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First Party Special Needs Trusts VS. Third Party Special Needs Trusts in Illinois

Article written by Illinois & Iowa Attorney Kevin O'Flaherty
Updated on
March 9, 2020

In this article, we explain first party special needs trusts vs. third party special needs trusts in Illinois. We address:


  • What is the purpose of a special needs trust in Illinois?
  • How many types of special needs trusts are there?
  • What is a first party special needs trust in Illinois?
  • What is a third party special needs trust in Illinois?
  • What type of special needs trust is best in Illinois?

What is the purpose of a special needs trust in Illinois?

A trust is a legal bonding of three parties, including a donor who supplies trust funds, a trustee who holds and administers the trust funds, and a beneficiary who receives the benefits of funds. A special needs trust is designed to financially care and provide for a person with special needs without jeopardizing any assistance received from governmental programs.

For more, check out our article: Illinois Special Needs Trusts Explained.

How Many Types of Special Needs Trusts Are There?

There are three main types of special needs trusts, all which name the person with special needs as the beneficiary:


  • First party trust
  • Third party trust
  • Pooled trust


This article will focus solely on the differences between and benefits of first party and third party trusts.

What is a First Party Special Needs Trust in Illinois?

A first party special needs trust is funded with assets owned by the beneficiary. It does have a few requirements.


  • The trust must be irrevocable
  • At the time the trust is established, its beneficiary must be under the age of 65
  • Only the beneficiary’s assets may be used to fund the trust
  • The beneficiary’s state Medicaid agency is to be reimbursed with a trust’s remaining funds upon their death


A first party special needs trust is ideal when an individual with special needs has or is expected to receive assets that would otherwise disqualify them from receiving public benefits in the future. Such examples include:


  • Receiving an inheritance
  • Receiving a lawsuit settlement (e.g. award in medical malpractice case)
  • Receiving a divorce settlement (e.g. spousal maintenance payments)

What is a Third Party Special Needs Trust?

A third party special needs trust is similar in purpose and structure to a first party, but is typically created and funded by family members who leave property through their estate plan (their will, life insurance benefits, etc.). The beneficiary never owns the property and does not have direct access to funds. Instead, the trustee of a third party special needs trust uses the funds to support the beneficiary, but there are specific trust requirements they must carefully abide by. 


For example, funds cannot be used for anything like cash gifts, food, or medical costs. Instead, the trust funds must be used for items government benefits are not intended for, such as hobbies, luxury items, furniture, pet supplies, vacations, and transportation.

Which Type of Special Needs Trust is Best in Illinois?

The type of special needs trust that will fit best for your situation depends on where the assets used to fund the trust are coming from. If they are assets owned by the beneficiary, then a first party special needs trust is appropriate. However, gifts and inheritances should be placed in a third party special needs trust rather than being commingled with assets owned by a first party trust in order to avoid those assets being used to pay back Medicaid when the individual with special needs passes. Below are a few examples: 


A couple decide to divorce. One is disabled and cannot work. As part of the divorce settlement, the disabled party requires a first party trust be established where spousal maintenance payments can be deposited. That way, they won’t interfere with public benefits the disabled spouse depends on.


An elderly couple has an adult child with severe disabilities. To make sure their child will be cared for after they pass, they set up a third party trust that will go into effect after they both have passed. The funds will protect their child’s eligibility for state health coverage and social security payments.


If you need to set up a special needs trust to protect or care for a family member, third-party special needs trusts are typically the right answer. If you or a family member currently or plan to require the aid of government assist programs but are on the receiving end of a cash settlement that would jeopardize your eligibility for assistance, a first-party special needs trust is typically the best approach.


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Third Party Special Needs Trusts in Illinois

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