What is the Difference between a First-Party and a Third-Party Special Needs Trust?

Understanding the differences between first-party and third-party Special Needs Trusts is important when planning for a loved one with special needs. Both types of trusts serve to protect the beneficiary’s eligibility for government benefits, but they are funded and managed differently. This article aims to clarify these differences to help you make an informed decision.

First-Party Special 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. This might include money from a personal injury settlement, an inheritance, or other sources of income or assets that belong to the individual with disabilities.

Before December 13, 2016, individuals with special needs could not establish a self-settled special needs trust for their own benefit. However, the Special Needs Trust Fairness Act changed that. Now, a mentally competent individual with disabilities, a parent, a grandparent, a guardian, or a court can establish a self-settled trust for a person under the age of 65 who is disabled according to the Social Security Administration’s definition.

First-Party Special Needs Trusts must be irrevocable. They also require a pay-back provision. This means that when the beneficiary dies, any remaining trust assets must first be used to repay Medicaid. The repayment reimburses Medicaid for benefits provided to the disabled beneficiary during the beneficiary’s life. This pay-back requirement is a key feature that sets First-Party Special Needs Trusts apart from Third-Party Special Needs Trusts.

Third-Party Special Needs Trusts

In contrast, a Third-Party Special Needs Trust is funded with assets that belong to someone other than the beneficiary. These assets can come from parents, grandparents, or other family members. The trust can be created while the person making the gift is still alive. It can also be established through a will. In the case of a trust established in a will, the trust won’t receive assets until after the person making the gift has died.

Almost any person except the beneficiary or their spouse can create a Third-Party Special Needs Trust. However, it is possible to create a special needs trust for one’s spouse in a Will. The creator of the trust uses their own money or other assets to fund the trust. Unlike First-Party Special Needs Trusts, there is no age limit for the beneficiary.

One of the significant advantages of a Third-Party Special Needs Trust is that it does not require a pay-back provision. This means that the creator of the trust can decide who will receive any remaining assets after the beneficiary’s death. This provides more flexibility in estate planning.

Key Differences at a Glance

• Funding Source: First-Party Special Needs Trusts contain the beneficiary’s own assets, while Third-Party Special Needs Trusts contain assets from third parties.
• Establishment: An individual with disabilities (if mentally competent), a parent, grandparent, guardian, or court can establish a First-Party Special Needs Trust. Someone other than the beneficiary can estalish a Third-Party Special Needs Trust.
• Pay-Back Provision: First-Party Special Needs Trusts must include a pay-back provision to reimburse Medicaid. Third-Party Special Needs Trusts do not require this provision, which allows the creator to direct what happens to the remaining assets after the beneficiary dies.

Conclusion

Choosing the right type of Special Needs Trust depends on the source of funds and your long-term planning goals. An experienced estate planning attorney can help you determine which type of trust best meets your family’s needs.