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Trust Law/Level IV · Trusts that care/4.1 Disability/Lesson 2

Special needs trusts: first-party and third-party

How first-party and third-party special needs trusts differ, and what ‘supplemental, not supplanting’ means in practice.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Third-party SNT in a parent’s will or living trust: no federal payback, so the remainder goes to siblings or others named. It stays outside SSI resources only if the beneficiary cannot revoke it or direct its use for support.
  2. Have the trustee pay providers directly: cash to the beneficiary is unearned income, but third-party payments for items other than food or shelter generally are not. Trust-paid rent or utilities cut SSI by at most $351.33 a month in 2026.
  3. A non-grantor SNT that is a qualified disability trust under IRC §642(b)(2)(C) deducts a $5,300 exemption for 2026, with no phaseout. Form 1041 is still due once the trust’s gross income reaches $600.
  4. For the person’s own money, a first-party (d)(4)(A) trust can be signed by the beneficiary personally since 13 December 2016, avoiding a court petition. The catch: under 65 when funded, and the state(s) are repaid at death.
  5. Gift and estate tax rarely bite: the 2026 basic exclusion is $15,000,000 per person. Gifts to a trust are usually future interests, so a Form 709 return can still be required even when no tax is due.

MaterialsA copy of any existing trust documents or willsYour state Medicaid agency’s information on trusts and estate recoveryA list of the beneficiary’s current benefits (for example SSI, Medicaid, SSDI), from their award letters

Wonder

  1. If I leave money for my disabled child, how can it be held so it does not count against their benefits?
  2. Can a trust pay for rent or food without affecting SSI?
  3. When does a trust have to repay Medicaid?

Explore

  1. In the United States, a special or supplemental needs trust (SNT) holds money for a disabled person in a way designed not to count against means-tested benefits such as Supplemental Security Income (SSI) and Medicaid. The guiding idea is ‘supplemental, not supplanting’: the trust pays for things benefits do not cover, such as education, therapies, equipment, travel or a phone, rather than replacing them. Usually the trustee pays providers directly; cash handed to the beneficiary generally counts as income for SSI and can reduce the payment.
  2. There are two main kinds. A first-party (self-settled) trust holds the disabled person’s own money, such as an inheritance received outright, back benefits or a personal injury settlement. Under 42 U.S.C. §1396p(d)(4)(A), the person must be disabled and under 65 when it is set up, and it can be established by the individual, a parent, grandparent, legal guardian or a court. Before the 21st Century Cures Act (signed 13 December 2016), the individual could not set up their own; SSA applies the change to trusts established on or after that date.
  3. A first-party trust must provide that, when the beneficiary dies, the state is repaid from what remains, up to the total Medicaid paid for the beneficiary; if more than one state provided Medicaid, each must be covered. SSA limits what may be paid before that repayment to items such as taxes due because of the death and reasonable fees for winding up the trust; funeral costs, other debts and payments to other heirs may not come first. The repayment terms must be written into the trust document itself; a label alone is not enough.
  4. A third-party trust is funded by someone else, such as parents, grandparents or other relatives, often through a will or a living trust. The federal payback rule does not apply to it, so when the beneficiary dies, what remains can go to the people the creator named, such as siblings. For SSI, SSA generally does not count such a trust as the beneficiary’s resource if the beneficiary cannot revoke it or direct its use for their own support. This is the kind parents usually use; the (d)(4)(A) rules apply to the disabled person’s own money.
  5. Federal law does not list a spendthrift clause as a requirement, but the trust’s terms still matter. A trust the beneficiary can revoke, or use for their own support, generally counts as their resource for SSI. A trust its creator can revoke is still the creator’s property. SSA reviews first-party trusts closely, and some terms, such as early termination clauses that pay leftovers to the beneficiary, can make one countable. Many SNTs are irrevocable and include spendthrift language, but the exact requirements come from SSA policy and state rules.
  6. Food and shelter need care. Since 30 September 2024, under an SSA rule, food a trust or anyone else provides is no longer counted as in-kind support and maintenance (ISM). Shelter still counts: if a trust pays rent, mortgage, property tax or utilities, SSI can be reduced, but only up to a cap of one-third of the federal benefit rate plus $20, not dollar for dollar. Some families accept that trade-off. Age matters too: additions to a (d)(4)(A) trust after the beneficiary turns 65 generally lose its exception; pooled trusts are covered next.

Key facts

  • A first-party SNT under 42 U.S.C. §1396p(d)(4)(A) holds the disabled person’s own assets and must be set up while the person is under 65.
  • Since the 21st Century Cures Act (13 December 2016), the individual can establish their own (d)(4)(A) trust, as can a parent, grandparent, legal guardian or court.
  • A (d)(4)(A) trust must repay the state(s) from what remains at death, up to the total Medicaid paid for the beneficiary.
  • A third-party SNT is funded by others and has no federal payback requirement; what remains goes to whoever the creator named.
  • Since 30 September 2024, SSA no longer counts food as in-kind support and maintenance; shelter costs a trust pays can still reduce SSI, up to a cap.
  • Additions to a (d)(4)(A) trust after the beneficiary turns 65 generally lose its exception.

Exercise nine, six, three, one

9CollectList up to 9 needs or wishes your family member has that their current benefits do not cover (some people have fewer), such as a computer, a trip, a hobby class, therapy or equipment.
6ClusterSort them into 6 categories: cash payments, shelter costs, personal care, education and training, recreation, and equipment or other purchases.
3DistillReduce the 6 categories to 3 groups: items a trustee could usually pay a provider for directly, items that may affect SSI (such as cash or shelter), and items to ask SSA or a benefits planner about.
1CrystallizeWrite 1 sentence naming where the money you are thinking about comes from (the disabled person’s own or someone else’s) and which set of trust rules would therefore apply.

Fact check

Dates, figures and claims checked against the published sources listed below.

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