A (d)(4)(A) Q&A
(Continued - Part 3 of 4)
by Gregory Wilcox, Esq.
Authors Note: This is the third installment of this article. Two
previous parts appeared in the Spring 2002 (Vol. 13, No.1) and Summer
2002 (Vol. 13, No.2) issues of The Legal Network News.
Can the trust pay for closing expenses?
You may notice that this topic was already covered in the second installment
of this article. Well, there has been a slight change in the SSI rules
that supersedes the language quoted in the earlier installment. The SSI
rules still say:
The State must be listed as the first payee and have priority over
payment of other debts and administrative expenses. SSA Program Operations
Manual System (POMS), SI 01120.203 B.1.f.
But recent POMS revisions now include after the word, expenses:
except as listed in SI 01120.203 B.3.a.. What happened?
The Social Security Administration has deleted the earlier content of
SI 01120.203 B.3.a. (unexciting transition rules having to do with reevaluations
of trusts under earlier temporary instructions), and replaced it with
language allowing payment of certain expenses before reimbursement to
Medi-Cal. Specifically, the language now says:
3. Allowable Administrative Expenses
The following instructions apply only to Medicaid special needs trusts
and to Medicaid pooled trusts.
a. Allowable Administrative Expenses
The following types of administrative expenses may be paid from the
trust prior to reimbursement of medical assistance to the State:
- Taxes due from the trust to the State or Federal government because
of the death of the beneficiary;
- Reasonable fees for administration of the trust estate such as an
accounting of the trust to a court, completion and filing of documents,
or other required actions associated with termination and wrapping of
b. Prohibited Expenses and Payments
The following expenses and payments are examples of some of the types
not permitted prior to reimbursement of the State for medical assistance:
- Payment of debts owed to third parties;
- Funeral expenses;
- Payments to residual beneficiaries.
This is all fine and good, and certainly makes it easier and more attractive
to administer such a trust. For example, it now appears that the Social
Security Administration will actually allow an attorney to charge for
his or her time to complete legally required accountings and to comply
with other trust termination obligations.
Nevertheless, there is still an inconsistency between the SSI rules
and the Medi-Cal rules, and the SSI rules are still harsher. For example,
the Medi-Cal rules expressly permit payment of the beneficiarys
outstanding bills and funeral expenses, both expressly barred by the SSI
rules. So the conclusion in the earlier installment of this article stands:
merely qualifying under the Medi-Cal rules will not make the trust valid
under the SSI interpretation of Medicaid law.
How much can a (d)(4)(A) trust distribute?
A. Public law limitations
It is an oddity of the (d)(4)(A) trust rules that they impose no requirements
on the amount of distributions other than that they must be for
the benefit of the disabled person who contributed the funds. 22
Cal Code Regs §50489.9(a)(3)(B), Medi-Cal Eligibility Procedures
Manual Letter No. 192, page 9J-74, and SI 01120.203 B.1.d. Does this mean
that a (d)(4)(A) trustee could make no distributions at all, or make distributions
of the entire trust corpus under (d)(4)(A) rules?
First, lets look at one extreme: the trustee decides to distribute
out the entire trust estate before the beneficiarys death.
Such an exhaustion of the trust is indeed likely to occur naturally where
the trust beneficiary is young and/or the trust principal is modest. Of
course, exhaustion of the trust before the beneficiarys death will
completely frustrate the provisions for paying back Medi-Cal after the
But suppose that the total distribution is not so natural.For example,
suppose the trust beneficiary is a man age 54 who is gravely ill. Suppose
it is a virtual medical certainty that he will not last more than a few
days. The trust still has $100,000 in it. What happens if the trustee
distributes the entire $100,000 to the beneficiary? Technically, he will
then lose his Medi-Cal eligibility because he will have assets that exceed
$2,000. However, if he dies very soon he may make little additional use
of Medi-Cal. When he dies the trust is obligated to repay the Medi-Cal
program with any remaining trust assets -- but it has none. Moreover,
the trust beneficiary is under the age of 55, so the Medi-Cal program
has no right to make a claim against his estate either. Is $100,000 protected
for the beneficiarys beneficiaries? No.
First, Medi-Cal could argue that the distribution of the $100,000 was
not really for the benefit of the beneficiary. It could argue
that the distribution was really for the benefit of his heirs and devisees.
Perhaps. But isnt such a distribution also for the benefit
the beneficiary? Does the mere disqualification for Medi-Cal arising from
the beneficiarys receipt of the distribution mean that it was not
for his or her benefit? Why should it mean this?
However, the real reason the answer is no is that Medi-Cal
regulations have cleaned up a gap in the federal statute. Medi-Cal regulations
require that the trust provide for reimbursement upon the death
of the individual or spouse or upon termination of the trust . . ..
22 Cal Code Regs §40489.9(a)(3)(C) (emphasis added). In contrast,
42 U.S.C. §1396p(d)(4)(A) only requires reimbursement upon the beneficiarys
Assuming that the states clarification of Congressional
intent must be met, it seems pretty clear that a total distribution of
the trust estate will result in a termination, and therefore
trigger a reimbursement requirement. All right, what if the trustee distributes
less than the entire trust estate, so that it does not result in a termination.
