Trust Matters

Third Party Supplemental Needs Trusts: How Families Can Plan Ahead

Financial Planning, Medicaid, Supplemental Security Income (SSI), Third Party Supplemental Needs Trusts

What Is a Third Party Supplemental Needs Trust?

The Third Party Funded Supplemental Needs Trust permits a family to plan and financially provide for an individual with disabilities without affecting the individual’s eligibility for government benefits. This type of a trust is a very effective tool, but it requires very careful advance planning.

These trusts are created and funded by a third party (the Settlor), someone other than the individual with disabilities, the individual’s spouse, a legal guardian, or a court. They are often created and funded by relatives and can exist as part of their will (a Testamentary Trust), or they can be created, funded, and funds can be disbursed while the Settlor is still alive (Inter-Vivos Trust).

When and Why It’s Beneficial

The trust will render the individual ineligible for SSI (Supplemental Security Income), or Medical Assistance (some states use MA, Medicaid, or have other names for this benefit) if it can be used for support (basic food, basic housing, or basic medicinal care) of the individual or if the trust requires, a pre-determined amount is to be spent on the individual (i.e. $50.00 per month; all interest income; etc.). Therefore, the trust must be written to give the trustee discretion to spend or retain funds, but the trustee must be directed to not spend funds in any manner that would reduce or eliminate government benefits the individual is receiving, or may in the future, be eligible to receive. The trustee can always supplement the individual’s benefits, but never supplant them. A Third Party Funded Supplemental Needs Trust can have multiple beneficiaries such as other siblings, charitable organizations, etc. but must contain language that protects the eligibility of a beneficiary with disabilities as previously recommended in this paragraph. The person establishing the trust, the Settlor, can direct who will receive any assets that remain (the residual) in the trust at the time of the disabled beneficiary’s death.

How This Differs From a Payback Trust

Due to the requirements of this type of trust, it may sometimes be referred to as a discretionary trust, a non-support trust, or common law trust. Since it is based in court cases rather than statutes, this type of trust is sometimes called a “Lang” Trust. These trusts are often incorrectly called a “Special Needs” Trust. In the realm of government benefits and supplemental needs trusts, the term Special Needs Trust refers specifically to a “Payback” Trust – please see our information regarding Payback Trusts.

Planning Considerations for Families

It is very important to remember that a Third Party Funded Supplemental Needs Trust cannot be self-funded. Once an individual is entitled to receive assets, this type of trust cannot be established. A parent can set up a Third Party Funded Supplemental Needs Trust in their will and leave assets to that trust for the benefit of a child with disabilities. If the parent were to leave the assets directly to the individual with disabilities instead of leaving the asset to the trust, a Third Party Funded Supplemental Needs Trust cannot be established because the individual is now entitled to those assets. •

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