A third-party special needs trust is funded with assets belonging to someone other than the beneficiary, commonly a parent, grandparent, or other relative. Assets can be transferred during the contributor’s lifetime or directed to the trust later through a will, another trust, or a beneficiary designation.
The source of the money matters. As part of a broader special needs planning strategy, a properly prepared and administered trust can provide additional support for a person with disabilities without necessarily making the trust assets count toward resource limits for Supplemental Security Income (SSI) or Medicaid.
Who Can Contribute to a Third-Party Special Needs Trust?
Parents frequently establish and fund these trusts for a child with disabilities, but they are not the only possible contributors. Grandparents, siblings, extended family members, and other individuals may also be able to add assets.
The person who creates the trust is often called the settlor or grantor. That person may provide the initial funding, but the trust document can allow other people to contribute as well. This flexibility lets relatives coordinate their gifts instead of leaving assets directly to the beneficiary.
The trustee has a different role. The trustee manages and distributes the trust property according to its terms, but does not have to be the person who contributed the funds.
When Can the Trust Receive Funding?
A family can fund a third-party special needs trust during the contributor’s lifetime. For example, parents might transfer money or investments to the trust so the trustee can begin paying for permitted expenses.
Another option is to establish the trust now but arrange for most of its funding to occur after a parent or other contributor dies. Creating the trust in advance gives relatives a designated place to direct future gifts and inheritances. It also allows the family to choose a trustee and settle key terms before the trust receives substantial assets.
The appropriate timing depends on the beneficiary’s current needs, the family’s finances, tax considerations, and the intended source of future funding.
What Assets Can Fund a Third-Party Special Needs Trust?
The trust may receive several types of property, depending on its terms and the broader estate plan. Common funding sources include:
- Cash and investment accounts
- Real estate or proceeds from its sale
- Life insurance benefits
- Retirement or other financial accounts, subject to tax considerations
- Property passing under a will or revocable living trust
A parent’s will, for example, can direct a child’s inheritance into the special needs trust rather than to the child outright. Life insurance and account beneficiary forms may also name the trust as a beneficiary when appropriate.
Each document must use the correct trust name and coordinate with the rest of the plan. An outdated designation or an outright gift could undermine the intended arrangement.
Can the Beneficiary Put Their Own Money Into the Trust?
Generally, no. A third-party special needs trust is designed for property that never belonged to the beneficiary. If the beneficiary receives an inheritance outright, a legal settlement, or other property in their own name, placing it into the existing third-party trust could create benefit and repayment problems.
Assets belonging to the beneficiary may instead require a first-party special needs trust or another permitted arrangement. Federal law imposes specific requirements on qualifying first-party trusts, including Medicaid reimbursement from funds remaining at the beneficiary’s death. Third-party trusts are evaluated differently because they contain someone else’s property.
Why Does the Source of the Money Matter?
The funding source helps determine which trust rules apply. Properly structured third-party trust assets may avoid being treated as an available resource for SSI purposes when the beneficiary cannot revoke the trust or demand its assets.
Third-party trusts also generally do not require the same Medicaid payback provision imposed on qualifying first-party trusts under federal Medicaid law. The person creating the third-party trust can usually specify who receives any remaining property after the beneficiary dies.
Funding is only part of the analysis. Distributions must also be handled carefully because certain payments, particularly cash or payments for food or shelter, can affect SSI benefits.
Build the Funding Plan Around Your Family
E.A. Goodman Law, LLC helps New Jersey families establish and fund third-party special needs trusts. We can coordinate the trust with your will, beneficiary designations, and other estate-planning documents while considering the beneficiary’s needs and public benefits.
If you want to leave an inheritance or other support for a person with disabilities, contact E.A. Goodman Law, LLC to discuss a funding strategy tailored to your family.
Posted in: Trusts