3rd Party Funded Trust

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 another loved one.

This type of trust gives the trustee almost total discretion to spend or not spend on the beneficiary’s needs, except that the trustee is always directed not to distribute assets in any way that reduces the beneficiary’s government benefits.  In effect, funds cannot be spent on support items: basic food, basic housing, and basic medicine and medical care.  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 distribution of an asset for the individual.

There are some very basic differences between this trust and the two self-funded trusts:

  1. The Third Party Funded Trust permit the Settlor, the individual establishing the trust, to direct all residual funds at the time of the beneficiary’s death without any pay back to the government.
  2. The Third Party Funded Trust permits, perhaps even encourages, more than one concurrent beneficiary.  The Third Party Funded Trust can use a family member or corporate fiduciary to serve as the trustee.  Each trust is established and maintained individually and must be approved individually by the government.

It is important to remember that this type of trust cannot be self-funded.  Once the individual is entitled to receive 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 for the benefit of the beneficiary.  If the parent leaves assets directly to the individual, a Third Party Funded Trust cannot be established since the individual would then already be entitled to the assets.

A Third Party Funded Trust is a very effective Supplemental Needs Trust option that requires advanced planning.