Consequences of Using Trusts in Medicaid Planning

Preventing Revocable Trusts Interfering with Medicaid Eligibility

    A. Revocable Trusts in Pre-Need Asset Planning
  • Please do not use a Revocable Trust in Medicaid Planning!
    B. Preventing Disqualifying Transfers/Divestment Penalties
    Transfer of Assets Rules for SSI/Medicaid
    1) Other than transfers between spouses, to exempt individuals (such as a disabled child), and to exempt trusts, a transfer of the applicant’s or their spouse’s assets for less than fair market value within 36 months of applying for SSI will cause a period of ineligibility. The transfer rules are different from the more stringent transfer rules for long-term care Medicaid vendor payments and HCBS waiver services under the Deficit Reduction Act of 2005 (no transfers for less than fair market value within 5 years of the application for these services).
    2) The penalty may be triggered by failing to accept a pension, personal injury award, an inheritance, or by failing to enforce child support or alimony payments. POMS SI 01150.110E, MEM § I-1672.
    3) The penalty is calculated by combining the value of the uncompensated transfers during the 36 months prior to the SSI application (the look-back period). The total is divided by the SSI benefit rate ($750 in 2018). 42 U.S.C. § 1382b(c). Round the result to two decimal places then round down to the nearest whole number to determine the number of months of ineligibility. POMS SI 01150.111(A). Regardless of the amount of the transfer, the maximum penalty is 36 months. The penalty period begins on the first day of the month after the month of the transfer. The penalty for inheritances begin to run the month the inheritance was received (typically when the decedent died). The length of penalty for LTC Medicaid vendor and HCBS waiver payments is unlimited and has a different divisor (the total amount of the penalty, divided by the average cost of a month stay in a Skilled Nursing Facility (currently the average cost is somewhere between $4,000 and $7,000 depending on where you live in Louisiana). The number you get is the number of months the individual facing the penalty must self-pay before being eligible to qualify for Medicaid). In addition, it begins to run when the applicant is otherwise eligible for LTC Medicaid and applies to receive Medicaid benefits.
    Strategic Use of Trusts in Medicaid Planning
    A. Designing Income-Only Trusts to Protect Family Assets When Qualifying for Medicaid
    1) Income-only Trusts may work; however, I never use them as there is a great deal of Medicaid case law from multiple states citing access to income only Trusts as the reason for the denial of Medicaid coverage. The case law generally holds that undistributed income is considered as co-mingled assets and could give the income-only beneficiary access to the entire Trust assets. (ex.: Cohen v. Commissioner of Div. of Medical Assistance, Supreme Judicial Court of Massachusetts, Suffolk, Barnstable, and Middlesex, August 2, 1996, 423 Mass. 399, 668 N.E.2d 769, 51 Soc.Sec.Rep.Serv. 492
    i. For purposes of determining eligibility for Medicaid benefits, “countable assets” include any portion of the trust principal that could under any circumstances be paid to or for the benefit of the settlor. Medicaid Act, § 1917(d)(3)(B), 42 U.S.C.A. § 1396p(d)(3)(B).
    B. Third-Party Special Needs Trusts
    1) A third-party special needs trust is typically created by a parent, grandparent, or other relative for the benefit of a person with a disability. The trust may be an inter-vivos trust or a testamentary trust. A third-party special needs trust is NOT funded with assets owned by the disabled beneficiary, rather assets owned by parents, grandparents or other relative typically fund the third-party trust.
    2) Typical Third-Party Special Needs Trust Plans
    i. A parent or grandparent drafting a will that includes a special needs trust for the benefit of a child or grandchild with a disability.
    ii. A sibling drafting a will that includes a special needs trust for the benefit of a disabled sibling.
    iii. A family member creating an inter-vivos third-party special needs trust and funding the trust with transfers to the trust during their lifetime.
    iv. A spouse drafting a will that includes a special needs trust for the
    benefit of their spouse residing in a nursing home. v. A parent, sibling or other person leaving assets to a special needs trust established by another person or a special needs trust that is already funded.
    vi. A family member may draft a revocable living (probate avoidance) trust with a special needs trust in lieu of a will.
    3) The assets of a third-party special needs trust will be countable for SSI/Medicaid purposes if determined to be available to the beneficiary; therefore, language used in the trust document is critical.
    i. A third-party special needs trust will not be considered a resource for SSI and/or Medicaid unless the beneficiary has a legal right to revoke the special needs trust and use the funds for food and shelter needs or if the beneficiary can use the trust principal for support and maintenance pursuant to the trust terms or state law. POMS SI 01120.200D(1)-(3).
    ii. Assets in a discretionary trust should not be considered a resource if the beneficiary needs a court order to compel a distribution. POMS SI 01120.010D.7.
    4) Most third-party special needs trusts last for the lifetime of the beneficiary. Provisions for an earlier termination are often drafted into the trust in the event the beneficiary no longer qualifies for governmental assistance or the disability ceases.
    5) A third-party special needs trust is typically drafted as a spendthrift trust for maximum creditor protection.
    6) Unlike a first-party special needs trust, a third-party special needs trust is not required to include a payback provision for Medicaid services.
    Assets remaining in the trust will pass through the beneficiary’s estate. However, the trust may be drafted with shifting principal interests that distribute the trust assets to other named beneficiaries (e.g. children or siblings). La. R.S. 9:1973.

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