Special needs planning is one of the more complicated areas of estate planning. Even the nomenclature can be confusing. The terms special needs trust and supplemental needs trust are often used interchangeably. First party special needs trusts (more about them later) are also known as d(4)(A) trusts or self-settled special needs trusts. There are also pooled special needs trusts in which funds from multiple sources are combined and spent on beneficiaries in proportion to their share of the total amount in the trust.
It will be helpful to begin by looking at what special needs trusts and supplemental needs trusts have in common. Both are intended to accomplish the same basic goal: provide a disabled person with funds for certain goods and services not covered by government programs like Medicaid and Social Security Income (SSI) while simultaneously protecting eligibility for these and other essential programs.
For example, special needs trusts and supplemental needs trusts both allow a trustee to authorize the distribution of funds to pay for personal care attendants, vacations, home furnishings, electronics, advanced medical and dental care, education, recreation, vehicles, physical rehabilitation, and more. As long as the trusts are properly designed, implemented, and funded, the money to pay for these goods and services will be available to enhance the life of a person with special needs without jeopardizing his or her eligibility for Medicaid and SSI.
So what is the difference between the two trusts? Basically, it comes down to a question of who owned the assets used to create the trust. In a first person special needs trust, the money came from the beneficiary, that is, the person with disabilities. Perhaps the person with disabilities received the money through a personal injury settlement or an inheritance. In a third party supplemental needs trust, on the other hand, the money typically came from the disabled person’s loved ones, often a parent or grandparent.
This has important ramifications for what will happen to any funds remaining in the trust after the primary beneficiary passes away.
In the case of first person special needs trusts, Medicaid must be reimbursed for the benefits it paid to the beneficiary. With a third party supplemental needs trust, this is not the case. Instead, remaining funds can be passed to other beneficiaries named in the trust, such as the disabled person’s siblings. Which brings us to another significant distinction: first person special needs trusts can only have one beneficiary, whereas third party supplemental needs trusts can have multiple beneficiaries.
In addition, a first party special needs trust requires the trustee to get government approval to authorize a payment in excess of $5,000 to any one entity during a single calendar year. First party special needs trusts are also more complicated to establish and administer than third party supplemental needs trusts.
As you can see, special needs planning is indeed quite complicated. Given the possibility that an improperly designed special or supplemental needs trust can put the primary beneficiary’s eligibility for government benefits at risk, it is vital to work with a qualified estate planning attorney who has experience in this area of the law.