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How do first- and third-party special needs trusts differ?

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How do first- and third-party special needs trusts differ?

When your child has a disability, you may need to take extra time when creating your Colorado estate plan. Many people with special needs use certain types of government help, such as Medicaid or Supplemental Security Income, to get by without an income. However, these benefits require means-testing. If you leave your child too much of an inheritance in a traditional will, it may make him or her ineligible to receive them any longer.

Per the Special Needs Alliance, a special needs trust allows you to leave behind a legacy for your child with special needs without it impacting eligibility for government benefits. Special needs trusts come in two key types: first-party and third-party special needs trusts. There are several important differences between the types, including how you fund them and what happens to the funds when the beneficiary dies.

Funding first- and third-party special needs trusts

If your child with a disability inherited money from someone or received a court settlement, a first-party special needs trust may be appropriate.

If you are looking to use the trust to leave your own assets, money or property behind for your child with special needs, you may want to do so through a third-party special needs trust.

Understanding where funds go after the beneficiary’s death

After a beneficiary’s death, any funds remaining in a first-party special needs trust may go toward reimbursing the state for Medicaid. With a third-party special needs trust, you do not have to reimburse the state. Instead, you retain control over where the funds go after a beneficiary’s death.

Keep in mind that there may be tax implications involved in creating either type of special needs trust.