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How first- and third-party special needs trusts differ

On Behalf of | Feb 5, 2021 | Estate Planning

Many Pennsylvania parents of children with special needs consider creating special needs trusts. These important estate planning tools give you a way to leave assets behind for your child after your death while allowing your child to remain eligible for certain means-based forms of government help.

The Special Needs Alliance notes that special needs trusts come in two different types. The first is the first-party special needs trust, and the second, the third-party special needs trust. An important difference between the two types involves where the assets inside the trust come from.

First-party special needs trusts

Sometimes called self-settled special needs trusts, first-party special needs trusts have funds that belong to the individual who has a disability. In some cases, the funds may be the result of a court settlement. In others, they may come from the individual with a disability inheriting money or property from someone else, among other circumstances.

Third-party special needs trusts

As a parent to a child with special needs, your goal may be to leave behind an inheritance for your child while allowing him or her to stay eligible for Medicaid or Supplemental Security Income. If so, you may want to consider creating a third-party special needs trust. You may be able to include property or life insurance policies for your child to benefit from after your passing in your third-party special needs trust.

First- and third-party special needs trusts also differ in terms of what happens to the funds inside after the individual with a disability dies. The more you understand about the important distinctions that exist between the two types, the better the chances of you making the right decision for your own family.