Apparently, there would be no reimbursement requirement at that point.
How close can the trustee get to a total distribution without amounting
to a termination? How close do you want to get to a challenge?
What about California Probate Code requirements? Californias Trust
Law says that even where:
A trust instrument confers absolute, sole,
or uncontrolled discretion on a trustee, the trustee shall
act in accordance with fiduciary principles and shall not act in bad
faith or in disregard of the purposes of the trust. Probate Code §16081.
If the trustee dumps out almost the entire trust to the beneficiary
shortly before his or her death, does the action violate this provision?
Certainly, it would be fairly easy to write into the trust a provision
that it is a purpose of the trust to preserve the trust estate
for the remainder beneficiaries and avoid creditors, thereby neutralizing
one prong of the statute. Would such an action still amount to a violation
of fiduciary principals or be in bad faith. What
is the fiduciary duty of the trustee to protect the Medi-Cal program as
a potential creditor of the trust estate? Although I have not researched
the issue, I would guess that the fiduciary duty of the trustee is to
protect the trusts beneficiaries from potential creditors.
B. Private law limitations
Never mind what the Probate and Medi-Cal rules say, what does the trust
say about the trustees rights and obligations to make distributions?
There are a number of alternative formulae for the trustees rights
and obligations with regard to special needs trust distributions. However,
the general debate about which formula to use relates to all special needs
trusts, not just (d)(4)(A) trusts, and is beyond the scope of this article.
For a detailed commentary on alternative distribution provisions in special
needs trusts, see Cynthia L. Barret, Distribution Standard for the
Special Needs Trust, NAELA Quarterly, Summer 2001, Vol. 14, No.
However, there is one very common special needs trust distribution provision
that may limit the right of the trustee to make large distributions from
a (d)(4)(A) trust. This is the provision limiting the trustees distributions
to the beneficiarys special needs and prohibiting the
trustee from making any distribution that either eliminates or reduces
the beneficiarys public benefits. Obviously, a large lump sum distribution
from a (d)(4)(A) trust would reduce the beneficiarys public benefits,
indeed, probably eliminate them -- and thereby violate the trustees
Commentators have criticized this narrow or strict
distribution provision as too restrictive and unnecessary in most cases.
Instead, the trust can simply call on the trustee to protect the beneficiarys
public benefits as a general goal:
Unless the trustee has determined in his sole, absolute, and unfettered
discretion that the benefit to the beneficiary from the particular trust
distribution outweighs the reduction in a particular public benefit program
that may be the consequence of the trust distribution.
This is sometimes called an on/off or spigot
provision that grants the trustee with discretionary authority to reduce
benefits if the trustee determines that it is in the beneficiarys
best interests. Cynthia Barrett, Id., at 12. In contrast to the
strict distribution standard, it would not only allow the
trustee to make lump sum distributions, but also other sensible distributions,
for example payment of the beneficiarys rent, that would likely
reduce public benefits.
How little can a (d)(4)(A) trust distribute?
Sometimes a trustee might want to distribute nothing at all or very
little from a (d)(4)(A) trust. Perhaps the trustee wants to preserve the
trust estate for later, or maybe the trustee wants the beneficiary to
be more self-reliant. Can the trustee stop making distributions?
A. Public law limitations
The trustees refusal to make any distribution at all would clearly
violate the (d)(4)(A) requirement that the trust be for the benefit
of the disabled person. What if the trustee makes only minimal distributions
for the benefit of the beneficiary? This would now appear
to comply with (d)(4)(A) law. Indeed, Medi-Cal could not claim that its
chances for reimbursement are being prejudiced; preservation of the trust
estate would enhance its chances of eventually being repaid.
But theres still the Probate Code problem. Depending on the language
of the trust (see below), tiny distributions might violate the language
of Probate Code §16081 quoted above that requires the trustee to
exercise his or her discretion within fiduciary limits and
B. Private law limitations
How narrowly can (or should) drafters write the distribution language?
Can the trust language simply say that the trustee may choose to
make no distributions at all?
This is tempting language. Indeed, it is a fairly common provision in
(d)(4)(A) and other special needs trusts. First, it helps resolve any
argument that the trustee is violating trust purposes. In
addition, it clearly prevents public benefit agencies from arguing that
the trustee must provide somehow for the beneficiary. Finally, it also
might serve to protect the trustee against an overly demanding beneficiary.
On the other hand, the language may cause the trust to violate the (d)(4)(A)
requirement that the trust be for the benefit of the beneficiary.
There is, therefore, a risk that the trust instrument itself will not
comply with (d)(4)(A) requirements, regardless of what the trustee actually
does. Second, the trustee must still act according to the fiduciary principals
imposed by the Probate Code. Finally, there is the risk that the trustee
will abuse his or her authority to make no distributions.
My conclusion is that drafters need to be very careful using language
that expressly permits the trustee to make no distributions at all. Perhaps
a safer route is to permit the trustee to postpone, or completely withhold
payments for periods of time (if one can anticipate that the trustee will
not misuse such authority)...
Gregory Wilcox, Esq., is an attorney in private practice in Berkeley,