There are two types of Special Needs Trusts (SNTs): first-party and third-party SNTs. Which type makes the most sense for you to use depends upon whose property is funding the SNT.
A special needs trust is a popular strategy for those who want to help someone in need without taking the risk that the person will lose their eligibility for programs that require their income or assets to remain below a certain limit.
If funding for a special needs trust comes from the SNT beneficiary, then it is considered a first-party SNT. If the SNT funding comes from someone other than the SNT beneficiary, then it must be set up as a third-party SNT.
Using a Third-Party Special Needs Trust
Third-party special needs trusts are commonly used by those planning in advance for a loved one with special needs. Typically, the parents of an individual with special needs will establish a third-party SNT, although others may establish the SNT as well.
Third-party SNTs can be included in a Last Will and Testament, established within an inter vivos trust that is designed to avoid probate (living trust), or drafted as a standalone SNT. These SNTs are usually funded upon the death of the beneficiary’s
parents or other individual(s) who established the SNT.
Special needs trusts created under a will or as a sub-trust within a living trust do not come into existence until after the death of the individual whose will or living trust created the SNT. Therefore, a standalone SNT may be more useful if there are multiple donors who wish to fund the SNT.
A standalone SNT exists during the lifetime of the person establishing the SNT, which allows the SNT to receive gifts from grandparents, family friends, or even the creator of the SNT.
This type of SNT does not have to be irrevocable in order to preserve the eligibility of the SNT beneficiary for means-tested public benefits. However, if the SNT beneficiary has the power to revoke the SNT, the SNT assets would be considered an available resource for Supplemental Security Income (SSI) and Medicaid purposes.
Using a First-Party Special Needs Trust
First-party special needs trusts are most often used when the person with a disability inherits money or property outright, or receives a court settlement. These SNTs are useful when a person without a prior disability owns assets in his or her name,
later becomes disabled, and thereafter needs to qualify for public benefits that have an income or asset limitation. Property in a first-party SNT can only be used for the “sole benefit” of that beneficiary. Individual first-party SNTs
may be created (and funded) only for individuals who meet the government’s definition of “disabled” and are under 65 years of age when the SNT is established (and funded).
All first-party SNTs must specify that after the beneficiary’s death, all amounts remaining in the SNT, up to an amount equal to the total lifetime medical assistance benefits paid on behalf of the beneficiary by the Medicaid program(s) of any state(s), are first repaid to those state Medicaid program(s), even to the extent of fully exhausting the remaining SNT assets. Only after this Medicaid payback is made, can any balance be distributed to other remaining beneficiaries.
Differences in Special Needs Trusts after the Beneficiary’s Death
The most important difference between first-party SNTs and third-party SNTs is what happens to SNT property when the beneficiary dies. Upon the beneficiary’s death, the third-party SNT is not required to use the remaining assets to reimburse any
state(s) for the Medicaid benefits received by the beneficiary during his or her lifetime. As a result, this type of SNT is a useful planning tool for people who want to set aside property for a beneficiary with disabilities, preserve essential public
benefits during that beneficiary’s lifetime, and remain in full control of where all of the remaining SNT assets will go upon the beneficiary’s death.
To best protect the government benefits for which an individual with disabilities may be eligible, it is important to discuss which type of SNT should be used in a specific situation with an attorney who is proficient in special needs planning.
Working With Janney
Depending on your financial needs
and personal preferences, you may opt to engage in a brokerage relationship, an advisory relationship or a combination of both. Each time you open an account, we will make recommendations on which type of relationship is in your best interest based
on the information you provide when you complete or update your client profile. When you engage in an advisory relationship, you will pay an asset-based fee which encompasses, among other things, a defined investment strategy, ongoing monitoring,
and performance reporting. Your Financial Advisor will serve in a fiduciary capacity for your advisory accounts. For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.
By establishing a relationship with a Janney Financial Advisor, we can build a tailored financial plan and make recommendations about solutions that are aligned with your best interest and unique needs, goals, and preferences. Contact us today to discuss
how we can put a plan in place designed to help you reach your financial goals.
Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting, or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.