Special needs trusts are essential when a person with disabilities has assets to protect and when that person’s parents are considering their estate plan. Whether the person with the disability has funds, receives funds from a personal injury settlement, or receives funds and property as a gift, the money must be managed carefully. Special needs trusts (or Supplemental Needs Trusts as they can be referred to) are the tool to use for asset protection for those with disabilities. When special needs trusts are created, it is important to know what specific type of trust must be used. There are two primary kinds of special needs trusts: first party and third party trusts. The unique situation of each person will dictate which type of special needs trust to use.

Special needs trusts are used to preserve a disabled person’s access to needs based public benefits. These benefits might otherwise be lost when the individual acquires resources over a given threshold. A person who is disabled may be receiving Supplemental Security Income (SSI) on a monthly basis and may have Medicaid coverage to pay for the costs of healthcare and nursing home care. Medicaid and SSI are means-tested and impose limits on resources, so an influx of money such as from an injury settlement or inheritance could result in a loss of benefit access.

A special needs trust makes it possible to avoid this loss of benefits. When appropriately created in accordance with the law and when properly structured and maintained, special needs trusts allow money to be used for the benefit of someone who is disabled without jeopardizing benefits access. The assets held in the trust are not counted as resources, but can be used to supplement and enrich the quality of life of the person who is disabled, beyond what governmental benefits provide for.

If the money or property being put into the trust comes from the person who is disabled, the trust is a first party trust. This situation can occur if the individual receives a windfall inheritance, receives a personal injury settlement, or if they simply have built up assets based on gifts from family members.  A third party trust can hold assets that come from any third party source, like a grandparent, parent, aunt, uncle, neighbor, etc.

A first party special needs trust can be established only by a grandparent, parent, guardian or court. They also can only be established for someone under aged 65. In some situations, courts monitor these trusts. When the person with special needs dies, the state must be named the primary beneficiary of any trust assets left in the trust, in what is called a “pay back” provision.  This is to allow the state to pursue reimbursement for the costs of care during the individual’s life.

A third party special needs trust can be created by anyone who wants to leave money to someone who is disabled. Third party special needs trusts can be funded up to any amount, and the trust can be a beneficiary of a life insurance policy. The trust can be used for virtually any purposes to benefit the person with special needs, except for that the person’s own money cannot be held in the trust.  Often times, parents of a child with disabilities will set up a third party trust as part of their estate plan, to insure any inheritance meant for the child will not affect their public benefits.

Upon the death of the disabled beneficiary of the third party special needs trust, the money and property can transfer to any other relatives or beneficiaries that the trust creator chooses. Because the money and assets in the trust never belonged to the person who was disabled, the state has no ability to require a pay back provision. This is a big benefit, because someone with disabilities can be provided for during his life and the remaining funds can then go to other relatives or friends of the trust creator’s choosing.

Special needs trusts can provide very important protections for someone with disabilities, as long as you know how these trusts work and follow the rules and processes for trust creation. To discuss the impact a special needs trust could have on you and your family, contact the attorneys at the Wladis Law Firm.


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