THE D4A TRUST. First, the D4A Trust, which derives its name from the federal statute authorizing it (42 USC 1396p(d)(4)(A)). It is used to hold assets already belonging to the disabled individual, or assets to which the disabled individual is already legally entitled to. For instance, a bank account held in the name of the disabled person, or an inheritance previously received by the same individual, would both be held by the D4A, or First Party Trust. In essence, if the asset is already in the disabled individual’s name, proper planning necessitates that it be held by a D4A Trust, and not a Supplemental, or Third Party, Special Needs Trust, which trust is discussed in greater detail below.
D4A trusts are also created to hold personal injury or medical malpractice awards received by disabled individuals. Because these individuals are often already recipients of means tested programs like Medicaid or Supplemental Security Income (SSI), or will become recipients of such programs as a result of their injury, a substantial monetary award could very well disqualify them from the receipt of such benefits. It is important to note that although the disabled individual is technically not “in possession” of a personal injury award prior to finalization of the judgment or settlement, he or she is nonetheless the only bona fide legal recipient of the award, and so the D4A Trust is the appropriate recipient of such an award.
Because the D4A Trust is a statutory creature, several important guidelines must be followed when creating the trust. According to 42 USC 1396P(d)(4)(a), such a trust must: (1) contain the assets of an individual under age 65 (2) be for the benefit of an individual who is disabled as defined by the regulations, (3) be established for the benefit of such individual by a parent, grandparent, legal guardian of the individual, or a court (and not the beneficiary himself) and (4) contain language mandating that the State will receive reimbursement for sums paid out to the disabled beneficiary during his or her lifetime.
D4A PAYBACK PROVISION. Perhaps the most important of these statutory dictates is number four. The D4A Trust is subject to a state payback provision; hence the monicker “Medicaid Payback Trust”. Upon the disabled person’s death, any funds remaining in the trust must be used to reimburse the state for services rendered during the individual’s lifetime. As a result, a beneficiary who receives significant benefits from the State, and who utilizes the D4A Trust over an extended period of time, may well have his or her entire remainder of trust funds, if any exist, wiped out upon death. Alternatively, if government benefits received by the individual during his or her lifetime were insubstantial, or if the individual did not survive very far into the tenure of the trust, there will likely be a remainder sum. Where a remainder amount exists after reimbursement to the State, it can be distributed to other private beneficiaries named under the trust, just like any other trust instrument.
The payback provision is the all-important feature of the D4A trust. Failure to include the appropriate payback language can be catastrophic. Such a failure will likely result in the disqualification of the individual from his or her government benefits, as the trust will be considered invalid under the statute, and the trust assets deemed available to the beneficiary. Also, commingling of funds already owned by the disabled beneficiary with third party funds, if all lumped into the D4A trust, will result in the availability of the third party funds for state payback upon the beneficiary’s death. As discussed below, third party funds are not otherwise available for State payback under an estate plan that properly incorporates special needs provisions.
THIRD PARTY SPECIAL NEEDS TRUST. The Supplemental Needs Trust, or Third Party Trust, in contrast to the D4A Trust, serves as the holder of monetary or non-monetary assets others wish to gift and/or leave to the disabled person either during the donor’s life or upon the donor’s death. For example, if an aunt or uncle wishes to gift money or leave an inheritance via his or her Last Will and Testament to a disabled niece or nephew, they would do so by designating a bank account held by the Supplemental Needs Trust as the recipient. Such a designation allows the disabled individual to remain qualified for any program he or she is currently receiving benefits from, while at the same time allowing the individual to reap the benefit of the gifted assets. From a document drafting standpoint, a parent desiring to make a $20,000 bequest to a disabled child upon the parent’s death should do so by including a provision in his or her Will stating that “I give and bequeath the sum of $20,000 to the Trustee of the John Smith Supplemental Needs Trust, to be administered in accordance with its terms.” As such, prior to the creation of the parent’s Will, the Third Party Trust would need to be created. Otherwise, leaving this amount outright to John Smith would disqualify John from programs like Medicaid or Supplemental Security Income immediately upon John’s receipt of the funds.
Fund drives organized for the benefit of a disabled individual should also earmark proceeds for such a third-party trust account. In contrast to the D4A Trust, the Supplemental Needs Trust has no State payback provision, which means that assets remaining in trust at the individual’s death may pass according to the wishes of either the individual or his or her family members, or as designated in the Will of the disabled beneficiary.
Given the payback distinction between these two types of special needs trusts, one can see why utilizing and spending down the assets held in a D4A Trust (where the individual has both kinds of trusts) prior to using the assets held in a Third Party Trust, makes sense. Also noteworthy is that the Third Party Trust need not meet the age or parent/guardian/court establishment requirements.
USE OF TRUST ASSETS FOR SUPPLEMENTAL NEEDS OF THE INDIVIDUAL. One common bond shared by both the D4A Trust and the Third Party Trust is the requirement that each trust must hold assets which are limited to use for the “supplemental needs” of the beneficiary. Improper use of the trust funds, or distribution of the funds directly to the disabled beneficiary, will likely result in disqualification of the individual from government benefits. The term “supplemental needs” encompasses those needs not already being provided for by State programs. Thus, use of special needs trust funds, be they from the D4A Trust or the Third Party Trust, must be for items like vacations, occasional meals out, schooling or other educational programs, entertainment, and the like. These are all purposes and activities which disabled persons do not receive support for from programs like Medicaid or SSI, and corresponding distributions will therefore not displace any government services.
While there are no hard and fast lists or rules governing exactly what constitutes a “supplemental need” of a disabled special needs trust beneficiary, the above uses illustrate well the kinds of distributions a trustee should consider. The primary question the trustee should ask oneself before making a distribution is “does the beneficiary already receive similar support from his or her government program(s)?” When in doubt, the trustee would be well-served by contacting the attorney who originally created the special needs trust for clarification.
The Social Security Administration’s regulations and Program Operations Manual System (POMS) provide some clarity on appropriate special needs trust distributions. Distributions for food and shelter needs, and their equivalents, are generally considered in-kind income to the beneficiary, and are thus considered disqualifying distributions. While there are some exceptions to this general standard, the overarching public policy theme envisioned by the regulations is that government programs aim to fulfill basic needs, such as food and shelter, while special needs trusts are allowed in order to provide for the beneficiary’s enhanced quality of life. As a result, while a weekly trust distribution for a disabled beneficiary’s groceries may be considered in-kind income, a distribution for a birthday meal at a restaurant, would not. Until recently, distributions for clothing needs of the disabled individual were also considered disqualifying, but that restriction no longer exists.
The POMS provisions governing in-kind support and maintenance list only a handful of items which would constitute food and shelter equivalents, such as food, mortgage, property insurance, taxes, rent, heating fuel, gas, electricity, water, sewer and garbage removal payments, so anything akin to these items is of questionable legiticacy. Again, at any point the trustee begins to question whether a distribution is appropriate, legal counsel should be sought.
The trustee of the special needs trust must also be cautious not to distribute funds directly to the individual, even if the distribution is intended for a legitimate purpose. Such a direct distribution to the individual necessarily entails the disabled beneficiary receiving income and/or assets, which will then be counted against him or her for program qualification purposes. Instead, the Trustee wishing to provide these “extras” for the beneficiary should directly reimburse vendors, or find alternative arrangements that do not include the beneficiary receiving direct cash distributions.
