When someone uses his or her own money to set up a special needs trust (SNT for short) for another person, that’s called a “third party” SNT.

It’s the best kind of SNT for two reasons.

First, unlike a “first party” or “self settled” SNT (established with the beneficiary’s own funds) a third party SNT does not have to be a “payback” trust. A first party SNT must provide that when the beneficiary dies, any remaining funds in the trust have to go to the state to pay back any Medicaid costs paid for the beneficiary. Only after the SNT pays back those costs can any remaining funds go to other beneficiaries.

But a third part SNT can leave remaining funds to others with no payback requirement.

Here’s an example. Mary has one disabled child, Eric, and two others who are not disabled. She decides to leave, say, $100,000 to Eric. If Mary leaves the money to Eric outright, he could arrange to have it placed into a payback trust. If $40,000 remained in that trust when Eric died, the rest would go first to pay back any Medicaid costs the state paid for Eric while he was alive. If there was anything left after paying the state, the remainder could go to Mary’s other two children.

But if Mary’s will established a SNT for Eric, that would qualify as a third party trust. If $40,000 remained when he died, the entire amount could pass to Mary’s other two children.

Second, a third party SNT is easier to establish. A competent person wishing to establish a SNT for another person can simply sign the trust document.

On the other hand, a person wishing to set up a first party SNT with his or her own money cannot just go ahead and do that. For some unknown reason, the law requires a parent, grandparent, legal guardian, or court to establish the trust for such a person. That requirement can pose a difficult hurdle, and require additional legal expense, if the parents and grandparents are deceased or incapacitated, or there is no legal guardian.

Third party trusts require advance planning, but they’re worth it.

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