Legal Definitions - third-party trust

A third-party trust is a specific type of special needs trust established and funded by someone other than the person who will benefit from it. Its primary purpose is to hold assets for a beneficiary with disabilities without jeopardizing their eligibility for essential government benefits, such as Medicaid or Supplemental Security Income (SSI).

The crucial characteristic of a third-party trust is that all assets placed into it must originate from a "third party" – meaning the funds or property never belonged to the beneficiary before being transferred into the trust. This distinction is vital for protecting the beneficiary's access to public assistance programs.

Here are some examples illustrating how a third-party trust works:

• Example 1: Parents Funding for a Child

  Maria and David have a son, Alex, who has a severe disability and relies on government assistance for medical care and living expenses. They want to ensure Alex is financially secure after they are gone, but they are concerned that a direct inheritance could disqualify him from his benefits.

  Maria and David establish a third-party trust using their own savings and investments, naming Alex as the beneficiary. Because the funds placed into the trust originated entirely from Maria and David (the "third parties") and never belonged to Alex, the assets held in the trust will not be counted as Alex's personal resources. This allows him to maintain his eligibility for government benefits while still receiving supplemental support from the trust for things like therapy, specialized equipment, or improved living conditions.

• Example 2: Grandparent's Inheritance for a Grandchild

  Sarah's grandmother, Eleanor, wants to leave a significant inheritance to Sarah, who has a chronic illness and receives disability benefits. Eleanor is worried that a direct inheritance could cause Sarah to lose her essential government programs.

  Eleanor consults with an attorney and creates a third-party trust, funding it with a portion of her estate. Upon Eleanor's passing, these funds are transferred into the trust for Sarah's benefit. Since the money came directly from Eleanor's estate (a "third party") and was never Sarah's personal property before entering the trust, it protects Sarah's eligibility for her government benefits while providing additional financial resources for her care and quality of life, such as private nursing care or accessible home modifications.

• Example 3: Sibling's Gift for an Adult Brother

  Mark wants to help his adult brother, Tom, who sustained a debilitating injury and now receives public assistance. Mark wishes to contribute to Tom's long-term care and comfort without disrupting his existing benefits.

  Mark establishes a third-party trust and contributes a substantial sum of his own money to it. Tom is the beneficiary. Because the funds originated solely from Mark (the "third party") and were never owned by Tom, the trust assets are not considered Tom's countable resources. This arrangement allows the trust to pay for things like specialized transportation, educational programs, or recreational activities that enhance Tom's well-being, all while Tom continues to qualify for his essential public assistance.