Special Needs Trusts: The Basics – Continued.
It’s difficult to overstate the benefits of a Special Needs Trust when one is needed. Often it covers a loved one’s unmet needs that remain after government benefits and family resources are exhausted. And it accomplishes this without causing the loved one to lose their government benefits, which might include SSI (Social Security Income), Medicaid, or housing benefits. You can find a deeper discussion of this here in an earlier article about Special Needs Trusts. In this article, I continue the explanation of Special Needs Trusts, describing the three (3) most common: First Party Special Needs Trusts, Third Party Special Needs Trusts, and Pooled Special Needs Trusts.
What Is a First Party Special Needs Trust?
A First Party Special Needs Trust is a Special Needs Trust created with the assets, or property, of the special needs beneficiary. In other words, the person with special needs owns or receives assets. If the assets would disqualify them from SSI, Medicaid, or other similar program, the assets can be placed in a First Party Special Needs Trust. When properly drafted, a First Party Special Needs Trust will permit the beneficiary to receive benefits from the trust without losing their government benefits, such as SSI or Medicaid.
While the First Party Special Needs Trust is a helpful tool, it comes with a trade-off. At the death of the special needs beneficiary, any assets left in the First Party Special Needs Trust must reimburse Medicaid for the benefits Medicaid provided the special needs beneficiary. In most instances, this payback obligation could have been avoided with careful advance planning. The assets could have been better preserved if a Third Party Special Needs Trust was used.
What is a Third Party Special Needs Trust?
A Third Party Special Needs Trust is a Special Needs Trust created with the assets, or property, of someone other than the special needs beneficiary. In other words, the person who wants to benefit the special needs beneficiary transfers assets, or property, into a trust established to benefit the special needs beneficiary. Through this Third Party Special Needs Trust, the special needs beneficiary can derive all of the benefits that he or she could derive from a First Party Special Needs Trust without the obligation to reimburse Medicaid at the special needs beneficiary’s death. Instead, the remaining assets can be distributed without restriction to other beneficiaries or charities, exactly as the family would want.
What is a Pooled Special Needs Trust?
A Pooled Special Needs Trust is similar to a First Party Special Needs Trust, but its unique characteristics make it a better option for many people. Occasionally, it’s difficult to find someone to serve as trustee of the special needs beneficiary’s First Party Trust. Perhaps, it’s difficult because the family is small or doesn’t have anyone capable of tending to the beneficiary’s needs. Or maybe it is difficult because the amount to be placed in the trust is so small that it isn’t practical to create a single trust for such a small amount. In those instances, a Pooled Special Needs Trust may be the best option.
A Pooled Special Needs Trust is a Special Needs Trust that is made up of the assets of many different special needs beneficiaries. The assets are “Pooled” and managed as a single trust with subtrusts, or accounts, set up for each beneficiary who contributed assets to it. Through the accumulation of many small contributions from a variety of special needs beneficiary’s, a Pooled Special Needs Trust is able to cover the cost of managing the assets and the special needs beneficiary’s needs at a lower cost to each beneficiary than if the beneficiary’s assets were the only assets in the trust.
Like the funding of the First Party Special Needs Trust discussed above, the Pooled Special Needs Trust is usually funded with the special needs beneficiary’s own assets, or property. And the similarity between the First Party and Pooled Special Needs Trust doesn’t stop there. In addition, at the special needs beneficiary’s death, the beneficiary’s family will not have control of the funds remaining in the subtrust, or account, or be able to direct where they are spent or distributed. Instead, the funds remain in the Pooled Special Needs Trust to cover operating costs, fees, and other administration expenses so that the cost to the other trust beneficiaries remains as low as possible.
Which Special Needs Trust Is Right For Your Family?
A Third Party Special Needs Trust is the best way to benefit a special needs family member or friend. It has all of the benefits of the First Party and Pooled Special Needs Trusts, yet allows remaining assets at the beneficiary’s death to pass to whomever the family directs rather than reimburse Medicaid (First Party Trust ) or remain in the trust to cover ongoing trust expenses (Pooled Trust). The First Party and Pooled Special Needs Trusts have their place and provide valuable benefits, but we only resort to those when we must. Be that as it may, we’re fortunate to have them available. If you want to learn more about how to set up a Special Needs Trust or simply have questions about other ways to benefit someone with special needs, contact us. We want to help.
