I have previously posted a discussion of planning with special needs trusts (see my post of April 8, 2011) which focused on the two types of special needs trusts – – one created with the beneficiary’s money (self-settled or first-party trust), and one created with someone else’s money, such as the disabled person’s immediate family, friends and other relatives (third-party trust). Today, I want to focus specifically on third-party trusts.
A third-party special needs trust can be either a testamentary trust established under the Last Will and Testament of a decedent, such as the disabled person’s parent, or it can be a standalone special needs trust established by the grantor, typically the disabled person’s parent, during the parent’s lifetime. The benefit of using a standalone trust is that the trust exists not only to retain assets upon the death of the grantor, but it can also be funded with gifts during the life of the grantor, either from the grantor, another person, or both. In addition, the standalone third-party special needs trust can be named as a beneficiary to receive funds under a life insurance policy and other financial accounts through TOD (Transfer on Death) designations or POD (Pay on Death) designations. It can also be named as the beneficiary of another person’s estate plan, other than the parent, such as a grandparent or a friend.
Third party special needs trusts are not funded with the disabled person’s own assets, so there is no payback requirement to Medicaid. Because a third-party special needs trust does not have to account for a Medicaid pay back, the funds can be used to benefit beneficiaries other than the disabled beneficiary, if the grantor so chooses. Therefore, for example, a trustee could be granted the authority to pay the travel and entertainment costs of friends and other family members to encourage them to interact with the disabled beneficiary more frequently.
If a beneficiary of an estate or trust is receiving public benefits and the inheritance is not passed to a third-party special needs trust, the disabled beneficiary likely will be disqualified from means-tested public benefits. Even though the disabled beneficiary may be able to shelter the funds in a first-party special needs trust, the first-party special needs trust must contain a payback provision. Further, if the beneficiary is over the age of 65 when the trust is to be funded, the first-party special needs trust cannot be established because of the age restrictions imposed by federal law. Therefore, utilizing third-party special needs trusts in estate planning can be very advantageous to a beneficiary with special needs.