Can a special needs trust hold child support? Yes, but only if it’s the correct kind of trust.
There are two categories of special needs trusts (SNT) – a first-party trust and a third-party trust.
A first-party trust holds money that belongs to the beneficiary. For example if Susan is disabled and wins a lawsuit, and the defendant has to pay him $100,000, that money belongs to Susan. If Susan wants the money to go into a SNT so thats he won’t lose disability benefits, it will have to be a first-party SNT, because it’s Susan’s money going in.
A third-party SNT holds money that belongs to someone other than the beneficiary. For example, if Susan’s parents want to leave her an inheritance of $100,000 in their will, they can leave that money into a third-party SNT for Susan, because the money belongs to a third-party, Susan’s parents.
It’s better for the beneficiary to have a third-party SNT than a first-party SNT. That is because a first-party SNT has to comply with special requirements under federal and state law. A first-party SNT must be irrevocable, must provide for any trust remainder to repay Medicaid when the beneficiary dies, and, in New Jersey, must report expenditures over $5,000 to the State, among other requirements.
Under Social Security Administration regulations, child support payments are considered income to the child. Therefore, for families that wish to use an SNT for child support, the payments must be made into a first-party SNT. A third-party SNT, such as the kind designed as part of an estate plan, will usually not be sufficient to hold child support payments.
There may be other options as well for parents to avoid disqualifying a child with disabilities from benefits. For example, parents could agree that payments will be made in lieu of child support, which would not count as income to the child. However, the parents probably would be under no obligation to use such payments to support the child, so in many cases this option would not be attractive.
FriedmanLaw is available to help with special needs trusts and disability benefit issues, and we encourage you to call or email us today.