Third-Party Special Needs Trust

Why This Skill Exists

Third-party SNTs fail for two reasons: they contain language that causes the trust corpus to be treated as an available resource for public benefits purposes, or they make distributions that constitute in-kind support and maintenance (ISM) and reduce or eliminate SSI. A trust that pays rent directly to a beneficiary's landlord without cost-benefit analysis can cost the beneficiary their entire SSI check. A trust that omits the spendthrift clause can be reached by creditors.

This skill produces a jurisdiction-aware, irrevocable third-party SNT that preserves SSI and Medicaid eligibility, uses solely supplemental distribution standards, requires no Medicaid payback at termination, and includes trustee guidance on ISM avoidance. The primary distinction from first-party/self-settled SNTs (42 U.S.C. § 1396p(d)(4)(A)) is that no payback provision is required or included — this trust holds assets that never belonged to the beneficiary.

[VERIFY state-specific treatment of third-party SNTs under applicable Medicaid manual]

Checkpoint A: Pre-Draft Intake (Mandatory)

Gather before drafting unless user says "use defaults":

Grantor — full legal name, relationship to beneficiary, state of residence
Beneficiary — full legal name, DOB, nature of disability, current benefit programs (SSI, Medicaid, SSDI), specific supplemental needs
Trustee — individual vs. corporate fiduciary, successor trustees, willingness to serve
Funding plan — immediate (asset schedule) or deferred (life insurance, retirement account beneficiary designation, pour-over from will)
Remainder beneficiaries — primary and contingent with shares/percentages
Jurisdiction — state trust execution formalities, state Medicaid manual rules for third-party SNTs
ABLE account eligibility — disability onset before age 26; if eligible, whether trustee should have authority to fund ABLE account
Tax posture — grantor vs. non-grantor trust preference; gift tax strategy (Crummey powers vs. lifetime exemption)

If user doesn't respond, apply and label defaults: sole and absolute discretion standard; no Crummey powers; non-grantor trust; standard spendthrift and anti-alienation; state-neutral template with

[VERIFY JURISDICTION]

flags on execution formalities.

Step 1: Validate Intake and Map State Law

Required Deliverable: State-Law Scaffold

Topic	Required Confirmation
Trust execution formalities	Witness count, notary requirement, disqualifications `[VERIFY]`
Third-party SNT treatment	State Medicaid manual classification; whether trust is excluded resource `[VERIFY]`
Distribution standards	State law on sole/absolute discretion; enforceability of supplemental-only limitation
Investment authority	UPIA adoption status; prudent investor standard applicability `[VERIFY]`
Termination rules	State rules on trust termination, modification, and decanting
Tax treatment	Grantor/non-grantor implications under state income tax

Step 2: Draft the Trust Document

Fixed Section Order

Section	Contents
Preamble	Trust name, grantor, trustee, beneficiary, date, recitals of intent
Art. I — Purpose & Intent	Supplemental-only purpose; benefits preservation declaration (see template below)
Art. II — Irrevocability	Irrevocable from execution; no amendment except as permitted by law
Art. III — Distribution Standards	Sole and absolute discretion; permissible categories; prohibited distributions; ISM guidance
Art. IV — Trustee Powers & Duties	Investment, hiring advisors, tax authority, recordkeeping, ABLE account funding authority
Art. V — Trustee Compensation & Succession	Fee schedule or reasonable compensation; resignation/removal; successor appointment
Art. VI — Administration	Annual accountings, EIN, trust situs, tax filings
Art. VII — Termination & Remainder	Terminates at beneficiary death; NO Medicaid payback; remainder to designated beneficiaries
Art. VIII — Tax Provisions	Grantor vs. non-grantor election; gift tax treatment; tax allocation
Art. IX — General Provisions	Severability, governing law, spendthrift, anti-alienation
Execution	Grantor signature (notarized), trustee acceptance, notary acknowledgment
Schedule A	Initial trust assets (if funded at execution)

Purpose Statement Template

text

This Trust is established solely to provide for the supplemental and extra
needs of the Beneficiary beyond those provided by any local, state, or
federal government program. It is the Grantor's intent that Trust assets
shall NOT supplant, replace, impair, or reduce any public benefits to which
the Beneficiary is or may become entitled.

