There are several types of Special Needs Trusts, the most common of which are self-funded and third-party.
A self-funded (also known as a First Party) Special Needs Trust is typically intended to protect the assets of an individual with a disability. This type of trust must be created by a parent, grandparent, or legal guardian, or by a court, but it cannot be created by the individual. One of the most common applications of a self-funded Special Needs Trust arises when an individual receives Supplemental Security Income (SSI).
SSI is a government program that provides approximately eight million low-income Americans with assistance. In order to qualify, the individual can only have $2,000 in his or her name. If that individual receives excess assets - say, for example, due to an inheritance - he or she may only continue to receive SSI by putting the assets into self-funded Special Needs Trust. Those assets can them be used to supplement the individual's public benefits during his or her lifetime. Upon death, any funds remaining shall be distributed to the government as repayment for the cost of his or her medical care.
A third-party Special Needs Trust is similar to a self-funded Special Needs Trust in that the purpose is to protect the assets of a disabled beneficiary. Assets can be held in trust so that the beneficiary is not at risk of losing his or her government benefits upon receipt of an inheritance. The main difference between the two trusts is that, upon death, any remaining assets can be distributed to other family members, friends, or charities - thus, the assets pass on through the trust to another individual or entity, rather than being used to reimburse the government.