Question: My wife and I have been taking care of our disabled daughter (now age 40) who has always lived with us. We have been appointed by the courts of our state as her guardians, a position that allows us to make her health care decisions and handle her finances. She receives SSI, Medicaid, and other benefits that help us take care of her.

Last year, we were involved in a serious accident and she was injured. We consulted with a lawyer who, after a time, called us in and told us that he was going to be able to get our daughter some money. Knowing she would lose her benefits if the funds were paid directly to her, we asked about our options to protect them. This lawyer was honest enough to tell us he did not know how it worked, but he would refer us to someone who could.

We met with another gentleman and came away with several suggestions, including the use of a special type of trust to protect her governmental benefits so that we could provide some “extras” for her that we would not otherwise have money to provide.

Like most parents with disabled children, it is our nature to attempt to protect her benefits, so we have been reading up on what the lawyer suggested to us in order to do what is best for her. We know about special needs trusts as our wills contain them, but we aren’t sure this lawyer knows what he is talking about because he told us that our state of residence would have to be the ultimate beneficiary of this trust. While we don’t want to hurt his feelings, it is our child’s future we are considering, and we don’t want her money going to the state.

Answer: The short answer to your questions is that the lawyer who advised you most probably knows what he is talking about. While the exact manner in which you may proceed will depend on federal law and the law of your state of residence, at the risk of oversimplifying a most complicated area of the law, we can tell you a few things that might help:

The assets of a disabled individual who has not yet reached age 65 can be transferred to an appropriately prepared irrevocable trust that will prevent the disabled individual from losing current benefits, from losing assets to creditors, or to help him or her qualify for Medicaid benefits. These types of trusts are often funded with the proceeds of injury or accident settlements and are called “(d)(4)(A)” or “payback” trusts after the portion of the United States Code of Laws that allows them.

While the transfer of one’s own assets in to a trust creates a five-year look-back period and penalties, (d)(4)(A) is one of two “safe harbors” that are exempt from the penalty period.

Funded with the beneficiary’s own assets, this type of trust mandates that at the death of the beneficiary and/or termination of the trust, all assets remaining must go toward repaying any state governmental program that provided Medicaid to the beneficiary. Once Medicaid has been reimbursed, any balance may be distributed to the other beneficiaries. This trust must be irrevocable. Generally, it must be created by court order. And the beneficiary can’t be the trustee.

While a detailed discussion of all of the ramifications of using (d)(4)(A) trusts is beyond the scope of our column, these types of trusts must include payback provisions because governmental programs provide benefits. Just what the trustee can and can’t do is rather complicated, so if you or your wife will be trustees, we suggest that you read up and take advice from a qualified lawyer or trustee.