First-Party and Third-Party Special Needs Trusts: What Is the Difference?

 Posted on February 02, 2023 in Estate Planning

Dallas Special Needs Trusts Attorney

When you are creating an estate plan, it is important to understand all the options available. Some of the most important considerations you may face may be related to how you can provide for a person with special needs. However, different issues may need to be addressed depending on whether a person has resources available to them or whether you are putting solutions in place to provide assistance to a loved one with a disability. While special needs trusts can be beneficial in these situations, it is important to understand the differences between first-party and third-party special needs trusts.

The primary benefit of a special needs trust (SNT) is that it provides assistance for a beneficiary who has a disability or other special needs without impacting their eligibility for government benefits. Since assets placed into a trust are not owned by the beneficiary and are not considered to be among their available resources, these assets will not affect their ability to apply for or receive benefits such as Supplemental Security Income (SSI) or Medicaid. A third party known as a trustee will manage the assets in the trust and ensure that they are used for approved purposes. This can help the person meet their ongoing needs and provide them with resources they can use in their daily lives.

What Is a First-Party Special Needs Trust?

In some cases, a person may fund a special needs trust with their own assets. First-party special needs trusts are frequently used in situations where an individual with disabilities receives an inheritance, a settlement from personal injury litigation, or insurance proceeds that could cause them to lose their government benefits. In many cases, people can utilize pooled trusts that are managed by charitable organizations. However, first-party special needs trusts will usually require any assets remaining after the beneficiary's death to be paid back to the government to cover a portion of the lifetime medical benefits the person received rather than being distributed to other beneficiaries.

What Is a Third-Party Special Needs Trust?

A special needs trust may be funded by someone other than the beneficiary, such as a parent or grandparent. Third-party special needs trusts can provide additional benefits beyond what first-party SNTs offer, since they are not subject to Medicaid payback rules. These trusts can also provide more flexibility in terms of how funds can be used to assist the beneficiary compared with first-party SNTs, which have stricter spending rules. However, there are still limitations on how funds in a special needs trust can be used. Since government benefits are meant to address costs related to living arrangements, nutrition, and medical care, distributions from an SNT will need to be used for other purposes, including transportation, education, entertainment, and for medical treatments or home modifications that are not otherwise covered by public aid.

Contact Our Dallas Special Needs Trusts Attorney

When it comes time to create an estate plan and decide how best to provide for beneficiaries who have special needs, understanding all of the available options is essential, especially when it comes to trusts. If you have significant assets or expect to receive an inheritance or settlement, a first-party special needs trust may be the right option for you. However, if you are looking to provide assistance to a loved one with a disability, you may want to consider creating a third-party special needs trust. It is important to consult with an experienced Irving estate planning lawyer who can advise you of your options and help you determine the best tools to use to provide for the needs of yourself and your family members. At Andrew Dunlap Attorneys, PLLC, we will guide you through the estate planning process and ensure that all legal requirements are met as you take steps to secure your family's future. Contact us today at 972-807-6357 to learn more about how we can help you create the estate plan you need.


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