Special needs planning can have a profoundly positive impact on families caring for loved ones with unique care requirements. As someone who has been in that advocate position for her own family members, I understand that determining the best way to meet all of your loved one’s needs while allowing flexibility for the future can be challenging. Some of the first questions that I get asked when planning for a family with special needs are what is a first party special needs trust, what is a third party special needs trust, and which option is best for them. Educating yourself on the options available to you is an admirable first step and I am honored to be a part of it. When you’re ready for a comprehensive care plan or to learn more about setting up a special needs trust for your family, please reach out to our team by filling out the form below.
Understanding Special Needs Trusts
A special needs trust is an essential estate planning tool designed to supplement, not replace, the government benefits that individuals with special needs may receive. The primary goal is to maximize benefits without penalizing the beneficiary. Whether you’re evaluating what is a first party special needs trust or what is a third party special needs trust, understanding the source of funding and long-term implications is crucial.
What Is a First Party Special Needs Trust?
A first party special needs trust, also known as a self-settled trust, is funded with the beneficiary’s own resources. One of the most common cases where this occurs is when an individual receives a settlement—often from an accident-related injury—that is used to establish the trust.
Key Features:
- Funding Source: The funds come directly from the individual.
- Medicaid Payback: Upon the beneficiary’s passing, the remaining funds in the trust are generally subject to reimbursement to the state for Medicaid expenses.
- Purpose: To ensure that while the individual can receive necessary benefits immediately, the trust supports additional care needs without jeopardizing their eligibility for government assistance.
What Is a Third Party Special Needs Trust?
A third party special needs trust is typically funded by someone other than the beneficiary, such as parents, grandparents, or other loved ones. This trust is designed to provide supplemental support for a higher quality of life, ensuring that the beneficiary’s inheritance does not interfere with their eligibility for government benefits.
Key Features:
- Funding Source: The funds are contributed by family members or other third parties.
- Flexibility: Trustees (often family members) have the discretion to manage and modify the trust to meet the beneficiary’s evolving needs.
- No Medicaid Payback: Unlike the first party trust, funds in a third party trust are not required to be repaid to the state, allowing the inheritance to potentially benefit other family members if unspent.
First Party vs Third Party Special Needs Trust: Key Differences
Understanding the distinction between these two types of trusts is essential for effective special needs planning:
- Source of Funds:
- First Party: Funded by the individual’s own resources (e.g., accident settlements).
- Third Party: Funded by family members or other loved ones.
- Medicaid Considerations:
- First Party: Funds may be reclaimed by the state to reimburse Medicaid upon the beneficiary’s death.
- Third Party: Funds are solely for the benefit of the individual without the obligation of Medicaid reimbursement.
- Flexibility in Estate Planning:
- First Party: Primarily serves to protect the beneficiary’s current benefits, with limited flexibility upon termination.
- Third Party: Offers broader flexibility and can be structured to continue providing for the beneficiary even after the primary beneficiary’s lifetime.
These distinctions highlight why understanding first party vs third party special needs trust options is pivotal in ensuring that your loved one receives comprehensive care without compromising their future benefits.
We’re Here to Help
Whether you are looking to set up a first party special needs trust or a third party special needs trust ultimately hinges on the source of the funds and the long-term goals for the beneficiary. A first party trust offers immediate support using the beneficiary’s own funds, while a third party trust provides a flexible solution funded by loved ones, allowing for enhanced care without impacting government benefits.
Effective special needs planning can make a profound difference in the quality of life for your loved one. If you need further guidance or have any questions about choosing the right trust for your family, fill out the form below to learn more about how McCarthy Law can help you.
About the Author
Attorney Jennifer Haskins is a Rhode Island estate planning and probate attorney dedicated to helping families navigate the legal complexities of caring for loved ones with special needs. A Warwick native now living in Cranston, Jennifer has lived her practice, personally advocating for her own family members in addition to clients with special needs.
Attorney Haskins earned her J.D. and certification in Compliance and Risk Management from New England Law in Boston, and is licensed to practice law in Rhode Island. When she’s not advocating for her clients, Jennifer enjoys playing tennis, reading, attending concerts and plays, and exploring the outdoors with her Golden Retriever mix, Murray.