When planning your child’s special needs trust, you’ll need to choose from one of three types of trusts available.

Third-Party Special Needs Trusts

Also referred to as a “family trust,” a third-party special needs trust is set up by the beneficiary’s family member or another individual, like a guardian, who is entrusted with their care.

The grantor can choose how the funds are distributed. For instance, they may specify in the trust that distributions cannot be made for specific food, shelter or medical expenses that are otherwise covered by the beneficiary’s government benefits.

A third-party special needs trust can be funded during the life of the grantor—the one setting up the policy—by transferring assets into the trust. It can also be funded using a life insurance policy.

“For most middle-income cases, it is recommended to buy a second-to-die policy—a whole life policy that covers both parents—because spread risk is less expensive,” says Megan Kopka of Kopka Financial, a financial planning firm specializing in working with families with special needs. “The idea is parents are supplementing their child’s needs during life, and when they are no longer living, the trust is funded via the life insurance policy.”

First-Party Special Needs Trusts

First-party trusts are established with the beneficiary’s assets. They are commonly used when a special needs individual directly receives an inheritance, life insurance payout or personal injury settlement that may impact their eligibility for government benefits.

This type of trust can also be used when someone who is not disabled and becomes disabled and receives a legal settlement as part of becoming disabled.

According to the Special Needs Alliance, when the beneficiary of a first-party SNT dies, all assets in the trust must be used to repay the “total lifetime medical assistance benefits,” such as Medicaid, received. If the repayment obligation is met and there are remaining assets in the trust, they can be distributed to any beneficiaries.

Since third-party trusts do not require this repayment, they are preferable to a first-party trust.

Pooled Trust

Pooled trusts are trusts that are managed by a nonprofit organization. This relieves the grantor of having to select a trustee who may not have experience in managing trust assets. Assets are still held solely for the benefit of their loved one.

Upon death of the beneficiary, any remaining amounts are either repaid to the state for services provided to the beneficiary or become property of the nonprofit organization itself.