Establishing a Special Needs Trust with the Beneficiary’s Own Funds

Occasionally, a disabled person receives assets that will disqualify him or her from receiving government needs-based program benefits. An exception has been created by 1396p(d)(4)(A) exists for trusts that are established with the disabled beneficiary's own funds. The reason we need the exception is that oherwise, the transfer of an individual's own funds to a trust would trigger a transfer penalty under 1396(c)(1)(A). Under the rules, outright transfers trigger penalties, as do transfers to trusts.

A kinder, gentler Congress decided that it would allow the assets of the "disabled" individual to be transferred to an irrevocable trust without triggering the transfer penalties of 1396(c)(1)(A) so long as certain criteria were met. Those criteria were set forth in 1396p(d)(4)(A). One of those criteria is that the trust must contain "the assets of an individual under age 65 who is disabled (as defined in section 1382c(a)(3) of this title)." 42 USC
1382c(a)(3) contains the familiar statutory definition of "disability" relating to "substantial gainful employment,"etc.

As a result, it is correct that a valid d4A trust must be for the sole benefit of a beneficiary who meets the statutory definition of disability. However, this only applies to a trust that is created with the disabled beneficiary's own assets and if you want to avoid the transfer penalties. Since third-party special needs trusts created with someone else’s money do not contain (or at least should not contain) the assets of the disabled beneficiary, the transfer penalty rules of 42 USC 1396p would not apply in the first place, so the third-party SNT does not need to avail itself of the (d)(4)(A) exception to the transfer penalty rules.

Accordingly, compliance with the restrictions of (d)(4)(A) are not required of a third-party SNT in order for the assets not to be considered resources of the beneficiary for needs-based benefits resource tests. Of course, restrictions on use of the funds are necessary in order that the assets not be counted for eligibility purposes; however, those requirements do not derive from 1396p(d)(4)(A). Rather, they derive from other provisions and rules relating to whether assets are "resources" for purposes of the resource test. You should look at your local State Medicaid regulations for guidance on what your State would consider an available resource and draft your third-party SNT to avoid triggering inclusion.