What Is a "First-Party" Special Needs Trust and When Is It Useful?

A Special Needs Trust (SNT) can play an important role in preserving the financial security and lifestyle of a person with special needs. A properly drafted SNT allows the individual to benefit from supplemental resources while still qualifying for public benefits, such as Supplemental Security Income (SSI) and Medicaid. Generally, when a parent or guardian wishes to establish and fund a trust for the benefit of a minor child, the attorney recommends a "third-party" SNT be set up for the child. But, when the person with special needs has his or her own assets, another option may be more appropriate: the "first-party" or "self-settled" SNT.

What Is a First-Party SNT?

Like a third-party SNT, the first-party trust is designed to benefit individuals with special needs who qualify - or expect to one day require - public benefits that are available only to people with limited resources. Both third- and first-party SNTs allow assets to be set aside for "supplemental" expenses not covered by SSI or other resources. For example, a trustee can distribute SNT funds to pay for education expenses, a vacation or hobbies, but not for food or shelter, which are covered by SSI.

What differentiates a first-party SNT is the following:

• The trust for a minor must be established by a parent, grandparent, guardian or the court.
• The trust must be "irrevocable," that is, unchangeable.
• The beneficiary's assets must be used to fund the trust.
• The beneficiary must be under age 65 at the time the trust is established.
• At the beneficiary's death, the state Medicaid agency must be reimbursed.

When Is a First-Party SNT Appropriate?

A first-party SNT may be desirable when an individual with special needs has assets - or expects to receive assets - that would disqualify him or her from eligibility for public benefits. Some examples include:

• An inheritance. Receiving an inheritance can cause a person with special needs to lose public benefits. That outcome may be prevented by placing the inherited assets in a first-party SNT.
• A settlement from a lawsuit. A first-party SNT can allow an individual to receive an award in a personal injury or medical malpractice case without losing eligibility for public benefits. Settlements often comprise a lump-sum payment and an annuity. Both types of payment can be directed to a first-party SNT established by the court.
• A divorce settlement. If a spouse with special needs is unable to work and qualifies for public benefits, it may be helpful to have a first-party trust incorporated into the divorce settlement. For example, when the settlement calls for the working spouse to pay the non-working spouse both a lump-sum equitable distribution and monthly alimony, both types of payment can be directed to the trust, rather than to the spouse. The spouse with special needs can then obtain monthly income through SSI and have medical expenses covered by Medicaid.

Because each situation is unique, it is important to discuss the best alternative with a knowledgeable special needs attorney.