Louisiana Special Needs Trusts: Third-Party Trusts

Louisiana special needs trusts come in three main flavors — first-party special needs trusts, third-party special needs trusts, and pooled trusts.  All three trust varieties are designed to hold resources for an individual with disabilities while still allowing them to qualify for public benefits.  While first-party special needs trusts and pooled trusts hold funds that belong to the person with special needs, third-party special needs trusts, as the name implies, are funded with assets that never belonged to the trust beneficiary. This kind of trust provides several advantages.

Establishing a Third-Party Trust

A donor – the person who contributes the funds – sets up a third-party special needs trust. These trusts are often part of the donor’s estate plan. Trusts can hold gifts made during the donor’s lifetime, and then receive an inheritance when the donor dies.  Third-party special needs trusts can be beneficiaries of life insurance policies, can inherit retirement accounts, and can even own real estate or other investments.

There is no limit to the size of a third-party trust, and the funds can pay for almost anything a beneficiary needs to supplement her government benefits.  Social Security rules limit first-party trusts to beneficiaries under age 65, but third-party trusts don’t have age limits. Upon the beneficiary’s death, the assets in a third-party special needs trust can often pass to the donor’s other relatives or anywhere else.

This last factor is one of the key advantages of a third-party special needs trust. Since the funds in the trust never belonged to the beneficiary, there is no Medicaid repayment due upon her death.  Medicaid may claim repayment against a first-party trust, pooled trust, or ABLE account.  A careful donor can support a family member for her life, and leave remaining funds to someone else.

Limitations

Although a third-party special needs trust has many advantages, it is not always an available option.  To be a third-party trust, the beneficiary can never have owned the funds directly. If the beneficiary has already received an inheritance or settled a lawsuit, those funds must go into a first-party or pooled trust.  Furthermore, the trustee must be careful not to distribute funds that Social Security might count as income to the beneficiary. This requires an informed and conscientious trustee.

Even with these restrictions, family members of individuals with special needs should strongly consider a third-party special needs trust.  Your special needs planner can help you understand how these important trusts fit into your other estate planning goals.

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