First-Party vs. Third-Party Special Needs Trusts Explained

If you care for a family member with a disability, you have probably been told what is best for them by plenty of people who do not live your life. You are the expert on your family, and our job is to explain the rules clearly. The first-party vs. third-party special needs trust question sounds like lawyer trivia, but it decides who can create the trust, what age limits apply, and what happens to the money when your loved one passes away. Both trusts hold money and property for a person with a disability without exceeding the $2,000 resource limit that Supplemental Security Income (SSI) and Utah’s disability Medicaid programs enforce under Utah Admin. Code R414-305. Code R414-305. The difference is where the money came from.

The One Question That Decides Everything

Whose money is it? That is the entire test. If the money belongs to the person with the disability, the law treats the trust as first-party, also called a self-settled special needs trust or a (d)(4)(A) trust after the federal section that created it, 42 U.S.C. § 1396p(d)(4)(A). If the money belongs to someone else and is given for that person’s benefit, the trust is a third-party. Both types of trusts allow a trustee to use trust assets for the beneficiary’s benefit without replacing certain benefits provided through SSI and Medicaid. The key differences come down to who provided the money, when the trust was created, and what happens to the remaining assets after the beneficiary dies.

Third-Party Special Needs Trusts

A third-party special needs trust can allow parents to leave assets for a child without leaving those assets directly to the child. It allows an inheritance or gift to be held in trust for your child instead of being placed directly in their name. Because the assets belong to the trust rather than the beneficiary, they generally do not count toward the beneficiary’s resource limit, and the trust does not have the same Medicaid payback requirement as a first-party trust.

Funded by Parents, Grandparents, Life Insurance, and Inheritances

Any source other than the beneficiary can fund this trust. Parents name it as the beneficiary of a life insurance policy or retirement account, grandparents leave it a share of their estate, and siblings or family friends can contribute. The one rule that matters is that none of the money can come from the person with the disability, because even a small deposit turns that portion into a first-party trust with a payback obligation.

No Medicaid Payback

When the beneficiary passes away, whatever remains in a third-party special needs trust goes wherever you said it should go, such as your other children, a grandchild, or a charity. The Utah Office of Recovery Services (ORS) has no claim on it, because the state’s recovery rights under Utah Code § 26B-3-1013 reach the recipient’s own estate and trusts the recipient funded, not money that was always someone else’s.

Usually Built Inside a Parent’s Living Trust

For many families, a third-party special needs trust can be created as a sub-trust within a parent’s revocable living trust rather than as a standalone document. The living trust can provide that, when you pass away, your child’s inheritance goes into a special needs sub-trust with its own trustee and rules for how the assets can be used. Our page on special needs trusts for loved ones walks through how the sub-trust is drafted, and our wills versus trusts page explains why a will alone will not get you there. A will is a letter to the probate judge, and it is designed for probate rather than around it.

First-Party, Self-Settled, and (d)(4)(A) Special Needs Trusts

A first-party special needs trust is the tool for money that already belongs to the person with the disability. Utah adopted the federal framework at Utah Code § 26B-6-412, which calls it a discretionary trust for an individual with a disability and directs every state agency, including the Division of Services for People with Disabilities (DSPD), to disregard it as a resource. It can protect those assets while allowing the beneficiary to maintain eligibility for certain benefits, but it comes with conditions that do not apply to a third-party trust.

Funded With the Beneficiary’s Own Money

The three most common sources we see in Utah County are personal injury settlements, lump-sum back pay from Social Security, and inheritances that a relative left directly to the person instead of to a trust. Injury money carries an extra step. Under Utah Code § 26B-3-1011, a Medicaid recipient may not settle an injury claim without the department’s written consent, and ORS recovers what Medicaid paid from the settlement before the remainder reaches the trust. When a settlement is structured as an annuity, the future payments need to be directed into the trust from the start, so the trust, the ORS lien, and the settlement paperwork all have to line up.

