The Important Differences Between Self-Settled and Third-Party Special Needs Trusts

Many Illinois residents who have children or other relatives with disabilities choose to create third-party special needs trusts for those individuals, which ensures that they will have the means to cover certain expenses. However, creating this type of trust can disqualify disabled individuals from need-based government assistance. Fortunately, when trusts are set up correctly, disabled beneficiaries are not at risk of losing their eligibility for government benefits like Supplemental Security Income (SSI) or Medicaid, which often happens when a person is deemed to have income or assets that exceed the eligibility limits. For help determining how to properly set up a special needs trust, please contact an experienced contested estates attorney who can ensure that your property is distributed according to your wishes.

Types of Special Needs Trusts

There are two main categories of special needs trusts, which are known as self-settled trusts or third-party trusts. The type of trust that a person creates depends on whose assets are actually used to fund it. As its name suggests, self-settled trusts are those that are fully funded by the disabled person’s own assets, whether collected through an inheritance, a personal injury settlement, or savings. It’s also a good indicator that a trust is self-settled if the disabled beneficiary had the legal right to use the money without any restrictions, at some point in his or her life.

To be considered valid, however, self-settled trusts must meet certain requirements. For instance, these types of trusts must include a provision explaining that, upon the beneficiary’s death, the state’s Medicaid agency will automatically be reimbursed for the cost of any benefits collected by the deceased beneficiary. These types of trusts also often require an annual accounting of trust expenditures to the Illinois Medicaid agency, which, if it is not undertaken, could result in a beneficiary’s eligibility for benefits being jeopardized. Finally, the assets held in a self-settled trust are taxed as if they still belonged to the beneficiary.

Third-party trusts, on the other hand, are created by and funded with property that belongs to someone other than the beneficiary. In most cases, inheritances left to a disabled relative or friend are placed in a third-party special needs trust. Assets held in this type of trust can be used to pay for food and shelter for the beneficiary, although in some cases, these costs could reduce his or her eligibility for benefit payments. Third-party trusts can also be terminated if a beneficiary’s condition improves to such a degree that he or she no longer requires government assistance. In these cases, the remaining balance contained in the trust is distributed outright to the beneficiary. Finally, property remaining in a third-party trust can be distributed to other relatives, friends, or charities in the event of the disabled individual’s death.

Call Today to Create a Special Needs Trust for Your Loved One

If you are concerned about providing for a disabled loved one, please don’t hesitate to contact the dedicated Skokie contested estates legal team at Orlowsky & Wilson, Ltd. Attorneys at Law by for assistance by calling 847-325-5559 or by sending us an online message today.

Updated as of July 2019
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