A first party trust is established when an individual receives a lump-sum payment from an insurance settlement, a Social Security back payment or an inheritance that was not previously directed to a Special Needs Trust. This type of trust allows an individual to retain this asset without jeopardizing their Medicaid benefit. However, upon the passing of the Trust Participant, Medicaid will seek reimbursement for any services provided during the life of the Participant. Individuals can designate that any balance in the Trust upon the passing of the Participant be given to a beneficiary or charity and this is completed after Medicaid received its reimbursement. Alternatively, an individual can opt to leave any remaining funds in the Trust for the benefit of others also participating in the Trust.
A third party trust is established when a family member or person other than the individual directs funds to the Trust specifically by-passing the individual. This can be funded with cash, insurance policy, annuity or other vehicle. In these cases, the granting party can determine how any residual funds are handled – whether to a named beneficiary or charity – as Medicaid cannot file a claim against these funds. The balance could also be left in the Trust for the benefit of other Participants.