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Third-Party Special Needs Trust
Legal/Rights§ 01 — Definition
A third-party special needs trust is funded with someone else's money — parents, grandparents, any relative or friend — and never with assets that belonged to the beneficiary. That single fact is what makes it the strongest planning tool available to a family: because the beneficiary never owned the funds, federal law imposes no Medicaid payback, and the parents name who receives whatever is left when the beneficiary dies, usually siblings. It contrasts with a first-party (or self-settled) trust under 42 U.S.C. section 1396p(d)(4)(A), which holds the beneficiary's own money — an inheritance received outright, a lawsuit settlement, back-owed benefits — and MUST repay the state Medicaid agency from the remainder before anyone else inherits. A third-party trust also has a second advantage: it exists now, has a name and a tax ID, and can receive gifts from anyone at any time, including grandparents who die before the parents.
§ 02 — Why it matters for benefits
The difference between a third-party and a first-party trust is often the entire remainder of the estate. The same dollars, routed one way, pass to siblings; routed the other way, they go back to the state. Which one applies is decided years earlier, by whether the trust existed before the money arrived.
