If you’ve been researching Special Needs Trusts (SNTs), you’ve likely seen the terms “first-party” and “third-party” used — sometimes without much explanation. The distinction matters enormously, especially when it comes to Medicaid payback: whether the state can recoup its costs from trust assets after the beneficiary dies.
This guide explains both trust types, the situations each one addresses, and why getting this distinction right matters for long-term planning.
The core difference: whose money is it?
The distinction comes down to one question: whose money funded the trust?
A first-party SNT is funded with assets that belonged to the beneficiary. A third-party SNT is funded with assets that belong to someone else — typically a parent, grandparent, or other family member.
That one difference drives almost everything else about how these two trust types work.
First-party Special Needs Trusts
What they are
A first-party SNT (also called a d(4)(A) trust, named for the section of federal law that authorizes it, or a “self-settled trust”) holds assets that the person with a disability already owned. Common sources include:
- A personal injury lawsuit settlement
- An inheritance received directly by the person
- Savings or other assets the person accumulated before benefits began
- Retroactive SSDI or SSI back payments
When these assets would otherwise disqualify the person from SSI or Medicaid — because they push countable assets above $2,000 — a first-party SNT can hold them without that effect.
Who can establish one
Federal law is specific here: a first-party SNT must be established by a parent, grandparent, legal guardian, or court. The beneficiary cannot establish their own first-party SNT. This rule exists to prevent people from simply sheltering their own assets to qualify for benefits.
The beneficiary must also be under age 65 when the trust is created. First-party SNTs are not available to people who are 65 or older.
The Medicaid payback requirement
This is the defining feature of first-party SNTs: Medicaid payback is mandatory.
When the beneficiary dies, the trust must first repay the state for all Medicaid benefits paid on the beneficiary’s behalf during their lifetime — at the full Medicaid rate. Only after that debt is settled can any remaining assets pass to heirs or other named beneficiaries.
If the beneficiary received substantial Medicaid services over many years — including long-term care — the payback obligation can be very large. In some cases, it consumes all remaining trust assets.
This does not make first-party SNTs bad tools. For someone who has received a large settlement and would otherwise lose all their benefits, a first-party SNT is often the only viable option. But Medicaid payback is a real cost that should be understood going in.
Pooled first-party trusts
An alternative to a standalone first-party SNT is a pooled trust — a first-party trust administered by a nonprofit organization that pools investments across many beneficiaries. Pooled trusts can be cost-effective for smaller amounts and don’t require hiring your own trustee or attorney for the same level of ongoing administration.
Pooled trusts also have Medicaid payback requirements, though some nonprofit pooled trusts are permitted to retain a portion of remaining assets for the nonprofit’s charitable purposes — the specifics vary by state and trust document.
Third-party Special Needs Trusts
What they are
A third-party SNT holds assets contributed by someone other than the beneficiary. The classic example: parents who want to leave money for their disabled child in a way that supplements — rather than replaces — government benefits.
Because the beneficiary never owned the money going in, the trust is not considered the beneficiary’s asset for SSI or Medicaid purposes. And crucially, because the beneficiary never owned the funds, there is no Medicaid payback when they die.
Who can establish one
Anyone can establish a third-party SNT — parents, grandparents, siblings, extended family, friends, or anyone who wants to benefit the person with a disability. It can be created during the grantor’s lifetime (a “living trust”) or through a will (a “testamentary trust”) to take effect upon death.
There is no age restriction for third-party SNTs. They can be established at any point, and assets can be added over time by multiple contributors.
No Medicaid payback
This is the defining advantage of a third-party SNT: when the beneficiary dies, Medicaid does not have a claim on trust assets. Remaining funds can pass to other named beneficiaries — siblings, other family members, charitable organizations — according to the trust document.
This makes third-party SNTs the preferred tool for estate planning. A parent who leaves assets directly to a disabled child risks disqualifying them from benefits. Routing those same assets through a third-party SNT protects eligibility and allows assets to eventually pass to other family members if the beneficiary doesn’t exhaust the trust.
Life insurance and third-party SNTs
A common structure: a parent purchases a life insurance policy and names a third-party SNT (not the disabled child directly) as the beneficiary. When the parent dies, the insurance payout goes into the trust. The trustee then manages those funds for the child’s benefit throughout their life, without creating a Medicaid payback obligation.
This is one of the most cost-effective ways to fund a third-party SNT, particularly for families who cannot contribute large sums during their lifetimes.
Side-by-side comparison
| First-Party SNT | Third-Party SNT | |
|---|---|---|
| Funded with | Beneficiary’s own assets | Family/third-party assets |
| Who can establish it | Parent, grandparent, guardian, or court | Anyone |
| Age limit | Must be under 65 at creation | No age limit |
| Medicaid payback | Yes — required at death | No |
| Assets pass to heirs | Only after Medicaid payback | Yes, directly |
| Best for | Protecting a settlement or inheritance | Family estate planning |
Which type applies to your situation?
A first-party SNT is the right tool when:
- A person with a disability has received (or is about to receive) a large sum in their own name — a lawsuit settlement, a direct inheritance, or accumulated assets
- The amount would disqualify them from SSI or Medicaid if held as a personal asset
- There is no alternative (the money is already theirs)
A third-party SNT is the right tool when:
- Family members are planning their estate and want to leave assets for a disabled loved one
- A parent is setting up life insurance or revising a will
- The goal is to preserve both the beneficiary’s benefits and the ability to pass assets to other heirs
In many families, both types are relevant at different points. A parent uses a third-party SNT in their estate plan; the disabled adult also has a first-party SNT (or a pooled trust) funded by a prior settlement.
What this means for you
- If you are a parent planning your will or estate, do not leave assets directly to a disabled family member. Leave them to a third-party SNT. Talk to a special needs attorney before finalizing any estate documents.
- If your disabled family member receives a settlement, inheritance, or other windfall in their own name, a first-party SNT may be needed. Get legal help before the money is spent.
- Third-party SNTs have no Medicaid payback — this is a significant advantage for long-term planning. First-party SNTs have mandatory payback that can consume remaining assets.
- Pooled trusts are a lower-cost alternative to standalone SNTs for both trust types. They are especially worth considering when the amount to protect is under $50,000–$100,000.
- An SNT and an ABLE account can work together. The SNT holds and protects large assets; the ABLE account provides day-to-day spending flexibility under the account holder’s own control. See our full comparison of ABLE accounts vs. SNTs.
This content is for educational purposes only and does not constitute legal, tax, or financial advice. Consult a qualified professional for your specific situation.