If you have a special needs child, or other loved one, that you wish to protect and provide for in the future you may need to create a special needs trust. Likewise, if your special needs child has suddenly inherited assets or been awarded a personal injury settlement you should also guard those funds through the creation of a special needs trust. Though all special needs trusts operate in essentially the same way, there is more than one type of special needs trust. Understanding the types of special needs trusts better will help you decide which type you should create for your child or loved one.
The concept behind any special needs trust is simple – to protect assets intended to provide for a special needs individual. The reason a trust is needed to protect assets for a special needs individual is that most depend on the assistance provided by federal programs such as Medicaid and SSI. These programs, however, have income and asset limits for eligibility purposes. Therefore, if a special needs individual has assets in his/her name eligibility for much needed assistance may be lost. A special needs trust is a type of trust that, when properly drafted, is recognized by the federal government and will not interfere with a beneficiary’s eligibility for programs such as Medicaid and SSI. Within the special needs trust category there are three types of special needs trusts:
- First party trust – this trust is used when the special needs individual himself/herself has assets. For example, if a well-meaning relative leaves a direct gift in a Will or a personal injury award is paid out directly to the special needs individual, the assets can be transferred into a first-party special needs trust. A first party trust must include a “payback” provision allowing Medicaid to recover from the trust after the death of the beneficiary.
- Third party trust – often referred to as a “supplemental needs trust” a third party special needs trust is funded by assets from a third party, such as a parent or other loved one. The trust may provide for things other than food and housing for the special needs beneficiary. Unlike its first party counterpart, a third party special needs trust does not require a “payback” clause.
- Pooled trust – when the duties of being the trustee of a special needs trust are too extensive or too emotional for family members a pooled special needs trust is an option. A professional trustee manages the funds of many disabled beneficiaries.. This type of special needs trust also requires a “payback” provision.