Third Party Special Needs Trust

Third Party Special Needs Trust Michigan

A Third Party Special Needs Trust is a type of Special Needs Trust that can be established for a person with special needs, also known as the beneficiary of the trust, in order to protect their eligibility for government benefits.

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A Third Party Special Needs Trust is funded with money from parents and grandparents as a way to provide additional funds to supplement their child’s benefits.

The assets held in the trust are used for the benefit of the disabled beneficiary and generally are not counted against their ability to qualify for benefits.

Why Do You Need A Third Party Special Needs Trust?

Families with a special needs child or adult often worry about how they will provide a comfortable life for their loved one without hurting their government benefits like SSI and Medicaid.

Oftentimes, these benefits are restrictive and don’t provide enough money to pay for expenses and services that your child may need to live comfortably when you are no longer there to care for them yourself.

As a result, a lot of families wish to leave behind money in the form of an inheritance to cover expenses and services that benefits programs wouldn’t be able to afford.

Unfortunately, even if you have the best of intentions, if you improperly leave behind a sum of money, you could cause your disabled family member to lose their much-needed benefits.

That’s because many assistance programs are “means-tested”, which means that eligibility for benefits is restricted based on income and financial resources.

So what are you to do if you want to set aside money to take care of your family member after you’re gone?

Fortunately, a Third Party Special Needs Trust is a proven solution that allows you to leave money behind to supplement your family member’s lifestyle while still preserving their benefits like SSI and Medicaid.

When Do You Need A Third Party Special Needs Trust?

A Third Party Special Needs Trust is among the most common trust vehicles families establish to provide for a loved one with disabilities. Often created as part of an estate plan by parents, grandparents, or other relatives, this trust lets you leave an inheritance—money, life insurance, or property—without endangering the beneficiary’s access to government benefits.

By placing assets into a Third Party Special Needs Trust rather than transferring them directly to your child, the beneficiary never takes direct ownership of those funds. Instead, the appointed trustee manages and distributes the resources according to the trust’s terms and the beneficiary’s needs.

The practical result is that the money you leave behind will not be counted against your loved one for means-tested programs, preserving benefits like SSI and Medicaid while providing additional support.

What Are The Benefits Of A Third Party Special Needs Trust?

The advantages of a Third Party Special Needs Trust are many and profound. It allows families to:

• Properly leave an inheritance—money, property, or insurance proceeds—for a special needs child without jeopardizing benefits such as SSI, Medicaid, subsidized housing, or vocational rehabilitation.
• Supplement government assistance with funds for services and comforts that public programs do not cover, helping the beneficiary live more comfortably and with greater dignity.
• Appoint a trusted person to manage the finances for the loved one, ensuring care and oversight while keeping the beneficiary’s eligibility intact.

How Does A Third Party Special Needs Trust Work?

A Third Party Special Needs Trust is typically an irrevocable trust—meaning it is permanent once established and generally cannot be revoked. Because of this permanence and the high stakes involved, careful, precise drafting by an experienced Special Needs Trust attorney is essential.

To understand how the trust functions, it helps to know the primary parties involved and their roles.

Settlor / Grantor

The settlor, or grantor, is the person who creates and funds the trust—most often a parent or grandparent—placing assets into the trust to provide for the special needs beneficiary.

Beneficiary

The beneficiary is the person with special needs for whose benefit the trust is created. The trust exists to enhance their life without compromising eligibility for government programs.

Trustee

The trustee is the linchpin of the arrangement. This individual or institution must be trustworthy, detail-oriented, and knowledgeable about the legal limits of benefit programs. The trustee manages assets, pays approved expenses on behalf of the beneficiary, and ensures distributions never disqualify the beneficiary from public assistance.

How Does The Beneficiary Access The Money?

The special needs beneficiary accesses the money in the trust through the trustee that you appointed.

In order to make sure that your child does not get disqualified from their benefits, the money can’t be owned or touched directly by the beneficiary themselves.

Instead, the trustee needs to pay for additional expenses on behalf of the special needs beneficiary.

As you can see, the trustee has a very important role as they will be responsible for managing the finances you leave behind.

Not only should they be someone who is trustworthy, they should also be someone who is responsible, diligent, and has attention to detail in order to make sure that the purchases they make on behalf of the beneficiary will not disqualify them from their benefits.

Is A Will Or Revocable Living Trust Enough When Special Needs Planning?

While a Last Will and Testament and Revocable Living Trust have a ton of benefits when estate planning, these are not enough when planning for a family member with special needs.

Say for instance you directly pass an inheritance to your special needs child while they are collecting SSI and Medicaid…

This money would go directly to your special needs beneficiary, meaning they would own the money and assets.

As a result, these new funds could be counted as income or financial resources by the government assistance programs causing your loved one to lose their benefits.

Obviously, this situation isn’t ideal. The best way to avoid a scenario like this is to create a Third Party Trust for your special needs child so their inheritance won’t count against their benefits.

What Happens To The Money In A Third Party Special Needs Trust After The Beneficiary Passes Away?

This is a common question because depending on the type of trust that is created, money remaining in the trust after the special needs beneficiary passes away may need to be paid back to Medicaid if benefits were provided while the beneficiary was alive.

With a Third Party Special Needs Trust, the trust is funded with money that doesn’t belong to the beneficiary. If the trust is set up properly, this means that the beneficiary doesn’t own any of the assets which is what protects their eligibility for benefits.

This also means that when the beneficiary passes away, there usually is not a payback provision directing the trustee to use the remaining funds in the trust to payback any Medicaid benefits that were used while the beneficiary was living.

This differs from a First Party Special Needs Trust. This type of trust does include a payback provision because the trust is funded with money and assets that the special needs beneficiary owns.

What Is The Difference Between A First And Third Party Special Needs Trust?

Aside from the payback provision, one of the biggest distinctions between a Third Party Special Needs Trust and First Party Trust is that the Third Party Trust is funded by money and assets that never belonged to the beneficiary. Typically, these types of trusts are created by a parent or grandparent during the estate planning process to leave behind an inheritance for their special needs child without hurting their benefits.

A First Party Special Needs Trust is funded by money and assets the beneficiary owns or is entitled to. Among the most common reasons this type of trust is set up is because a person with special needs is receiving a large sum of money from a lawsuit over an injury that resulted in their disability. It’s also very common for a well meaning relative to leave behind a direct inheritance for a loved one with special needs, not knowing that the inheritance should have been directed into a Third Party Special Needs Trust in order to avoid hurting their disabled family member’s benefits.

How To Set Up A Third Party Special Needs Trust

If you need to create a Third Party Special Needs Trust, you should set up an initial consultation to speak with an experienced Special Needs Trust Attorney. These trusts are very complicated and you can hurt your loved one’s benefits if it is set up improperly.

Everyone’s situation is unique. The best way to get customized advice based on your specific situation is to speak with a professional who can make sure your family is properly protected.

At Rochester Law Center we’ve helped 1,000s of clients protect their families with comprehensive estate planning. Give us a call today to schedule a complimentary consultation with one of our experienced Special Needs Trust Attorneys. Call us now at (248) 613-0007.