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Explaining Third-Party Special Needs Trusts

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Third-party special needs trusts

What is the difference between a third-party special needs trust and a self-settled trust? The distinction can be way more confusing than it ought to be. The trusts are similar in a number of ways, but there are important differences.

A few months ago, we explained self-settled special needs trusts in this space. Those are the kind of trust one might set up for a beneficiary who just settled a lawsuit, or received an (unrestricted) inheritance.

Third-party special needs trusts are different, as we explained in an earlier podcast episode. The funds come from a completely separate person (the “third party”, if you will), like a parent or grandparent. The rules governing the two kinds of trusts are different in significant ways.

Is my trust self-settled, or third-party?

The basic difference between the two types of special needs trust: where did the money come from? Was it really the beneficiary’s money (as in a personal injury lawsuit settlement, or an unrestricted inheritance)? Or did it go directly from someone else into the trust (as in a will leaving money to the special needs trust)? As one of our favorite colleagues explained some time ago, there are a number of distinctions to consider. But the key one is: whose money was it?

Some lawyers insist on calling third-party trusts “supplemental benefits trusts.” Confusingly, other lawyers insist on using that term for self-settled trusts. Others use “supplemental needs” for one, the other, or both types of trusts. The bottom line: don’t look at the names as a clear distinguishing factor.

Often the name of a trust will include clues about the type of trust. Just as often, however, nothing about the name of the trust will indicate whether it is a self-settled or third-party special needs trust. In fact, the name of the trust may not even include the term “special needs” at all. We often avoid including the phrase in a trust’s name to help avoid labeling — or identifying — the beneficiary or the disability.

Which would I prefer to have?

The answer here is easy: the third-party special needs trust can be far more useful and flexible than its self-settled cousin. There are a number of limitations imposed on self-settled trusts, including the requirement of a payback provision for Medicaid payment received by the beneficiary. Arizona, like some other states, imposes additional restrictions on how a self-settled trust can be used. Those restrictions — and the payback requirement — do not apply to third-party trusts.

Unfortunately, it’s not usually possible to simply decide which kind of trust you want to have. If the money already belongs to the beneficiary, the trust will be self-settled. But note: that choice IS available to the family member who wants to leave something to the beneficiary. It’s critical that the generous family member establish a third-party special needs trust to receive any inheritance. It can’t be done after the gift, or after the death of the donor.

Won’t the trust affect the beneficiary’s SSI, Medicaid, etc.?


With proper drafting and administration, there will be no reduction in or loss of public benefits. Good legal and accounting advice is essential, but it is easy to avoid loss of benefits.

But wait: sometimes you might prefer to reduce (or even eliminate) public benefits if the beneficiary’s life would be better. A well-advised trustee can figure out when to use the trust to improve the beneficiary’s quality of life. That kind of flexibility may not be available with a self-settled trust.

Because there is no payback requirement, the third-party trust can also go to other family members — or to charity — on the death of the primary beneficiary. Once again: if you have a family member with a disability, it is critical that you get good legal advice about the use of a third-party special needs trust.

Isn’t a third-party trust expensive? Aren’t there alternatives?

While planning how to leave money to your family member with a disability, you might run into the idea of ABLE Act accounts, or (if they are still young) UTMA accounts. Both have their places, and each can be useful in ways that a third-party special needs trust is not. But neither is a substitute for good special needs planning.

Talk with your lawyer. The expense will likely surprise you — not because it will cost a lot, but because it will be very reasonable. Don’t go shopping for the cheapest alternative you can find, online or otherwise. Actually engage in a conversation with your lawyer about her familiarity with the issue, her experience and her understanding of your wishes. Insist on your estate plan addressing your needs and wishes. And don’t be surprised if you get advice to use ABLE Act accounts (particularly) or UTMA accounts (less often) as part of the plan.


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Robert B. Fleming


Robert Fleming is a Fellow of both the American College of Trust and Estate Counsel and the National Academy of Elder Law Attorneys. He has been certified as a Specialist in Estate and Trust Law by the State Bar of Arizona‘s Board of Legal Specialization, and he is also a Certified Elder Law Attorney by the National Elder Law Foundation. Robert has a long history of involvement in local, state and national organizations. He is most proud of his instrumental involvement in the Special Needs Alliance, the premier national organization for lawyers dealing with special needs trusts and planning.

Robert has two adult children, two young grandchildren and a wife of over fifty years. He is devoted to all of them. He is also very fond of Rosalind Franklin (his office companion corgi), and his homebound cat Muninn. He just likes people, their pets and their stories.

Elizabeth N.R. Friman


Elizabeth Noble Rollings Friman is a principal and licensed fiduciary at Fleming & Curti, PLC. Elizabeth enjoys estate planning and helping families navigate trust and probate administrations. She is passionate about the fiduciary work that she performs as a trustee, personal representative, guardian, and conservator. Elizabeth works with CPAs, financial professionals, case managers, and medical providers to tailor solutions to complex family challenges. Elizabeth is often called upon to serve as a neutral party so that families can avoid protracted legal conflict. Elizabeth relies on the expertise of her team at Fleming & Curti, and as the Firm approaches its third decade, she is proud of the culture of care and consideration that the Firm embodies. Finding workable solutions to sensitive and complex family challenges is something that Elizabeth and the Fleming & Curti team do well.

Amy F. Matheson


Amy Farrell Matheson has worked as an attorney at Fleming & Curti since 2006. A member of the Southern Arizona Estate Planning Council, she is primarily responsible for estate planning and probate matters.

Amy graduated from Wellesley College with a double major in political science and English. She is an honors graduate of Suffolk University Law School and has been admitted to practice in Arizona, Massachusetts, New York, and the District of Columbia.

Prior to joining Fleming & Curti, Amy worked for American Public Television in Boston, and with the international trade group at White & Case, LLP, in Washington, D.C.

Amy’s husband, Tom, is an astronomer at NOIRLab and the Head of Time Domain Services, whose main project is ANTARES. Sadly, this does not involve actual time travel. Amy’s twin daughters are high school students; Finn, her Irish Red and White Setter, remains a puppy at heart.

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Matthew M. Mansour


Matthew is a law clerk who recently earned his law degree from the University of Arizona James E. Rogers College of Law. His undergraduate degree is in psychology from the University of California, Santa Barbara. Matthew has had a passion for advocacy in the Tucson community since his time as a law student representative in the Workers’ Rights Clinic. He also has worked in both the Pima County Attorney’s Office and the Pima County Public Defender’s Office. He enjoys playing basketball, caring for his cat, and listening to audiobooks narrated by the authors.