Planning for a loved one with a disability can feel like a puzzle with too many pieces. You want to protect benefits, give real support, and keep future choices open, all at the same time.
At Woods & Bates, P.C., we serve Illinois families who want clear paths and steady guidance, online or in person. In this article, we explain how a third-party special needs trust works and why it differs from other trust types that you might have heard about.
Special Needs Trusts: An Overview
A special needs trust, often called an SNT, is a planning tool that preserves eligibility for needs-based programs like Medicaid and Supplemental Security Income, SSI. The trust holds assets for the benefit of a person with a disability, allowing the trustee to pay for extras that improve life without jeopardizing benefits. The language must be drafted with care, which is why families typically work with an attorney who is familiar with public benefits and trust rules.
In Illinois, these trusts are governed by the Illinois Trust Code and must be administered with the same fiduciary care as any other trust. The goal remains simple: to maintain benefits while enhancing daily life.
Key Distinctions: Third-Party vs. First-Party and Pooled Trusts
There are three common versions. First-party trusts, also known as self-settled trusts, are distinct from third-party trusts, commonly referred to as supplemental needs trusts, and pooled trusts, which are managed by nonprofit organizations. The differences begin with the source of the money and how the trust must settle its affairs upon the beneficiary’s passing.
Funding Source
Third-party SNTs are funded with assets that do not belong to the beneficiary. Parents, grandparents, or others can contribute to help the person with a disability without risking SSI or Medicaid eligibility. First-party SNTs, by contrast, are funded with the beneficiary’s own assets, such as a personal injury settlement or an inheritance received outright.
Pooled trusts combine funds from many beneficiaries. A nonprofit establishes the master trust, and then each person has a separate subaccount. This can be a cost-effective choice where the amount is modest.
Medicaid Payback Provisions
Federal law usually requires first-party SNTs to reimburse Medicaid for benefits paid during the beneficiary’s lifetime if funds remain at death. This payback rule is a core component of allowing individuals to retain their benefits while using their own funds. Third-party SNTs do not have a Medicaid payback, since the assets never belonged to the beneficiary.
Pooled trusts are often subject to payback rules or require the nonprofit to retain a portion of the funds at the end of the trust. Exact terms depend on the organization and the program involved.
Age Restrictions
First-party SNTs generally must be established for someone under age 65 under federal rules. That age rule does not apply to third-party SNTs. Families can create third-party SNTs for loved ones of any age, which helps long-range planning.
Flexibility and Control
A third-party SNT gives the person who created it, the grantor, the power to name remainder beneficiaries at the end. You can direct what happens next, for example, gifts to siblings, nieces, nephews, or a charity. With a first-party SNT, that choice is restricted by Medicaid payback and other federal terms.
Here is a quick comparison to keep the main features straight.
Table: Comparison of Special Needs Trust Types
| Feature | Third-Party SNT | First-Party SNT | Pooled Trust |
| Funding source | Family or other third parties | Beneficiary’s own assets | Beneficiary assets held in subaccounts |
| Medicaid payback | No payback required | Payback required at death | Often, payback or nonprofit retention |
| Age limit to set up | No age limit | Generally under 65 | Varies by program |
| Who manages | Chosen trustee | Chosen trustee | Nonprofit organization |
| After the death of the beneficiary | Goes to named remainder beneficiaries | Medicaid reimbursed first | Payback or nonprofit share, then remainder per terms |
Illinois families often use this chart as a starting point, then weigh taxes, trustee choice, and benefit rules before finalizing a plan.
Advantages of a Third-Party Special Needs Trust
A third-party SNT can be named as the beneficiary of a life insurance policy and can own real estate or investments. It can also receive retirement benefits with careful drafting, and in some cases, special tax rules for disabled beneficiaries may allow a longer payout. There is no legal cap on the size of the fund.
Trust funds are meant to supplement benefits, not replace them. The trustee can pay for many goods and services that lift the person’s quality of life while keeping benefits in place.
- Housing costs, such as rent or a home owned by the trust, are taken into account, as rent or groceries can reduce SSI cash payments.
- Caregivers, therapies, dental, and vision services that insurance does not cover, and assistive technology.
- Transportation, including accessible vans, ride services, and travel to visit family.
- Education, hobbies, internet, cell phone, and other everyday tools that support independence.
- Home furnishings and modifications, such as ramps or bathroom updates.
Because third-party funds are not the beneficiary’s money, any amount left after the beneficiary’s lifetime can pass to people or causes you choose. The government is not first in line for repayment. In Illinois, third-party SNTs typically do not require ongoing court oversight, which keeps administration more private and less costly.
Tax treatment depends on how the trust is drafted. Many third-party SNTs are treated as grantor trusts while the donor is living, which means the donor, not the beneficiary, usually reports income, and that can simplify SSI reporting.
Stand-Alone vs. Testamentary Third-Party SNTs
A stand-alone third-party SNT is created while the grantor is alive. It can be funded right away or kept ready as a named beneficiary on life insurance, brokerage accounts, or a deed. A testamentary third-party SNT springs to life through a will or living trust and usually does not receive assets until the grantor’s death.
The stand-alone version brings added flexibility. Other relatives can direct gifts or inheritances to the same trust, which helps avoid the risk of assets being distributed to the beneficiary and potentially disrupting benefits. It can also start supporting the beneficiary immediately if that is needed.
Here is a simple way to consider which format aligns with your family’s goals.
- Choose a stand-alone trust if grandparents or others want to make gifts during their lifetime, or if you want the trust to be ready for immediate use.
- Choose testamentary if you are only planning to fund at death and prefer fewer documents today.
- Either way, keep beneficiary designations, deeds, and the schedule of assets up to date to prevent accidental direct transfers.
Whichever route you pick, mixing the beneficiary’s own money into a third-party SNT is a big no. If the beneficiary later receives a settlement or an inheritance outside the plan, that separate money should be placed in a first-party or pooled trust to safeguard benefits.
Crafting Your Plan: Why Woods & Bates, P.C. Is Your Ally
Every family is unique, which is why your plan should align with your vision and budget. We welcome your questions and will walk through options in plain language, no pressure. Feel free to call us, and let’s build something steady that supports your loved one now and in the future.
You do not have to figure this out alone. Reach us at 217.735.1234 or send a note through our Contact Us page. A brief conversation can clarify things and help you move forward with confidence.