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Estate Planning – Caring for Loved Ones with Special Needs: Part 2

In our prior posting, we defined “Special Needs Trusts.”  To recap, a “Special Needs Trust”  is used to hold assets for a person with a physical or mental disability or with chronic illness.  The trust is not intended  to provide basic levels of support but, rather, is intended to supplement public benefits (such as Medicaid and Supplemental Security Income, discussed in Part 3 of this series) to which the disabled individual is legally entitled.

In this posting, we discuss two different types of special needs trusts.

1. “Self-Settled” Special Needs Trust – This type of trust is established by the disabled individual (i.e., the beneficiary), or by someone acting on behalf of the beneficiary, using the beneficiary’s funds.  Frequently, these funds are proceeds from a lawsuit that the beneficiary has won due to injuries that he or she incurred and that resulted in a disability.  The beneficiary may also have other sources of funding such as an inheritance or even winning the lottery.   As with all special needs trusts, self-settled trusts are established to supplement government assistance which typically provides for basic needs (such as food and shelter).  However, a key requirement of self-settled trusts is that, upon the beneficiary’s death, any remaining funds in this trust are “paid back” to the state Medicaid program as compensation for moneys received by the beneficiary from the state.

2.  “Third-party” Special Needs Trust – This type of trust is established by someone other than the beneficiary (frequently a parent or grandparent) using funds that never belonged to the beneficiary.  Unlike the self-settled trust, the third-party trust does not include a “payback” clause to Medicaid upon the beneficiary’s death.  Additionally, third-party trusts are more flexible than self-settled trusts regarding how the monies may be used to improve the quality of a beneficiary’s life.

Please note, a third-party trust cannot be established with funds that a disabled person inherits.  Once inherited, the assets belong to the beneficiary, and so the only option is to establish a self-settled special needs trust.

Part 3 in our series will address government assistance programs as they relate to special needs trusts.

Getting Help

Experienced Estate Planning Attorney, Elga Goodman, can help you navigate through the very complicated issues involved in establishing and administering special needs trusts.  Contact us today at 973-841-5111.

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