I received an email this week from someone who had a special needs trust for a sibling. She wondered if her sibling could put some of his own assets into a special needs trust that a family member created for him.
Special needs trusts are not all the same. First-party special needs trusts are designed to hold the disabled person’s own assets, while third-party special needs trusts are designed to hold assets given to a disabled person by a third party. Below is a summary of each type of special needs trust.
First Party Supplemental Needs Trusts
A First-Party Special Needs Trust, also known as a “self-settled” or “(d)(a)(4)” trust is funded with the beneficiary’s own assets. It can only be established by a parent, a grandparent, a guardian or a court for a person under the age of 65 who is disabled according to the Social Security Administration definition.
The First Party Special Needs Trust must be irrevocable. It also must contain a pay-back provision providing that any assets left in the trust when the beneficiary dies must first be used to reimburse Medicaid for benefits it provided to the disabled beneficiary while the trust was in existence.
Third-Party Special Needs Trusts
A Third-Party Special Needs Trust is funded with assets owned by a third party. It can be established during the lifetime of the person who makes the gift, or can be established in a will. A special needs trust created in a will is not funded until after the death of the person making the gift.
Unlike the First-Party Special Needs Trust, a Third-Party Special Needs Trust can be created by almost any person except the beneficiary or his/her spouse (although a spouse can create an SNT in his/her will). The creator of the trust puts his or her own money or other assets into the Trust. There is no age limit on the beneficiary, and the person creating the trust can decide how any assets left in the trust after the beneficiary dies will be distributed.
Unlike a self-settled trust, no pay-back provision is required, which means that the creator of the trust can dictate how the remaining assets will be distributed after the beneficiary dies.