Special needs trusts (SNTs) are important tools for individuals with disabilities who need to maintain eligibility for government benefits while still having access to funds to supplement their needs and enhance their quality of life. They provide a mechanism for managing assets on behalf of individuals with disabilities without jeopardizing their eligibility for means-tested government programs such as Medicaid and Supplemental Security Income (SSI).
These trusts can be established as either first-party or third-party special needs trusts. The primary differences between the two types of SNTs are as follows.
Trust funding
The source of funds is the main distinction between first-party and third-party special needs trusts. In a first-party SNT, the funds come directly from the individual with a disability often through inheritances, legal settlements or personal injury awards. These assets belong to the beneficiary and are placed into the trust for their benefit.
Conversely, third-party SNTs are funded with assets from someone other than the beneficiary such as parents, grandparents or other relatives. These assets are not owned by the beneficiary and are typically contributed to the trust by family members who want to provide financial support without affecting the beneficiary’s eligibility for government benefits.
Medicaid payback requirements
Special needs trusts (SNTs) have different Medicaid payback requirements based on their funding sources. First-party SNTs must include provisions for reimbursing Medicaid for any benefits received by the beneficiary during their lifetime. This means that after the beneficiary’s passing, any remaining funds in the trust must first be used to repay Medicaid before any other beneficiaries can receive distributions.
Third-party SNTs, however, do not have Medicaid payback requirements, allowing the remaining trust assets to be distributed to designated beneficiaries after the beneficiary’s passing without reimbursement to Medicaid.
Legal counsel can provide invaluable guidance and assistance in establishing both first-party and third-party special needs trusts, ensuring that they comply with applicable laws and regulations while meeting the specific needs and goals of individuals with disabilities and their families.