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DISABILITY ANNUITY TRUSTS

by Thomas D. Begley, Jr., CELA

The Concept. A sole benefit of trust is a creature of HCFA Transmittal 64.[1] These trusts have traditionally been used in crisis planning. They can be established for the benefit of disabled persons—a Disability Annuity Trust (“DAT”).[2] The idea is that assets would be transferred to an irrevocable trust for the sole benefit of the disabled individual. The assets in the trust were then paid out to the beneficiary on an actuarially sound basis using the actuarial tables contained in HCFA Transmittal 64.[3] However, some states, including New Jersey, maintain that despite the clear language in HCFA Transmittal 64, the language in the statute “sole benefit of” means that a Medicaid payback provision is required. Because the assets were transferred to an irrevocable trust “for the sole benefit of” a disabled individual, the transfer is not subject to the Medicaid transfer penalty rules.

This is a particularly useful device where (1) there are highly appreciated assets and utilization of the trust makes it possible for a “step up” in basis to be obtained, and (2) advanced planning has not been done and the transfer of assets to children would result in significant periods of Medicaid ineligibility. There are two issues to be considered in utilizing “for the sole benefit of” trusts: transfer rules and availability.

Transfer of Asset Penalty. A sole benefit of trust is exempt from the Medicaid transfer of asset penalties. If the sole benefit of trust is established for a disabled child, there is no age limit.

Age Limit.

  • Sole benefit of disabled child. The trust can be established for a disabled child age 65 or older.[4]
  • Sole benefit of other disabled individual. If the sole benefit of trust is established for an individual other than a child, the other individual must be under age 65 years of age and disabled.[5]

Definition of sole benefit of. HCFA Transmittal 64 deals with transfers of assets and treatment of trusts.[6] For the sole benefit of is defined as follows:

A transfer is considered to be for the sole benefit of a spouse, blind or disabled child, or a disabled individual if the transfer is arranged in such a way that no individual or entity except for the spouse, blind or disabled child, or disabled individual can benefit from the assets transferred in any way, whether at the time of the transfer or at any time in the future. For a transfer or trust to be considered for the sole benefit of one of these individuals, the instrument or document must provide for the spending of funds involved for the benefit of the individual on a basis that is actuarially sound based on the life expectancy of the individual involved.[7]

Despite the clear definition of sole benefit of in HCFA Transmittal 64, many states, including New Jersey, require that the sole benefit of trust have a provision requiring a payback on the death of the beneficiary to the state Medicaid agency.      

Therefore, if the beneficiary is receiving Social Security Disability Income (“SSDI”) and Medicare, a DAT is appropriate. Beneficiaries receiving Supplemental Security Income (“SSI”) and Medicaid must utilize a Disability Annuity Special Needs Trust.

 

[1] HCFA Transmittal 64 § 3257.

[2] HCFA Transmittal 64 § 3258.9B.

[3] HCFA Transmittal 64 § 3258.9B.

[4] 42 U.S.C. § l396p(c)(2)(B)(iii).

[5] 42 U.S.C. § l396p(c)(2)(B)(iv).

[6] HCFA Transmittal 64 § 3257.

[7] HCFA Transmittal 64 § 3257(B)(6).

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