Planning for a loved one with disabilities can be overwhelming. You want to safeguard their future and well-being, but the challenge is clear: how do you build their financial security without jeopardizing the vital government benefits they may depend on?
This is where a special needs trust (SNT) comes in. It is an estate planning tool that allows a beneficiary to receive support without losing their eligibility for Medicaid or Supplemental Security Income (SSI).
There are two main types of SNTs: first-party and third-party. The difference between the two lies in where the funds come from.
How the trusts are funded
First-party SNTs use assets that belong to the beneficiary. These funds may be from the person’s own savings, an inheritance, a settlement from a lawsuit or other assets already in the beneficiary’s name.
A first-party SNT must be established for the beneficiary by a parent, grandparent, legal guardian or a court. The trust must be established and funded before the beneficiary turns 65, and it must be irrevocable
Third-party SNTs use assets contributed by someone else, usually a parent, grandparent or other relatives. These funds come in the form of gifts, life insurance proceeds or inheritances from others. Family members use them when they wish to leave money or assets to a person with special needs without affecting SSI/Medicaid eligibility.
Knowing the difference between the two can save you a lot of time when you are setting up an SNT for yourself or a loved one.
How remaining assets are distributed after death
When the beneficiary passes away, the two trusts operate differently. For first-party SNTs, federal law requires a Medicaid “payback” provision. This means that when the beneficiary dies, any remaining funds go first to reimburse the state for Medicaid benefits paid on their behalf during their life.
Third-party SNTs have no such requirement. Instead, funds pass to the remainder beneficiaries designated by the grantor in the trust document such as other children or family members.
Why choosing the correct type matters
The stakes in special needs trust planning are higher than in most estate plans. A single oversight can strip a loved one of their eligibility for Medicaid or SSI, threatening their access to healthcare, housing assistance and other essential services they may depend on for daily living.
Getting this choice right during the estate planning process can set the foundation for decades of stability for your loved ones. With guidance from a professional, families can structure a comprehensive plan that creates a viable, long-term support system.