Special Needs Trusts: First Party vs Third Party

Several factors should be considered when determining whether a First Party Special Needs Trust or a Third Party Special Needs Trust should be utilized when developing the appropriate plan for a beneficiary with special needs.

In both circumstances, the type of government programs the individual is receiving should be considered, as well the age of the beneficiary and the needs of the beneficiary.

In addition, one of the key factors in determining what kind of Trust to use is whether the assets that are going to be used to fund the Trust are those of beneficiary or those of a third party.

First Party Special Needs Trust

A First Party Special Needs Trust is Trust that is established for the benefit of an individual with special needs. The Trust is funded with the assets of the beneficiary. This type of Trust is exempt for Medicaid eligibility purposes and the funding will not affect the Medicaid eligibility of the beneficiary.

There is a statutory requirement that the disabled beneficiary be under the age of sixty-five (65) upon the creation of the trust. If a Special Needs Trust is created for an individual who is under the age of 65, that trust will remain exempt if the individual lives beyond the age of 65. However, any assets added to the trust after the individual reaches age 65 will be subject to the Medicaid transfer penalty rules.

The First Party Special Needs Trust must contain a “payback” provision. That is, upon the death of the beneficiary, any balance left in the trust must be paid back to the Department of Health in an amount not to exceed the Medicaid benefits paid on behalf of the individual.

A typical example of when a First Party Special Needs Trust is established is when someone who is receiving a needs-based government benefit (such as Medicaid) receives a money either as an inheritance that was left directly to him or her or from a lawsuit, such as a medical malpractice.

Third Party Supplemental Needs Trust

When established as a living trust, a  Third Party Supplemental Needs Trust is a good planning tool when the Trust is going to be funded with assets from someone other than the beneficiary of the Trust. For example, the assets of the beneficiary’s parents may be used to fund the Trust. In addition, if there are other people who may be inclined to make gifts or bequests to the individual with special needs, such gifts or bequests can be made directly to this trust, now or in the future, without effecting eligibility for programs such as Medicaid or SSI for the individual with special needs.

Unlike a First Party Special Needs Trust, a Third Party Supplemental Needs Trust does not require the payback provision to the state.

 A Testamentary Third Party Supplemental Needs Trust can also be established under an individual’s Last Will and Testament for the benefit of the beneficiary without adversely affecting the beneficiary’s eligibility for government programs such as SSI and Medicaid.  A testamentary trust does not get funded (receive any assets) until the person who created the Will dies.

It is very important, especially when planning for someone with special needs, to consult with an experienced special needs planning attorney so that your loved ones, and the benefits they need, are protected.

Choosing and working with a law firm can be stressful. Often you don’t know what the process is, what it will cost, and whether the law firm will even be able to help you! To feel confident in your choice, and to know that your confidence is not misplaced, you should look for much more.

Our team of elder law attorneys, estate planning attorneys, and special needs (disability) attorneys have represented the elderly and persons with special needs/disabilities and their families since 1985. In most professional occupations there is no replacement for experience. At Russo Law Group, our caring and compassionate staff have been involved in literally thousands of cases. Our experience is your protection.