Prohibited Distributions — ISM Rules

Prohibited	Compliant Alternative
Cash directly to beneficiary	Pay vendors/providers directly
Food purchases for beneficiary	Use ABLE account if available; accept ISM reduction if justified
Shelter costs paid to/for beneficiary	Trust purchases and holds title to residence; trustee pays carrying costs
Rent paid to beneficiary's landlord	Structure as trust-owned housing or accept ISM reduction with documented cost-benefit analysis

Trustee instruction: Before any distribution that could affect benefits, consult a public benefits specialist. Document the analysis in trust records.

Remainder Distribution Template

text

Upon the death of the Beneficiary, the Trustee shall distribute remaining
Trust assets to the following remainder beneficiaries, free of any obligation
to reimburse any governmental entity for benefits provided to the Beneficiary
during the Beneficiary's lifetime:
  [Remainder beneficiary designations with shares and contingencies]

Step 3: Execute Compliance Verification

Required Deliverable: Execution Checklist

Item	Verification
Grantor signature	Notarized (best practice even if not required by state law)
Trustee acceptance	Signed acceptance of fiduciary duties
Witnesses	Per state requirement; disqualification screening completed
Notary acknowledgment	Venue and seal; state-prescribed language if applicable
Irrevocability	Unambiguously stated; no reserved amendment power
Spendthrift clause	Assets not assignable by beneficiary; not reachable by creditors
Discretionary standard	"Sole and absolute discretion" — no enforceable right to demand distributions
No payback clause	Explicitly disclaimed; no Medicaid reimbursement obligation
Defined terms	"Grantor," "Trustee," "Beneficiary," "Trust" used consistently; cross-references verified

Step 4: Produce Final Package

Mandatory Front Matter

At the top of every output:

Assumptions Used — jurisdiction, funding plan, tax posture, key facts relied on
Open Items / Needed Inputs — missing data, unresolved jurisdictional questions, unverified citations

Deliverable Package

Complete third-party SNT document
Execution compliance checklist (filled)
State-specific notes and
```
[VERIFY]
```
items for attorney review

Checkpoint B: Post-Draft Alignment (Mandatory)

After delivering the initial package, ask:

Does the distribution standard and trustee discretion language match intent?
Are the remainder beneficiary designations and shares correct?
Is the funding plan (immediate vs. deferred) correctly reflected?
Should ABLE account funding authority be included or modified?
Does the tax posture (grantor vs. non-grantor) need adjustment?

Quality Audit

Before finalizing, verify:

Jurisdiction identified and state-law scaffold completed
Irrevocability stated unambiguously
Supplemental-only purpose statement included
No Medicaid payback clause — explicitly disclaimed
Sole and absolute discretion standard used throughout
Spendthrift and anti-alienation clauses present
ISM guidance included with prohibited/compliant alternatives
Remainder distribution explicitly free of government reimbursement
ABLE account coordination addressed if beneficiary qualifies
Gift tax treatment addressed (Crummey powers flagged if needed)
Grantor vs. non-grantor trust election specified
Execution formalities match state requirements
```
[VERIFY]
```
Every statutory citation verified or marked
```
[VERIFY]
```
Assumptions and open items listed in front matter
No first-party/self-settled SNT provisions (payback, age-65 restrictions)

Guidelines

No Medicaid payback — this is the defining characteristic of a third-party SNT; explicitly disclaim any reimbursement obligation in the termination article
Do not rely on memory for state Medicaid manual treatment of third-party SNTs — require statute URLs or official guidance; flag with
```
[VERIFY]
```
Gift tax: if grantor wants annual exclusion eligibility, a Crummey power may be needed — flag for attorney review; otherwise contributions use lifetime exemption
ABLE coordination: if beneficiary qualifies (disability onset before age 26), include trustee authority to fund ABLE account up to annual limit for food/shelter flexibility
Do not draft first-party/self-settled SNT provisions — those require a separate skill
Do not advise on clinical or benefits eligibility determinations — this is legal structuring only
Attorney review required — include disclaimer and execution-readiness statement in final output

third-party-snt

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