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You may have a family member who depends on you for support, perhaps an incapacitated parent or a disabled child. If so, you may have given some thought to providing for this individual after you die. A special needs trust is an effective way to secure your loved one’s future while not harming his or her eligibility for government benefits.

According to Forbes Magazine, there are two types of special needs trusts available: A third-party trust or a first-party trust, also called a self-settled trust. Though both accomplish the same objective, they differ in significant ways.

Third-party trust

A third-party trust is one that you create and fund with your own assets for the benefit of your loved one. Creating a third-party trust with your own money also gives you the option of controlling where any remaining assets go after the beneficiary dies.

To protect your loved one’s eligibility for government benefits, you should specify that the funds he or she receives from the trust are to go to expenses that enhance quality of life, such as pet care, travel and entertainment, rather than essentials.

Self-settled trust

Despite the name, a self-settled or first-party trust is not one that someone can create for his or her own benefit. Someone else has to create it on the beneficiary’s behalf.

The difference between a third-party trust and a self-settled trust is that you fund the latter with assets already belonging to the beneficiary. Examples include a court-ordered settlement or an inheritance, as well as property that your loved one owned prior to becoming disabled. Putting this property in a trust allows your loved one to meet the financial requirements for benefits such as Supplemental Security Income or Medicare.

Another difference between a self-settled trust and a third-party trust is what happens to any remaining assets following the death of the beneficiary. If your loved one received Medicare benefits, the remaining assets in a self-settled trust go to reimburse the state for these expenses.