SPECIAL NEEDS TRUSTS Under 42 U.S.C. §1396p(d)(4)(A):
Protecting Public Benefits and the Personal Injury Settlement, Inheritance or Windfall for an Individual with Disabilities

1. The Benefits of (d)(4)(A) Trusts for Individuals With Disabilities

Many disabled individuals are dependent on public benefits like SSI and MaineCare. Those benefits are "means-tested" which means that they are only available to individuals with very limited assets. If an individual who is dependent on public benefits like these receives a personal injury recovery, an inheritance, or other assets, those resources will disqualify the individual from government assistance until the assets are spent down.

Congress addressed this problem in the Omnibus Budget Reconciliation Act of 1993 when it enacted 42 U.S.C. § 1396p(d)(4)(A). The Act permits the creation of a self-settled trust for a disabled individual under age 65 to hold assets that would otherwise disqualify the individual with disabilities for public benefits.

The advantages of a (d)(4)(A) trust are only available to a person with disabilities. An individual is generally considered to be disabled if he or she "is unable to engage in any substantial gainful activity" by reason of a medically determinable physical or mental impairment that is expected to result in death or has lasted or can be expected to last for a continuous period of at least 12 months. Children under the age of 18 are considered to be disabled if they suffer from a physical or mental impairment of comparable duration and severity.

If an individual is not disabled or is not expected to need significant additional medical care, then he or she may not benefit from a (d)(4)(A) trust. If you are unsure whether a (d)(4)(A) trust or another special needs trust can help, call Skelton Law Offices, LLC. We'll send you our Questionnaire for Suitability of Special Needs Trust and schedule a telephone conference to discuss whether a trust can help.

2. When the (d)(4)(A) Trust Should Be Created

If the (d)(4)(A) trust is to be funded with the disabled individual's own assets - presumably before the beneficiary applies for public benefits - create the trust as soon as possible to avoid further spend-down of the assets destined for the trust. For the same reason, a trust to hold an inheritance should be created at or before the time the disabled individual becomes legally entitled to the funds.

For personal injury recoveries, the determination of the suitability of a (d)(4)(A) trust should be made before the settlement or judgment. The best approach is to obtain court approval to implement and fund the trust at the same time the settlement or judgment is being finalized. This avoids the risk of ineligibility for SSI and MaineCare while waiting for the trust to be formed.

3. Criteria for a (d)(4)(A) Trust

The Social Security Administration publishes the Program Operations Manual (POMS) that contains an action chart to determine whether a trust is compliant with 42 U.S.C. § 1396p(d)(4)(A). If the trust fails any of the tests, the trust property will be considered countable resources to the disabled person, and his or her eligibility for means-tested government assistance will be jeopardized.

1. Was the trust established for a disabled individual under age 65?

2. Was the trust established with the assets of a disabled individual?

3. Is the disabled individual the beneficiary of the trust?

4. Did a parent, grandparent, legal guardian or court establish the trust?

5. Does the trust provide that upon the death of a disabled individual any state will be reimbursed for medical assistance paid on his or her behalf?

6. Does the trust meet the special needs trust exception to the extent that assets of the beneficiary were put in the trust prior to the beneficiary attaining age 65? Any assets placed in trust after the 65^th birthday are not protected.

7. Is the trust irrevocable?
   The most common reason for the SSA to declare a trust invalid under (d)(4)(A) is the failure to comply with state trust laws regarding irrevocability. And, in addition to the factors listed above, individual states often impose additional requirements to qualify the trust property as non-countable assets under that state's Medicaid program. Therefore, it is essential that an experienced attorney who is well acquainted with these local idiosyncrasies create the (d)(4)(A) trust.

4. Choosing a Trustee

While the trustee may be a family member (but should not be a parent of a minor child), if the value of the trust property is $50,000 to $100,000 or more, consider the benefits of a professional trustee with one or more family members serving as co-trustees or as advisors. Banks have traditionally served as professional trustees, but other professionals also serve in this capacity, including CPA firms and brokerage firms. In certain cases, Skelton Law Offices, LLC, agrees to serve as trustee for (d)(4)(A) trusts.

5. Distributions from a (d)(4)(A) Trust for Goods and Services

Generally speaking, the trustee of a (d)(4)(A) trust is authorized to spend trust principal and income for goods and services not otherwise provided through government assistance. For example, the trustee may be authorized to purchase more sophisticated medical or diagnostic treatment not generally considered to be "medically necessary" or to provide for private, rehabilitative care and recreation and items such as electric wheelchairs and mobility aids.

Since 42 U.S.C. § 1396p(d)(4)(A) exempts the trust funds from consideration as countable resources of the beneficiary, arguably no limitation on trust distribution standards is required. This offers a potential for abuse if trust funds are spent for lavish homes and extravagant vacations. Regulations refer to such trusts as "special needs trusts," suggesting that distributions to provide for primary care may result in loss of the federal exclusion. Moreover, without supplemental or special needs limitations in the trust document, the relevant agencies may rule that the trustee's decision not to pay for support or medical needs when the trust permits such expenditures constitutes an abuse of discretion or a breach of fiduciary duty.

To date, there is limited case law to assist in determining the breadth of standards governing the distribution of (d)(4)(A) trusts. The better practice, where possible (and this may create tension with parents of disabled children), is to use reasonably well-defined supplemental needs or special needs trust provisions, such as limiting distributions to more sophisticated medical and diagnostic treatment, therapy, rehabilitation and mobility aids, private care providers, dental care, recreation, transportation, periodic outings and entertainment, etc. Presumably, the state may retain a cause of action against the trustee if no portion of the trust remains at the death of the disabled individual and the trustee has improperly spent trust funds.

6. A (d)(4)(A) Trust Should Not Hold Assets from a Third Party?

The assets of a third party should never be added to a (d)(4)(A) trust. If a relative or friend wants to make a gift or leave an inheritance, it should be directed to a (d)(4)(A) trust. Any assets remaining in the (d)(4)(A) trust on the death of the beneficiary will be available and must be used to reimburse any state that provided medical assistance to the disabled beneficiary. A third party trust does not have payback requirements.

7. Drafting a (d)(4)(A) Trust

Planning for individuals with disabilities requires knowledge and understanding of fiduciary law, trust law, public benefits law and regulations, and tax law. This practice area requires experience and is not forms-driven. The (d)(4)(A) trust must conform to federal and state law and be customized to meet the current and anticipated future needs of the disabled beneficiary. The attorney who creates the trust should communicate with the relevant government agencies, particularly reporting the creation and funding of the (d)(4)(A) trust to the SSA and to the Maine Department of Health and Human Services. The attorney should also advise on the selection and education of the trustees of the (d)(4)(A) trust.