First-Party vs Third-Party Special Needs Trusts

Not all special needs trusts work the same way. The type you need depends on one simple question: whose money is going into the trust?

Get this wrong and the trust may not protect benefits the way you expect. It could even trigger a Medi-Cal payback requirement that wipes out the remaining funds after your loved one passes away.

Here is a plain-language breakdown of both types so you can understand what you are looking at before you sit down with an attorney.

Side by Side

First-Party vs. Third-Party: The Key Differences

The third-party trust is almost always the better option when parents are doing advance planning. The money does not come from the beneficiary, so there is no payback requirement and the family gets to decide who receives the remaining funds.

Third-Party Trusts

When to Use a Third-Party Special Needs Trust

If you are a parent or grandparent planning ahead, this is almost certainly the trust you want. You fund it with your own assets — savings, life insurance, real estate proceeds, or retirement account benefits.

It protects your child’s SSI and Medi-Cal benefits, it gives your family control over how funds are spent, and it does not require Medi-Cal reimbursement at the end. That last part is a big deal for families who want leftover funds to go to siblings or other loved ones.

You can create this type of trust now and fund it over time. Many families use a life insurance policy as the primary funding source, which means a relatively small premium can create a large trust at death. A special needs trust attorney can help you structure this efficiently.

First-Party Trusts

When a First-Party Trust Is Necessary

Sometimes there is no choice. If your loved one already has money in their name — from a lawsuit settlement, a direct inheritance, or accumulated savings — a first-party trust may be the only option to protect their benefits going forward.

These trusts have more restrictions. They must be established by a parent, grandparent, guardian, or court. The beneficiary must be under 65 when the trust is created. And Medi-Cal must be reimbursed from the trust when the beneficiary passes away.

Despite those limitations, a first-party trust is still far better than leaving the money sitting in the beneficiary’s name. At least the trust protects benefits while they are alive — which is what matters most. Work with a trust attorney who knows California’s Medi-Cal rules to make sure it is set up correctly.

Common Questions

FAQ