First Party Special Needs Trust or D(4)(A) Trust

This trust is set up with money that belongs to the person with special needs. This may happen if the person with the special needs was accidentally named a beneficiary outright. Proceeds from a settlement resulting from a lawsuit can go into this type of trust. Usually, this trust is still set up by a parent, grandparent, guardian, or conservator. In order to set up a First Party Special Needs Trust, a parent, grandparent, guardian, or conservator will go to court to have to trust set up. The court will authorize the trust to be set up and then the parent, grandparent, guardian or conservator will sign it.

The reason to set up this type of trust is to keep the special needs beneficiary on government benefits. There are strict income and asset requirements in place in order to receive state and federal benefits. If the special needs beneficiary is even one dollar over the income or asset limit, they cannot receive benefits until he/she spends it down or fixes the income limits.

The main difference with this type of trust is that after the death of the person with special needs, the state and federal government are paid back for the benefits provided to that person during the lifetime of the trust. After the money is paid back, any remaining money can be given to additional beneficiaries designated by the trust drafter.

When is a First Party Special Needs Trust used?

  1. Inheritance – if the person with special needs receives his/her inheritance outright instead of in a special needs trust, he/she can put the money in a special needs trust rather than lose government benefits until the inheritance money is spent down.
  2. Settlement From Lawsuit – A First Party Special Needs Trust can allow someone to get a large personal injury award or medical malpractice award without losing his/her benefits.
  3. Divorce Settlement – A First Party Special Needs Trust can allow someone to receive money from a divorce settlement without losing his/her federal and state benefits.

Both a First Party and a Third Party Special Needs Trust allow assets to be set aside to supplement expenses not covered by government benefits. However, there are differences between these two types of trust.

Some characteristic of a First Party SNT are the following:

  • The trust for a minor must be established by a parent, grandparent, guardian or the court.
  • The trust must be “irrevocable,” that means it cannot be changed.
  • The beneficiary’s assets are used to fund the trust.
  • The beneficiary must be under age 65 at the time the trust is established.
  • At the beneficiary’s death, the state Medicaid agency must be reimbursed.

Third Party Special Needs Trust

This trust is created by the donor with their money and is usually part of a larger estate plan. Typically donors are parents and grandparents. Usually, these trusts are funded when the parents or grandparents die. Assets that can go into the trust are life insurance proceeds, bank accounts, real property, and mutual fund accounts. Retirement accounts can go in although the process is very complicated and typically not recommended unless there are no other assets available. There is no limit on the size of the Special Needs Trust.

The beneficiary of this trust is the person with special needs. As long as the money is left in a Special Needs Trust the person with special needs can continue to receive state and federal benefits. The assets in the Special Needs Trust will not be counted again him or her.

The ABLE Act changes the asset limits for anyone who is diagnosed with a disability before age 26. However, the ABLE Act does not negate the need for a special needs trust.

One advance of a third party special needs trust is that is can be revocable until certain triggering events. The advantages to that is that the trust can be changed during the lifetime of the Grantors. Typical, Grantors usually are parents and grandparents. The reason that it is good that the third party special needs trust stays revocable is that it is typical to change trusts. Common changes are changes are changing trustee, changing the beneficiaries who inherit the money after the special needs beneficiary and changing the trust due to changes in the law.

The drawback of the Third Party Special Needs Trust is it cannot hold the money of the person with special needs. It is really important that the money is not commingled. Often special needs beneficiaries work. Parents are reluctant to take money from their special needs children. Even if they charge rent they save the money, therefore, special needs beneficiaries frequently have their own money. The issue is what can be done with that money. If there is less than $100,000.00 and the child was diagnosed with the disability before age 26 then the ABLE Act applies. If there is more than $100,000 or the child did not get his/her diagnosis before age 26 then a first party special needs trust needs to be looked at.

Some of the main benefits of third-party special needs trust are

  1. There is no age limit for the beneficiary.
  2. There is no limit to the amount left to the beneficiary.
  3. The funds can be used for anything the supplement needs of the beneficiary.
  4. When the special needs beneficiary dies other beneficiaries can be designated to receive any remaining assets without paying back any government agency.

What to do When you Special Needs Child Reaches 18

A big concern in the special needs community is what to do when your child reaches 18. Despite the special needs you as the parent no longer have the right to make medical and financial decisions for your child.

If the child is capable he or she can sign a Power of Attorney and Health Care Power of Attorney naming his or her parents as Agents.

If the child is not capable if executing his or her own documents then the parent(s) should seek a Guardian and Conservatorship over the child. You may not need the conservatorship unless the child has income other than government benefits.

A guardian is a person appointed by a judge after a formal court proceeding who is charged with making all the personal i.e. health issues, non-financial decisions for an incapacitated individual.

A conservator is a person appointed by a judge after a formal court proceeding who is charged with taking control of and managing the estate and finances for an incapacitated individual.

How do I get One?

In order to get a guardianship and conservatorship, a trip to court is necessary. A petition is filed asking the court to grant the necessary powers. What is in the petition is dependent on the situation.

After the petition is filed the clerk’s office appoints a guardian ad litem. That is an attorney appointed by the court to protect the rights of the person for whom a guardianship or/and conservatorship is sought. The guardian ad litem does this by meeting with the person prior to the formal hearing, explaining the process, assessing the situation, and then making a recommendation to the judge. A guardian ad litem is needed even if the incapacitated person is incapable of communicating or understanding what is being said. Only an attorney certified by the courts can serve as a guardian ad litem.