Special Needs Trusts: First-Party vs. Third-Party Trusts

The special needs trust you make to help loved one will not protect that person's own assets.

By , Attorney
Updated 7/05/2022

Special needs trusts are used to improve the lives of people with special needs. If people with special needs own too much property, they become ineligible for government benefits. Special needs trust help people with special needs avoid this problem because the trust owns the property instead of the person with special needs. (Learn more about Special Needs Trusts on Nolo.com.)

A special needs trust you create and fund with your own property to help a loved one with special needs is called a third-party trust, and it will not protect any property that person receives directly through inheritance, a court settlement, insurance, or any other payment. Only a first-party special needs trust can protect the property of a person with special needs.

Third-Party Special Needs Trusts

A third-party special needs trust is the typical type of trust used to benefit a person with special needs. Commonly, family members create a trust for a loved one with special needs and leave property in the trust through their estate plan (their will, trust, life insurance, or other beneficiary designation). Learn more about How to Leave Property to a Special Needs Trust.

The trustee of the trust uses trust funds to support the person with special needs. When doing so, the trustee must carefully abide by trust requirements – trust funds cannot be used for anything that would make the beneficiary ineligible for benefits, such as cash gifts. But the trustee may use trust funds for many other things, including classes, hobbies, luxury items, personal services, furniture, professional fees, computer equipment, pet supplies, transportation, and vacations. The beneficiary never owns the property in the trust and does not have direct access to trust funds.

First-Party Special Needs Trusts

Unlike third-party trusts, which are funded by property owned by someone other the beneficiary, a first-party trust is used for the property of person with special needs. A person with special needs might acquire property though a:

  • personal injury award
  • retirement plan
  • divorce settlement
  • life insurance policy, or
  • inheritance.

But if a person with special needs owns any significant amount of property outright, it will affect eligibility for government benefits. So instead of owning the property directly, the person with special needs puts the property into a first-party trust. If the trust is created properly, adhering to strict government rules, those assets can be used to benefit the person with special needs without jeopardizing eligibility for government benefits.

There are several variations of this type of trust, including a "payback special needs trust," "litigation special needs trust," "Miller Trust," "pooled SNT," "(d)(4)(A) SNT," or "(d)(4)(C) SNT." All of these trusts are subject to specific federal and state rules designed to keep applicants from sheltering their property in order to meet program eligibility requirements. They are also generally subject to "payback" rules that require that the state be reimbursed for medical expenses after the trust beneficiary dies. Because each state has very specific rules that constantly change, to create a first-party trust, you'll need the help of a lawyer in your state who has experience with first-party special needs planning.

More About Special Needs Trusts

Learn more about how thrid-party special needs trusts work in the Special Needs Trusts section of Nolo.com. Also, this article was excerpted in part from Special Needs Trusts, by Steven Elias and Kevin Urbatsch (Nolo), which provides all of the information and forms you need to create your own third-party special needs trust without the help of a lawyer.

If you want to learn more about first-party special needs trusts, see our article on using a special needs trusts for your own assets. Or, find an estate planning lawyer with the experience you need.

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