The (d)(4)(A) Trust Safe Harbor for Medicaid and SSI

 In Long-Term Care Planning, Special Needs Planning

As explained here, Medicaid counts the funds in most trusts you create for yourself or for your spouse as being available should either of you were to apply for benefits. However, the Medicaid rules provide for three “safe harbor” trusts that are exceptions to the general trust rules under 42 U.S.C. sec. 1396b(d)(4)(A-C). The first, referred to as a “(d)(4)(A)” trust  or “pay-back” trust – referring to one of its key features, explained below — may be created by the beneficiary or her parent, grandparent, guardian or a court for the sole benefit of a disabled individual under age 65. It may be funded with the disabled individual’s own funds, and the trust property will not be considered available in determining the disabled individual’s eligibility for Medicaid benefits as long as the trust provides that at the beneficiary’s death the state will be reimbursed out of any remaining trust funds for Medicaid benefits paid on behalf of the beneficiary during his or her life.

Transfers into a (d)(4)(A) trust are not penalized whether the trust is for the Medicaid applicant’s benefit or that of another individual who is disabled and under age 65 at the time of the transfer.

These trusts are incredibly valuable planning devices for people under age-65 who are disabled, whether the disability arose at birth or at a later age. The trade off of having to reimburse Medicaid with funds remaining at death in exchange for getting benefits, both Medicaid and Supplemental Security Income, during life, is almost always worth it. But there can be exceptions.

We once prepared a (d)(4)(A) trust for a man in his early 50s who had been injured in a motorcycle accident. The trust sheltered his personal injury settlement that resulted from the accident. It came several years after the accident during which he incurred large medical costs covered by Medicaid. Unfortunately, his family contacted us just a year or two later when the man died. Almost all of the trust money went to reimburse the state for the man’s medical expenses it had paid. This would not have been the case had we not set up the trust because Medicaid’s normal claim for reimbursement is only for benefits paid after age 55 or for payments for nursing home care at any age. Of course, when we set up the trust, we did not expect our client’s imminent death, this predated the Affordable Care Act, so private insurance was not available due to his preexisting conditions, and Medicaid paid for the man’s personal care attendants which are not covered by private insurance in any case.

While the beneficiary must be under age 65 when the trust is funded, the trust retains its exempt status for the rest of her life. You may well ask why everyone doesn’t put some money into a (d)(4)(A) trust before age 65 just in case they need Medicaid in the future. The pay-back provision is not a problem if you don’t use Medicaid, so that’s not a drawback. The problem is that the trust does not qualify unless you are disabled when you fund it.

To review, in order for a (d)(4)(A) trust to qualify, it must meet the following requirements:

  • It must be irrevocable.
  • The beneficiary must be under age 65 and disabled at the time of funding. Anyone who is receiving Social Security Disability Income or Supplemental Security Income  is automatically deemed to be disabled. Beneficiaries who are not receiving these benefits will have to go through a certification process as determined by each state.
  • The trust must be created by the beneficiary, a court, or the beneficiary’s parent, grandparent or guardian.
  • The disabled individual must be the only beneficiary during his life.
  • At the beneficiary’s death all state Medicaid programs that have paid for his care during his life must be reimbursed for their costs. If funds remain after such reimbursements, they can be distributed to the beneficiary’s estate or to others named in the trust.

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