Disability Trust

Special Needs Trusts and Disability Trusts are designed to provide ongoing financial support to disabled persons without jeopardizing their right to receive specific types of public assistance. Because benefits under programs such as Medicaid and Supplemental Security Income (SSI) are usually contingent upon the recipient falling below a minimum income level, disabled individuals cannot own anything – or at least very little. As detailed at Special Needs Trust and Medicaid Trust, a trust that you control and benefit from will generally disqualify you from Medicaid or SSI. This is where a Special Needs Trust or Disability Trust comes in.

Although they serve a similar purpose, Special Needs Trusts and Disability Trusts are two distinct estate planning techniques. The key difference is the funding source.

A Special Needs Trust is created for the benefit of a disabled person using assets that belong to someone else – usually the trustmaker. Because the disabled individual has no ownership interest in the assets, it is relatively easy to name an independent trustee, give him or her wide discretion as to how and when to provide assistance, and thus prevent the trust assets from being attributed to the beneficiary. This is also why Special Needs Trusts are generally effective in shielding assets from creditors of the disabled child. Special Needs Trusts work especially well for parents or grandparents who wish to set up a source of support for disabled children without jeopardizing Medicaid and SSI.

Disability Trusts are self-funded, meaning that the assets used to establish the trust are owned by the trustmaker. This makes it difficult to claim that the disabled person does not own anything. Fortunately, federal law permits disabled individuals to create a qualified Disability Trust and still retain their SSI and Medicaid benefits. These types of trusts are codified under the Social Security Act at 42 U.S.C. 1396p(d)(4)(A) or (C) and are sometimes referred to as “D4A Trusts” after the code section under which they were created.

To be effective, a Disability Trust must meet the following requirements:

• Provide only “supplemental” benefits. It cannot provide for food and shelter. Aside from those two exclusions, federal law allows a laundry list of acceptable supplemental benefits.
• The beneficiary must be under 65 and disabled as defined by the Social Security Act.
• The trust must contain a “payback provision”, which kicks in upon the beneficiary’s death and requires the trust to reimburse the state Medicaid agency for benefits the beneficiary received while he was alive.

Qualified (D4A) Disability Trusts are often used as part of personal injury settlements to establish a source of benefits for a plaintiff awarded compensation for a lifetime injury.

For more information about D4A trusts and Medicaid qualification, see Medicaid Secrets or speak to a living trust attorney. You can also ask specific questions at living trust questions or (for a small fee) at:

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