Individuals living with disabilities that impact their day-to-day or long-term medical conditions often depend on external support. For example, they may rely on government assistance programs, like Medicaid, to access necessary care. However, some of these programs have strict asset limit rules that can make or break your eligibility. One way disabled individuals, families and parents get around this is to create a special needs trust (also called a Supplement Needs Trust). A first-party special needs trust (SNT) is one of the two forms that this tool can come in. Here’s how it works.
A financial advisor could help you create an estate plan for your family’s needs and goals.
What Is a First-Party Special Needs Trust?
A first-party SNT is one of two types of SNTs, sometimes referred to as Medicaid payback trusts, self-settled SNTs, OBRA ’93 trusts and d4A or d4C trusts. Funding for a first-party SNT comes from the beneficiary’s own property or assets. They may either already own said assets or be entitled to them in the future.
Once assets are in the fund, they can only be used for the beneficiary’s benefit. It’s up to the trustee to ensure they meet their fiduciary responsibility in this capacity.
A mentally competent beneficiary can establish their own first-party SNT. A legal guardian or a court can also open a first-party SNT for a disabled individual. However, the beneficiary must be under 65 years old at the time of the trust’s establishment. In addition, the individual must meet the government’s definition of disability.
A first-party SNT most commonly comes into play when an individual with a disability inherits property or assets, either directly or through a court settlement. It also comes in handy if a person owns a sufficient amount of assets earlier on in life and later becomes disabled. That way, they still meet asset or income limitations for public benefits.
How First-Party Needs Trust Funds Are Used
Funds from a first-party SNT can cover expenses that would improve the beneficiary’s quality of life. Some costs include:
- Assistive technology
- Caregiver costs
- Dental and medical services not covered by insurance
- Education costs
- Furniture and clothing
- Hearing aids, eyeglasses and prosthetics
- Home modifications
- Pre-paid funeral expenses
The trustee can request disbursements from the trust to cover expenses such as the above. However, they may need to be reviewed and approved depending on the situation, such as in the case of a first-party pooled special needs trust (PSNT). In that case, the request must not jeopardize benefit eligibility, be for the beneficiary’s sole benefit and be deemed appropriate.
There are rules, though, that first-party SNTs must follow to do this. Namely, the trust must include a provision that it will pay back Medicaid after the beneficiary passes. Only after it repays the necessary amount can any remaining assets be distributed to other beneficiaries. In some cases, though, repaying state programs may exhaust the SNT’s fund.
First Party vs. Third-Party Special Needs Trust
Special Needs Trusts break into two categories: First-Party SNT and Third-Party SNT. A crucial difference between the two stems from the source of funding. It either becomes first-party or third-party, depending on the owner of the property funding the SNT.
In the case of a third-party SNT, the funding comes from others. For example, parents and guardians often use it as an estate planning tool. So, instead of leaving an inheritance directly to the beneficiary (and jeopardizing their state assistance eligibility), they create a third-party SNT. They put the assets into the trust as a way to provide for the individual’s future needs.
But the more critical difference between the two is how the remaining property gets distributed after the beneficiary’s death. With a first-party SNT, leftover assets must reimburse Medicaid first. It should repay the amount of benefits paid out to take care of the disabled individual during their life. Only after that can the trust assets be distributed according to the beneficiary or trust’s wishes.
However, third-party SNTs bypass this step. Instead, the guardian who established the trust can specify who receives the remaining funds after the beneficiary passes.
Should I Establish a First-Party Special Needs Trust?
In the end, the use of a first-party special needs trust depends on your situation. It may be worthwhile to consider it if you have a child with special needs that you want to financially support long-term. Or, if you live with a disability, you may have to set one up so that you can still access your assets and claim government benefits.
A trust can also be a way to protect the beneficiary. Creditors have a harder time accessing funds in trusts. In addition, they act as a safeguard against financial abuse since trustees have a fiduciary duty.
However, a third-party SNT may work better if you want more control over the distribution of assets.
As with any type of trust, you should consider the financial impact. For instance, you may want to research the potential fees before establishing a first-party SNT. SNTs aren’t exempt from taxes either. Since they’re treated as grantor trusts, they are income taxable to the beneficiary. While this generally sits below taxable limits, exploring the most tax-efficient option is important.
Ultimately, a first-party special needs trust can protect a beneficiary’s financial wellbeing. It ensures that they have access to quality care while still receiving government benefits. However, every grantor should investigate the long-term costs before they open one.
Consider speaking with a lawyer or financial advisor on how to minimize costs. They may be able to point you in the direction of a more compatible trust.
Tips for Estate Planning
- A financial advisor can help you create a plan for your estate needs. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Some guardians use third-party trusts as part of their estate plan. But if you need to plan for the future, you need more legal documents than a trust. For example, if you have a medical condition, you may want to create an advance healthcare directive. That way, you ensure your medical wishes are heard. You’ll also need to consider important positions, like a financial power of attorney. An estate planner can guide you through all the documents you need to take care of yourself and your loved ones.
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