This post is part of a month-long series about special needs trusts. We welcome you to contact our comprehensive settlement planning firm, Milestone Consulting, with any questions or to seek advice about whether establishing a trust is right for you.
Like all special needs trusts, third-party trusts are designed to allow people with disabilities to benefit from financial investments while maintaining eligibility for government benefit programs like Supplemental Security Income (SSI) and Medicaid. Individuals who cross a certain threshold of personal assets and income — such as when a personal injury settlement comes in — are not eligible for these benefits.
Special needs trusts provide a work-around for this problem. Instead of depositing money into a personal bank account, the proceeds are placed in a trust. Trusts are managed and disbursed by a trustee, but the products and services purchased using the money only to support the needs of the trust’s beneficiary. This special legal arrangement means that neither the trust’s assets nor any disbursements will be counted toward eligibility evaluations for government benefits — as long as the goods and services purchased by the trust do not overlap with what government benefits cover.
What’s the Difference Between First and Third-Party Special Needs Trusts?
While first-party trusts are funded using the beneficiary’s own money, third-party trusts are seeded with money from a donor. Third-party trusts are only an option for people who want to help a loved one with special needs. Personal funds secured in an injury settlement need to be placed in a first-party trust or pooled special needs trust.
Establishing a third-party special needs trust allows someone to leave an inheritance to someone who relies on government benefits. Many people write third-party special needs trusts into their estate plans. Life insurance policies, existing investment funds and even real estate assets can all be used to fund a third-party trust.
Benefits of Third-Party Trusts
Third-party special needs trusts come with outstanding benefits:
- They do not have beneficiary age limits. In contrast, first-party trusts can only benefit people under age 65.
- Third-party special needs trusts rarely require oversight from the court system, particularly when the trust’s donor is still alive.
- There’s no limit to how much money can be placed in the trust.
- Taxation is different. During a donor’s lifetime, most third-party special needs trust result in income taxes for the donor, rather than the beneficiary. This cuts down on red tape, as beneficiaries would otherwise be required to file income tax returns and then explain those tax returns to the Social Security Administration.
The most critical difference between first- and third-party special needs trusts is what can happen to the money after the trust’s beneficiary dies. When the beneficiary of a first-party trust passes away, the remaining funds in their trust are used to reimburse the government for benefits that were paid out during their lifetime. Third-party trusts do not come with this “payback” provision, because the money never belonged to the beneficiary in the first place. Instead of going to pay the government back, a third-party trust’s assets can be passed on to other relatives, even people who don’t have special needs.
If you’re considering establishing a special needs trust for yourself or a loved one, we welcome you to contact our settlement planning firm, Milestone Consulting, to get on the right track.
A West Point graduate where he served as captain and military aviator, John Bair continues his commitment to our country through his efforts within the settlement planning industry. He has represented families of victims lost in the Flight 3407 crash, offered pro bono services to the families of 9/11 victims and drafted the first consumer protection bill for plaintiffs (H.R. 3699).