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Written by: Ruthann P. Lacey
A Special Needs Trust allows for the beneficiary to qualify for or maintain eligibility for government benefits like Supplemental Security Income and Medicaid, while maintaining a higher quality of life than would otherwise be possible. In the realm of special needs planning there are two basic types of Special Needs Trusts: First Party Trusts and Third Party Trusts.
First Party Trusts
First Party or “Self-Settled” Trusts are those funded with assets that the beneficiary owns or has a legal right to own. Specific rules apply to the drafting and administration of these Trusts, including the requirement that the Trust pay back to Medicaid at the beneficiary’s death for the value of the health care costs which have been paid by Medicaid on the beneficiary’s behalf over his lifetime.
Because the rate that is paid for care provided to Medicaid recipients is typically significantly less than what the same individual would have paid privately, those reimbursable expenses are generally much less than they otherwise would have been had trust assets been used to provide for the beneficiary’s medical care.
Further, this arrangement is a reasonable and equitable method for providing for the beneficiary’s needs during his lifetime while alleviating some of the burden on the state’s Medicaid programs. Congress viewed this as a win-win scenario for the individual and for the governmental agency.
Third Party Trusts
Third Party Special Needs Trusts are funded with assets that come from a third party. These trusts are often established by a family member as part of an estate plan for a beneficiary with a disability who needs access to government benefits either today or in the future. Because a Third Party Trust is not funded with the beneficiary’s assets, there is no pay-back required.
So as you can see, First Party and Third Party Special Needs Trusts are very different creatures and the rules governing the workings of each type of Trust are strict and strictly enforced by governmental agencies. Some individuals may have both types of Trust; the funds can never be intermingled between these Trusts.
History of Special Needs Trust Law
First Party Special Needs Trusts have been around since Congress specifically provided for their creation in 1993, under 42 U.S.C. §1396p(d)(4)(A). They have been used as planning tools when an individual who needs public benefits has assets that he owns (perhaps assets he accumulated while working), or an inheritance that he is receiving, or a litigation settlement that he is entitled to, which funds would cause him to have too much money to qualify for the benefits he needs.
Under the 1993 statute a First Party Special Needs Trust could be established by the parent, grandparent, or guardian of the person with a disability, or by a court. A competent adult who had a physical disability could not establish his own Special Needs Trust.
This meant that if an individual with a disability did not have a living parent or grandparent, and if he was competent so did not need a guardian, it was necessary to file a Petition with a Court and ask a Judge to sign an Order establishing the Trust. This was costly and often time consuming, waiting for the Judge to determine if a hearing would be necessary, and then to enter the Order.
Changes to Special Needs Trust Law
The governing law has remained unchanged from 1993 until 2016. On December 13, 2016, the President signed the 21st Century Cares Act, which amends 42 U.S.C. §1396p(d)(4)(A)) by adding two words: “the individual.” This (finally!) allows individuals who are competent to establish their own self-settled Special Needs Trusts.
With the new law will likely come confusion, given that there are different types of Special Needs Trusts and different rules that govern each type of Trust. In addition, even if the Trust is drafted and established perfectly, Special Needs Trusts require specialized management due to the legal requirements and strict governmental oversight.
The Trustee must be specially versed in administering Special Needs Trusts and must maintain accurate and complete records in order to ensure compliance with the law and to make sure that the beneficiary does not accidentally become disqualified from the benefits he needs, causing the purpose of the creation of the Trust to fail.