Types of Special Needs Trusts

There are several types of special needs trusts. The kind of trust you need depends on your circumstances. It is important to talk to a qualified attorney about the type of trust that will work best for your situation. Below is a brief explanation to help you understand the differences. The most common is a third-party special needs sub-trust created as part of an estate plan to protect the benefits of a special needs individual.

Third-Party Special Needs Trust Sub-Trust

A third-party special needs sub-trust typically is created as part of a family member’s estate plan controlling what happens to their assets when they die.
As part of a last will and testament or revocable living trust, the family member can designate a share of the estate be held in a special needs trust, or sub-trust.
The sub-trust is not funded immediately, but rather after the family member’s death.
This allows the disabled individual to receive a share of the inheritance while maintaining government benefits.
A trustee controls distribution of funds to the individual with special needs.
People often choose this option because it gives them the flexibility to manage their assets while they are alive, yet protects their loved one with disability upon their death.

Third-Party Special Needs Trust — Stand-Alone

A stand-alone third-party special needs trust often is created when the loved one of a person with disability wants to immediately give the loved one with disability a large sum of money or smaller sums over a long period of time.
This type of trust can be created immediately; no one has to die before the special needs trust is funded and administered.
One advantage of this type of trust is that other family members also may contribute. Grandparents or other relatives who want to give money to their loved one with disability name the trust as beneficiary of those funds. This means they don’t have to spend money to set up a separate special needs trust.
This type of trust typically is useful for people who have larger estates, but some people with smaller estates also may choose to create a stand-alone third-party special needs trust.

First-Party Special Needs Trust

This type of trust often is used when a person with disability (or someone else receiving government benefits) receives money without proper planning.
If the person with disability inherited money or won a lawsuit and suddenly has assets greater than the $2,000 allowed those benefits can be lost.
To prevent that from happening, a qualified attorney can create a first-party special needs trust.
However, a first-party special needs trust must contain a government payback provision if at any point in the person’s lifetime Medicaid benefits were received. This means that when the person with disability dies, any money left in the trust must be used to pay back Medicaid.
For this reason, most attorneys will recommend that a first-party special needs trust be established only when necessary to preserve an individual’s benefits.

Pooled Trust

A pooled trust is an option similar to a first-party special needs trust, but is less expensive to set up. That means it’s often a better choice when smaller amounts of money are involved.
An individual with disability who receives funds that would cause the loss of public benefits can join an existing pooled trust, which is managed by a nonprofit trustee along with money from other individuals with special needs.

Need For An Attorney

Special needs planning is a specific and unique area of law. Proper planning requires an attorney who is experienced in both special needs law and public benefits.

Finding the Right Professionals

Selecting the right attorney, planner or other professional is vital in planning for the future of your child with special needs. The following resources are designed to help you make the right choice: