Trusts are tools. They are useful for many different purposes and have a rich history. In fact, Georgia was originally settled as a Trust. The charter signed by King George on April 21, 1732, “created a corporate body called a Trust and provided for an unspecified number of Trustees who would govern the colony from England.”[1] This history demonstrates that trusts are powerful when used properly. The history of trusts indicates they were originally used as a means to transfer real property.
One focus here is exploring the intersection of trust law and public benefits law. To put that discussion in context, initially basic trust concepts are discussed, focusing on Georgia trust law.[2] The discussion then moves to Medicaid and Supplemental Security Income (SSI) eligibility rules, at least to the extent they impact trust structure and administration.
Generally speaking, a trust divides the legal and equitable interests in property. See Understanding Trusts – Keeping it EZ. A trust exists when one person (a trustee) holds legal title to property, but has a duty to use trust property for the benefit of someone else (a beneficiary).[3] This definition of a trust is somewhat limited since modern trust law allows a beneficiary to serve as his or her own trustee;[4] it is still a useful starting point. But since the rights a public benefits applicant has to access and control property often impacts eligibility, we will must begin here to discuss how Medicaid treats trusts, including special needs trusts.[5] To do so, we refer to other materials (e.g., statutes, regulations, general counsel opinions).[6] In American jurisprudence (our common law system), precedent informs us regarding how future controversies will be resolved by looking to see how they were resolved in the past.
To distinguish basic trust law from Medicaid’s treatment of trusts, we refer to the “Medicaid Trust Rules.” The phrase “Medicaid Trusts Rules” also describes the Medicaid and SSI eligibility rules applicable to trusts.[7] Usually, when we describe the Medicaid Trust Rules, we are referring to rules applicable to self-settled (first party) trusts. A self-settled trusts is one created by the applicant (or the applicant’s spouse) or funded with the applicant’s own assets (or the spouse’s assets). Although third party trusts may count toward benefits eligibility, when they negatively impact eligibility, it is usually due to poor planning or poor drafting.[8] Under the Medicaid Trust Rules, self-settled trusts may count toward eligibility even when control and access over the trust is virtually nonexistent.
Since Medicaid Planning is not the only purpose for using a trust, we also refer to the Grantor Trust rules. The phrase “Grantor Trust” usually indicates how a trust is taxed (or not taxed). The Grantor Trust rules appear in Sections 671 through 679 of the Internal Revenue Code of 1986, as amended (the “IRC”).[9] Sections 671 through 679, which address income tax treatment (and Sections 2036 through 2038, which address estate and gift taxation) cause certain trusts to be disregarded for tax purposes. Trusts that come within the Grantor Trust rules are taxed to the person who established the trust(the Grantor), or to the Grantor’s estate. Because taxes impact many transactions, the term Grantor Trust has also become common short hand in the non-tax context for describing a trust created with a settlor’s assets.
