Sick or Disabled Parents?

Living Trusts Today Don’t Usually Protect Your Assets From Nursing Home Costs

AnaMVeliz-LivingTrustsTodayDon'tUsuallyProtect
Edited by Ana M. Veliz

When it comes to qualifying for Medicaid, those with assets in excess of the allowable limit are faced with limited options. For instance, when older individuals require nursing home or long-term care coverage but cannot afford the hefty costs, they may look to give away their assets to family members or set up trusts; however, this can lead to Medicaid transfer penalties that prevent them from qualifying for a period of time. This underscores the importance of understanding all the necessary requirements to obtain coverage and ensuring that one’s assets fall within allowable limits before applying for Medicaid.

Special Purpose Trusts Can Provide Asset Protection Under Medicaid Rules…

Under Medicaid rules, there are certain irrevocable trusts that can own assets transferred by an individual, even if that individual is also a beneficiary. These irrevocable trusts, called “special purpose trusts,” will not subject the individual to a transfer penalty and the assets in them will not be counted as available resources.

The federal law has created these special trusts that can hold assets transferred by the Medicaid beneficiary, and in order for the value of those assets to not be considered when determining eligibility for Medicaid, they must be distributed according to specific rules established by statute. There are two types of special purpose trusts available:

  • First-party special needs trusts, which are established for individuals under 65 years of age, and
  • Pooled trusts, which are administered by a non-profit organization for the benefit of individuals of any age.

A special needs trust is a legal instrument that can be used to hold assets for the benefit of an individual receiving Medicaid, who otherwise might exceed the resource limit. These trusts are created by state and federal law in order to enable individuals of limited means to access long-term care while preserving their eligibility for Medicaid coverage. By transferring assets into a special needs trust, an individual is not considered “over-resource” and will not be disqualified from receiving necessary care. The trust must comply with all requirements of the governing statutes in order to remain valid and protect its beneficiary.

Here are the trusts you should look at:

A trust designed for the excess resources of a Medicaid applicant or beneficiary is known as a special needs trust. This type of trust is established by federal law, and the applicant will not be penalized for transferring assets into it as long as it is established correctly. When the trust is created with the beneficiary’s own assets, it is called a first-party trust, or a self-settled trust, and is defined in federal law under 42 USC 1396p(d)(4)(a). These trusts are often used to manage a significant amount of funds received from an inheritance or court settlement when the beneficiary is already receiving Medicaid.

To qualify for a first-party trust, the beneficiary must be under the age of 65 and disabled and the trust must be created by a parent, grandparent, guardian, or court. The state paying out benefits is designated as the primary beneficiary of the trust and all assets within it can only be used for the benefit of the Medicaid recipient. Each state may have its own regulations regarding how resources are spent from a special needs trust, such as requiring prior approval for expenditures and establishing an annual budget; failure to adhere to these rules can result in disqualification from Medicaid.

In order to qualify for Medicaid, it is important to ensure that only resources are placed in a special needs trust. However, a Medicaid beneficiary’s income can be put into an income trust, also known as a Miller Trust or Qualifying Income Trust. After the income has been received, it becomes a resource the following month and can then be transferred into the first-party trust. It is important to note that the transfer should take place in the same month that the income was received in order to avoid any potential issues with Medicaid qualification.

Pooled Trusts

A pooled trust, also known as a d4c trust, is a special purpose trust operated by a non-profit organization for Medicaid beneficiaries. It combines the resources of participants into one master trust, with separate sub-trusts or sub-accounts for each individual. This type of trust offers an advantage when compared to a first-party special needs trust—namely that it can be established by anyone, regardless of age, and does not have the same restrictions. As such, it may be an advantageous option for those over 65 who need access to Medicaid benefits while protecting their assets.

Third-Party Special Needs Trusts

A third-party special needs trust is different from a first-party special needs trust because it’s created with the assets of family members, friends, or other relatives, rather than the Medicaid beneficiary’s own assets. Although it’s sometimes called a special treatment trust, it isn’t officially designated as such in federal law and doesn’t have the same statutory requirements as a first-party trust.

Since the trust doesn’t contain assets transferred by the beneficiary, but only assets belonging to someone else, the only requirement is that the trustee has sole discretion over the distribution of trust assets. The beneficiary can’t demand any type of distribution, doesn’t own the property in the trust, and doesn’t have direct access to trust funds. The beneficiary can’t receive cash from the trust, and all distributions from the trust must be monitored to ensure the beneficiary doesn’t become ineligible due to owning countable assets over the resource limit.

Unlike a first-party special needs trust, which primarily benefits the state, any beneficiary can be established with a third-party special needs trust, and the state has no right to reimbursement from this trust after the Medicaid beneficiary’s death.

A sub-account in a pooled trust can be established by the Medicaid applicant/beneficiary, their parent, grandparent, guardian, or a court. Upon the death of the Medicaid beneficiary, the state is entitled to reimbursement from the pooled trust for expenses paid on the beneficiary’s behalf. Any remaining amount is divided between the charitable organization that created the pooled trust and those designated by the Medicaid beneficiary.

Medicaid Qualifying Trusts

Medicaid qualifying trusts are specialized financial vehicles that were created before 1993 and can drastically reduce an individual’s eligibility for Medicaid assistance. These trusts are designed to protect assets that would otherwise be counted towards Medicaid eligibility, allowing the beneficiary to access funds without impacting their ability to receive benefits from the program.

Qualified Income Trusts

Qualified Income Trusts, also referred to as Miller Trusts or simply Income Trusts, are a way for those living in states that lack a medically needy program to qualify for Medicaid when their income exceeds the Medicaid limit. By utilizing this type of trust, the funds from their income can be set aside to pay for their medical costs. 

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    About the author

    Ana M. Veliz

    Ana M. Veliz, a Spanish-speaking attorney, has more than 25 years of experience providing dedicated assistance to Miami families in these select areas of the law.

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