How Should the Family of a Disabled Individual Design an Estate Plan? (Part Two)*
Lisa Nachmias Davis
Attorney at Law
129 Church Street, Suite 805
New Haven, CT 06510
Fax 203-774-1060 or 776-4411

    Part One of this article discussed the ways that the family of a disabled individual could design an estate plan to include a "special needs trust" to supplement, not reduce or replace, the disabled person's entitlement benefits. But what if planning has not been done, and funds pass to the disabled individual outright? Or what if the individual is about to receive a personal injury settlement or award?

    First, a word about liens. Families should know that the State of Connecticut has a lien for so-called "cash assistance," also known as "state supp.," but only up to 50% of an inheritance or proceeds of litigation received. A similar lien applies with respect to costs of incarceration, care provided in state mental institutions or through state programs for the developmentally disabled, and care provided to an individual's children under the TANF (formerly AFDC) programs, as well as other state-funded programs.  In addition, when a personal injury is involved, the State's lien includes costs of medical assistance (Medicaid) related to that injury. (There are also liens for other state-administered benefits.) However, the law in Connecticut to date (being challenged in the courts) is that under federal law the State can not require further repayment of Medicaid benefits provided during the disabled individual's lifetime, but must wait until the individual's death to file a claim. Nor does the federal government impose a payback lien of any kind with respect to the programs it administers (Social Security, SSI, and Medicare), with the possible exception of disabling injuries subsequently compensated by a workers' compensation award.

    Second, a word about income. An inheritance or injury award that is received while an individual is on Medicaid is considered "lump-sum income" that may affect benefits for at least six months. The individual may sometimes avoid this problem by going "off" Medicaid before payment is received. Other state and federal benefits have their own timing rules.

    Once these issues have been resolved, however, families should know that the "OBRA '93 Trust" or "payback" trust can preserve the remaining funds in a trust for the individual's supplemental needs during lifetime without further affecting Medicaid benefits.

    The requirements of an OBRA '93 Trust are simple: (1) established for the lifetime benefit of one individual under age 65 (2) who is either blind, or disabled as defined by the Social Security laws (receipt of a government disability benefit should satisfy this requirement, but is not required), (3) with pay-back of the state Medicaid lien required at death. In addition, the trust may only be established by parents, grandparents, courts, or "guardians" (construed to include conservators), not by the disabled individual directly. In 1998, the Connecticut legislature passed a law explicitly authorizing probate courts and conservators to establish OBRA '93 Trusts, subject to ongoing probate court jurisdiction, and in December the Connecticut Supreme Court not only upheld this power with respect to pre-1998 trusts, but also implicitly endorsed OBRA '93 Trusts as important to the management of a disabled ward's estate.

    In deciding whether to establish an OBRA '93 trust with the disabled individual's funds, the disabled beneficiary's specific needs and the effect of the trust on all of the individual's entitlement benefits must be taken into account. For example, establishing a trust while the beneficiary is receiving cash assistance within two years of application may result in a lengthy period of ineligibility from receiving this benefit, and funds left in the trust at the end of that period may be considered an available resource. If cash assistance will be important to the beneficiary, it may be foolish to preserve Medicaid eligibility while destroying eligibility for state cash assistance, and other options must be considered instead.

    In the context of personal injury lawsuits, interaction with available settlement options such as "structured settlement annuities" must also be considered. Once such an annuity is established, it usually cannot be assigned, and as a result, the OBRA '93 Trust option is lost. However, if the court directs payment to the OBRA '93 Trust, or if the settlement is in a lump sum, the OBRA '93 Trust option remains open. It is important, therefore, to plan from the beginning when damages for a personal injury are involved.

    The rules affecting entitlement benefits for disabled individuals are complex. Attorneys who handle estate planning are not always familiar with these rules. While the OBRA '93 Trust can provide a significant benefit when appropriate planning was not done, or when no planning is possible (the personal injury situation), it is essential to obtain both good estate and tax planning and good entitlement planning when arranging for an OBRA '93 Trust.


I can only provide general information, and will not provide advice about a particular case without a formal engagement. Writing to me does not create an attorney-client relationship.

*Revised 8-2-09