Disability Annuity Special Needs Trusts
by: Begley Law Group
By Thomas D. Begley, Jr., CELA
One of the trusts used in Medicaid Planning is a Disability Annuity Special Needs Trust (“DASNT”). A previous Straight Word article discussed a Disability Annuity Trust (“DAT”). These trusts are designed so that an individual can establish a trust and transfer assets to the trust for the benefit of a disabled child of any age or a disabled individual under age 65 without incurring a Medicaid transfer of asset penalty. The problem with that trust is that the assets in the trust are considered available for public benefit purposes. Therefore, if a DAT were established for the benefit of an individual receiving Supplemental Security Income (“SSI”) and/or Medicaid, they would become ineligible for those public benefits because the assets in the trust would be countable. The solution would be to wrap a DAT inside a Special Needs Trust (“SNT”). In a Medicaid Planning context, the monies to be used to fund the trust would belong to the third party, usually a parent or a grandparent, so the SNT would be a Third-Party Special Needs Trust (“TPSNT”). In a typical situation, the parent would require long-term care and be applying for Medicaid. In order to become immediately eligible, from an asset standpoint, the parent would transfer the assets to a DASNT. The trust is exempt from the SSI and Medicaid transfer of asset penalties, and the assets in the trust would not be considered available because of the special needs provisions.
Generally, a family member, other than the trust beneficiary, would be the trustee of the DASNT, although a professional trustee could be utilized.
There are seven main issues to be considered in drafting any trust involving a potential Medicaid recipient.
- Transfer of asset penalty;
- Payback provision;
- Tax considerations, including income, gift and estate taxes;
- Estate recovery; and
- Elective share.
Let’s examine each of these issues in the context of a DASNT.
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.
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. Under the provisions of HCFA Transmittal 64, a payback does not appear to be required so long as distributions are made to the beneficiary on an actuarially sound basis. This means that the distributions must be made over the actuarial life expectancy of the beneficiary as determined by the tables contained in HCFA Transmittal 64. Many states follow this interpretation with respect to “sole benefit of” trusts including DATs and DASTs.
Because a DASNT is a crisis Medicaid planning strategy, generally all assets are placed in the trust. A careful analysis must be made as to whether to include retirement accounts. If the life expectancy of the grantor is short, a better strategy may be to take the risk and use the retirement accounts to pay for care. If the life expectancy is longer, the best strategy may be to simply pay the tax and transfer the after-tax assets to the DASNT.
- 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.
There would be no Medicaid estate recovery from the estate of the grantor, but there would be estate recovery from the estate of the beneficiary. Since the state requires a payback, then the payback would replace the estate recovery provisions. The payback would include all medical assistance paid to the beneficiary since birth.
Transfers of assets to a DASNT would be subject to elective share considerations. It is good practice for both spouses to contribute the assets to the DASNT.
Comparison Between DAT and DASNT
CONSIDERATION DAT DASNT
Typical Grantor Parent/Grandparent Parent/Grandparent
Typical Trustee Family Member (Non-Beneficiary) Family Member (Non-Beneficiary)
Assets Available Yes No
SSDI/Medicare Yes Yes
SSI/Medicaid No Yes
Transfer Penalty No No
HEMS Standard Yes No
SNT Standard No Yes
(1) 42 U.S.C. §1396p(c )(2)( B).