fix this problem could result in the loss of Medicaid or Supplemental Security Income benefits.
Are all third party trusts funded with inheritances?
Absolutely not. Many people create third party trusts for their children, loved ones, friends or family members while the person creating the trust is still living. This is often the case when a family wishes to engage in estate tax planning and wants to make provisions for a child with a disability. By creating the trust during lifetime, other relatives can contribute funds to it, as well.
Are all third-party special needs trusts irrevocable?
No. First party special needs trusts must be irrevocable, but the same is not true for third party special needs trusts. Third party special needs trusts may be revocable or irrevocable. It is important that the beneficiary not be able to revoke the trust, but there is no reason someone who is not the beneficiary cannot be given the authority to terminate it.
What kinds of things may a third-party special needs trust pay for?
Though there may be limitations in Medicaid rules about what a first party special needs trust can pay for, there are almost no limitations on third-party trust distributions. The trustee must remember this, though: some distributions may have the effect of reducing — or even eliminating — some or all of the beneficiary’s public benefits. Keep in mind that this may not always be a bad result; especially if the quality of life of the beneficiary is improved.
The take-away message: third-party special needs trusts are much more flexible and can be much more beneficial to a person with a disability than the more-restrictive first party special needs trust. However, sometimes you don’t have a choice. Moreover, individuals can actually have both types of trusts. When doing this type of planning for your family, it is imperative that you work with an expert who understands all the relevant issues and who can properly guide you.
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