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CONSIDERATIONS IN DRAFTING A DISABILITY ANNUITY SPECIAL NEEDS TRUST

by Thomas D. Begley, Jr., CELA

There are four main issues to be considered in drafting any trust involving a potential Medicaid recipient. These include:

  • Availability;
  • Transfer of asset penalty;
  • Payback provision; and
  • Tax considerations, including income, gift and estate taxes.

Let’s examine each of these issues in the context of a DASNT.

Availability. The assets in the DASNT would not be available, because the trust would be designed to give the trustee complete discretion with respect to distributions. Standard Third-Party Special Needs Trust language would be used in designing the trust. The standard DAT language would also be included. Because of the special needs provisions, the assets in the trust are not counted as assets of the beneficiary.

Transfer of Asset Penalty. There would be no transfer of asset penalty imposed upon the grantor, usually a parent or grandparent, by SSI and Medicaid, because there is a statutory exemption[1] from the penalties for transfers of assets to or for the sole benefit of individuals with disabilities. For a child with a disability, there is no age limit. If the beneficiary of the DASNT is an individual other than a child, there is an age limit of 65.

Payback. Whether a “sole benefit of” trust is subject to a Medicaid payback is open to question. New Jersey takes the position that such a trust must include a Medicaid payback and this issue has not been litigated.

Tax Considerations

  • Income. The income generated by a DASNT is taxed to the beneficiary.
  • Gift. There would be a gift from the grantor to the trust for gift tax purposes.
  • Estate tax. The assets in the trust would be excluded from the estate of the grantor, but included in the estate of the beneficiary.

 

[1] 42 U.S.C. §1396p(c)(2)(B).

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