What Is 42 USC 1396p(d)(4)(A)? Age 65 Rule and Medicaid Payback

A first-party special needs trust under 42 U.S.C. § 1396p(d)(4)(A) lets a person with a disability hold their own assets in trust without losing Medicaid or SSI eligibility.¹ To qualify for that treatment, the trust has to be established before the beneficiary turns 65, spent solely for that beneficiary’s benefit, and written to repay the state for Medicaid costs when the beneficiary dies. Miss any of those pieces and the trust can fail, which usually means losing the benefits it was designed to protect.

Who Can Set One Up

Federal law allows five categories of people to establish the trust: the disabled individual themselves, a parent, a grandparent, a legal guardian, or a court.¹ The option for the individual to create their own trust was added by Section 5007 of the 21st Century Cures Act, so trusts drafted before December 2016 may have been set up by a family member or court even when the beneficiary was legally capable.²

The beneficiary has to meet Social Security’s definition of disability: a medically determinable physical or mental impairment that prevents substantial gainful activity and is expected to last at least 12 continuous months or result in death.³ Only the disabled person’s own assets can fund the trust. Money a relative wants to set aside for a disabled family member belongs in a third-party special needs trust, which is a different instrument with different rules.

The Age 65 Cutoff

The trust must be established before the beneficiary reaches 65. This is a statutory line with no waiver.¹ Someone who receives a settlement or inheritance after their 65th birthday can no longer use a standalone (d)(4)(A) trust. The alternative at that point is a pooled special needs trust under § 1396p(d)(4)(C), managed by a nonprofit.

A trust that was validly created before 65 does not expire when the beneficiary turns 65. It can keep holding and spending assets as before.⁴ What changes is that new contributions after 65 may trigger a transfer-of-assets penalty under Medicaid’s look-back rules. Setting the trust up well before that birthday avoids the cliff.

How to Fund the Trust

Common funding sources are personal injury settlements, retroactive SSI or SSDI payments, and inheritances received directly by the beneficiary. Whatever the source, the money should flow straight into the trust account rather than through the beneficiary’s personal bank account first. Assets that sit in the beneficiary’s name, even briefly, can be counted for Medicaid eligibility.

Real estate, investment accounts, and structured settlement payments need to be titled in the trust’s name. Structured settlements deserve extra attention: if periodic payments get misdirected to the beneficiary personally instead of the trust, Medicaid may treat them as available income. Where a personal injury settlement funds the trust and Medicaid has already covered injury-related care, the state may assert a lien against the settlement itself. Sorting the settlement allocation before the money is paid out preserves significantly more of it for the trust.

How Trust Money Can Be Spent

Every distribution has to be for the sole benefit of the disabled beneficiary. No gifts to family, no loans to friends, no payments that primarily benefit anyone else.⁴ Within that boundary, the trust can pay for things that improve the beneficiary’s life beyond what Medicaid covers: specialized medical equipment, assistive technology, home accessibility modifications, personal care attendants, recreation, and travel.

Housing and the SSI Reduction

Housing is where most trustees stumble. Paying for home modifications, furniture, or property insurance is generally fine, because SSI does not treat those as food or shelter. But if the trust pays rent, a mortgage, property taxes, or utilities directly, SSI counts that as in-kind support and maintenance and reduces the monthly SSI check.⁵ The reduction is capped at roughly one-third of the federal benefit rate. In 2026, that means a maximum cut of about $331 per month from the $994 federal SSI payment.⁶ Sometimes paying rent from the trust still makes sense. Losing $331 in SSI to cover $1,200 in rent is a net gain. The point is to run that math on purpose.

Travel and Companions

The trust can pay for the beneficiary’s transportation, lodging, and meals. It can also cover a companion or caregiver’s travel costs when the beneficiary needs one because of disability or age. SSA applies a reasonableness test: paying for a parent to accompany a disabled child on vacation is fine; paying for extended family members who aren’t providing care violates the sole-benefit rule. The fact that a caregiver’s other children have nowhere else to stay is not a justification.

