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A (d)(4)(A) Q & A

by Gregory Wilcox, Esq.


Author’s Note: This "short" article got out of hand and became too big for one issue of The Legal Network News. Accordingly, I will offer CANHR a second part for a later issue.

What is a (d)(4)(A)? It’s a special kind of trust authorized by a federal statute at 42 United States Code §1396p(d)(4)(A). Why should you care? Because it is by far the easiest way for you to protect people who receive Supplemental Security Income (SSI) and/or Medi–Cal from losing all their benefits when they receive a "windfall" (e.g., an inheritance, a personal injury award, or life insurance benefit).

Bonehead (d)(4)(A)

Since 1993, the federal Medicaid statutes have carved out an exemption allowing (d)(4)(A) trusts. Under the exemption, Medicaid authorities (Medi–Cal in California) will not count the assets held in such a trust against the eligibility of a Medi–Cal beneficiary — even though the Medi–Cal beneficiary funds the trust with his or her own assets. However, there are a number of catches:

  1. The trust will only work for a person who is under 65 when it is established.
  2. It must be established for the benefit of such a person by a parent, grandparent, legal guardian of the individual, or a court.
  3. It must pay back all amounts remaining in the trust upon the death of such individual up to an amount equal to the total assistance paid by Medi–Cal on behalf of the individual.

In 1999, Congress decided that SSI applicants were having it much too easy, and adopted new rules to disqualify such applicants when they had given their assets away so that they then qualified for benefits. However, Congress also carved out an exception to the new anti–transfer rules: (d)(4)(A) Medicaid trusts. In other words, if the applicant had transferred funds into a valid (d)(4)(A) trust, the SSI program may not disqualify the applicant from SSI because of it (42 USC §1382b(e)(5)). For previous comment on these points in The Legal Network News, see "New SSI Trust Provisions," by Peter Stern.

So now we have a fairly attractive statutorily–authorized trust container into which an SSI and Medi–Cal recipient can dump any unwanted "windfall" and still maintain benefits. Of course, the (d)(4)(A) trust should always include discretionary "special needs" distribution language so that SSI and Medi–Cal would not treat the benefits coming back out of the trust as "income" and thereby stop or reduce benefits on that account.

Note: There are various ways to write the "special needs" distribution language, from very restrictive to very loose. Usually, the language gives the trustee discretion to make distributions of income and principal, but encourages the trustee to make them only for "special needs" that do not include food, shelter, and clothing (that SSI is supposed to cover) or medical care (that Medi–Cal is supposed to cover). But this is another whole topic for a separate article. See also Probate Code §§16080–16081 on the standards of care that apply when discretion is granted to trustees.

However, there are problems with (d)(4)(A) trusts. Practitioners who have tried to use the available rules to create such trusts have found a number of puzzles and frustrations. For example:

What rights must a person have who "establishes" such a trust?

One of the devils in the (d)(4)(A) details is that it (apparently) distinguishes between "creating" a trust and "establishing" a trust. This is what the SSI rules say:

An individual is considered to have established a trust if any of the assets of the individual (or spouse), regardless of how little, were transferred to a trust other than by will. [SI 01120.201B.7., in the Social Security Administration’s "Program Operations Manual System" (POMS)].

Knowing only this, an innocent reader might be forgiven for thinking that SSI does not distinguish between the funder of the trust and the establisher of the trust. However, SSI goes on with additional language that completely confuses the issue:

Note: The grantor (see SI 01120.200B.2.) named in the trust document and the individual who established the trust may not be the same for purposes of this provision. The trust may name the individual who physically took action to establish the trust rather than the individual who provided the trust assets as grantor, e.g., a parent, insurance company, or other agent. This distinction is important, especially in developing Medicaid trust exceptions in SI 001120.203. [Id.]

Okay, the first sentence in the foregoing "NOTE" might make some sense, if it distinguishes the person who signs the trust document from the "grantor" who funds the trust. Reassuringly, this thought is consistent with the language defining "grantor" in SI 01120.200B.2, "a grantor (also called a settlor or trustor) is the individual who provides the trust principal (or corpus)." So the "e.g." in the second sentence in the "NOTE" above must actually refer to the individual who "physically took action" rather than to the "grantor" (who provided the principal or corpus).

