Do You Need a First-Party or a Third-Party Special Needs Trust?

Two people with the same diagnosis can need entirely different legal tools. Special needs trusts, used to protect eligibility for government benefits, are a prime example. To the untrained eye, a first-party trust and a third-party trust might seem interchangeable. Both protect assets and keep Medicaid and SSI in play, but their structure and purpose are not the same.

In fact, using the wrong one can create problems that won’t show up until it’s too late to fix them.

First-Party Special Needs Trusts

A first-party trust uses the beneficiary’s own assets. That money might come from a settlement, inheritance, or personal savings—but it can’t sit in a regular account. SSI and Medicaid have strict asset limits. Anything over $2,000? That’s a problem. However, transferring those funds directly into a first-party trust solves it.

Here’s the catch: the government sets the terms. A first-party trust must be created by a parent, grandparent, legal guardian, or the court—not the person who owns the money, not even if they’re a competent adult. The person setting it up needs to do so before the beneficiary turns 65.

When that person passes away, the government gets the first claim. The trust must repay Medicaid for benefits used. Only after that can the rest go to family or friends if anything is left.

Third-Party Special Needs Trusts

Third-party trusts are built differently. The money doesn’t belong to the beneficiary. It comes from someone else, usually a parent or relative, who wants to provide support without interfering with government benefits. This kind of trust is typically folded into an estate plan and can be created long before it’s needed.

Age isn’t a factor here. The trust can benefit someone of any age. And unlike a first-party trust, there’s no Medicaid payback rule. When the beneficiary dies, the trust creator decides where the remaining assets go. That control makes a big difference.

If a parent wants to ensure funds support a disabled child for life and then go to siblings, a charity, or anywhere else, a third-party trust is the tool for that.

Choose Based on Ownership, Not Emotion

These trusts require thoughtful planning. You have to consider who owns the money and what rules come with that ownership. If the assets started in the beneficiary’s hands, a first-party trust is required. If the money is coming from someone else, a third-party trust keeps more options open.

Mixing these up isn’t just a technical error. It can cost families thousands and restrict their ability to make decisions later.

Start With the Right Structure

If you’re planning for a loved one with disabilities, the best time to act is before the assets become an issue. A properly structured trust keeps public benefits safe while giving families more control and peace of mind.

Both trust types serve their purpose. However, that purpose only matters when matched to the right situation. It’s not a one-size-fits-all tool.

Want to Set Up a Special Needs Trust?



McGrath Law Office, P.C. helps families protect what matters. We make legal conversations make sense. Call our Mackinaw office at 309-359-3461 or our Morton office at 309-266-6211 to start the conversation.