Recently, I wrote a post explaining the differences between a First Party Special Needs Trust and a Third Party Supplemental Needs Trust. As you are aware, the goal of a Special Needs Trust or a Supplemental Needs Trust is to provide financial resources to a Special Needs Person in a way that will not cause them to lose their government benefits, like Medicaid. Today, I wanted to explore the benefits of a Third Party Supplemental Needs Trusts in more depth.
A Third Party Supplemental Needs Trust can be created under a Will or it can be created as a stand alone trust by the parent or grandparent. We usually recommend that it be created as a stand alone Irrevocable Life Insurance Trust for the following reasons:
- Money/Insurance held by the Third Party Supplemental Needs Trust will pass free of estate tax and inheritance tax. However this may not be a concern for federal estate taxes if your assets are below the current threshold of $11.2 million. (Remember, the federal estate tax gets reduced to $5 million dollars, indexed for inflation, in 2026.)
- Other relatives who wish to benefit the special needs child can name the stand alone trust as a beneficiary under their Will or as beneficiary of a life insurance policy. This is important because otherwise each parent, grandparent, aunt, uncle and sibling that may want to benefit the special needs person would have to set up their own special needs trust, creating complexity and extra costs.
- We frequently recommend that parents of a Special Needs child purchase a permanent life insurance policy to guarantee money will be there for the Special Needs Child as other assets may dissipate.
- A Third Party Supplemental Needs Trust and Life Insurance Trusts are protected from creditors of both the parents and child.
- Creating a stand alone trust during your lifetime generally avoids the need to get the Court involved. This can come up in various different ways:
- Every time the trustee of a Trust created under a Will changes, it requires Court permission. This is not true of a trust that is created as a stand alone trust. A change of trustee of a stand alone Third Party Supplemental Needs Trust or Life Insurance Trust can be accomplished very easily and usually without having to go to Court if the documents are drafted properly.
- If the trust needs to be modified or moved to another jurisdiction, the document can provide mechanisms for these changes without getting Court permission. A frequent reason to move a trust is to get better protection or lower the income tax consequences.
- The beneficiary of a stand alone trust has access to funds more quickly than if it were to go through an estate administration under a Will. (Probate can take months or even years. If a Special Needs Person is reliant on a certain amount of monthly funding, naming a Third Party Supplemental Needs Trust as the owner and beneficiary of any insurance policy can be a tax efficient and quick way to guarantee that money will be available in a manner that will not cause the Special Needs Person to lose his or her government benefits.
NOTE: A stand alone trust is frequently referred to as an Inter Vivos Trust. There are many types of stand alone trusts, including Revocable Trusts. So while a Third Party Supplemental Needs Trust can be set up as a Revocable Trust, we usually recommend it be established in the same manner as an irrevocable life insurance trust for tax reasons.
As you can see, there are many benefits to creating a Third Party Supplemental Needs Trust during your lifetime, rather than having it created under your Will. If you have any questions regarding the best way to set up a Supplemental Needs Trust or a Special Needs Trust for a loved one, please don’t hesitate to contact one of our estate planning attorneys.