Although we have discussed how and why you need to create a special needs trust, it is essential to distinguish between a self-settled trust and a third-party one. Self-settled trusts can be particularly confusing because they are also referred to as first-party trusts. Despite what you think the name implies, these trusts are not established by those with special needs. They are created by a parent (or grandparent), the person’s legal guardian, and in some cases, the court itself.
Rather than looking at who established the trust to differentiate the two, you should be considering the following:
- Whose assets funded the trust?
- Who is the beneficiary of the trust?
A self-settled trust is funded with the assets that belong to the person with special needs—and it will be done so by the people we listed above. Furthermore, the person with special needs will also be the beneficiary. Though an attorney will outline the entirety of what a self-settled trust can do, there are some key features of them that you should understand.
These can be created when someone with special needs receives money from civil litigation or a direct inheritance. The funds awarded may make them ineligible for Medicaid, Social Security Insurance (SSI), housing, and other disability programs. When the person’s assets are successfully placed into this trust, they will not jeopardize their access to these benefits. However, your attorney will also explain that trusts must be:
- Established before the person is 65
Lastly, because the assets belong to the person with special needs, the Medicaid agency will be reimbursed when the person passes away.
Again, when you look at how the trust is funded, you will see how a third-party trust differs from a self-settled trust. Third-party trusts are established and funded by a third party. This could be anyone who wishes to give their assets to someone with special needs but doesn’t want to make them ineligible for governmental assistance.
Furthermore, Medicaid will not receive reimbursement from the beneficiary when the beneficiary passes away. Because the assets didn’t originally belong to the person with special needs, the third-party chooses who receives them if the special needs person passes away.
Kevin Tharpe, P.C.
Although we have a long and established history of working with clients to create self-settled and third-party special needs trusts, these may not be the only planning options available to you. Contact J. Kevin Tharpe, P.C., to schedule a consultation to speak about estate planning, elder law, and special needs planning.