Please enable JS


Third Party and First Party Special Needs Trusts
Special Needs Trusts

The first type is called a "Third Party Special Needs Trust" and is also known as a Supplemental Needs Trust. That means that someone other than the beneficiary is contributing the funds that go into the trust.

A Trust is a type of legal instrument that holds funds or property for a person (or persons). The person who receives the benefits of the contents of the trust is called a "beneficiary". In a Third Party Special Needs Trust, it is extremely important that the funds must never have been in the name of the individual receiving the government benefits. Because the funds have never been in the individual's name, the Third Party Special Needs Trust funds are not considered income to the individual who is receiving Social Security Income and Medicaid benefits.

The Third Party Trust contains very particular standards about how the funds are disbursed. Typically, the beneficiary (or his/her guardian or conservator) asks the Trustee for a distribution. The Trustee considers whether the law permits the distribution and whether it is in the best interest of the beneficiary. If all is well, the Trustee will issue the distribution directly to the vendor. The distribution must never be in the name of the beneficiary because it would then be considered income and could cause a reduction or discontinuance of benefits. Should the beneficiary pass away with funds remaining in the trust, the proceeds from the trust can be passed on to other family members and will not be subject to a Medicaid lien.

The second type of Special Needs Trusts is called a "First Party Special Needs Trust". The source of the funds that go into the First Party Trust comes from the individual with disabilities, himself or herself. These trusts are subject to complicated rules that do not apply to the Third Party Trusts. The most important rule is that these trusts must provide that when the beneficiary is deceased, the Trust will first payback Medicaid for any funds provided to the disabled individual during his or her lifetime.

Although a Third Party Trust is preferred, since the rules are much less restrictive and there is no obligation to payback Medicaid; a First Party Trust is still a very useful tool when an individual receives an inheritance and there is no Third Party Special Needs Trust set up or to preserve the proceeds of a judgment or settlement.

There are two types of First Party Special Needs Trusts. The first is set up by a parent, grandparent, guardian or the court and can be drafted so that the beneficiary can choose the trustee. This process involves approval by the Social Security Administration and the Court.

The second type of First Party Special Needs Trusts is a Pooled Trust. A Pooled Trust is already set up and the beneficiary joins an existing account with his or her own sub-account for investment purposes.

There are various topics that are related to Special Needs Trusts. The selection of a Trustee for the Trust; whether there should be a Trust Protector, a named Advocate or Care Manager; the importance of preparing a Memorandum of Intent.

It is important to select an attorney experienced in this area to draft a Special Needs Trust as this Trust is intended to last the lifetime of the individual with disabilities. Although the process may seem difficult, at times; with the right attorney, this exploratory process can lead to great peace of mind. It will ensure that the beneficiary has the care, love and support that you have provided.

Get a Free Copy of the Special Needs Alliance Trustee Handbook