Special Needs Trust – The Basics
What is a Special Needs Trust? What are the two different types of Special Needs Trust? What are the differences?
A Special Needs Trust is a type of trust that protects the assets of somebody who is on some sort of disability or a minor child.
Somebody is on disability, and they are not going to be able to work in the future. Their parents have accumulated a substantial amount of assets throughout their life, and now they want to transfer those assets to their children upon their death.
However, even though it's substantial, the assets are not significant enough to take care of disabled children for their entire life. What happens is that people have looked for ways to protect the Medicaid benefits or the government benefits and still allow their child to inherit the money. Hence, the Special Needs Trust.
The way it works is the Special Needs Trust will own the assets. If your loved one passes away, if a parent passes away, those assets won't go to their disabled child, the assets will go into a Special Needs Trust.
Once those assets are in the Special Needs Trust, then the trustee manages and controls the assets, and they have the discretion to supply care beyond the basic needs. Typically, it's discretionary.
Disabled child could still receive all their Medicaid benefits. They could make sure if they have housing benefits they will be protected; they will still get their medical benefits as protected. But the trustee would have the ability to fully furnish the home. They would make sure they have good clothes. It's just like a little bit of supplement, and it's like a supplemental trust or what we call a Special Needs Trust.
Now the big thing to note is that there are two main types of Special Needs Trust. The main types are a First Party Special Needs Trust and a Third-Party Special Needs Trust.
First Party Special Needs Trust means you are setting the trust up for yourself. If you are disabled and you were going to inherit some benefits, you could set up a First Party Special Needs Trust.
Now, typically, if you can’t set one up for yourself, then what happens is it might have been identified in your parent’s Will or somebody else's Will. If it's identified in their Will, then they would set this up as a First Party or could be a Third-Party Special Needs Trust set up via a Will.
Third-Party Special Needs Trust
The most significant difference between the first-party and the Third-Party Special Needs Trust is really what happens when your loved one passes.
A Third-Party Special Needs Trust is when a parent foresees that their child is going to be on some sort of disability, and they want to set up these Special Needs Trust for their child's benefits so, they don't disinherit their government or they don't lose qualification for their government services and they can also inherit.
But again, the biggest difference is what happens to the assets once the beneficiary dies.
We have our loved ones, and then we have disabled people. And then we have our assets and the assets are held in our special needs trust.
With those assets being held in the special needs trust, the disabled person can have access to them by way of the Special Needs Trust. But under a First Party Trust, which means the disabled person set it up for themselves versus the third party where the loved one may have set it up in advance.
For the disabled person under a First Party Special Needs Trust, the disabled person is required to pay the Medicaid benefits back.
Let's say this disabled person lives for twenty years and then passes away, there may be some assets that remain in the special needs trust. And if a disabled person has children, those assets do not go to the child. But rather those assets would be paid to reimburse Medicaid,
pay any state taxes, any local taxes, and any administrative fees. Once all those fees are paid, then their children would inherit.
But under a Third-Party Special Needs Trust, there is no requirement to reimburse Medicaid or any government agency. This is why the Third-Party Special Needs Trust may be beneficial for you and your family.
If you're concerned about which Special Needs Trust is best for you and your loved one, give Littlejohn Law a call at 740-346-2899.
Littlejohn Law, LLC
The Real Estate and Probate Law Firm
352 Main Street
Wintersville, OH 43953
“Remember where there's a Will, there's a way, and where there's no Will, then there's probate"