My note: It is a little worrisome that the language seems to define parents and insurance companies as "agents", a concept not otherwise defined or even mentioned — but never mind. It may also bother some people that these latter provisions appear to contradict the first indented quotation above, which seems clearly to make the grantor also an establisher in the general case — but never mind (perhaps the fact that the (d)(4)(A) rules are an exception to the overall trust rules can take us out of its definitions as well!).

So then we look at the SSI language that specifically describes the (d)(4)(A) trusts whose assets SSI will not count. First, it notes that a (d)(4)(A) trust may not be "established" by the individual public benefits beneficiary himself/herself [SI 01120.203B.1.e.]. It must be "established" by one of the four named above: parent, grandparent, guardian, or court. Of course, the public benefits beneficiary may still be the grantor — and even the "creator" of the trust under California law (Probate Code §15200), since he or she will be the "owner" of property transferred to a trust.

Here’s where the SSI rules go into the Twilight Zone. They state:
The person establishing the trust must have legal authority to act with regard to the assets of the individual. An attempt to establish a trust by an individual without the legal right or authority to act with respect to the assets of the individual may result in an invalid trust.
Note: This requirement refers to the individual who took action to establish the trust even though the trust was established with the assets of the SSI claimant/recipient. [SI 01120.203B.1.e.]

So, what if a parent "establishes" a (d)(4)(A) trust for a disabled but legally competent child who receives SSI and Medi–Cal? Why does the parent have to have a "legal right or authority to act with respect to the assets of the" child? If the child does not like the trust, presumably he or she will simply not fund it. Does this language require that the child also give a parent a power of attorney or some other agency authority to make the parent an "agent" as suggested by the other language mentioned above? Why?

Perhaps this language was intended to deal with public benefits beneficiaries without legal capacity. Then it is certainly clear that someone has to have legal authority over the beneficiary’s assets in order to effect a valid transfer to the trustee of the trust. But why does it have to be the person who took "physical action" to make (i.e., establish) the trust? Why can’t it be some other "agent" or fiduciary.

Probably the POMS just got mixed up in its own complicated language and used the word, "establish", too loosely. Probably it meant that any attempt by a person to fund a trust (that is, the grantor, trustor, and funder) without legal authority over the assets may result in an invalid trust (which seems obvious). I hope so. But SSA’s local offices are not likely to realize or correct the error. They may instead disregard (d)(4)(A) trusts when the parent who signed the trust document did not also have a valid agency from the public benefits beneficiary to fund the trust as well as physically "establish" it.

How do you get a court to establish the trust?

Often clients don’t come in with a convenient parent or grandparent to establish a (d)(4)(A) trust. Indeed, they don’t even have a "guardian" (i.e., a conservator here in California). Only a "court" is left of the four potential actors who can establish such a trust. But how do we get a court to agree to do this job?

If the prospective trust beneficiary is "an incompetent person" who receives money from a settlement, compromise, or judgment, the answer is often easy: use the procedures outlined in Probate Code §§3600, 3602(d), 3604, and 3605. These sections provide for court review and approval of a special needs trust to receive such proceeds (the trust must meet certain state requirements which are not the same as, but do not conflict with, the federal (d)(4)(A) requirements). The state rules also authorize a court order that the money from such settlement, compromise, or judgment "be paid to a special needs trust established under Section 3604 for the benefit of the minor or incompetent person" (Probate Code §3602(d)).

It is interesting in light of the discussion above that the state statutes just described never actually authorize the court to "establish" a trust — although court establishment is what (d)(4)(A) and the SSI POMS rules literally require. In fact, using SSI’s language, the person who took physical action to establish the trust was almost certainly not the court but someone else acting on behalf of the "incompetent person". But I quibble. The Medi–Cal program has never made the argument that the court’s order funding the proposed trust only "creates" the trust (under Probate Code §15200) but does not "establish" it. Whether or not the SSI program will also ignore this technicality is unclear.

