Perhaps you have a disabled teenage son who was the victim of a serious car accident. You are considering setting up a trust to hold the financial compensation he is due to receive.
According to federal and state law, those who qualify for SSI and some Medicaid programs cannot keep more than $2,000 in their own name. Therefore, the compensation your son expects to receive as an accident settlement can go into a trust. There are three main types of trusts for you to look into. You can establish any one of these without affecting the Supplemental Security Income (SSI) your son receives.
First-party trust (individual)
One kind of special needs trust is a first-party trust, which can hold the accident proceeds without affecting your son’s SSI. Your son can use funds from the trust throughout his lifetime. When he dies, the remainder will reimburse the government for his medical costs paid by Medicaid. The remaining funds, if any, can be distributed to family members or as your son directs.
First-party trust (pooled)
Charitable organizations set up pooled trusts. Beneficiaries pool their resources, which are then invested but maintain their own separate accounts with funds used for their individual needs. If you choose a pooled trust for the benefit of your son, then after his death the funds remaining in his account will reimburse the government for his care received through Medicaid. Alternatively, all or a portion can be directed to the nonprofit organization that managed the trust. Anything remaining can be distributed to family members or others as your son chooses.
Family members often favor the third-party trust. This is a receptacle for any kind of asset that belongs to the family. Common assets that fund a third-party trust include retirement plans, life insurance, stocks and bonds, and even a house. Once again, funds are used for the lifetime of your son. However, after his death, any funds remaining can either pass to other family members or to a charity. Unlike first-party trusts, third-party trusts are not required to reimburse Medicaid.
With legal guidance, you can learn more about this and the other special needs trusts to determine which best suits your son’s circumstances.