What Is a Third-Party Trust?

A third-party trust is a legal entity set up for the financial benefit of a disabled or special needs beneficiary. These trusts consist of three separate parties, including the donor or financier, the beneficiary, and the trustee. The donor supplies money or property to the trust, and the beneficiary receives payments or some other form of financial benefit from the trust. The trustee manages the property on behalf of the beneficiary, and determines how much access he will have to the property or funds. In a third-party trust, neither the donor nor the recipient may act as the trustee in charge of the account.

These trusts are typically set up for the benefit of special needs or disabled individuals. They are often formed by one or both parents or other family members. The person setting up the trust invests some form of property or assets, which then become the property of the trust. The beneficiary does not legally own these assets, and instead is entitled to investment income or disbursements from the trust.

While people may set up a third-party trust for any number of reasons, the primary motivation is to ensure that special-needs individuals will be cared for long term. For example, a parent with a disabled child may set up a third-party trust so that his child will have access to money even if the parent were to pass away. Rather than simply giving the child the money, the parent puts it in a trust where it can be monitored and overseen by the trustee.

Another common reason that people may form a third-party trust is to avoid complications with disability payments from the state. For example, disabled individuals in the United States (US) often receive monthly checks from Medicaid. This federal program helps those in need cover basic living expenses. If parents were to give assets to the child outright, Medicaid may determine that his net worth is too high and he is not longer eligible for these checks. Given that assets in a third-party trust are not owned by the beneficiary, these trusts can help ensure the individual remains eligible for all applicable benefits.

The trustee in a third-party trust acts as a manager or overseer for the property held by the trust. He ensures that all assets are wisely invested, and that the beneficiary only receives money as it is needed, and not for frivolous reasons. He helps the beneficiary get the money he needs, but also keeps payments low enough to avoid compromising state and federal disability benefits. The trustee may also take care of tax payments and other legal obligations related to the trust.