What is a Supplemental Needs Trust? How is it different from a Special Needs Trust? What is the difference between a “first party” and a “third-party” trust?
A Supplemental Needs Trust is a trust created to hold assets for the benefit of a disabled individual in a way that will not interfere with or abate any government benefits that are available to the individual. These benefits include Supplemental Security income and Medicaid benefits. These benefits can be crucial for the disabled individual, both in economic terms but also to the extent that there are community resources available to the disabled beneficiary through Medicaid that would not otherwise be available, even through a private pay mechanism. It is paramount to protect these benefits so that care continues without interruption.
A Supplemental Needs Trust is often referred to as a Special Needs Trust and the two terms are, for general purposes, referring to the same trust vehicle. There are two types of supplemental trusts: a “first-party” and a “third-party.”
In a first-party supplemental trust, the disabled individual is transferring his or her assets into the trust. The individual is the grantor of the trust. This is most commonly found in situations where the disabled beneficiary recovered a settlement in a personal injury or negligence lawsuit. Sometimes the personal injury lawsuit arose out of the injury that caused the individual’s disability. The settlement proceeds — after payment of any Medicaid lien for medical services rendered as a result of the accident — can be deposited into a first-party trust without any interruption in benefits.
The feature that distinguishes a first-party trust from a third-party is that the first-party trust must contain a “payback” provision. This means that when the grantor (the disabled beneficiary) dies, any outstanding Medicaid liens are repaid from the remaining assets in the trust before any money is distributed to the remainder beneficiaries named in the trust. This means that there might not be any remaining trust assets to distribute to the remainder beneficiaries (i.e., family members or even a charity). Any Medicaid lien takes priority, even before funeral expenses. It is prudent to purchase a pre-paid burial from the trust during the beneficiary’s lifetime.
A third-party trust does not have a payback requirement, because the funds used to “seed” the trust are not the disabled individual’s own funds. They are generally the funds contributed by a third party, whether a parent, grandparent, sibling, or other. The balance in the trust can be distributed or appointed to anyone that the grantor (the person who creates the trust) names as a contingent or remainder beneficiary.
Keep in mind that, under current law, first-party trusts can only be created by a parent, grandparent, or sibling. This presents a strange nuance under the law because there are disabled beneficiaries who are not necessarily incompetent to create a trust. It also becomes problematic when the disabled beneficiary lacks someone qualified to create the trust on his behalf.
The beauty of Supplemental Needs Trusts is that they enhance and enrich the lifestyle of disabled individuals who would otherwise be faced with a Hobson’s choice of available benefits or trust assets that would otherwise be insufficient, on their own, to support the beneficiary. In the past, these individuals were frequently disinherited and impoverished in order to maintain crucial government benefits. Supplemental Needs Trusts result in greater services and products for disabled individuals.
Alison Arden Besunder is the founding attorney of the law firm of Arden Besunder P.C., where she assists new and not-so-new parents with their estate planning needs. Her firm assists clients in Manhattan, Brooklyn, Queens, Nassau, and Suffolk Counties. You can find Alison Besunder on Twitter @estatetrustplan and on her website at www.besun
