Special needs trusts come in three main flavors: first-party special needs trusts, third-party special needs trusts, and pooled trusts. All three trust varieties are designed to manage resources for a person with special needs so that the beneficiary can still qualify for public benefits like Supplemental Security Income (SSI) and Medicaid. 

While first-party special needs trusts and pooled trusts hold funds that belong to the person with special needs, third-party special needs trusts, as the name implies, are funded with assets that never belonged to the trust beneficiary, and they provide several advantages over the other two types of trusts.

Third-party special needs trusts are set up by a donor – the person who contributes the funds to the trust. The donor can be a parent, grandparent, sibling, aunt, uncle, or any other person who wishes to financially assist the special needs individual. These trusts are typically designed as part of the donor's estate plan to receive gifts that can help a family member with special needs and can be established while the donor is living or after a person’s death.

Third-party special needs trusts can be the beneficiaries of life insurance policies, can own real estate or investments and can even receive benefits from retirement accounts (but only place retirement assets in trust after discussing the tax consequences with an attorney with significant tax and estate planning experience). 

There is no limit to the size of the third party trust fund and the funds can be used for almost anything a beneficiary needs to supplement her government benefits. Upon the beneficiary's death, the assets in a third-party special needs trust can pass to the donor's other relatives or anywhere else.

This last factor is one key advantage of a third-party special needs trust: because the funds in the trust never belonged to the beneficiary, the government is not entitled to reimbursement for Medicaid payments made on behalf of the beneficiary upon her death, unlike with a first-party or pooled trust. This allows a careful donor to benefit her family member with special needs while potentially also, after the death of the special needs beneficiary, passing funds to other family members who may or may not have special needs.



Anyone other than the beneficiary can set up a third-party special needs trust. In addition, while the donor is living, funds in the trust usually generate income tax for the donor, not for the beneficiary, avoiding the complication of having to file income tax returns for an otherwise non-taxable beneficiary and then explain them to the Social Security Administration or Medicaid.  After the donor’s death, the third party trust will be required to pay income tax from the trust funds.



Although a third-party special needs trust has many advantages, it is not always a viable option for families of people with special needs.  One of the major drawbacks of a third-party trust is its inability to hold funds belonging to the person with special needs.  So if the trust beneficiary receives an inheritance that wasn't directed into the special needs trust to begin with or if she settles a personal injury case, the funds have to be placed in either a first-party trust or a pooled trust, since even one dollar of a beneficiary's own money could taint an entire third-party trust.

But even with these restrictions, most people trying to help a family member with special needs are going to want to consider a third-party special needs trust to ensure the special needs individual can maintain the same standard of living they enjoyed while their family member was living. If you or someone you love loves an individual with special needs, please contact an attorney with significant tax and estate planning experience to discuss third party special needs trusts in more detail.

Attorney Macrina G. Hjerpe is a partner in the Providence law firm Chace Ruttenberg & Freedman. She practices in the areas of Estate Planning, Probate, Estate Administration, Trust Administration, Trust Litigation, Guardianship, Business Succession Planning, Asset Protection Planning, Elder Law and Estate Litigation.