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Understanding the three types of special needs trusts

Whether you have a child with a mental or physical disability or you have a disability yourself, you may want to create a special needs trust to protect assets while maintaining eligibility for government benefits.

This financial planning tool may allow you to preserve assets while creating income that supplements basic needs programs like Supplemental Security Income and Medicaid.

However, the type of SNT you set up may depend on how the trust will receive funding and who the beneficiary will be.

1. Third-party trusts

You may establish a third-party SNT if you want to provide for a disabled child or another family member without compromising his or her benefits eligibility. With this type of trust, you may fund the account during your lifetime to provide current aid or you may choose to fund the trust upon your death to help with future expenses.

2. First-party trusts

Also known as a self-settled trust, a first-party trust may be an option if you have a disability and want to preserve certain assets while continuing to benefit from government aid. For instance, if you have received a large settlement after an injury, you may be able to transfer the award to a first-party SNT to help fund medical and rehabilitation needs.

3. Pooled trusts

A pooled trust allows you to delegate management of funds to a non-profit organization that specializes in maintaining such accounts. While you or a family member may fund the trust account, the organization handles investments, disbursements and other trust details.

Whichever type of SNT you may be considering, keep in mind that a special needs trust may only protect assets and preserve benefits eligibility under specific circumstances. Before investing, make sure that you have explored both the impact on government aid as well as the potential tax implications.

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