Wednesday, March 21, 2018

Special Needs Trusts vs. Supplemental Needs Trusts: “First Party” vs. “Third Party” Funds

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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