Pairing With an ABLE Account

ABLE accounts, authorized under 26 U.S.C. § 529A, are tax-advantaged savings accounts for people whose disability began before age 46. They pair well with a first-party trust because ABLE payments for housing are not treated as in-kind support and maintenance by SSI.⁷ That makes the ABLE account a better vehicle for shelter costs than the trust itself.

Total annual contributions to an ABLE account from all sources are capped at $19,000 in 2026.⁷ Employed beneficiaries who don’t participate in an employer retirement plan may add earnings up to the federal poverty level for a one-person household. A common strategy is to route rent and utilities through the ABLE account up to the annual limit and use the trust directly for non-shelter expenses.

What the Trustee Has to Do

The trustee is a fiduciary. Every decision has to put the beneficiary first, which in practice means understanding Medicaid rules, keeping trust assets separate from personal funds, tracking every distribution, and maintaining records that could survive an audit. Most states require accountings, whether to a court, the Medicaid agency, or the beneficiary’s representative. Poor records are the fastest route to trouble, including trustee removal.

For federal income tax purposes, a first-party special needs trust is a grantor trust, so income is reported on the beneficiary’s personal return rather than at the trust’s higher compressed rates. The trustee files an informational Form 1041 with a grantor trust letter, but the actual tax flows through to the beneficiary. Trustees without fiduciary tax experience should work with a professional.

Professional trustees (banks, trust companies, and specialized nonprofits) typically charge annual fees of roughly 0.25% to 2% of trust assets. Family trustees more often serve without a fee, and also make more mistakes. The choice usually turns on trust size, complexity, and whether a qualified family member is willing.

The Medicaid Payback at Death

This is the feature that separates first-party from third-party trusts. When the beneficiary dies, whatever is left in the trust must first reimburse the state for Medicaid benefits paid during the beneficiary’s lifetime, up to the full amount remaining.¹ Only after the state is repaid can anything pass to other named beneficiaries. After years of long-term care, Medicaid costs often consume most or all of what’s left.

Federal guidance allows only two narrow categories of expenses to be paid from the trust before the state collects:⁴

Federal or state taxes owed by the trust or triggered by the beneficiary’s death.
Reasonable wind-down fees, such as a final court accounting or termination filings.

Funeral expenses cannot be paid after death and before Medicaid is reimbursed. Neither can debts the beneficiary owed to third parties, inheritance taxes owed by remainder beneficiaries, or distributions to family.⁴ If prepaid funeral arrangements matter, the trustee should handle them during the beneficiary’s lifetime.

If the Trust Is Terminated Early

Terminating the trust while the beneficiary is still alive does not avoid the payback. Any remaining funds go to reimburse Medicaid first. The trust cannot be closed and the money handed back to the beneficiary or distributed to relatives; doing so disqualifies the trust from the (d)(4)(A) exception entirely.⁴ An attorney experienced with these trusts should be involved before any termination steps are taken.

What It Costs to Set Up

Attorney fees for drafting a first-party special needs trust typically run between $3,000 and $7,500, with complex cases going higher. The range depends on whether court approval is required, whether existing benefits need to be protected during setup, and how complicated the incoming assets are. When a court must establish the trust, such as a minor’s personal injury settlement, expect filing fees and possibly a guardian ad litem fee on top of the drafting cost. It is real money, but it is small compared to the cost of losing Medicaid eligibility outright.

1
Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets
2
Medicaid.gov. SMD 17-001 RE: Implications of the Cures Act for Special Needs Trusts
3
Social Security Administration. How Do We Define Disability?
4
Social Security Administration. POMS SI 01120.203 – Exceptions to Counting Trusts Established on or After 1-1-00
5
Social Security Administration. SSI Spotlight on Living Arrangements
6
Social Security Administration. SSI Federal Payment Amounts for 2026
7
Social Security Administration. Spotlight on Achieving a Better Life Experience (ABLE) Accounts