A settlement check arrives. A parent includes a child with a disability in their estate plan. An inheritance lands in the wrong hands. Each of these moments brings Arkansas families to the same question: what kind of special needs trust do we need? The answer matters more than most families realize, because the two main trust types operate under entirely different rules, carry different consequences at death, and aren’t interchangeable once funding has occurred.
The distinction between first-party and third-party special needs trusts determines whether Medicaid must be repaid from trust assets after your loved one dies, whether a court needs to approve the trust before it can be funded, and whether recent changes to Arkansas statutory law give the trust additional legal protection. Getting the structure right from the start protects your family member’s access to Medicaid and SSI for years to come.
At AAPG Law, we’ve helped Arkansas families work through both paths since 2013. We walk through source-of-funds questions, beneficiary age requirements, and how the trust fits within a broader Medicaid plan before recommending a structure. Here’s what every Arkansas family should understand about these two trust types before signing anything.
The Core Difference: Where the Money Comes From
First-Party Trusts
A first-party special needs trust, sometimes called a self-settled trust, is funded with assets that already belong to the person with disabilities. Personal injury settlements, Social Security disability back pay, and an inheritance received directly in the beneficiary’s name all qualify as first-party funding. If the money was ever legally the beneficiary’s own property, it must go into a first-party trust structure to maintain Medicaid and SSI eligibility.
Third-Party Trusts
A third-party special needs trust is funded with assets belonging to someone other than the beneficiary. Parents establishing a trust as part of their estate plan, grandparents contributing during their lifetimes, and siblings setting aside funds for a disabled family member are all classic third-party scenarios. The money was never the beneficiary’s to begin with, and that distinction changes virtually every rule that applies to the trust.
First-Party Trusts: Requirements & the Medicaid Payback Rule
First-party special needs trusts are governed by federal law, specifically 42 U.S.C. § 1396p(d)(4)(A). That statute sets out the conditions a trust must meet to avoid being counted as a resource for Medicaid and SSI eligibility purposes. Two requirements stand out for Arkansas families.
The first is the Medicaid payback provision. Every first-party trust must include language stating that when the beneficiary dies, Arkansas Medicaid, administered through the Arkansas Department of Human Services, will be reimbursed for benefits paid on the beneficiary’s behalf before any remaining assets pass to family members. This isn’t optional language. It’s a federal condition for the trust to function as intended, and it means the assets heirs ultimately receive may be significantly reduced.
The second is the age-65 cutoff. A first-party trust must be established while the beneficiary is under age 65, with no exceptions under federal law. Families who discover a loved one received a direct inheritance at 66 have essentially lost the first-party trust option, which is why early planning matters so much.
There’s also a procedural consideration specific to settlements. When a first-party trust is being funded with proceeds from a personal injury settlement in Arkansas, court approval may be required before the trust can receive those funds, a step that surprises many families. Third-party trusts created by parents as part of their estate plan generally don’t involve the court at all, which is one reason the planning process looks different depending on which path applies.
Third-Party Trusts: The Arkansas Statutory Advantage
Arkansas took a significant step in 2023 that most families planning a third-party trust haven’t heard about yet. Act 293 of 2023 added explicit statutory definitions for special needs trusts, third-party trusts, and pooled trusts to the Arkansas Trust Code at ACA § 28-73-818, effective August 1, 2023. That statute declares third-party trusts in Arkansas to be explicitly exempt from all state laws and regulations regarding trust treatment for Medicaid eligibility, a level of statutory protection most states don’t have. In states without this kind of language, a third-party trust’s protection can hinge on regulatory interpretation. In Arkansas, it’s written into the Trust Code.
Third-party trusts also carry a structural advantage at death. Because the funds were never the beneficiary’s own assets, there’s no Medicaid payback requirement. Whatever remains in the trust when the beneficiary dies passes to whoever is named as the remainder beneficiary in the trust document, whether siblings, other family members, or a charitable organization. That flexibility simply isn’t available with a first-party trust.
There’s also a planning angle that matters for aging parents. Transferring assets to a properly drafted third-party special needs trust for the sole benefit of a disabled child doesn’t trigger a Medicaid transfer-of-assets penalty. A parent who needs to qualify for Medicaid to cover long-term care costs can direct assets toward their disabled child’s future without the five-year lookback penalty that would ordinarily apply. This is one of the most practical intersections of elder law and disability planning we work through with families.
What the Trust Can & Can’t Pay For
Both trust types exist to supplement government benefits, not replace them. Distributions that substitute for what Medicaid or SSI already cover can disrupt eligibility, so trustees need to understand what the trust can pay for and how those payments are treated by SSA.
One area got significantly easier in September 2024. SSA eliminated food from the in-kind support and maintenance (ISM) calculation, the SSA term for non-cash contributions toward food or shelter that can reduce an SSI payment. With food removed, trust distributions for groceries, restaurant meals, and food-related expenses no longer reduce the beneficiary’s SSI check, simplifying administration for trustees and opening up a straightforward category of helpful distributions.
Shelter costs are a different story. Rent, mortgage payments, and utilities paid directly from the trust still count as in-kind support and maintenance and can reduce an SSI payment by up to approximately $351 per month in 2026. That’s not a reason to avoid paying housing costs from a trust. In many cases it’s still the right call. But trustees need to weigh the benefit of the payment against the SSI reduction before writing that check.
Allowable distributions generally include a wide range of supplemental expenses:
- Medical & Therapeutic: Equipment, therapies, and services not covered by Medicaid
- Education & Training: Tuition, books, job training, and vocational programs
- Transportation: Vehicle expenses, ride services, and travel for medical or personal reasons
- Personal Enrichment: Recreation, entertainment, vacations, and hobbies
- Technology: Computers, tablets, communication devices, and software
Direct cash distributions to the beneficiary aren’t allowable under either trust type, because cash counts as income and can affect both SSI and Medicaid eligibility.
Choosing the Right Structure for Your Family
The funding source is always the first decision point. If the money already belongs to the person with disabilities, a first-party trust governed by 42 U.S.C. § 1396p(d)(4)(A) is the path that protects benefits. A pooled special needs trust administered by a nonprofit organization is another option in this category and may be worth evaluating alongside the individual first-party structure. If family members are setting aside their own assets for a loved one’s future care, a third-party trust offers more flexibility, no payback requirement, and the statutory protections Arkansas added in 2023.
Trustee selection matters for both types, and Arkansas families should understand what it actually requires. Under ACA § 28-73-813 of the Arkansas Trust Code, trustees must keep beneficiaries reasonably informed about trust administration and send at least annually a report of trust property, liabilities, receipts, and disbursements. That isn’t just a formality. It means organized, documented recordkeeping is a practical requirement from the first distribution. Choosing someone who understands both the fiduciary obligation and the benefit eligibility rules is worth careful thought.
An ABLE account, a tax-advantaged savings account for people with disabilities, can sometimes complement either trust type for smaller, day-to-day expenses, though contribution limits and eligibility requirements make it a supplement rather than a substitute for a well-structured trust.
AAPG Law offers a free initial consultation to help your family work through which structure fits your specific situation, including source of funds, beneficiary age, whether court involvement applies, and how the trust fits within a broader Medicaid and estate plan. With five office locations across Arkansas and a fully remote service option, we’re here wherever you need us. Reach our team at (888) 635-9081.