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How do first- and third-party special needs trusts differ?

| May 14, 2021 | Estate Planning | 0 comments

When you live in Florida and have an older loved one who lacks capacity or a child with a disability, you may need to take extra steps when creating your estate plan. Many individuals with disabilities or special needs rely on certain types of government assistance, such as Medicaid or Supplemental Security Income, to support themselves. However, if you leave your loved one considerable assets in a traditional will, those assets may impact eligibility for these critical government benefits.

Per the Special Needs Alliance, a special needs trust gives you a way to leave assets behind for a loved one without hindering government benefits eligibility. Special needs trusts are available in two formats. The first is the first-party special needs trust, the second, the third-party special needs trust.

First-party special needs trusts

If your loved one receives a court settlement or inheritance, a first-party special needs trust may prove worthwhile. You may also decide to establish a first-party special needs trust if a parent has assets in his or her name, becomes disabled and then needs to qualify for assistance programs with asset limits.

Third-party special needs trusts

A third-party special needs trust may prove advantageous if you have a child with a disability and you want to make sure he or she has everything needed to get by in your absence. You might place life insurance policies or similar assets inside the trust for your child to access once you die.

First- and third-party special needs trusts also differ in terms of what happens to any remaining funds inside when the beneficiary dies. Funds remaining in a first-party special needs trust must go toward Medicaid reimbursement. This is not the case for third-party special needs trusts, meaning you get to decide where the remaining funds go once the beneficiary dies.

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