Which Type of Trust Would You Use for a Disabled Beneficiary?

Mother hugs her daughter who has special needs

When it comes to disabled beneficiaries, there are a few different types of trusts that can be used to help preserve their eligibility for needs-based government benefits. In this blog post, we will discuss the three most common types of trusts: first-party special needs trust, third-party special needs trust, and pooled trust. We will also provide an overview of the benefits and drawbacks of each type of trust.

First-Party Special Needs Trust

A first-party special needs trust is designed specifically for disabled beneficiaries under age 65 who rely on needs-based benefits such as Medicaid and SSI. It is funded using the beneficiary’s assets; for instance, proceeds from an injury settlement can be used as a funding source.

The purpose of the trust is to provide additional income, resources, and support without risking the recipient's eligibility for government aid. This type of trust typically makes distributions for goods and services that meet certain criteria set by the trustee and state trust laws. For example, they may only be allowed to use funds from the trust for specific medical or educational expenses.

A first-party special needs trust must be irrevocable, which means that it cannot be undone. Also, when the beneficiary passes away, the trust must reimburse Medicaid for any expenses incurred during the beneficiary’s lifetime.

Third-Party Special Needs Trust

Similarly, a third-party special needs trust provides a source of income for a disabled beneficiary. However, it is funded with assets from an individual other than the beneficiary (e.g., a parent, grandparent, etc.). Like its first-party counterpart, a third-party special needs trust can help the beneficiary maintain their needs-based government benefits.

A third-party special needs trust does not have an age restriction and it can either be set up as a revocable or irrevocable trust. There is a Medicaid payback provision if the trust is revocable; however, if the trust is irrevocable, Medicaid does not need to be reimbursed when the beneficiary dies.

Pooled Trust

The third option for protecting needs-based government benefits is a pooled trust. A pooled trust is funded with the beneficiary’s assets and typically has lower setup fees than a first- or third-party special needs trust. It does not have an age restriction; however, some states may impose a penalty if the beneficiary is over age 65.

A pooled trust is owned by a nonprofit organization. Multiple beneficiaries have sub-accounts that are pooled for investment purposes. Funds in the beneficiary’s sub-account can be used to pay for goods and services not covered by needs-based government benefits. A pooled trust account is irrevocable and Medicaid must be reimbursed when the beneficiary dies.

We Can Help with Your Trust Planning

No matter which type of trust you choose for your disabled beneficiary, it is important to ensure that the trust document is set up properly and that the trust is managed appropriately. At Legacy Enhancement Trust, we have years of experience helping families plan and manage trusts for disabled beneficiaries. We can do the same for you.

Call Legacy Enhancement Trust today at (888) 988-5503 or fill out the online contact form to learn how we may assist you!

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