Nicole T. Livingston, Esq.
Are there different Types of Special Needs Trusts?
Yes, there are two types of Special Needs Trusts:
Self-settled trusts (“first party trusts”) and,
Third party trusts.
The distinction between the two trusts is to look at the source of the money when setting up the trust. You need to determine who provided the money to transfer into the trust. Was it the beneficiary’s own money (first party trust) or was the money from a person other than the beneficiary (third party trust)? Both types of trusts are established to allow the beneficiary of the trust to continue to receive means-based government benefits. These government benefits are available only if you meet stringent financial qualifications. Most programs permit a beneficiary to only have Two Thousand Dollars ($2,000.00) in his or her own name in order to qualify.
First Party Special Needs Trust
A first party special needs trust is funded with the disabled beneficiary’s own money. If a person with a disability receives a personal injury settlement award, he or she may transfer the money into a first party trust for his/her own use. A first party trust may also be funded with money from savings or brokerage accounts, inherited money, or a retroactive award of disability benefits. When a person transfers money to a first party trust in order to obtain Supplemental Security Income (SSI) or Medicaid (MA) benefits, the trust must meet certain requirements. It must be irrevocable. The trust must be established by the beneficiary, a parent, grandparent, legal guardian, or a court. A first party trust can only be set up for someone who is deemed disabled under the Social Security Administration’s definition of disability. The most significant aspect of a first party trust is that there must be a Medicaid payback provision to any State for any Medicaid benefits received while the beneficiary was alive.
Typically, the trustee can use trust money to supplement (but not replace) any benefits or governmental assistance the beneficiary of the trust is or may become entitled to receive. There are reporting requirements for a first party trust. The Maryland Department of Health, Medical Care Program’s Office of Eligibility Services (“OES”) must confirm that the self-settled trust complies with very specific regulations. The department also requires the name, address, and social security number of the beneficiary and all trustees. Annually, the trustee must file an accounting of the trust’s assets.
The State of Maryland has additional requirements that are more stringent than the federal law in order for a first party trust to be in compliance. For instance, the trustee can purchase a primary residence for the beneficiary if the home is titled in the name of the trust and requires a court order for an amount exceeding $100,000.00. Funeral expenses cannot be paid from remaining trust assets; however, the trust can purchase a prepaid funeral contract. Any titled property valued over $500.00 must be titled in the name of the trust. Trust money may not be used to purchase gifts. Each trust must specifically include these and many other provisions to comply with the law.
To prevent the need for a first party trust, you should not title assets directly in the name of a person who is disabled and receiving government benefits or name the person as a beneficiary of an account. If assets are already titled in his or her name, it may be necessary to create a first party trust to apply for much needed governmental benefits and preserve the assets he or she accumulated during his or her lifetime.
Third Party Special Needs Trust
A third-party trust is one that contains money that belonged to someone other than the disabled beneficiary before they were put in the trust. A classic example of a third-party trust is one that a parent creates in order to leave an inheritance to a disabled child. A parent can create a third-party trust under his or her will, through a separate standalone Supplemental Needs Trust, or through a Revocable Trust. In most cases, a third-party trust will not contain any money until the parent dies.
Third party trusts provide that during the lifetime of the person who is disabled, the trustee can use the money in the trust for his or her benefit. For example, the trustee can use money in the trust to supplement basic health care services, to pay for special equipment not covered by insurance, to provide for special programs or classes, and to make improvements to real estate that would provide suitable housing for him or her. The critical difference is that a third-party trust does not have a payback provision to states who provided Medicaid benefits. At the death of the person for whom the trust is established, all of the remaining trust assets can pass to anyone who the Grantor of the trust decides at the time of the creation of the trust. The secondary beneficiaries are often siblings, other family members, or charities.
At Council Baradel, we can assist you with setting up either trust. Schedule a free consultation with one of our estates and trusts attorneys.