A special needs trust (SNT) holds assets for a person with disabilities without disqualifying them from means-tested public benefits such as SSI and Medicaid. The critical distinction is the source of funds: a first-party SNT holds the beneficiary's own assets and carries a Medicaid payback; a third-party SNT holds someone else's assets and does not.
- First-party / self-settled (42 U.S.C. 1396p(d)(4)(A))
- Holds the beneficiary's own assets (e.g., a personal-injury recovery or inheritance). Must be for a beneficiary under 65 at funding, established by the individual, a parent, grandparent, guardian, or court, and include a Medicaid payback at death.
- Pooled trust (d4C)
- Managed by a nonprofit with separate sub-accounts; available regardless of age in many states; remaining funds are either retained by the nonprofit or subject to payback.
- Third-party SNT
- Funded with a family member's assets (typically via the estate plan). No payback — remainder can pass to other family beneficiaries. The vehicle of choice for parents planning for a child with disabilities.
Caution
Never leave assets outright, or via a general support trust, to a beneficiary receiving means-tested benefits — it can terminate SSI/Medicaid eligibility. Direct inheritances and gifts to a third-party SNT.
- Distributions should supplement, not supplant, public benefits; give the trustee sole, absolute discretion and avoid support-standard language that makes assets 'available'.
- Cash to the beneficiary is treated as income; direct third-party payments for goods and services are preferable. Payments for food or shelter can reduce SSI under the in-kind support and maintenance (ISM) rules — budget deliberately.
- First-party SNTs require careful reporting and the state Medicaid payback at death before any remainder distribution.
- Coordinate with an ABLE account (up to the annual contribution limit) for beneficiary-controlled spending on qualified disability expenses.
Key takeaways
- Match structure to funding source: first-party (d4A) and pooled (d4C) trusts carry Medicaid payback; third-party SNTs do not.
- Use sole-discretion, supplemental-needs language — never a support standard that makes assets 'available'.
- Manage ISM rules and prefer direct third-party payments; pair with an ABLE account.
- Redirect all inheritances and gifts for the beneficiary into a third-party SNT.
Authorities
- 42 U.S.C. 1396p(d)(4)(A) and (C); 42 U.S.C. 1382 (SSI); POMS SI 01120.200
- Special Needs Trust Fairness Act of 2016 — Allows competent individuals to self-settle a d4A trust.
- IRC 529A (ABLE accounts)