One is commonly called a self-settled special needs trust and the other is called a third-party special needs trust. They are intended to hold very different types of assets but both of them are designed to set aside funds in a trust and use those funds for the needs of a person with disabilities while still preserving public benefits that are based on financial need, like SSI or Medicaid.
A third-party special needs trust is the type of trust that would be created by parents to hold an inheritance for a child with disabilities. They can set aside those funds to be managed for that child’s life options to maximize opportunities, to utilize the money and an inheritance in a trust, to name a trustee to manage the assets for that child long-term, and to utilize the funds in a way that supplements what the public benefits otherwise pays for. The money that’s in a third-party special needs trust never belonged to that child beneficiary, ever. And it really is a third party, a parent, setting aside the assets for a child.
A self-settled special needs trust is intended to hold assets of the disabled individual themselves, whether it’s a child, whether it’s an adult. And those are creatures of federal law so those have very specific requirements for setting them up. In order to create a self-settled special needs trust, the individual can create it, a court can create it for them, a guardian can create it, a parent can create it, or even a grandparent for that person with disabilities if they can’t create it themselves. That person has to be under the age of 65, that trust has to be irrevocable, it has to be for the sole benefit of that person. The funds in that trust can’t be used for a sibling or a spouse but just for the person with disabilities.
In a self-settled special needs trust, unlike a third-party special needs trust, at that individual’s death, if they received Medicaid benefits, medical assistance from a state, any money remaining in that trust has to be used to reimburse Medicaid for the amount of money that was paid during that individual’s lifetime.