A third party special needs trust is either a trust set up within a persons living trust or is set up as a separate stand alone trust.
The primary purpose of a third party special needs trust is to preserve government benefits for disabled beneficiaries. Usually the benefits that are trying to be protected are from government programs that have eligibility requirements. Receipt of an inheritance will disqualify the beneficiary for future government benefits.
For example, the typical programs that are based on financial need are Supplemental Security Income (SSI) and Medi-Cal, which is California’s Medicaid program. Housing subsidies, also called the Section 8 program, In Home Support Services, food stamps, and utility payment assistance are also based on financial need.
Social Security and Medicare are not based on financial need, but are based on age and earning records.
For example, a couple has two adult children who are to receive their estate of $300,000 after they are gone. One child is receiving SSI due to a disability. Additionally that child has difficulties with money. That child is also eligible for Medi-Cal benefits for his continuing medical problems. If this child received his share of the inheritance out right he would be disqualified from SSI and Medi-Cal. That child would then have to spend his inheritance to live and for medical care. The child will have no assets left form the inheritance and have great difficulty in returning to the SSI and Medi-Cal programs.
Instead of leaving assets directly to the disabled adult child, the parents could establish a Third Party Special Needs Trust. This trust would not be under the control of the child and therefore would not disqualify the child from the above government benefits. Additionally the child would not be able to revoke it and use the assets on his own which would help in cases of children who have difficulty handling funds. The trust would have an independent trustee (for example the other non-disabled child) and the trustee would manage the funds and pay out for the beneficiaries “special needs” for their lifetime.
A Third Party Special Needs Trust can own various assets, such as a house, that are used by the child, but due to the ownership by the trust, the assets are not counted as being owned by the child. The trust could also pay for services required by the beneficiary, such as telephone, education, car repairs, etc., without affecting the beneficiary's eligibility for the government programs.
The above mentioned type of Third-Party Special Needs Trust has no obligation to notify the state or pay back Medi-Cal payments after the beneficiary's death because the Special Needs Trust was funded through the parents trust, a third party, and the beneficiary did not own the assets in their name.
For more information on Special Needs Trusts please contact Attorney Daniel H. Alexander and the Law Offices of Daniel H. Alexander, PLC www.dalexander.com