Third-Party Special Needs Trusts

Written By Ann Hynek

Families caring for a loved one with a disability often face a difficult balancing act: how to provide meaningful financial support without jeopardizing access to essential public benefits. A third-party special needs trust is one of the most effective tools available to solve this problem. When structured correctly, it allows families to enhance quality of life while preserving eligibility for programs like Supplemental Security Income (SSI) and Medicaid.

What is a Third-Party Special Needs Trust?

A third-party special needs trust (SNT) is a legal arrangement created and funded with assets that never belong to the individual with a disability. Typically, these assets come from parents, grandparents, or other family members who want to provide financial support without disqualifying their loved one from needs-based government benefits.

Because the assets in the trust are not considered owned by the beneficiary, they are generally not counted against strict resource limits imposed by programs like SSI and Medicaid.

How it Works

The trust is managed by a trustee, who has full discretion over how and when distributions are made. Trustees can be family members, friends, professional fiduciaries, banks, trust companies, and non-profit organizations. Instead of giving money directly to the beneficiary, the trustee uses trust funds to pay for goods and services that enhance the beneficiary’s life.

These may include:

  • Education and vocational training

  • Therapies not covered by insurance

  • Transportation and travel

  • Personal care services

  • Technology and assistive devices

  • Recreation and social experiences

The key principle is that distributions should supplement, not replace, public benefits.

One more note about trustees: Family members and friends may seem like a good choice, as they’re close to the beneficiary and understand their needs. However, professional trustees are ideally well-versed in public benefits, and are equipped to manage legal and investment complexities.

Why Families Choose a Third-Party SNT

For many families, this type of trust becomes the cornerstone of long-term planning. It addresses several critical concerns:

  • Preserving Benefits Eligibility
    Direct inheritances or financial gifts can easily disqualify a person from SSI or Medicaid. A properly structured trust avoids this risk.

  • Flexibility Over Time
    The trustee can adapt distributions as the beneficiary’s needs change, whether that involves new therapies, housing arrangements, or lifestyle support.

  • Multi-Generational Planning
    Family members can contribute to the trust over time, including through estate plans, life insurance, or lifetime gifts.

  • No Medicaid Payback Requirement
    Unlike first-party special needs trusts, third-party trusts are not subject to Medicaid payback rules after the beneficiary’s death. Remaining assets can pass to other family members or designated heirs.

Funding the Trust

A third-party SNT can be funded in several ways:

  • Bequests through a will or revocable living trust

  • Life insurance policies

  • Retirement accounts (with careful beneficiary designation planning)

  • Lifetime gifts from family members

Many families start by creating the trust as part of their estate plan and fund it later, often through life insurance or upon death.

Third-Party vs. First-Party Trusts

It’s important to distinguish third-party SNTs from first-party (or self-settled) trusts. First-party trusts are funded with the beneficiary’s own assets, often from inheritances received outright or legal settlements. These trusts come with stricter rules, including mandatory Medicaid payback provisions.

Third-party trusts, by contrast, offer greater flexibility and are generally preferred when planning proactively.

Common Mistakes to Avoid

Even well-intentioned planning can go sideways without proper structure. Some common pitfalls include:

  • Leaving assets directly to the individual instead of the trust

  • Naming the individual with a disability as a direct beneficiary on retirement accounts or life insurance

  • Choosing a trustee without sufficient knowledge or support

  • Failing to coordinate the trust with the broader financial and life plan

Each of these mistakes can have significant consequences, particularly when it comes to benefits eligibility.

Integrating the Trust into a Broader Plan

A third-party special needs trust is not a standalone solution. It works best when integrated into a comprehensive plan that includes:

  • Government benefits strategy (SSI, SSDI, Medicaid waivers)

  • ABLE account coordination

  • Estate planning across generations

  • Housing and care planning

  • Lifetime cost projections

This “two-lifetime” approach ensures that both the caregiver’s and the beneficiary’s needs are addressed over time.

At its core, a third-party special needs trust is about more than protecting assets. It’s about creating stability, flexibility, and dignity for a loved one’s future.

When thoughtfully designed and properly managed, it gives families something that is otherwise hard to come by in this space: confidence that financial resources will be there to support a meaningful life, without compromising access to the systems that make that life possible.

This communication contains general information that is not suitable for everyone and was prepared for informational purposes only.  Nothing contained herein should not be construed as a solicitation to buy or sell any security or as an offer to provide investment advice. Hestia Wealth & Wellness, LLC is a registered investment adviser. For additional information about Hestia Wealth & Wellness, LLC, including its services and fees, send for the firm’s disclosure brochure using the contact information contained herein or visit advisorinfo.sec.gov.
Ann Hynek
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First-Party Special Needs Trusts
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