Third-Party vs. First-Party (Self-Settled) Special Needs Trusts

Special Needs Trusts allow individuals with disabilities to qualify for needs-based government programs while maintaining access to additional assets which can be used to pay for expenses that are not covered by those programs. Special Needs Trusts generally fall into one of two categories: first-party (self-settled) or third-party.  A first-party (Self-settled) Special Needs Trust is funded with the disabled person’s own assets such as an inheritance or a personal injury settlement. A third party Special Needs Trust is established by and funded with assets belonging to someone other than the beneficiary.

The effect of a particular Special Needs Trust will differ depending on the type of trust. Here are some key differences:

First-party (self-settled) Special Needs Trust:

  • Must include a provision stating that upon the beneficiary’s death, Medicaid will be reimbursed for the cost of the benefits received by the beneficiary (called a “Medicaid Payback”);
  • Usually irrevocable;
  • Payments the trustee make must be for the “sole benefit” of the beneficiary; and
  • Normally not an option for disabled individuals over the age of 65.

Third-party Special Needs Trust:

  • Can pay for housing and food for the beneficiary although the expenditures may reduce the amount of the beneficiary’s SSI benefit;
  • No “Medicaid Payback” — Can be distributed to charities or other family members upon the death of the disabled beneficiary; and
  • Can be revocable.

Determining which type of Special Needs Trust to use to secure the future of a disabled person is complex. If you would like to talk with an attorney who has years of experience helping Fairfax families, contact our office at (571) 328-5795 and schedule an appointment with Attorney Sheri Abrams.