If you've got a family member with special needs who is receiving government benefits, hopefully, you've considered how special needs planning can be a part of your estate plan. Commonly, the answer is to use a special needs trust to protect the entitlement to government benefits and to allow your family member to still receive support from you. These trusts come in three main types,
- First-Party Special Needs Trust
- Third-Party Special Needs Trust
- Pooled Trust
Each of these trusts is designed to protect your loved one's entitlement to government benefits. Unlike first-party and pooled trusts, a third-party special needs trust is set up with assets that do not belong to your loved one and there are advantages to using the third-party trust.
What is a Third-Party Special Needs Trust
A third-party special needs trust is the most common method that my clients use to create trusts for their family members with special needs. Some key features:
- They are set up by a donor to fund the trust (as opposed to using the beneficiary's assets).
- Normally, they are part of an overall estate plan to provide for a family member with special needs.
- The trust can be the beneficiary of a life insurance policy, own real estate, and can own investments.
- There's no limit to the amount of assets in the trust.
- The funds in the trust can be used for almost any purpose to supplement government benefits.
- When the person with special needs dies, the government is not entitled to reimbursement from the remaining assets in the trust - they can be passed on to other family members.
As you can probably see from the final feature, this type of special needs trust is popular because it allows you to keep your money in the family when the family member with special needs passes away. Instead of the government being able to make claims for reimbursement, your legacy can be passed on to other family members or charities.
Other Features of a Third-Party Special Needs Trust
Unlike a first-party trust, a third-party trust does not have an age limit of when it has to be established. Depending on where you live, your state may also require the first-party trust to be subject to a court reviewing the trust. Third-party trusts usually do not have such a requirement, especially when the donor to the trust is still alive. And while the donor is alive, if funds in the trust generate income that requires taxes, the donor, not the beneficiary, is responsible for the taxes.
The main hurdle that my clients face when considering a third-party trust is that it cannot hold the assets of the person with special needs. So if there's an inheritance or proceeds from a lawsuit that goes directly to the person with special needs, a first-party or pooled trust may be necessary to hold those assets because they can't go into a third-party special trust.
Even with that hurdle, the third-party special needs trust is still a preferred type of trust for many of my clients.
You May Also Like
- What is a First-Party Special Needs Trust?
- What is a Pooled Trust?
- What Can a Special Needs Trust Pay For?
If you and your family are ready to make sure your family member with special needs is properly planned for, let's set up a Legal Strategy Session to discuss the best options.