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The difference between first-party and third-party special needs trusts

On Behalf of | Aug 23, 2021 | Estate Planning

When you have a child with special needs, you’re naturally concerned about your child’s well-being after you’re gone. There are assets available that could be used to see to their comfort, but you’re concerned about interfering with their eligibility for government benefits like Medicaid and Supplemental Security Income (SSI). 

You know that special needs trusts (sometimes called “supplemental needs trusts”) can be used to circumvent this problem, but did you know that there are actually two different kinds of special needs trusts? First-party trusts and third-party trusts, if properly established, can both be used for this purpose.

What’s a first-party trust? 

First-party special needs trusts are those funded with the assets that legally belong to the trust’s beneficiary in the first place. 

This commonly happens in situations where the disabled person has received an insurance settlement or an award from a personal injury lawsuit, but they may also be funded by other assets, such as an inheritance. These trusts may be subject to Medicaid repayment rules upon the beneficiary’s death.

What’s a third-party trust?

Third-party special needs trusts are generally used by people who are planning in advance for their loved one’s future, and they are funded with assets that belong to someone other than the trust’s beneficiary.

Third-party trusts like these can be established at a grantor’s death and funded by the estate, but they can also be established as stand-alone trusts much sooner. Doing so can allow other concerned relatives, like a child’s grandparents or older siblings, to also contribute to the trust, increasing its value. These trusts are typically not subject to any Medicaid repayment rules.

Estate planning is often a complex process, especially if you’re unfamiliar with your trust options. Learning more can help you make the right plan for your family’s needs.