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A (d)(4)(A) Q&A
(Continued - Part 2 of 3)

by Gregory Wilcox, Esq.

Author's Note: This article continues to grow as I write it. The first part appeared in the last issue of The Legal Network News. Here is the next installment. More to follow.

Can the trust pay for closing expenses?

It depends. This is because there are differences between the Medi-Cal and SSI programs when it comes to payments for expenses when the trust terminates at the beneficiary's death.

The Medi-Cal rules are pretty clear. They say that before reimbursement to the state, funds can be retained in the trust upon the death of the disabled individual for the cost of remaining management and investment fees, outstanding bills subject to payment by the trust, and burial/funeral expenses (Eligibility Procedures Manual, as amended by Letter No. 192, December 18, 1997, page 9J-75).

The SSI rules are harsher than the Medi-Cal rules. They say:

To qualify for the [(d)(4)(A)] special-needs trust exception, the trust must contain specific language that provides that upon the death of the individual, the State will receive all amounts remaining in the trust, up to an amount equal to the total amount of the medical assistance paid on behalf of the individual under the State Medicaid Plan. The State must be listed as the first payee and have priority over payment of other debts and administrative expenses [emphasis added], POMS SI 01120.203B.1.f.

In other words, Medi-Cal will allow (d)(4)(A) trusts to pay remaining management and investment fees, outstanding bills, and burial/funeral expenses before Medi-Cal reimbursement, but SSI apparently will not.

As a result, merely qualifying under the slightly more generous provisions of Medi-Cal law will not make the trust valid for the SSI interpretation of Medicaid law! As a result, if you want your (d)(4)(A) trust to allow a beneficiary to qualify for SSI, you had better prohibit payment of the "remaining management and investment fees, outstanding bills, and burial/funeral expenses" even if the Medi-Cal program allows it.

Can the trust require DHS to make a claim to be repaid?

No. Medi-Cal insists that the trust not require the state to make any kind of "claim" for reimbursement. The trustee is simply to contact the Medi-Cal program to obtain the dollar amount for reimbursement, and then pay it. Any trust that requires DHS to make a "claim" before reimbursement does not pass Medi-Cal's requirements for a valid (d)(4)(A) trust (Eligibility Procedures Manual, as amended by Letter No. 192, December 18, 1997, pages 9J-75). DHS even provides examples of trust language that do, and do not, meet this requirement (Id., at 9J-83 and 84).

In spite of this apparently clear rule, I have recently seen DHS actually approve some (d)(4)(A) trusts with defective repayment language. This happened when a petition was filed under Probate Code §3604 to create a (d)(4)(A) special needs trust for an incompetent adult. Under the Probate Code, the petitioner was required to give notice of the hearing to DHS. DHS then responded by letter approving the defective language. Gotcha? No. Such DHS letters always say that petitioners cannot rely on the letter's approval for any expectation of Medi-Cal eligibility. To say the least.

Who is allowed to benefit from a (d)(4)(A) trust?

A foundation requirement of 42 USC §1396p(d)(4)(A) is that trusts established under it be "for the benefit of" the public benefits beneficiary. At first glance this may seem like a no brainer. However, note that a trust created under 42 USC §1396p(d)(4)(C)–a (d)(4)(C) trust—must be created "solely for the benefit of individuals who are disabled" (emphasis added). We don't see many such (d)(4)(C) trusts in California. They are so-called "pooled trusts" that have never caught on here (perhaps it has something to do with the high ratio of liability and administrative cost to potential reward for the trustees).

The Medi-Cal version of the (d)(4)(A) requirements is found in 22 California Code of Regulations §50489.9. Although the regulations go to great pains to define "sole benefit" for (d)(4)(C) trusts (that we don't have in California), they do not elaborate at all on the simple "benefit" that must be received from (d)(4)(A) trusts (that we do have). In any case, this contrasting language focuses attention on the issue of how much unadulterated benefit the public benefits beneficiary must receive from the trust before it rises to a level that meets the "for the benefit of" requirement. For example, can such a trust make distributions for others? What about remainder beneficiaries?

A. Can there be other trust beneficiaries during the primary beneficiary's life?

I don't think so. One could argue that the "sole benefit" limit for (d)(4)(C) trusts suggests that the apparently broader "benefit" limit for (d)(4)(A) trusts allows other trust beneficiaries along with the primary beneficiary. After all, a trust for a disabled person under age 65 and for someone else as well is still "for the benefit of" the disabled person.

There may be nothing technically wrong with this interpretation as a matter of linguistic analysis—but it will surely come as a shock to DHS (and if you want to challenge DHS on this point, let me know how it comes out).

B. Can there be remainder beneficiaries?

Medi-Cal rules are clear that the "benefit" requirement for (d)(4)(A) trusts does not prohibit the naming of a remainder beneficiary of such a trust after reimbursement to the state for all Medi-Cal benefits. Medi-Cal rules say:

A beneficiary may be named in the trust, to receive amounts remaining in the trust upon the death of the primary beneficiary, however, the terms of the trust must be clear that the transfer to the secondary beneficiary occurs only after DHS has been reimbursed for the medical assistance provided (Eligibility Procedures Manual, as amended by Letter No. 192, December 18, 1997, pages 9J-75).

SSI rules are silent about remainder beneficiaries in (d)(4)(A) trusts. However, SSI must allow remainder beneficiaries in such trusts because (a fortiori, as we said in law school) SSI rules expressly allow remainder beneficiaries even in the stricter (d)(4)(C) pooled trusts that are required to be for the beneficiary's "sole benefit", POMS SI 01120.201F.2.

Note, however, that it may be a very good idea to name a clear individual remainder beneficiary in a (d)(4)(A) trust. This is because the SSI rules say that "if a grantor is also the sole beneficiary of a trust, the trust may be revocable regardless of the language in the trust to the contrary", POMS SI 01120.200D.3. Implied revocability would, or course, be a disastrous result. SSI rules helpfully suggest that "most states recognize the irrevocability of a grantor trust if there is a named 'residual beneficiary' in the trust document who would, for example, receive the principal upon the grantor's death or the occurrence of some specific event", Id. This approach would seem to work to make the trust irrevocable under California law, Probate Code §15403.

The Social Security Administration has sometimes taken the position that merely giving the remainder interest in the trust to the beneficiary's "heirs" is inadequate. Avoid this issue by using the names of specific people as remainder beneficiaries.


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