If you are someone with a disabled or special needs child, you might consider creating a trust to provide for your loved one. Some disabled individuals create their own trusts, but in doing so, they may disqualify themselves from receiving government benefits. Recognizing this fact, some parents set up a third party special needs trust to provide for a disabled child.
CNBC explains that people other than the intended beneficiary set up a third party trust. The third party in this scenario is the beneficiary who will receive it. Some disabled persons receive Medicaid, known as Medi-Cal in California, but if that person receives money from a trust, the government may disqualify the person from receiving Medicaid payments. However, a third party trust can help get around this problem.
Basically, your child does not own the money in a third party special needs trust. Instead, the money is under the jurisdiction of a trustee, who has the power to invest the money and to pay for the needs of your child, including living arrangements, travel and food. Under this arrangement, the government will still provide Medicaid coverage to your child.
Another reason parents choose a third party trust is to protect their child from creditors. Even disabled adults may accumulate debt. Creditors may attempt to collect on it by taking assets from your child. But money in a third party trust is not owned by the beneficiary, so creditors such as credit card companies cannot access it. While a trustee may decide to pay off those debts using the trust money, the trustee does not have to do so.
Using a third party trust also offers an additional benefit. The trust may last for the remainder of the life of your child. Some money, however, might remain after your child passes away. You can name beneficiaries to receive the leftover money, like other children or relatives. Even if your disabled child has some debt after passing away, the money will pass to your named beneficiaries regardless.