The Difference Between a First-and Third-Party Special Needs Trust

What is the Difference Between First-and Third-Party Special Needs Trusts? A Wills and Trusts Attorney Explains

If you have a loved one with special needs, you probably know that special needs trusts are used to financially support them without risking their ability to qualify for government benefits. But you may not be familiar with the different types of special needs trusts.  

The two primary types are referred to as first-party and third-party special needs trusts, and each type has its own rules, requirements, advantages, and restrictions. Today, the Davidson Law Group looks at the essence of each trust and when each trust might be necessary.

First-Party Special Needs Trusts

A first-party trust is used for the property of a person with special needs, which might be obtained through an inheritance, a retirement plan, a personal injury award, a divorce settlement, or a life insurance policy. If a person with special needs owns too much property, it will affect their eligibility for government benefits. So, instead of owning the property directly, the person with special needs puts the property into a first-party trust.

This trust may be established only by the beneficiary’s parent, grandparent, legal guardian, or by a court (if the beneficiary was awarded damages in a lawsuit). Because the assets in the trust belong to the beneficiary, if the beneficiary passes, his or her estate may have to reimburse Medicaid with assets remaining in the trust. First-party special needs trusts are also called self-settled SNTs, Medicaid payback trusts, OBRA ’93 trusts, and d4A or d4C trusts.

When Are They Necessary?

If the beneficiary receives an inheritance from a probate estate or a judgment from a lawsuit, a first-party trust must be set up for those assets.

Third-Party Special Needs Trusts

A third-party special needs trust is the most common type of trust used to help a person with special needs. These trusts are established by a donor, which may be anyone (parents, grandparents, siblings) except the beneficiary. Family members usually leave property in the trust through their estate plan — their will, trust, life insurance, or other designation.

As long as he or she abides by trust requirements, the trustee may use trust funds for many things, including hobbies, classes, vacations, luxury items, and more. The beneficiary never owns the property in the trust and does not have direct access to trust funds. Therefore, those assets cannot be claimed by Medicaid as reimbursement if the beneficiary passes away. This is perhaps the biggest advantage of a third-party trust.  

When Are They Necessary?

If you’re the parent or grandparent of a disabled beneficiary and you want to include them in your updated estate plan, then a third-party trust is best for you.

Schedule a Free Consultation With Davidson Law Group

The attorneys at the Davidson Law Group have many years of experience helping families with special needs planning. To learn more about planning for a child with special needs, contact us today to schedule your free consultation.