The Real Problem

But this is not the real problem. The real problem is that the state statutory scheme for the creation and/or establishment of special needs trusts only covers part of the territory. There are at least two categories of people left out:

  • What about "incompetent persons" who receive money and other property that is not from a settlement, compromise, or judgment. Suppose, for example, that such a person receives money as a beneficiary of a life insurance policy or IRA, or from a probate or trust distribution, or even from a personal injury award that was settled before it ever went to court? What court is to be used to order payment to a special needs trust?
  • What about disabled persons who receive public benefits and a "windfall" but are not "incompetent"? They are apparently not within the scope of people entitled to use the procedures under Probate Code §§3600, et seq. Once again, the lawmakers seem unable to conceive of the possibility that people can be disabled without being incompetent.

These omissions by our lawmakers have been an challenge to the fertile imaginations of attorneys determined to achieve their clients’ goals. With regard to the first group of omitted potential (d)(4)(A) beneficiaries, many attorneys have argued that an Order for Distribution in a probate proceeding is a "judgment" that brings the matter within Probate Code §§3600, et seq. Other attorneys, wishing to avoid the payback provisions required in a (d)(4)(A) trust, try to get the distributee changed under Probate Code §11700. At least if the recipient of anticipated funds is not competent, it might be possible to get a conservator appointed, and a conservator is someone who is eligible to establish a (d)(4)(A) trust.

But what if there is a court involved in a matter but the disabled recipient is not incompetent? Or worse, what if there is no court involved in the matter? There appear to be two popular approaches to solving these problem, both are crazy but brilliant.

First, if there is a court involved in the matter but the beneficiary is competent, some attorneys argue that the procedures in Probate Code §3600, et seq., can still be applied. The theory? They point out that under Probate Code §3603 an incompetent person includes "any person for whom a conservator may be appointed". Then referring to Probate Code §1802, they point out that a conservator can be appointed for anyone who voluntarily requests such an appointment and establishes good cause to the court for the appointment. In other words, all of us are "incompetent" under these definitions, allowing the court to order our settlements, compromises, and judgments into a state authorized special needs trust. I know; if I hadn’t seen it work I wouldn’t believe it either.

Second, if there is no court involved in the matter and the beneficiary is competent, some attorneys advise their clients to execute a durable power of attorney appointing an attorney–in–fact and including the authority to create special needs trusts. The attorney–in–fact then drafts the trust and files a petition under Probate Code §4541. This provision allows an attorney–in–fact to ask a court to pass on the proposed acts of the agent, i.e., the establishment of the proposed trust. Bingo, a court order (kudos to attorney Thomas Beltran who not only invented this strategy but has made it work).

Of course, there is still the lingering technical question of whether or not the court has actually "established" the trust for purposes of the (D)(4)(A) requirements. However, my hunch is that both SSI and Medi–Cal will deem the requirement satisfied if they receive an order approving a specific trust on official–looking pleading paper with a court caption, signed by a judge, and stamped "filed" in blue ink.

Finally, there is recent word on the street that the judges in some probate courts (including Alameda and Orange Counties) are showing reluctance to participate in the creation of (d)(4)(A) trusts unless there are specific state procedures authorized by statute, as in Probate Code §3600, et seq. Hopefully these problems can be worked out without having to resort to an appellate court order. There is a helpful case on this point from New York, Application of Moretti, 606 NYS 2d 543, 159 Misc Rpts 2d 654 (1993). The state had argued in that case that a (d)(4)(A) trust could not be created until the state legislature had passed conforming procedural rules. The court disagreed and held that it could go ahead and approve the proposed trust with or without state procedural rules. Indeed, it even went out of its way to say that if that state’s eventual procedural rules ended up burdening the Medicaid beneficiary’s substantive federal rights, the rules would violate the Supremacy Clause of the U.S. Constitution and be invalid.

Continued:

Gregory Wilcox, Esq., is an attorney in private practice in Berkeley, California.