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Tuesday, August 26, 2014

Self-Settled or Third Party Special Needs Trusts, which is Best for Me?

Special Needs Trusts are designed to provide additional financial support to a person with a mental or physical disability. There are three basic categories of special needs trusts: Self-Settled, Pooled, or Third Party special needs trusts. This  article will explore the features of self-settled and third party trusts; which comprise the majority of special needs trusts drafted today. Pooled trusts are not commonly used as they involve the pooling of assets from multiple trusts for investment purposes and do not always qualify as a special needs trust.


Special needs trusts provide you the option of utilizing them in conjunction with or in lieu of government benefits to provide for the needs of your disabled loved one. If you choose to use a special needs trust in conjunction with government benefits, a vital detail to remember is that the trust should “supplement” and not “supplant” those benefits.


Self-Settled Trust: Self-Settled trusts are a product of federal law 42 U.S.C. § 1396p (4)(d)(A), which is sometimes known as either a “(4)(d)(A)” or “payback” trust. The main features of a self-settled trust are:

  • The trust can only be established by a parent, grandparent, guardian or court order;
  • The trust is funded only with the assets of the disabled person;
  • The beneficiary can only be the disabled person;
  • The trust must be set up only as an inter vivos trust (during the life of the donor);
  • The trust must only be irrevocable; and
  • When the disabled person passes away, any unused assets remaining in the trust must be used to “payback” the government for any Medicaid benefits the disabled person received during their life.

While the self-settled trust is appropriate in certain situations, its lack of flexibility can be a drawback that would not make it an applicable choice for some families.


Third Party Trust: The third party trust is most commonly used by parents who are establishing a means to provide supplemental financial support to a child with a special need. The key features of a third party trust are:

  • The trust can be established by anyone other than the disabled person;
  • The trust can be funded with the assets of anyone other than the disabled person;
  • The beneficiary of the trust can be the disabled person, any nondisabled person, or a charity;
  • The trust can be set up as an inter vivos trust or as a testamentary trust (at the death of the donor);
  • The trust can be revocable or irrevocable; and
  • When the disabled person passes away, any unused assets remaining in the trust do not refund the state agency for benefits received and pass to other beneficiaries according to the trust language.


Either trust, if properly planned and drafted will serve the function of providing supplemental financial support for a loved one with a special need; the choice on which to use should be based on your own personal situation and needs.

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