Today we’re going to talk about the two types of special needs trusts. Special needs trusts are designed to help a special needs beneficiary continue to qualify for public benefit programs such as Medicaid, by keeping their assets low and their income low. The first type we’re going to talk about is a third party special needs trust. This is a trust created for a special needs beneficiary by a third party, such as a parent, a grandparent, a friend. It’s typically created in one of three ways. It’s drafted outright as a third party special needs trust. It’s a special needs trust that’s created by the beneficiary receiving funds or property through the last will and testament of somebody. Or you may draft a revocable trust, and upon a triggering event, when the person that’s the beneficiary begins receiving the funds, it’s in a special needs trust to keep them qualified for these programs.
It’s important when you’re writing these trusts to keep this drafting consideration in mind. You need to provide the trustee the ability to make changes to some of the terms. And you may think that seems kind of crazy, but it’s not. Because these laws changed so often, you want to make sure that the trustee can have enough flexibility to help the trust adjust with the laws. You may write a trust today with certain parameters, but two, five, seven, 10 years from now, those parameters might change a little bit. So you just want to make sure that the trust can change within reason to accommodate those parameters and those changes in the law.
An important part of the third party special needs trust is what happens when the special needs beneficiary dies. If there’s any funds left in the trust, those funds go to a beneficiary the third party chooses. A first party trust, it’s typically paid back to Medicaid. But with a third party trust, since it’s somebody else’s money to begin with, once they pass away, whatever’s left can go to a different beneficiary.
Now the next one is the first party special needs trust, also called self-settled special needs trust, Medicaid payback trust. This is a trust that is created by the beneficiary with their own funds or funds they are legally entitled to. These funds could be things they’re getting from a will. It could be a court settlement. It could be just their own income or assets in general. But it’s something that is theirs. It has to be theirs. These trusts, these first party special needs trusts, have to be written with a sole benefit going to the special needs beneficiary. It seems like that would be the logical choice, but it’s important that we emphasize that you can’t have other beneficiaries in this. It can only be that specific person.
What happens when the special needs individual passes away here is whatever funds are left in this trust are paid back to the state programs and Medicaid, only up to the amount they’ve used. So for example, if the special needs beneficiary used $100,000 worth of Medicaid and there was $105,000 left in the trust, only $100,000 would go to Medicaid, not the full 105. It’s only up to the amount that they’ve used during their lifetime.
If you think you know someone who could benefit from this video or benefit from a special needs trust, third party or first party, please share this video with them and let them know more about it. If you have any questions for me or think I can help you with this, you can reach me at my office, 802-442-9800, or schedule a consultation online.
William C. Deveneau is an attorney practicing in Southern Vermont, including Bennington and Manchester, and New York, including Albany, Colonie, Hoosick Falls, and Troy.