Understanding Special Needs Trusts
A Layman's Guide for Parents and Caregivers
As parents of a child significantly impacted by their disabilities ages, ensuring their long-term financial security becomes a priority. Special Needs Trusts are powerful tools that can help allow you to provide for your child's future while protecting their eligibility for means-tested government benefits. Note I said “help allow”, by themselves a Special Needs Trust won’t do anything. It’s a place to hold assets, if it’s not funded it can’t “do” anything.
In this article, I will explain the differences between a 1st and 3rd-Party Special Needs Trust, discuss the role of a Trust Protector, explore funding options, and give some ideas about what Trustees can use the Trust to pay for. Throughout this article, I will be using the terms 1st/First and 3rd/Third interchangeably.
I’m not an attorney, this isn’t legal advice. I don’t know if you “need” a Special Needs Trust or not. I don’t know you or your situation, so don’t take any of this as prescriptive. It’s meant to serve as a starting point. Let’s start by explaining the differences between a 1st and 3rd-Party Special Needs Trust (SNT).
First-Party Special Needs Trust (SNT)
Also known as a "Self-Settled" or "Payback" Trust, a First-Party SNT is funded with assets owned by the individual with disabilities, such as an inheritance, personal injury settlement, savings bonds (if in their name), or accumulated savings. These trusts are subject to strict rules, primarily that any remaining funds upon the beneficiary's death must be used to reimburse the state for Medicaid benefits received. There are (2) situations I see with enough frequency that I think they are worth doing a deep dive into.
