Special Needs Trusts can be described in a number of ways. There are self-settled trusts and there are third party trusts. There are individual trusts and there are pooled trusts. There are inter vivos trusts and testamentary trusts. And each of these distinctions can be mixed and matched as a custom trust is prepared for your loved one.
Initially, any trust created by or funded by a Medicaid (or SSI) applicant or by his or her spouse is a self-settled trust. Since 1993, federal Medicaid law 42 U.S.C. § 1396p(d)(2)(A) creates a two part test for determining which trusts are covered by the rule. True third party trusts, those created by others with money that doesn’t belong to the SSI/Medicaid applicant, are not covered by this rule.
So, why use a special needs trust? The main reason is to access public benefits so limited family dollars can be stretched. Every dollar of health care Medicaid pays for leaves a dollar to pay for special needs (quality of life) for the disabled individuals. Similarly, every dollar of food or shelter funded by SSI leaves an additional dollar of family money to pay for special needs. (Note: We’re not saying Medicaid or SSI “gives” you more money; what we’re saying is that you save money for other things when those programs pay for things you need).
The federal rule for self settled individual trusts, found at 42 U.S. Code § 1396p(d)(4)(A), is: “This subsection shall not apply to any of the following trusts: (A) A trust containing the assets of an individual under age 65 who is disabled (as defined in section 1382c(a)(3) of this title) and which is established for the benefit of such individual by the individual, a parent, grandparent, legal guardian of the individual, or a court if the State will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State plan under this subchapter.” The “shall not apply” language refers to Medicaid’s default trust rule which incorporates Medicaid’s penalty rules. In other words, transfers to a properly structured special needs trust do not trigger a Medicaid penalty, and the resources inside a properly formed special needs trust do not count toward eligibility for benefits.
For the rule to apply, assets of the individual (or the individual’s spouse) must have been used to form all or part of the corpus of the trust. James v. Richman, 465 F. Supp. 2d 395, 403 (M.D. Pa. 2006). Second, the trust must have been formed by one of the following persons: (i) The Medicaid applicant or his or her spouse; (ii) any person, including a court or administrative body, with legal authority to act in place of or on behalf of the individual or the individual’s spouse; or (iii) any person, including any court or administrative body, acting at the direction or upon the request of the individual or the individual’s spouse. Johnson v. Guhl, 91 F. Supp. 2d 754, 763 (D. N.J. 2000). Interestingly, the Statute expressly excludes any testamentary trust created by these persons. See Skindzier, supra; Hazelton v. Wilson-Coker, 2003 Conn. Super. LEXIS 2665 (9/19/2003). The trust must be for a disabled person under the age of 65. Although subsection (d)(4)(C), relating to pooled trusts, does not include an age limit, some State (like Georgia) take the position that an individual over 65 cannot establish a pooled trust subaccout without triggering a transfer penalty. Structurally, a self-settled trust must be irrevocable and distributions cannot be controlled by the disabled individual.
A third party trust is a trust established with assets that belong to someone other than the Medicaid or SSI applicant. To qualify as a third party trust, the Medicaid applicant (trust beneficiary) cannot have legal authority to revoke or terminate the trust and use funds to meet his or her own needs, and cannot have authority to direct the use of the trust principal for his/her support or maintenance under the terms of the trust. See POMS SI 01120.200.D.2. If the beneficiary has that authority, then the trust is a countable resource; conversely, if the applicant does not have that legal authority, then the trust is not countable. If the beneficiary can sell his or her interest in the trust (e.g., there is no valid spendthrift clause), then the trust is countable.
(i) The trust is established and managed by a non-profit association;
(ii) A separate account is maintained for each beneficiary of the trust, but, for purposes of investment and management of funds, the trust pools these accounts;
(iii) Accounts in the trust are established solely for the benefit of individuals who are disabled (as defined in section 1382c(a)(3) of this title) by the parent, grandparent, or legal guardian of such individuals, by such individuals, or by a court; and
(iv) To the extent that amounts remaining in the beneficiary’s account upon the death of the beneficiary are not retained by the trust, the trust pays to the State from such remaining amounts in the account an amount equal to the total amount of medical assistance paid on behalf of the beneficiary under the State plan under this subchapter.
Recently, states have attacked subaccounts created by individuals over 65 by imposing transfer penalties. The basis for this attack is a disconnect between Section 1396p(d)(4)(C), which allows individuals over 65 to establish pooled trust subaccounts, and Section 1396p(c)(2)(B)(iii) and (iv) which fails to include pooled trusts as being exempt from the imposition of a transfer penalty when the transferee is over the age of 65. Most recently, in Pfoser v. Harpstead, (Minn. 2021), the Minnesota Supreme Court affirmed a lower court decision finding that funding a pooled trust subaccount was intended to dispose of the assets either at fair market value or for other valuable consideration and, therefore, not subject to a transfer penalty. At this time, Georgia still takes the position that funding a pooled trust subaccount after the Medicaid applicant attains the age of 65 triggers a transfer of resources penalty.
