Structured settlements

To correct a typo from last week, the d4A, not the d4C, first party trust requires a clause that states that any funds remaining on the death of the disabled person must be paid to the state Medicaid recovery program prior to payment to relatives or certain expenses caused by the disabled person's death, such as funeral expenses.
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The d4C trust is administered by a tax-exempt, non-profit organization that is allowed to keep all or most of the funds after the disabled person's death.

Both of these trusts are quite different from the third party trust. The third party trust is set up by someone other than the disabled person, and funded with funds that do not belong to the disabled person, for the benefit of the disabled person, as well as any other beneficiaries. It may be a lifetime gifting trust set up solely for the disabled person, which can be named as the beneficiary of a gift from Aunt Mary's last will, as well as receive gifts from other relatives.

The third party special needs trust can also be created by language inserted in a parent's or sibling's dynasty trust. In both cases the trust will have certain language restricting distributions to the supplemental or special needs of the disabled person from their share of the trust, in the sole discretion of the trustee. Neither third party trust will require the d4A "pay-back" clause. The trust will say who the funds go to on the death of the disabled person, such as to their lineal descendants, if any, or to their siblings, to other persons, or to a specific charity. A parent can set up a fund for their disabled child, consisting of all of their estate or that child's portion of the estate, and ensure to whom any unspent funds will go, without the obligation of the pay-back clause to Medicaid.

If, mistakenly, the grandparents name that disabled grandchild in their will, or in certain trusts, the funds will vest, or become the property of the disabled person, and disqualify him or her from benefits until the funds are spent-down or are transferred to a d4A special needs trust with the pay-back clause. I cannot over-emphasize how important it is that the parents of a disabled child warn the grandparents and other relatives, that they need to consider this language in their trust, or name the disabled child's parent's trust as the beneficiary of the disabled person's share. No one should ever make a gift to the disabled person directly.

The third party trust may come under review of the Social Security Administration, or SSA, case worker who will evaluate the trust by the Program Operations Manual System, or POMS. If the disabled individual has the power to revoke the third party trust and claim the assets, the assets will be considered a countable resource. It is wrong to disinherit the disabled child, or to trust their care and money to the other siblings, when these documents are available.
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In Attorney David Lillesand's analysis of the January 2009 revisions of the POMS at the recent conference of the Academy of Special Needs Planners, he also mentioned that the revisions make it clear that the pay-back obligation of the d4A trust must not limit the payback to only Florida reimbursement, but must include the obligation to pay-back all states proportionately that provided medical care. The trust also cannot attempt to limit the pay-back to those medical expenses incurred after the trust was established, but must include those expenses incurred by any state prior to the trust.

To be approved as a first party d4A special needs trust by SSA, the caseworker must find that the trust was signed as trustmaker by a parent, grandparent, or a court, for the sole benefit of a disabled person, while under the age of 65, and contains a pay-back clause. The question had arisen of whether annuity payments from a personal injury settlement that will continue after age 65 would disqualify the applicant. The revisions make it clear that such are permitted if the annuity contains that restriction, not a standard clause and the trust contains an irrevocable assignment of the right to receive annuity payments made when the beneficiary was under age 65. If a person over age 65 has other funds, such as an inheritance, a d4A trust is not permitted. They must either use a d4C pooled trust, where the funds do not go to named beneficiaries, but are used to pay-back or remain in the trust for other disabled beneficiaries, or they must use some other strategy to shelter the funds.
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Although certain administrative expenses may be paid after the death of the disabled person prior to the pay-back to the state, the amendments to the POMS require language in the trust prohibiting payment of estate tax not due to the inclusion of trust assets in the estate, payment of debts to third parties, payments of funeral expenses and payments to residuary beneficiaries. Funeral expenses should be pre-paid by the trustee during the life of the disabled person.
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The revisions to the POMS do not answer the controversy raised in some states where a minor could redirect the annuity payments from a structured settlement after they reach the age of majority under the state's guardianship law. If they can redirect the payments to themselves, the trust fails the pay-back requirement and the assets will count as income or a resource. It is important that the trust contain an irrevocable assignment to the trust, not a standard clause, and does not allow the parents or child when becoming an adult to sell the remaining payments to avoid the pay-back.

Finally, Lillesand reminded the attorneys present of the importance of including a savings clause in every trust. The clause would state that if any provision of the trust would disqualify the beneficiary from public benefits, then that offending clause would be void, permitting the trust to meet the requirements for a special needs trust. Any provision of the trust which is inconsistent with the statute would be void. He calls this clause the "get out of jail free card."