When should I use a first-party SNT vs a third-party SNT, and what is this Medicaid payback?

Short answer: the difference is whose money funds the trust. A first-party SNT is funded with the BENEFICIARY own assets (typically a settlement or inheritance) and must include a Medicaid payback provision. A third-party SNT is funded by SOMEONE ELSE (parents, grandparents) and has NO payback. For a parent-funded plan, third-party is almost always the right answer.

The two flavors side by side

Why the Medicaid payback applies to first-party

Federal law (42 USC 1396p(d)(4)(A) — the "d4A trust") allows a disabled person to put HER OWN money into a self-settled SNT WITHOUT being treated as having transferred assets (which would disqualify her from Medicaid). But the trade-off is that when she dies, any remaining trust assets must FIRST pay back the state Medicaid program for the total cost of Medicaid benefits paid during her lifetime. Whatever remains after the payback can then go to other named beneficiaries.

The logic: if the government allows a disabled person to retain assets in a special trust during her lifetime AND collect Medicaid, the government wants to be reimbursed at death from what is left.

Why third-party has NO payback

In a third-party SNT, the assets were NEVER the beneficiary money. Parents (or other third parties) are simply choosing to set up a trust to benefit their child during her lifetime. The beneficiary never owned the trust corpus, so Medicaid has no claim against it at her death. The trust can distribute the remainder to anyone the donors named — typically the disabled beneficiary siblings, charity, or grandchildren.

A worked example — Carlos and Maria Martinez situation

Suppose Carlos and Maria Martinez have $50 million and want to provide for their special-needs daughter Sofia, with two healthy siblings (Ana and Juan). The natural structure:

A first-party SNT would only become relevant if Sofia received a settlement, inheritance, or gift OUTRIGHT in her own name — for instance, if a grandparent had named her directly in a will. Then the parents would have to "pour" that money into a self-settled d4A trust to preserve Medicaid eligibility, accepting the payback obligation.

The avoidable mistake

A common parent mistake is to leave the disabled child a direct bequest in their will — say $1,000,000 outright "to Sofia." This blows up Medicaid eligibility AND, if poured into a first-party SNT, becomes subject to Medicaid payback at her death. ALWAYS direct that share into a third-party SNT in the will itself.

Other supplemental tools

The third-party SNT can be paired with:

1. ABLE account — $19,000/year (2025) contribution limit, no Medicaid payback unless balance over $100k for SSI purposes
2. Direct-to-provider payments for housing, food, medical care
3. POMS-compliant in-kind support and maintenance rules that limit how much the SNT can pay for shelter and food without affecting SSI

For more on the broader trust toolkit see our trust income taxation article.