Third-party special needs trusts are established by someone other than the trust’s beneficiary and can be funded using the income and assets of the grantor or other individuals, excluding those of the trust’s beneficiary. Unlike first-party trusts, third-party trusts can be structured to be revocable rather than irrevocable, meaning that the trust can be amended as needed.
The two different types of third-party trusts are testamentary and standalone trusts. Testamentary trusts are created from a Will; in other words, the trust is created after you pass away, so it does not exist prior to that event. In this process, the probate court is heavily involved; it is responsible for setting up the trust, maintaining oversight, and requiring regular accounting. A standalone trust is independent of your Will, meaning it can be created during your lifetime without the need for overreliance on the probate court for oversight.
A testamentary trust almost never makes sense. From the outset of estate planning, it is less expensive to leave the instructions in the Will. But in estate planning, like everything else, you get what you pay for. Although, in theory, a testamentary trust will be created with your wishes in mind, there is a possibility that the trust will not be set up as you initially intended, and you will not be able to correct it. This is why it’s incredibly important that you make sure it is done correctly. Since a testamentary trust goes through probate, you have less control over it; so, why would anyone want a testamentary trust?
There are a few reasons why a testamentary trust may be preferred by an individual. For starters, it appears to be an easier route to take. It is much easier to say “I’ll do it later” than to actually get started on a tedious project. The same theory applies in setting up a testamentary trust because you are not actually setting up the trust when you create your Will and estate plan. Instead, the trust will be created in the future by someone else on your behalf. In addition to the ease of setting up a testamentary trust, it is also more beneficial to some in terms of financial costs. Testamentary trusts are cheaper initially because you are not fully setting up the trust at the immediate moment. However, going through probate is very expensive.
Additionally, testamentary trusts can be problematic if there are multiple people intending to leave the special needs beneficiary money in a trust. If anyone other than yourself leaves money to your loved one, they will need to establish another trust, which means more expenses and additional complications with trust management.
A standalone trust alleviates this burden because you can ask that other individuals name the one standalone trust in their Wills instead of creating their own testamentary trusts. This also allows for more flexibility in trust contributions from friends and family members and reduces the complexity of neurodiverse financial planning. For example, creating one standalone trust that grandparents, aunts, uncles, and others can contribute to at any time is far more streamlined and easier to manage than if four grandparents each created their own testamentary trust, which would result in additional reporting to the probate court, greater taxes, and overall, a greater amount of work.
This factor alone demonstrates how standalone trusts provide a lot more flexibility and control over your intentions for the future. In the long run, they are less expensive especially when you consider how costly probate can be. While it is more work and additional expenses upfront, it is usually worthwhile to set up a standalone trust in which you have more direct control than waiting until after you are gone to start planning for your loved one’s financial future.