Third Party Special Needs Trust

How To Provide a Comfortable Life for a Special Needs Loved One Without Hurting Their Benefits Like SSI and Medicaid

Benefits of a Third Party Special Needs Trust

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Why Do You Need a Third Party Special Needs Trust?

Families with a special needs child or adult often worry about how they will provide a comfortable life for their loved one without hurting their government benefits like SSI and Medicaid.

Oftentimes, these benefits are restrictive and don’t provide enough money to pay for expenses and services that your child may need to live comfortably when you are no longer there to care for them yourself.

As a result, a lot of families wish to leave behind money in the form of an inheritance to cover expenses and services that benefits programs wouldn’t be able to afford.

Unfortunately, even if you have the best of intentions, if you improperly leave behind a sum of money, you could cause your disabled family member to lose their much-needed benefits.

That’s because many assistance programs are “means-tested”, which means that eligibility for benefits is restricted based on income and financial resources.

So what are you to do if you want to set aside money to take care of your family member after you’re gone?

Fortunately, a Third Party Special Needs Trust is a proven solution that allows you to leave money behind to supplement your family member’s lifestyle while still preserving their benefits like SSI and Medicaid.

What is a Third Party Special Needs Trust?

A Third Party Special Needs Trust is a type of Special Needs Trust that can be established for a person with special needs, also known as the beneficiary of the trust, in order to protect their eligibility for government benefits.

Usually this type of trust is funded with money from parents and grandparents as a way to provide additional funds to supplement their child’s benefits.

The assets held in the trust are used for the benefit of the disabled beneficiary and generally are not counted against their ability to qualify for benefits.

What are the Benefits of a Third Party Special Needs Trust?

  • Properly leave behind an inheritance in the form of money and assets for your special needs child without hurting their benefits like SSI, Medicaid, subsidized housing, and vocational rehab
  • Supplement a special needs child or adult’s government assistance to provide care and services that their benefits do not cover so they can live comfortably
  • Appoint a person you trust to manage the finances for your special needs loved one to make sure they are taken care of without being disqualified from their benefits

When Do You Need a Third Party Special Needs Trust?

A Third Party Special Needs Trust is one of the most common types of Special Needs Trusts that families create to provide for their loved one.

It is usually set up during the estate planning process by the parents, grandparents, or other family members in order to leave behind an inheritance in the form of money, life insurance, and property.

Doing so allows parents to leave behind funds for expenses when they are no longer alive to provide care for their special needs child themselves.

By placing an inheritance in a Special Needs Trust instead of giving it directly to your child, your child never directly owns or touches the money.

Instead, the funds in the trust will be managed and dispersed by a trustee that you appoint when you draft the trust.

The result is that the money you leave behind for your child won’t be counted against their eligibility for government benefits.

Schedule a free consultation with an experienced Special Needs Trust Attorney today! Call us now at (248) 613-0007

How Does a Third Party Special Needs Trust Work?

A Third Party Special Needs Trust is a type of irrevocable trust. This means that the trust is permanent and can’t be reversed or dissolved.

These types of trusts are very complicated and there is a lot at stake if the document is drafted improperly. As a result, you should always use the services of an experienced Special Needs Trust Attorney.

To better understand how the Third Party Trust works, let’s take a closer look at some of the key parties involved…

Settlor/Grantor

The settlor, sometimes called the grantor, is the person who creates and funds the trust to provide for their special needs loved one. Typically these are the parents or grandparents, although it doesn’t necessarily have to be.

Beneficiary

This is the special needs child or adult that the trust is being created for.

Trustee

This role is extremely important and it requires trustworthiness and a lot of attention to detail. That’s because the trustee is responsible for managing all of the money and assets in the trust. They are also responsible for making distributions for expenses on behalf of the beneficiary and making sure that the money is handled in a way that doesn’t disqualify the special needs beneficiary from their benefits.

How Does the Beneficiary Access the Money in the Third Party Special Needs Trust?

The special needs beneficiary accesses the money in the trust through the trustee that you appointed.

