3rd Party Funded Trusts

The Third Party Funded Trust is a trust which is created and funded by someone other than the individual with a disability, such as, a parent, grandparent or other loved one.

The trust gives the trustee almost total discretion to spend or not spend on the beneficiary except the trustee is directed not to distribute assets in any way that reduces the beneficiary's government benefit. In effect, funds cannot be spent on basic support items (food, clothing, housing and medicine). Due to the discretion vested in the trustee, choice of the trustee is critically important. The trust walks the fine line of supplementing government supports for the individual without creating a disqualifying asset for the individual.

There are some very basic differences between this trust and the two self-funded trusts. The Third Party Funded Trust does permit the Settlor (or initiator) of the trust to direct the residual upon the beneficiary's death and without any pay back to the government. The Third Party Funded Trust permits, perhaps even encourages, more than one concurrent beneficiary. Also, the Third Party Funded Trust can use a family member or corporate fiduciaryto serve as the trustee. Each trust is established and maintained individually and must be approved individually.

It is important to remember that this trust cannot be self-funded. Once the individual is entitled to receive the assets, a Third Party Trust cannot be established. A parent can set up a Third Party Funded Trust in his or her will and leave assets to the trust. If the parent leaves funds to the individual, rather than the trust for the individual, a Third Party Funded Trust cannot be established since the individual is entitled to the funds.

A Third Party Funded Trust is an effective Special Needs Trust option but requires advanced planning.