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Planning For the Future
with a Special Needs Child - Part 1

The Child’s Long-Term Needs
By Harry S. Margolis and Eric Prichard

(Page 2 of 2)

There are two main types of supplemental needs trusts. 

The first, called a third-party trust, can be set up by any family member for the benefit of the person with special needs. Funds contributed to this trust are used to pay for additional care and services for a beneficiary, and are not considered the beneficiary’s assets for purposes of determining eligibility for government benefits. Theoretically, a parent or grandparent could deposit millions of dollars into a third-party supplemental needs trust and their child or grandchild would still qualify for benefits if necessary (although in this case, using the funds to provide superior private health insurance or housing may be a better idea).

The second type of trust is called a first-party or (d)(4)(A) trust. The key difference between a first-party trust and a third-party trust is that the former is designed to hold a beneficiary’s own assets, not funds donated by others. Even though the trust is designed to hold the beneficiary’s own funds, due to a quirk in federal law, the trust must be created by a parent, grandparent, or a court - the beneficiary cannot do it. These trusts are typically used when someone with special needs receives a large accident settlement or inheritance in her own name, or when someone who had been healthy and working becomes disabled through an injury or illness. While depositing funds into a first-party trust will allow a person to qualify for government benefits, the trust must provide that if any money remains in the trust when the beneficiary dies, it must first be used to reimburse the state for Medicaid paid out on the beneficiary’s behalf. If funds remain after such reimbursement, they can then go to other family members.  Because of this provision, parents or other relatives of a person with special needs should never leave money directly to a beneficiary - they should establish their own third-party trust to hold the funds, avoiding the 
payback provision.

So which type of trust is the right one to set up? Both, actually. The third-party trust is important because you can place funds into it while alive, and through your will, life insurance policies and retirement accounts when you pass away, and the funds can be used without fear of government reimbursement. As for a first-party trust, since only a parent, grandparent or court can create it, we recommend creating one at the same time as the rest of your estate plan. Doing this ensures that the trust is available if or when your child comes into his own funds and needs to shelter them in the trust.

A variation on the first-party trust is a pooled disability or (d)(4)(C) trust. Like the first-party or (d)(4)(A) trust, this trust is to be funded with the beneficiary’s own funds, which fall under a special safe-harbor in the law that permits their creation and management by non-profit associations for any number of beneficiaries. Unlike the (d)(4)(A) trust, a disabled beneficiary herself can fund such a trust without the participation of a parent, grandparent, guardian or court. This can be very useful when there is no appropriate trustee to manage funds for a disabled beneficiary.


Harry S. Margolis is the founder of ElderLawAnswers.com and co-founder of the Academy of Special Needs Planners (ASNP). Special needs planner Eric Prichard is a staff attorney with ASNP. To find a well-qualified attorney who specializes in helping families with special needs, as well as additional background and news on special needs planning, visit Special Needs Answers at specialneedsanswers.com.

 

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