Special Needs Trusts vs. Supplemental Needs Trusts: “First
Party” vs. “Third Party” Funds
When it comes to planning for persons with a disability, and
eligibility for governmental benefits, it is important to distinguish between “first
party” money and “third party” money. That
is, “first party” money is money or funds that belongs to the disabled person himself
or herself. So that, for example, if there was an accident and a tort recovery
on behalf of a child or adult, and the monetary award belonged to the child or
adult who had been disabled as a result of the accident, or if a person in question inherited
funds from a decedent’s estate, that would be “first party” money. It is owned by the disabled person. “Third party” money on the other hand is money
or funds that a parent or grandparent or other third person wishes to provide
for the disabled person. These funds do not belong to the disabled person. If, however, for example, a parent dies and
under his or her Will leaves his/her disabled child the funds in question, then
the funds become those of the disabled child and would be transformed into “first
party” money.
The distinction between the two types of funds is important
as it effects the planning that would be done for the disabled child or adult,
and that person’s eligibility (or continued eligibility) for governmental
benefits. If the disabled person owns
the funds in question, then eligibility for needs based programs, such as SSI
and Medicaid, are going to be impacted, in that eligibility for such programs is
typically based upon the applicant or recipient’s income and assets. One way to plan around the requirements would
be for an ABLE account to be set up for the disabled person (if the ABLE
requirements are met, and typically if we are talking about a relatively small
amount of money), or for a Disability Trust under Section 1396 p(d)(4)(a) to be
set up with the first party money. One critical feature of the 1396 (p)(d)(4)(a)
or Disability Trust, is that there must be a refund feature to the trust
whereby Medicaid is going to be repaid out of the funds left in the trust at
its termination (assume death of the disabled individual). Also, the use or
distribution of the income and principal of the trust is going to be restricted
so that it can not be used for purposes which would cause the loss of the disabled
person’s governmental benefits. This type of Trust is frequently called a “Special
Needs Trust.
By contrast, with “third party” money, a “Supplemental
Needs Trust” should be created. I use
this latter term so that a distinction may be drawn in the source of the funds.
Here we are talking about third party money, not first party money. And on that
account, the Supplemental Needs Trust does not have to have, nor is it customarily
going to have, a refund provision discussed above which is required in the case
of a Special Needs Trust as to first party money. Thus, there is no provision
for the repayment of Medicaid on the termination of a Supplemental Needs Trust (again
think in terms of the death of the disabled person). I have seen on numerous occasions where third
party money has incorrectly been placed into a Special Needs Trust, and thereby
needlessly subjecting the third party funds to Medicaid recoupment at the back
end of the Trust on the disabled person’s death as if it was first party money.
In the Supplemental Needs Trust, the funds
should go on to the remainder persons without Medicaid repayment. This is a huge distinction between the two
types of Trusts and between first party and third party money. Also, the
Supplemental Needs Trust with third party money is going to be purely
discretionary in its terms and provisions as to distribution and use of the net
income and/or principal of the trust for the benefit of the disabled person,
though it will restrict the usage and distributions so that the child or adult
does not lose his or her governmental benefits.
Also to be noted, the Special Needs Trust with first party
money is going to contain numerous restrictions to satisfy State requirements.
For example, the trust might include a requirement that the Trustee notify the
State first before any large distributions are to be made, something that would
not be contained in the Supplemental Needs Trust holding third party money. In New Jersey there is basically a whole checklist of provisions the State requires to be included if the Trust is not going to be treated as an available resource for benefit eligibility or transfers to the trust as not causing eligibility penalties.
For a parent with a disabled child, he or she is going to
want to either set up an inter vivos (lifetime) Supplemental Needs Trust (if it
is desired to transfer funds for the disabled child during the parent’s
lifetime), or is going to want to set up a Supplemental Needs Trust under his
or her Will so that the funds for that disabled child pass under the Will to
the testamentary trust on the death of the parent, and not to the child
himself or herself.[1] Note that this applies even if the disabled
child is now an adult.
When
a disabled person, adult or child, is to receive a monetary award from a
lawsuit, it is imperative that a Special Needs Trust (i.e., Disability Trust under
1396 p(d)(4)(a)) be created for the benefit of the disabled individual, if he or
she is not yet age 65. That trust may be
created by a parent, grandparent or guardian of the disabled individual, or by
the Court itself, or if the disabled person has mental capacity and is of age
(18+), then by the disabled person himself or herself.
The purpose of this blog post was to alert the reader as to
the distinction in planning for a disabled person’s own money and funds (“first
party”) versus the money and funds of third persons (“third party”), and the
distinction I draw in use of my terminology as to “Special Needs Trusts” vs. “Supplemental
Needs Trusts”. Generically it will all come under the umbrella or rubric of
special needs planning, but the distinction is important on account of the difference
in the documents which would be drafted and the planning opportunities
available for the two types of funds.
Please do not hesitate to call the office (908-359-8000) to speak with me should
you have any questions as regards special needs planning.
March 21, 2018 Barry M. Benson, Esq.
[1] Note that it is also important for the parent to plan
the beneficiary designation on life insurance or retirement plans for the
benefit of the disabled child/adult, so that these proceeds or retirement
benefits pay to the Supplemental Needs Trust as third party money and not directly
to the disabled child/adult as first party money.
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