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How does a third-party special needs trust work?

When you hear about a third-party special needs trust, the term "third-party" refers to the trust as a tertiary entity that will provide for the needs of the special needs person. The benefit of a federally-approved special needs trust is the fact that it will not disqualify the beneficiary from receiving government aid and other financial assistance.

Unlike other types of irrevocable trusts, an irrevocable special needs trust, allows for continued government assistance and other government benefits to be received by the beneficiary of the trust. With traditional types of inheritance, the person with special needs would have to choose between (1) receiving and benefiting from his or her parent's estate and (2) receiving and benefiting from government various types of government assistance to pay for medical care and other services.

Another benefit of the special needs trust is that the beneficiary's creditors will not be able to pursue claims against it. Imagine that you leave $750,000 to your special needs child via a third-party special needs trust, and then your child becomes the victim of a predatory lending strategy. The lender will not be able to touch any of the assets contained in the special needs trust and your child's continued financial assistance will remain secure.

If you are the parent of a special needs child, you will want to consider your estate planning options carefully to make sure your child's future is safe. Even if you don't have a lot of personal financial assets at your disposal, you may be able to use a life insurance policy to fund your child's special needs trust.

Source: CNBC, "The benefits of a 'third-party' special needs trust," Peter Klenk, accessed May 03, 2018

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