Special Needs Trusts: Understanding The Different Types

When I meet with clients who have family members with special needs, they are thrown when I mention there are two types of special needs trusts (SNTs)—the third party special needs trust and the first party or “self-settled” special needs trust.  Hopefully this discussion will answer some of your questions.

What is a Special Needs Trust and How does a “self-settled” SNT differ from a “third-party” SNT?

“Third-party” SNTs are created by a “third party”, often a parent, for the benefit of a family member in need of government assistance.  A parent may create a trust for a child with developmental disabilities and fund it with the parent’s money, either while the parent is living (“inter vivos”) or at death through the parent’s trust.

A “self-settled” or first party SNT might involve a child injured in an accident and receiving a large cash settlement, but not enough to meet the child’s ongoing needs.  The child creates the trust (or more likely you create it for him) using his settlement proceeds so he doesn’t lose his entitlement to government benefits, such as medical care under Medicaid.

A self-settled trust usually is established by you or by a court of law.  Your child might not even know it exists.  The only question is whether his money was used to fund the trust.  If it was, it is a self-settled trust.

Many self-settled SNTs hold proceeds from a personal injury case or lawsuit or from an outright inheritance from a family member to a child with a disability.  The child is entitled to receive the money outright, but if he does, he will lose his government benefits so a self-settled SNT is created.

Are there significant differences between a self-settled and a third-party SNT?

Yes, a self-settled trust must include a “payback” provision stating that assets remaining in the trust at the beneficiary’s death must first be paid to reimburse the State for Medicaid benefits provided to the beneficiary and only then may the remaining assets be paid to beneficiaries.

Third-party trusts should never include a payback provision since the funds in the trust never belonged to the beneficiary, but were only there for his or her benefit.

There are other differences which I’ll discuss in a future blog.

Jerry Shiles
Author and Attorney at Law
Parman & Easterday