Many parents think that all special needs trusts (SNTs) or supplemental needs trusts can be invaded by Medicaid after their disabled child dies. Let me try and clarify.
A first-party special needs trust (payback trust) is funded by your child’s money, has a payback clause and therefore may be invaded by Medicaid.
A third-party special needs trust is funded by someone other than the disabled individual and does not contain a payback clause. Therefore, Medicaid does not have to right to pay themselves back for services provided at the end of your child’s life.
This distinction is important since you, as the parent, have the option of either overfunding or underfunding a special needs trust for your child. What does this mean? Since you don’t know exactly how much money your child is going to require over his lifetime— how long she will live or how much she will need annually—the trust will either not have enough money to adequately pay for the needs of your child over his lifetime, or it will have more than enough. Obviously, in a perfect world, we would choose to overfund the trust to ensure that our child’s needs are financed, allowing for the fullest possible life.
As there is a payback clause allowing Medicaid to access the trust after your child’s death, many parents would be inclined to underfund it, not wanting the unused money to go to the government. 
The third-party SNT, not having a payback clause, is more conducive to overfunding the trust. The parents can name the ultimate beneficiaries—the people or organizations who will receive any money left in the trust at the end of the disabled child’s lifetime. Ultimate beneficiaries can be children, grandchildren, relatives, friends, agencies who have cared for your child, etc.
If your child has money in his/her name as a result of savings, an inheritance, or other source, you need to reduce the amount to under $2,000 in order to qualify for SSI/Medicaid. In that case, the money may need to be transferred to a first party (payback) SNT or possibly an ABLE account (discussed in a previous blog). Both of these have a payback clause entitling Medicaid to repay themselves for services provided at the end of your disabled child’s lifetime. In the meantime, however, your child receives SSI benefits and has access to all of the adult services provided by Medicaid dollars.
Some disabled individuals have both – a first party (payback) SNT and a third-party SNT. The third-party SNT is funded by someone else, often the parents. Since it has no payback clause and cannot be invaded by Medicaid, the trustee often uses the money in the first party payback trust first. Once that has been spent down, the trustee for the third-party trust begins to access and distribute the money for the benefit of the special needs child. Utilizing this approach helps to ensure that any money left over goes to the ultimate beneficiaries named by the creator of the trust, usually the parents.
Third-party special needs trusts are often the best way to provide a secure financial future for your special needs child. A special needs trust is often an integral part of the safety net that will allow your child to have the best possible life once you are no longer around. A third-party trust, properly funded upon your death, will help ensure that your vision for your child becomes a reality. Remember, as a parent, you are your child’s greatest resource.