Third-Party Special Needs Trusts
Updated: Apr 15, 2018
The third-party special needs trust can reserve assets for a disabled beneficiary’s special needs without jeopardizing his or her access to Medicaid and SSI benefits. This trust is often created for a disabled individual as part of a parent’s estate plan. Typical special needs provisions would limit distributions to the disabled child for special or supplemental needs only (not food or shelter), and would subject the distributions to the trustee’s sole, absolute and uncontrolled discretion. The trust assets that provide payments for supplemental or special needs would be considered unavailable to the government.
Because the third-party special needs trust is governed by state law, it generally has greater flexibility than the first party 42 USC §1396(d)(4)(A) trust. There is no payback provision requirement, for example. The assets remaining in a third-party special needs trust at the death of the beneficiary may be distributed to other family members, or to charity, without reimbursement to the government. Additionally, the beneficiary of a third-party special needs trust does not have to meet the definition of “disabled” under federal law.
A third-party special needs trust must not, however, include terms suggesting that the trust is meant to provide basic support to the beneficiary. In Corcoran v. Department of Social Services, the Connecticut Supreme Court ruled that a trust apparently intended to function as a special needs trust was in fact a general support trust. The Court reasoned that because the trustees were directed to exercise their sole discretion in consideration of the beneficiary’s health, support, comfort and welfare, the trust could not be considered a special needs trust. Thus, the trust’s assets were countable for purposes of Medicaid eligibility. (Conn., SC 16955, Nov. 9, 2004 (unpublished)). In light of Corcoran, a third-party special needs trust should not direct the trustee to provide for anything but the beneficiary’s special or supplemental needs.
In sum, the special needs trust clearly has the potential to provide a disabled beneficiary with resources that will not jeopardize eligibility for Medicaid or SSI. Whether of the first-party or third-party variety, the special needs trust can greatly enhance the life of the disabled beneficiary. Of course, proper drafting is crucial.