When you have a child with special needs, you may need to take extra steps when working on your estate plan so that you may preserve your child’s eligibility for government help. Your child’s ability to collect certain types of benefits, such as Medicaid or Supplemental Security Income, depends on the value of the assets he or she has. So, leaving your child assets in a traditional manner could jeopardize your son or daughter’s ability to remain eligible for help.
The Special Needs Alliance notes that many parents of children with disabilities help their kids stay eligible for government benefits by creating special needs trusts. These trusts come in two types; first-party and third-party special needs trusts. There are important differences between them, including where the assets inside come from and what happens to them when the beneficiary dies.
Third-party special needs trusts
Third-party special needs trusts are more common than first-party ones. Notably, the funds inside come from somewhere other than the beneficiary. Often, life insurance policies help fund special needs trusts. A major benefit of these trusts is that, when the beneficiary dies, the assets remaining inside may go to another person or entity.
First-party special needs trusts
If the person with a disability receives assets through a settlement, inheritance or something similar, those assets may fund a first-party special needs trust. With this type of trust, though, any funds that remain in it have to go toward reimbursing Medicaid after the death of the beneficiary.
Other differences also exist between first- and third-party special needs trusts, including how they impact taxes, among others.