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The 2 basic types of special needs trusts

| Jan 14, 2020 | Uncategorized |

There are many potential benefits to creating a special needs trust for a loved one with disabilities. Not only can it provide funds to ensure that person lives comfortably, it can also help the beneficiary meet eligibility requirements for certain government programs, such as Medicaid.

Of course, achieving these two key objectives requires thorough preparation plus a well-written, customized plan. And it starts with understanding the two main types of special needs trusts.

A first-party special needs trust

The source of funding is a fundamental differentiator for the two main types of trusts.

When assets belonging to the beneficiary are used to create and fund the trust, it is known as a first-party special needs trust (also referred to as a self-settled special needs trust). Oftentimes, this can happen when the beneficiary receives a large sum of money, such as damages from a personal injury case.

With a first-party special needs trust, the beneficiary does not have direct control of the funds. Rather, a trustee is in charge of portioning out funds based on the purpose of the trust.

A third-party special needs trust

The other main type of special needs trust is third-party. This is when assets from someone other than the beneficiary are used to create and fund the trust.

Commonly, this will be a parent that has a child with special needs. As part of their long-term planning, they will designate certain property and assets for a special needs trust in order to ensure their child receives proper care. This type of trust can generally help provide supplemental needs.

This can be preferable to simply passing property to that child through inheritance, as doing so would likely mean the individual is ineligible for valuable public benefits.

A complex process

This is a simplified overview of what is a complicated legal area. To set up a truly effective trust that accomplishes what you want it to, you need to plan ahead and do everything possible to ensure the language is legally sound.

The goal, for many people, is to ensure a loved one that may not be able to fully care for themselves is able to live a comfortable, happy life. A special needs trust that does not have a firm grasp on the law may be at risk of crumbling at the foundation.

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