Magazine article The Exceptional Parent

How to Maintain Government Benefits for a Child Who Receives an Inheritance or Legal Settlement

Magazine article The Exceptional Parent

How to Maintain Government Benefits for a Child Who Receives an Inheritance or Legal Settlement

Article excerpt

When a person with disabilities receives a significant amount of money--for example, from an inheritance or a legal settlement in a personal injury or medical malpractice action--eligibility for critical government benefits, such as Supplemental Security Income (SSI) and Medicaid can be lost because these benefits are for individuals with very limited assets. Unless proper legal steps are taken, money received will have to be "spent down" until it is nearly gone before the individual will again be eligible for government assistance.

Congress addressed this problem in the Omnibus Budget Reconciliation Act of 1993 when it enacted 42 U.S.C. [sections] 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 for public benefits. The funds in the trust can then be used to pay for things that are not covered by SSI or Medicaid. This article will explain how d4A trusts operate and how they can be used most effectively.

How is a d4A trust different from special needs trusts established using the funds of a third-party?

A d4A trust is a "self-funded" special needs trust--that is, the money or property going into the trust belongs to the disabled trust beneficiary. This is fundamentally different from a "third-party" special needs trust established using money belonging to someone else (such as a parent or grandparent). And because d4A trusts are established with funds belonging to the person with disabilities, with funds that would otherwise typically have to be spent on that person's medical care, they are subject to stricter rules than "third-party" trusts. For example, with a d4A trust, any funds remaining in the trust after the beneficiary's death must first be used to pay back the state for any Medicaid benefits received during the trust beneficiary's lifetime (and hence these trusts are often referred to as "payback" trusts). With a "third-party" special needs trust, however, any remaining funds can go to other beneficiaries of the trust settlor's choosing. Also, funds in a d4A trust must be used for the disabled beneficiary's "sole benefit." There is no such limitation for a third-party special needs trust.

For these reasons, assets belonging to a third party should never be added to a d4A trust. If a relative or friend wants to make a gift to an individual with disabilities, a third-party trust should be used to take advantage of the increased flexibility and avoid the payback requirement.

When is a d4A trust needed?

A d4A trust can be used when a person with disabilities under the age of 65 receives funds that will cause ineligibility for government benefits such as SSI or Medicaid. This may happen, for example, when a well-meaning relative leaves an inheritance for a loved one with disabilities outright, without using a third-party special needs trust. Another common situation is when a person with disabilities receives a personal injury or medical malpractice award. A d4A trust will allow these funds to enhance quality of life of the trust beneficiary without causing ineligibility for government assistance.

Who can benefit from a d4A trust?

The advantages of a d4A trust are only available to an individual with disabilities. For purposes of this trust, an individual is considered to be "disabled" if unable to support himself or herself through work. More specifically, the individual must be "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.

How can the funds in a d4A trust be used?

Generally speaking, the trustee of a d4A trust is authorized to spend trust principal and income for goods and services not otherwise provided through government assistance. …

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