Special or Supplemental Needs Trusts:
The First-Party Special Needs Trust
As life expectancies and health care costs continue to rise, the supplemental or special needs trust is becoming increasingly relevant. Such a trust can enrich the life of a disabled person who relies on means-tested government programs like Medicaid and Supplemental Security Income (“SSI”) by allowing him or her to retain government payments even while receiving benefits paid out from the trust.
Both the first-party or “self-settled” special needs trust under federal law and the third-party special needs trust under state law provide exclusively for the beneficiary’s special needs, which are defined by the eligibility rules of SSI as needs other than food and shelter.
The first-party trust, funded with the beneficiary’s own assets, is permitted by federal statute 42 USC §1396p (d)(4)(A) and is especially useful when a disabled person is about to be awarded a lump sum payment from an inheritance or lawsuit. It carves out an exception to the common law prohibition against asset protection for self-settled first-party trusts. See Greenwich Trust v. Tyson, 129 Conn. 211 (1942) (establishing that a settlor may not avoid his or her creditors by transferring assets into his or her trust).
The funds in the (d)(4)(A) trust can be used for the disabled beneficiary’s special or supplemental needs – needs other than food or shelter – provided certain restrictions apply. First, the beneficiary must be disabled under the Social Security Act, or unable to engage in any substantial gainful activity as a result of disability. Additionally, the trust must include a payback provision stating that upon the beneficiary’s death, the state will receive all amounts remaining in the trust up to an amount equal to the total medical assistance paid on behalf of the beneficiary. If those requirements are met, the (d)(4)(A) trust can hold assets and make payments to the beneficiary without jeopardizing his or her Medicaid or SSI benefits.
For purposes of Connecticut benefits, it should be noted that assets held in a (d)(4)(A) trust may disqualify a beneficiary for the state supplemental income program. Parkhurst v. Wilson-Coker, 82 Conn. App. 877 (2004). Assets can reliably be held in and paid out of a (d)(4)(A) trust, however, without disqualifying a beneficiary for federal means-tested programs.