You've decided to create an estate plan to protect your family – well done! Peace of mind is around the corner. You've got a few decisions to make and guess what…you will be hiring! There are a number of roles that need to be filled in order for your plan to work as intended, and it's critical that you choose the right legal infrastructure for your plan and place the right team members into the right roles.

For all the information below, please note: everyone's estate plan, and special needs plan is unique and needs to reflect their financial and family situation. Additionally, terminology varies state by state. The information below is reflective of the most commonly used definitions. Even with variations, these concepts largely hold true, even when a different name is

used in your state of residence. "A rose by any other name would smell as sweet." Still, it is always recommended to speak with an attorney licensed to practice in your state, that has special needs expertise. Looking for lawyers who belong to the Special Needs Alliance, Academy of Special Needs Planners, Life Care Planning Law Firms Association, or hold the CELA designation is a great place to start.

STEP 1 : CHOOSE THE RIGHT TRUST TYPE

1st party (Special Needs Trust) v. 3rd party (Supplemental Needs Trust)

If your loved one has a settlement, or acquired their disability later in life, they will likely need a 1st party trust to protect their assets and ensure that they still qualify for government benefits, such as Medicaid. Frequently, these trusts are created with court supervision, so you likely know if you have a 1st party trust, or if one is needed.

In some cases, an individual with a disability builds up assets in their name, and the need for a 1st party trust arises outside of the settlement context. An individual with (in most cases) more than $2,000 of assets in their name is ineligible for Medicaid, but moving those assets into a 1st party SNT (Special Needs Trust) can restore program eligibility, after a lookback period.

Key Takeaway

Even if you have a 1st party SNT, you may still need a 3rd party SNT. These two trusts address different problems, and many beneficiaries have both types of trusts.

A 3rd party Supplemental Needs Trust (SNT) holds money that was never in the disabled individual's name. Often, this is money that was inherited from parents or grandparents. If your loved one will inherit more than $2,000, you probably need a Supplemental Needs Trust.

The biggest difference between 1st and 3rd party SNTs is how the trusts work with Medicaid.

Medicaid payback: 1st party trusts are subject to a Medicaid payback lien. This means that upon the demise of the beneficiary (the disabled individual), before any money is distributed to remainder persons, often siblings or the children of the beneficiary, any money that Medicaid has paid out gets repaid first, with interest. Often the payback amount is greater than the trust assets, eliminating any further distribution. Don't worry though, the excess Medicaid lien does not pass as debt to anyone else — it just bills against the trust balance to whatever extent funds are available.

3rd party trusts are not subject to a Medicaid lien, so excess assets can be distributed to the persons or organizations that you designate as remainder persons.

Another note on Medicaid liens: Since Medicaid is waiting to be paid back for their expenditures out of the funds in the SNT, Medicaid will monitor expenditures from a 1st party trust closely to ensure funds are being preserved for their eventual payback. Accountings, oversight, and strict adherence to the Social Security Administration POMS (Program Operations Manual System) is required.

The Medicaid payback and oversight of 1st party trusts are the primary reasons that families strategize to place as much money into a 3rd party trust as possible, while spending down the 1st party trust, if one exists.

Absent proper planning, such as the creation of a 3rd party SNT, courts may create a 1st party SNT to protect a disabled individual's benefits that would be

lost. For instance, in the case of an accident or medical malpractice, where there is a settlement or money inherited from parents who didn't have an estate plan, money would go into the disabled person's name, barring them from qualifying for benefits (or would kick them off existing benefits). Courts often step in and create 1st party SNTs to protect this from happening — if/when they are alerted. Sometimes, no one lets them know, then it's a very arduous clean up process that doesn't always work out well.

While creating the 1st party SNT provides protection for the beneficiary, so that they don't lose benefits, the lack of planning unnecessarily gives Medicaid oversight of trust expenditures, and results in a payback lien — not to mention the substantial legal fees involved in creating a trust via judicial intervention. Creating an SNT now avoids these legal fees and can eliminate the complexities that come with a 1st party trust.

Key Takeaway

You almost always need a 3rd party SNT if your loved one is receiving or will receive benefits, or would benefit from the financial guidance and protections of a supplemental needs trust. You only need a 1st party SNT if your loved one receives or intends to receive government benefits and has assets of their own. These two types of trusts can work together, and one does not replace the other.