The general purpose of a special needs trust is to provide supplemental assistance and care for an individual who qualifies for needs-based government benefits without disqualifying them from eligibility to receive such government benefits.

A special needs trust can be created directly, as an irrevocable trust, or indirectly through a revocable living trust or as a testamentary trust created through a last will and testament.

The two main types of special needs trusts are (1) the self-settled trust (also known as a first-party trust); and (2) the third-party trust.

A “Self-settled” special needs trust is established by the beneficiary or by someone acting on the beneficiary’s behalf using the beneficiary’s funds (usually the accumulation of personal assets, an inheritance already received by the individual, or most commonly, proceeds from a lawsuit). Self-settled trusts must include a provision directing the trustee to pay back Medicaid for anything it spent on the beneficiary. The repayment comes from any assets remaining in the trust upon the death of the beneficiary. The trustee is not personally liable for repayment of the benefits.

A “third-party” special needs trust is set up by someone, like a parent or grandparent, using assets that never belonged to the beneficiary (i.e., a future inheritance). A third-party special needs trust does NOT have a payback requirement so that any amount remaining in a third-party special needs trust upon the death of the beneficiary may be distributed to remainder beneficiaries (i.e., other children or grandchildren).