Written by Jill Roamer J.D.
A First-Party Special Needs Trust (SNT) and a Third-Party Supplemental Needs Trust (SNT) are used when a beneficiary would like access to extra funds without jeopardizing their eligibility for public benefits. Let’s review some key differences between these trusts.
The First-Party SNT is irrevocable and is used when the assets funding the trust belong to the beneficiary. This would be if an individual has money in the bank, or comes into money, such as via a settlement or inheritance. If the funds are obtained through a settlement, an MSA subtrust may be needed. (More on that in a bit.)
Public benefits programs will let that individual still have access to the money, via the terms of the trust, but a payback provision is required. The payback provision states that after the individual has passed away, any remaining funds must be paid to the state to the extent the state expended Medicaid funds on that individual. Any funds remaining after the state has been repaid can be distributed to residuary beneficiaries.
For social security benefits, in order for the corpus of the First-Party SNT to be a non-countable asset, the First-Party SNT must have been funded before the beneficiary’s 65th birthday. (See POMS SI 01120.203B.) If the beneficiary has a structured settlement and those payments extend beyond the beneficiary’s 65th birthday, the additional payments to the trust after the 65th birthday will not be a countable asset so long as the settlement was reached and the payments began before that magical birth date.
The federal statute that keeps the corpus of a First-Party SNT from being a countable asset for Medicaid-eligibility purposes is 42 U.S. Code § 1396p(d)(4)(A). As such, a First-Party SNT is oftentimes called a d4A Trust. Per that Code section, the trust must be funded before the beneficiary’s 65th birthday.
The beneficiary of a First-Party SNT must be disabled within the definition of § 1382c(a)(3). A First-Party SNT must be established by the beneficiary, a parent, a grandparent, legal guardian, or a court.
A Medicare Set-Aside (MSA) subtrust is needed when certain types of settlements are reached, such as a Worker’s Compensation claim or injury settlement. If a settlement is reached in a case where future medical payments will be made from the settlement money, Medicare wants to ensure the settlement funds designated for that purpose will be preserved. So those funds are placed in the MSA subtrust to be used for future medical expenses.
A Third-Party SNT is funded with assets that never belonged to the beneficiary. As such, a payback provision is not required and thus the terms of the trust are more favorable. This trust is used when someone wants to put their own money aside for the beneficiary’s care and benefit. There are no age restrictions on when the Third-Party SNT must be established.
The Third-Party SNT can be revocable or irrevocable. However, the revocable Third-Party SNT in ElderDocx is designed so as to become irrevocable on certain events: upon the death of the Grantor, when the trust is funded with retirement account benefits, or if someone other than the Grantor funds the trust with a specified dollar amount. While the Third-Party SNT is revocable, it is a grantor trust and the Grantor will be taxed on the income of that trust. If someone other than the Grantor funds the trust with a large dollar amount, the Grantor would likely not want to be taxed on the income from those funds.
The Grantor may choose to make the trust irrevocable from the onset if she knows that retirement account funds will be funded into the trust, if someone other than the Grantor plans on funding the trust with a substantial amount, or if she otherwise doesn’t want to be taxed on the trust income. Also, if the Grantor dies while the trust is revocable, the funds in the trust will be included in the Grantor’s estate; she may not desire that outcome and so she may design the Third-Party SNT as an irrevocable trust.
The First-Party (Self-Settled) SNT and Third-Party SNT are just two of the trusts available in ElderDocx. Other trusts you can generate using ElderDocx include a Revocable Living Trust, Medicaid Asset Protection Trust, Medicaid Family Protection Trust, Veterans Asset Protection Trust, Miller Trust, Sole Benefit Trust, Parental Protection Trust, and Secure Supplemental Needs Trust.
Jeffrey C. Nickerson - Estate Planning Attorney - My Passion is Special Needs Planning!