A special needs trust (SNT) lets you set aside money for a loved one with a disability without taking away government benefits like Supplemental Security Income (SSI) or Medicaid. There are two main types, and picking the wrong one can cost your family a lot of money or cut off benefits your loved one depends on.
What Is a First-Party Special Needs Trust?
A first-party SNT (sometimes called a self-settled or "d4A" trust) holds money that already belongs to the person with a disability. Common funding sources include a personal injury settlement, an inheritance received outright, retroactive Social Security disability back-pay, or wages the person has saved.
Federal law under 42 U.S.C. § 1396p(d)(4)(A) sets the rules:
- The beneficiary must be under age 65 when the trust is established.
- The trust must be created by a parent, grandparent, legal guardian, or court. Since the Special Needs Trust Fairness Act of 2016 amended 42 U.S.C. § 1396p(d)(4)(A), a competent beneficiary may also establish one themselves.
- When the beneficiary dies, any remaining funds must first repay the state for Medicaid benefits provided during their lifetime. In Arizona that means reimbursing AHCCCS, including ALTCS long-term care costs.
This Medicaid payback rule is the defining feature. The trust protects benefits during life, but the state recoups its costs after death.
What Is a Third-Party Special Needs Trust?
A third-party SNT holds money that never belonged to the person with a disability. Parents, grandparents, or other family members fund it with their own assets, life insurance proceeds, retirement accounts, or gifts directed through a will or living trust. Because the funds were never the beneficiary's, there is no Medicaid payback requirement.
When the beneficiary dies, leftover funds pass to whoever the family names: siblings, nieces and nephews, charity, or anywhere else. There is no age limit. A third-party SNT can be set up at any time and can sit empty until it is funded by a will, life insurance, or a parent's living trust at death. This is the type most families use for long-term planning.
Pooled SNTs Under (d)(4)(C)
A third option exists for families with smaller trust balances or no suitable individual trustee. Under 42 U.S.C. § 1396p(d)(4)(C), a nonprofit can pool many beneficiaries' funds into one master trust while keeping a separate sub-account for each person. In Arizona, PLAN of Arizona is the most well-known pooled-trust provider. Pooled trusts can hold either first-party or third-party funds and have their own rules about what happens to remaining assets at death.
Which Type Does Your Family Need?
The key factor is whose money is going in.
- The person with a disability already owns the money. A first-party SNT may be the only way to keep them eligible for SSI and AHCCCS.
- Family members are providing the money. A third-party SNT avoids the payback rule and keeps remainder in the family.
- Both situations apply. Many families use both. A parent might create a third-party trust funded by life insurance while a separate first-party trust handles a settlement the child received on their own.
How Each Type Affects Government Benefits
Both types keep assets out of the beneficiary's countable name, protecting access to means-tested programs. SSI caps countable assets at $2,000 for an individual, and AHCCCS uses the same threshold. Without a trust, even a $5,000 inheritance could end coverage for months until the funds are spent down.
A well-drafted SNT lets the trustee pay for items that improve quality of life: vacations, technology, hobbies, transportation, and personal care. The trust generally cannot pay for food or shelter without reducing SSI under the in-kind support rule, which is why many families also open an AZ ABLE account to handle those categories.
Trustee Duties Apply to Both Types
Whichever type you choose, the trustee must follow Arizona's trust standards. Under A.R.S. § 14-10801, the trustee administers the trust in good faith. A.R.S. § 14-10804 requires prudent administration. A.R.S. § 14-10813 requires annual reporting to qualified beneficiaries. SNT trustees must also know SSI and AHCCCS spending rules cold, because one wrong distribution can pause benefits.
Getting Started
Choosing between a first-party and third-party SNT is one of the biggest calls a family makes, and the answer is not always obvious when both situations exist. The right setup keeps benefits flowing and protects what you leave behind. The wrong setup can trigger a payback obligation or end coverage entirely. Estate planning attorneys at RJP can review your case, explain how the two types compare for your situation, and coordinate the trust with the rest of your estate plan.
Common Mistakes Families Make
The most expensive errors usually happen at the funding stage, not the drafting stage:
- Naming the beneficiary directly on a life insurance policy or 401(k) "just in case." That single line on a beneficiary form can override an otherwise perfect plan and end SSI the day funds transfer.
- Mixing first-party and third-party funds in one trust. Once you commingle, the whole trust may be treated as first-party and trigger Medicaid payback at death.
- Forgetting to tell extended family. Grandparents, aunts, and godparents who plan to leave anything to the beneficiary need to know to direct gifts to the third-party SNT, not the person.
This question is one piece of a larger picture. For the full Arizona overview, see our Special Needs Trust Arizona: Complete Guide.
Quick reference: see our SNT distribution cheatsheet for a side-by-side of 20 common expenses showing whether to pay from the SNT, the ABLE account, or not at all, and the SSI impact of each choice.