Can the provisions of a disability trust be updated?

Yes, the special needs trust can be updated as long as the trust document allows for the trust to be decanted. However, the updated trust must be for the sole benefit of the same beneficiary as the old trust.

Updating Your D4A Trust

A first-party special needs trust is created for the sole benefit of the special needs beneficiary receiving government benefits. The trust helps pay for things not paid for by government benefits. A disability trust—also called a D4A trust—is a kind of first party special needs trust meant to hold the assets of a single beneficiary. After the special needs beneficiary passes away, the money in the the disability trust is used to repay all Medicaid benefits that the beneficiary received thought their lifetime.

Sometimes a disability trust needs to be updated. Perhaps the laws changed and the distribution standards needs to change in the trust. Or perhaps the trust was not drafted properly and changes need to be made. Or perhaps the trustee needs to be changed.

The complicating factor here is that all disability trusts are required to be irrevocable. This means that the trust cannot simply be taken back by the person who made the trust. But if the trust is irrevocable, does that mean it cannot be updated or terminated?

Terminating a Special Needs Trust

All first-party special needs trusts, including D4A disability trusts, are terminated after the death of the beneficiary. The trust assets are then used to repay the state for all Medicaid benefits the beneficiary received through their entire life. If anything is left over, the remaining assets can then be distributed according to the terms of the trust (or if trust is silent on this, the assets would go into the beneficiary’s estate).

But can a first party special needs trust be terminated before death? Yes, the trust can be terminated before the beneficiary’s death. However, the decision to end the trust must be made by someone other than the beneficiary and the termination must benefit no one other than the beneficiary. Medicaid then must be paid back by the trust assets before any trust assets are distributed.

Decanting a Special Needs Trust

Because all first party special needs trusts are irrevocable, the terms of the trust cannot be changed by the grantor. However, you can get around this problem by decanting the trust. Trust decanting means making a brand new trust and then moving the assets from the old trust into the new one. In other words, you throw away the old trust and use a new one instead that looks just like the old one but with a few updates. Legally, you have a brand new trust. But practically, you have just found a clever way to update a trust that is not allowed to be updated.

But the decanting process looks an awful lot like terminating the old trust. Indeed, the Social Security Administration’s rules say that decanting is normally treated as an early termination of the trust. And as we just saw, terminating the trust means that Medicaid has to be repaid. Presumably, that is not what most people want when they set out to update their disability trusts.

Thankfully, there is a loophole created to fix this very problem. the Social Security Administration’s rules also state that trust decanting is not treated as an early termination as long as the transfer of trust assets is to another D4A trust (or a D4C trust) which is for the sole benefit of the same beneficiary as the old trust. This means that you can decant your disability trust assets to another disability trust, as long as that trust is also for your sole benefit.

However, the decanting must also be allowed by state law. So, if you want to decant the trust, your trust must be drafted to allow decanting under your state’s trust code. This is part of the reason that it is so important to hire a good trust attorney to draft your special needs trust. You need someone that thinks through and avoids these pitfalls ahead of time. And if you need a trust updated, you should look for a qualified attorney in your state to help you.