A Special Needs Trust are also known as Supplemental Needs Trust and are created often times to protect assets for a party who is receiving SSI Disability or Medicaid. When an individual is disabled and is receiving government benefits because they do not have many assets, then it is important for them not to receive a large amount of assets upon the death of their parent or really for any other reason. Special needs trusts were created which are designed to allow assets to be held in this type of trust and not be countable as an asset for the beneficiary of the trust who continues to receive their government benefits and support based upon need. These trusts are designed to supplement the needs of a disabled individual, not to take the place of their basic needs.
There are two types of supplemental needs trust, one is called a third party special needs trust which can be created by someone other than the disabled party. In other words a parent can establish a supplemental needs trust for a child and this is a living trust that is created while the child is alive. Anyone can contribute to a supplemental needs trust once it is created for the benefit of a disabled person. If a third party special needs trust is created one of the benefits are that once the beneficiary of the trust dies money left in the trust can be directed to an individual who is named at the time the trust is established. In other words it is not used to pay Medicaid back or any other government agency benefits paid to the disabled beneficiary during his or her life.
The other type of special needs trust (which are called a first party special needs trust) is what occurs when a person who is under sixty five years of age and disabled receives funds from any source. These funds could come from the death of a parent and the funds are payable directly to the disabled child. Another way to receive these types of funds would be the settlement of an accident claim where a person became disabled and received a settlement directly to that person. Both of these examples would cause an individual who is disabled and under the age of sixty five to lose all of their government benefits because of the newly received asset. The idea behind this trust is similar to the third party special needs trust in that assets can be placed into the trust and the disabled individual will continue to receive their government benefits. These trusts are typically created by a guardian, a parent, grandparent, court or the disabled person themselves. By creating this first party special needs trust the assets are held in trust and for the benefit of the disabled party and the assets in the trust are to supplement their needs. In this respect the disabled party does not lose their government benefits. The only drawback to this first party special needs trust is at the death of the disabled beneficiary monies in the trust are used to pay back Medicaid for the government benefits that were supplied to the disabled people. That is the primary disadvantage to this type of trust.
It should be noted that the only time a special needs trust can be created by one spouse for another is through a Will. So third party trusts cannot be created by a husband for a wife and vice versa.