The Under-65 Rule and Who Can Establish It

Utah Code § 26B-6-412 requires the beneficiary to be under 65 and disabled as defined in federal law when the trust is created, and it lists who may establish it. The individual can do it personally; a parent or grandparent can, a legal guardian can, or a court can. Self-establishment is relatively new. Before the federal Special Needs Trust Fairness Act took effect on December 13, 2016, a mentally capable adult still needed a parent, grandparent, guardian, or judge to sign, and Utah’s Medicaid policy follows that date. When no parent or grandparent is living, and there is no guardian, the remaining path is a petition to the district court. For Utah County families, that means the Fourth District Court in Provo, and Juab County families petition the Fourth District Court in Nephi.

Medicaid Payback at Death

Every first-party trust must state that when the beneficiary dies, the state receives whatever remains, up to the total Medicaid paid on the beneficiary’s behalf over their lifetime. In practice, the trustee notifies Utah Medicaid, and the Bureau of Medical Collections at ORS calculates and collects the claim. This is broader than ordinary Medicaid estate recovery, which only reaches care provided after age 55, because a payback trust repays every Medicaid dollar at any age. If the trust spent everything on the beneficiary during life, there is nothing to repay, and anything left after the state is paid passes to whoever the document names. The Medicaid payback requirement is one of the tradeoffs that comes with using a first-party trust to protect the beneficiary’s eligibility for certain benefits.

Side-by-Side Comparison

The table below puts the first-party vs. third-party special needs trust rules next to each other so you can see which column describes your situation.

The Most Common Mistake: Leaving Money Directly to a Disabled Child

This is the situation we see most often, and it almost never comes from carelessness. A grandmother wants her grandson taken care of, so she names him in her will or on a bank account. The decision usually comes from a good place. The problem is that leaving the money directly to your child can affect their eligibility for benefits. The moment the money is his, it counts against the $2,000 limit, his SSI and Medicaid can stop, and the only way to protect what he received is a first-party trust with a payback clause and an age limit the family never needed. Planning for this in advance can help avoid the problem. Instead of leaving the gift directly to the beneficiary, relatives can direct it to a third-party special needs trust.

Which One Do You Need? Three Scenarios

Imagine you are a parent in Lehi or Santaquin planning your estate. Your daughter receives SSI and Medicaid, so you want her inheritance to go into a third-party special needs trust as part of your estate plan.

Now imagine your adult son was injured in a car accident and is receiving a settlement. Because that money belongs to him, a first-party special needs trust may be appropriate. The ORS lien must be addressed, and the trust must be established while he is under 65.

In another situation, a grandparent may pass away and leave money directly to a grandchild who receives Medicaid. Because that inheritance belongs to the beneficiary, it may need to go into a first-party trust. The family can also update its estate plan so future gifts go to a third-party special needs trust instead.

It is common for a family to use both types of trusts at different points. Many Utah families end up with both trusts over time, and that is a normal outcome rather than a failure.

We Never Charge to Chat

If you have questions about which type of trust fits your situation, you can talk with our team at no cost. We offer phone and in-office consultations, and our pricing is upfront and flat. Bring the settlement letter or the will that named your child directly, and we will walk through it together. Reach the Lehi office at (801) 874-5644 or the Santaquin office at (801) 441-2881.

Frequently Asked Questions

Can a first-party trust be converted to a third-party trust?

No. The classification follows the source of the money and cannot be changed by retitling or amending the trust. Money that belonged to the beneficiary stays subject to the payback rule for as long as it exists, and the practical fix is to direct all future gifts and inheritances to a separate third-party trust.

Who can set up a first-party special needs trust?

Under Utah Code § 26B-6-412 and the federal statute, the beneficiary, a parent, a grandparent, a legal guardian, or a court may establish it. A mentally capable adult has been able to sign their own since December 13, 2016. When none of those people are available, a petition to the district court, such as the Fourth District Court in Provo, creates the trust.

Does a third-party special needs trust have to pay back Medicaid?

No. The money never belonged to the beneficiary, so Utah’s recovery statutes do not reach it, and remaining funds pass to the people the trust names. The one exception is any portion funded with the beneficiary’s own money, which is treated as first-party and owes payback.

Can a first-party SNT be created after age 65?

No. Both federal law and Utah Code § 26B-6-412 require the beneficiary to be under 65 when the trust is created. After 65, transfers into a pooled trust are treated in Utah as transfers for less than fair market value that can trigger a Medicaid penalty period, so the options narrow and deserve a careful conversation before any money moves.