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Date: January 1, 2012

We expect that everyone who reads this Newsletter is familiar with the concept of a “Special Needs Trust.” This type of trust is specifically designed to hold money for individuals with disabilities who participate in any number of means tested government benefit programs, and is used to provide goods and services which supplement what is available through those programs. For those who want more information, we suspect that their first step would be an internet search on the topic. This is where readers need to be cautious.

One of the most common points of confusion for clients (and many professionals) is the distinction between a “First Party” Special Needs Trust (a trust funded with the assets of the person with the disability) and a “Third Party” Special Needs Trust (a trust funded with someone else’s assets). If a visitor to a website discussing Special Needs Trusts does not know the difference between the two (or if the website does not draw a sufficient distinction in its explanation), the visitor may draw conclusions which are not relevant to her situation. For example, a First Party Special Needs Trust must provide that Medicaid benefits will be repaid to the State upon the death of the individual with the disability (the “payback” clause). Third Party Special Needs Trusts do not need to include a payback clause, and funds remaining in the Trust can go wherever the creator of the Trust chooses.

Yet we regularly hear clients and professionals alike say that Special Needs Trusts require a Medicaid “payback” at the end of a beneficiary’s life, without distinguishing between the two types of Special Needs Trusts. If a parent wants to update her estate plan and believes (incorrectly) that any money she leaves for her child with a disability will be subject to Medicaid repayment, she may choose to leave that child out of her estate plan altogether. Many websites do not make this distinction clear, leaving their less-informed visitors with the wrong impression. A good Special Needs Estate Planning attorney should ask about disability as part of the intake process and then guide the client to the right decision (which would include a Third Party Special Needs Trust without a payback clause), but we know from experience that this is not always the case.

This newsletter is not intended as a substitute for legal counsel. While every precaution has been taken to make this newsletter accurate, we assume no responsibility for errors or omissions, or for damages resulting from the use of the information in this newsletter. If you would like to be removed from our distribution list, please email us or call us at (518) 881-1621