Plaintiff attorneys who need to protect their client’s Medicaid and SSI benefits may have heard of the terms “first-party special needs trust” and “third-party special needs trust”. What do these terms mean? Let us first define what first-party and third-party special needs trusts are to better understand the differences between the two.
What is a First-Party Special Needs Trusts?
A first-party special needs trust is a type of trust where the money that a client is receiving from their settlement is what is funding that special needs trust. Beneficiaries of first-party special needs trusts can move their assets into the trust without losing their eligibility for needs-based government benefits, such as SSI or Medicaid.
A first-party special needs trust — especially when a minor is concerned — is typically established by either of the following: a parent, a grandparent, a legal guardian, or the court. Mentally capable adults, however, can create a trust on their own behalf thanks to the Special Needs Trust Fairness Act.
What is a Third-Party Special Needs Trust?
In a third-party special needs trust arrangement, the parents of a special needs child typically establish a trust as part of their estate plan so that when the parents pass away, that child’s portion of the inheritance goes to that child’s special needs trust, rather than going to that child in his own name (thus preserving government benefit eligibility).
Other Differences Between First-Party and Third-Party Special Needs Trusts
Most of the time, in a personal injury settlement context you will be dealing with a first-party special needs trust, wherein one of the specific requirements is a Medicaid payback provision. In other words, state Medicaid departments have the right to be reimbursed for anything they’ve paid through the Medicaid system on behalf of a special needs client beneficiary. This is assuming there are still funds in the special needs trust when the client passes away, or when the trust is terminated.
In contrast, a third-party special needs trust does not have a Medicaid payback requirement. This is because third-party special needs trusts are set up by a third party with the third party’s funds.
Are These Trusts a Good Idea for Remainder Beneficiaries?
The goal in these types of special needs trusts is to use the money inside the trust to benefit the client during that client’s lifetime.
The purpose of these trusts is not to transfer wealth. Using these trusts to save and grow money to pass it on to remainder beneficiaries is not a good idea — especially in a first-party special needs trust in which Medicaid is going to have the “first bite of that apple” when the client passes away. After Medicaid has received payment for expenses incurred on behalf of the trust’s beneficiary, then any remaining funds can be dispersed to the other remainder beneficiaries.
If you have clients that are on Medicaid or SSI or other needs-based government benefits and they’re getting a settlement, remember that anything over $2,000 in their own name will most likely get them kicked off of disability Medicaid or SSI. That’s when a first-party special needs trust can be a great tool.
If you are in a settlement situation and you are having difficulties navigating first-party or third-party special needs trusts, give us a call. Amicus Settlement Planners can help you work through which type of trust, if any, makes sense for a client.