Holidays are around the corner, and other significant life events such as family celebrations, or graduations are times to celebrate. During such occasions, beneficiaries may want to purchase or give to their loved ones. However, a beneficiary who has established a First-party Special Needs Trust, such as with CPT, such disbursements will always be prohibited.
With First-Party Special Needs Trusts, such disbursements (gifts, donations, parties, fundraisers) are prohibited because they violate the “sole benefit” rule. First-Party Special Needs Trusts allow distributions that are solely for the beneficiary. The sole benefit rule is a requirement for a First-Party Special Needs Trust. Sole benefit means that the distributions made must provide a direct benefit to the beneficiary
What About a Third-Party Special Needs Trust?
Per Kevin Urbatsch and Michele Fuller, authors of Administering the California Special Needs Trust: A Guide for Trustees and Those Who Advise Them (2nd ed.), state that such above distributions for a Third-Party Special Needs Trust could be possible. Meaning that, it is dependent on the terms provided on the trust document. If the Third-Party Special Needs Trust Documents state that donations, gifts, etc. are allowable then such distributions without jeopardizing the beneficiary’s eligibility with public benefits.
Difference Between First and Third-Party Special Needs Trusts
Kevin Urbatsch and Michele Fuller, provide a great explanation in the above-mentioned book in Chapter 2 regarding the difference between a First and Third-Party Special Needs Trust:
“A first-party SNT is funded with the person with a disability’s money or assets. That’s it. If the money being transferred to the trusts is the person with a disability’s own assets, then the trust must be a first-party SNT to work. This type of SNT typically arises when the beneficiary with a disability has received a litigation recovery or the beneficiary receives an inheritance or gift in his or her own name and transfers the property to an SNT. However, if a person with a disability has existing assets and wishes to transfer them, he or she is allowed to do that as well (Urbatsch & Fuller, 2016).”
“A third-party SNT is funded with money or assets that belong to a third person that is not the person with a disability. This is typically done through a parent or grandparent’s estate plan. However, anyone but the person with a disability can put money or assets into the trust (Urbatsch & Fuller, 2016).”
Urbatsch, K., & Fuller, M. (2016). Administering the California special needs trust: A guide for trustees and those who advise them (2nd ed.). Bloomington, IN: IUniverse