In order to make sure that your child does not get disqualified from their benefits, the money can’t be owned or touched directly by the beneficiary themselves.

Instead, the trustee needs to pay for additional expenses on behalf of the special needs beneficiary.

As you can see, the trustee has a very important role as they will be responsible for managing the finances you leave behind.

Not only should they be someone who is trustworthy, they should also be someone who is responsible, diligent, and has attention to detail in order to make sure that the purchases they make on behalf of the beneficiary will not disqualify them from their benefits.

Is a Will or Revocable Living Trust Enough When Special Needs Planning?

While a Last Will and Testament and Revocable Living Trust have a ton of benefits when estate planning, these are not enough when planning for a family member with special needs.

Say for instance you directly pass an inheritance to your special needs child while they are collecting SSI and Medicaid…

This money would go directly to your special needs beneficiary, meaning they would own the money and assets.

As a result, these new funds could be counted as income or financial resources by the government assistance programs causing your loved one to lose their benefits.

Obviously, this situation isn’t ideal. The best way to avoid a scenario like this is to create a Third Party Trust for your special needs child so their inheritance won’t count against their benefits.

What Happens to the Money in the Trust After the Special Needs Beneficiary Passes Away?

This is a common question because depending on the type of trust that is created, money remaining in the trust after the special needs beneficiary passes away may need to be paid back to Medicaid if benefits were provided while the beneficiary was alive.

With a Third Party Special Needs Trust, the trust is funded with money that doesn’t belong to the beneficiary. If the trust is set up properly, this means that the beneficiary doesn’t own any of the assets which is what protects their eligibility for benefits.

This also means that when the beneficiary passes away, there usually is not a payback provision directing the trustee to use the remaining funds in the trust to payback any Medicaid benefits that were used while the beneficiary was living.

This differs from a First Party Special Needs Trust. This type of trust does include a payback provision because the trust is funded with money and assets that the special needs beneficiary owns.

What is the Difference Between a Third Party and First Party Special Needs Trust?

Aside from the payback provision, one of the biggest distinctions between a Third Party Special Needs Trust and First Party Trust is that the Third Party Trust is funded by money and assets that never belonged to the beneficiary. Typically, these types of trusts are created by a parent or grandparent during the estate planning process to leave behind an inheritance for their special needs child without hurting their benefits.

A First Party Special Needs Trust is funded by money and assets the beneficiary owns or is entitled to. Among the most common reasons this type of trust is set up is because a person with special needs is receiving a large sum of money from a lawsuit over an injury that resulted in their disability. It’s also very common for a well meaning relative to leave behind a direct inheritance for a loved one with special needs, not knowing that the inheritance should have been directed into a Third Party Special Needs Trust in order to avoid hurting their disabled family member’s benefits.

How Do I Set Up a Third Party Special Needs Trust?

If you need to create a Third Party Special Needs Trust, you should set up an initial consultation to speak with an experienced Special Needs Trust Attorney. These trusts are very complicated and you can hurt your loved one’s benefits if it is set up improperly.

Everyone’s situation is unique. The best way to get customized advice based on your specific situation is to speak with a professional who can make sure your family is properly protected.

At Rochester Law Center we’ve helped 1,000s of clients protect their families with comprehensive estate planning. Give us a call today to schedule a complimentary consultation with one of our experienced Special Needs Trust Attorneys. Call us now at (248) 613-0007.

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Written By Chris Atallah - Founder, Rochester Law Center, PLLC
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Written By Chris Atallah - Founder, Rochester Law Center, PLLC

Chris Atallah is a licensed Michigan Attorney and the author of “The Ultimate Guide to Wills & Trusts – Estate Planning for Michigan Families”. Over that past decade, Chris has helped 1,000s of Michigan families and businesses secure their futures in all matters of Wills, Trusts, and Estate Planning. He has taught dozens of seminars across the State of Michigan on such topics as avoiding the death tax, protecting minor children after the parents’ death, and preserving family wealth from the courts and accidental disinheritance. If you have any questions, Chris would be happy to answer them for you – just call at 248-613-0007.