First Party and Third Party- The 2 Types of Special Needs Trusts

A Special Needs Trust (“SNT”) or Supplemental Needs Trust is a certain type of trust which can be used for goods and services that governmental programs will not cover.  The SNT must have special language within the trust such as: “This trust shall be used to supplement and not supplant governmental programs”.  Having such necessary language, the assets in the trust are not counted against the special needs beneficiary as an asset in determining eligibility for governmental programs such as Medicaid and Supplemental Security Income (SSI).

There are two types of SNTs.  The First Party SNT is funded with the special needs person’s own funds.  For instance, if a person with a disability is awarded monies from a settlement from an auto -mobile accident, those funds can be placed in a First Party SNT to preserve the eligibility for SSI and/or Medicaid.  The same process can be used for when a special needs person inherits a sum of money outright.

There is one disadvantage with the First Party SNT.  When the beneficiary dies, Medicaid will send a bill to the Trust for the monies spent by that program during her life.  The trust must pay back Medicaid the amount of the bill. However, if the trust assets are less than the Medicaid charge, Medicaid will absorb the balance of its bill.  If there is a balance after paying the Medicaid bill, the proceeds may be distributed to family or anyone who is a distributee of the Trust.

Unlike the First Party SNT, the Third Party SNT is funded with monies from a third party source, such as parents, grandparents or other persons.  For example, parents of a special needs child may include in their Will or Trust that a percentage of their assets shall be distributed to the Third Party SNT.  The same procedure can be used for IRAs, Life Insurance or other assets that have beneficiary designations.  But remember, the beneficiary of these assets should be the SNT itself and not the person with a disability.

Unlike the First Party SNT, the Third Party SNT does not pay back Medicaid upon the beneficiary’s death.  The balance within the SNT is distributed directly to those persons or entities named in the document.


Bill Wilson concentrates in Estate Planning for Special Needs Families and Elder Law.  He can be reached at 708-482-7090 or at