Can using a trust actually be worse than probate? When it comes to a specific type of special needs trust, it just might.

I’ve had clients ask me about the “D4A” Special Needs Trust, and they’ve read articles or heard from friends how it’s the greatest thing since sliced bread. In short, it is a specific trust to help a person who would otherwise qualify for Medicaid or disability, except they have too much money to qualify. “Well, just create a D4A Trust, put the money in, and then Abracadabra! You qualify!”

So what’s the catch here? There are actually several catches:

  • The assets have to be used for very specific expenses for the beneficiary, which are often things government programs would have paid for anyway. In other words, while you may think you’re preserving the money going into the trust, the truth is the money can’t just be spent on anything at all; it is likely to be spent in a way that offsets what the benefits would have covered anyway.
  • These expenses are monitored, or are at least reviewed, and records need to be kept often to the same level as probate or a conservatorship. So now the trust is basically in living probate until the money is spent. How much time does the trustee want to spend gathering and maintaining paperwork around each expense? Do you want to have, each time money is spent, to include an invoice, a copy of the cancelled check or receipt, and a corresponding copy of the bank statement showing the expenditure? It may come to that just to ensure there is proof the expense is “proper” if it is ever questioned.
  • If the beneficiary dies, the assets in the trust go to the government to pay back the money they provided in benefits, so the money isn’t actually saved anyway. So after keeping track of every penny for years or even decades, interacting with benefit offices to ensure the money that is spent is properly spent, and providing whatever paperwork is requested, all of the money left in the trust after the beneficiary dies goes straight to the government.

With these downsides and the availability of other, more effective ways to qualify without risking losing all of the money (up front or down the road), D4A Trusts may be the among the worst of the options available depending on the situation. For example, what if the $50,000 “extra” was capable of being filtered through a legally acceptable transaction or transactions, the money gets placed into a different trust that does not have to be reviewed by bureaucracies, and when the beneficiary passes on the money goes to the family instead of the government? Most of my clients would take that option.