Use of Trusts in Elder Law and Disability Planning

This is a guest post by Marco Chayet and Dawn Hewitt, from the law firm Chayet & Danzo, LLC in Denver, Colorado.

There are several different types of trusts that can be used to enhance the quality of life for a trust beneficiary with special needs.  These trusts generally supplement benefits that the beneficiary receives through public assistance programs, such as Supplemental Security Income (SSI) and Medicaid.  As supplemental needs trusts, or special needs trusts, there are certain items that trust funds cannot be used to pay, such as food and shelter.  The reason for this is that the beneficiary’s public assistance programs are intended to pay for food and shelter.  However, in spite of these narrow exceptions for trust distributions, the trusts can be used for a wide range of purposes.

Some examples of how funds in a properly created special needs trusts can be used are for medical treatment and medication that are not otherwise covered through Medicaid, attendant care for non-medical services, education expenses, vehicle with modifications, travel, and entertainment.  These are just a few examples.  There are literally innumerable ways that funds in the trusts can be used.

Special needs trusts are often distinguished by the manner in which they are created and funded.  Colorado’s Medicaid regulations require that any trust that is created for the benefit of a Medicaid beneficiary be submitted to the state Medicaid agency for review and approval.  The type of trust determines the provisions that it must contain to comply with Medicaid regulations and SSI criteria.  There are five trusts generally used in special needs planning.  They are (1) disability trusts, (2) pooled trusts, (3) third party discretionary trusts, (4) testamentary special needs trust, and (5) income trusts.

The following is a discussion of the aforementioned trusts used in special needs planning in Colorado.

Disability Trust

A disability trust is created for a trust beneficiary under the age of 65 who is disabled under Social Security’s criteria.  The disability trust is funded with the beneficiary’s own assets.  Some common types of assets that are used to fund a disability trust are proceeds from a personal injury settlement and an inheritance.  Assets that are held in a properly created disability trust are exempt and will not affect the beneficiary’s ability to receive Medicaid and SSI.  Federal and state law require the disability trust to be established by the beneficiary’s parent, grandparent, or legal guardian, or by a court.

A disability trust must contain certain provisions for it to be exempt for Medicaid and SSI.  Most notably, it must contain a provision to reimburse the state medical assistance program up to the amount of benefits paid for the beneficiary during the beneficiary’s lifetime.  Repayment must be made under either of the following circumstances: (1) the beneficiary no longer requires medical assistance in the state where he has been receiving benefits (i.e., the beneficiary moves to a different state, or the beneficiary no longer wishes to receive medical benefits), or (2) the beneficiary dies.

If the trust is to be funded with an annuity or other periodic payments, then the state Medicaid agency must be named as the remainder beneficiary under the contract, up to the amount of medical assistance paid on behalf of the beneficiary.

The trust can contain a provision for distributions to remote contingent beneficiaries in the event that there are funds remaining in the trust after repayment is made to the state.

The trust must contain the name and mailing address of the trustee.  It is also generally advisable to name a successor trustee in case the original trustee is unable to act for any reason, such as if the trustee resigns, becomes incapacitated, or dies.  Notice of any change in trustee must be given to the state Medicaid agency within 30 calendar days.

The trustee has sole discretion on the use of trust funds.  Therefore, it is advisable to select a trustee who knows the beneficiary’s situation and needs well and who is willing to work with the beneficiary and/or the beneficiary’s legal representative to use the trust in the beneficiary’s best interests.  Professional trustees can also be named.

The trustee should not make distributions from the trust directly to the beneficiary, such as giving cash to the beneficiary.  Nor should the trustee expend trust monies for food or shelter.  Such distributions can be seen as income to the beneficiary and could affect the beneficiary’s ongoing eligibility for benefits.

Additionally, trust monies should not be used to purchase non-exempt assets, which would also affect ongoing eligibility.

Aside from these limitations, the trust assets can be used in a wide variety of ways.  The trustee will be required to provide regular accountings of the trust to the county and state Medicaid agencies.  Therefore, it is imperative for the beneficiary’s ongoing public benefits eligibility that the trustee properly administer the trust and maintain detailed records.

Pooled Trust

A pooled trust is similar to a disability trust, in that it is funded with the beneficiary’s own assets and that it requires the trust beneficiary to be disabled under Social Security’s criteria.  The pooled trust is most commonly used for Medicaid recipients who are over the age of 65, but it can also be used by younger individuals.  The trust is established by the individual, a parent, grandparent, or legal guardian, or by the court.

The pooled trust differs from the disability trust in that it is established for many disabled individuals, instead of just one individual.  Each beneficiary has a separate account.  The accounts are pooled for investment and management purposes.  Also, the trustee of a pooled trust must be a non-profit organization, approved by the Internal Revenue Service.

Similar to the disability trust, funds remaining in the individual’s account at his death must be used to reimburse the state Medicaid agency up to the amount of medical assistance provided on the individual’s behalf, to the extent that those funds are not retained by the pooled trust.  Additionally, funds in a properly created and administered pooled trust are exempt and do not affect the individual’s ongoing eligibility for Medicaid.  The trustee has the same wide range of discretion to use trust funds for the benefit of the beneficiary.

There are special funding requirements for pooled trust beneficiaries over the age of 65.  Specifically, there must be a written care plan for the use of the funds in the pooled trust that is actuarially sound based on the individual’s life expectancy.  Absent such a care plan, Medicaid will view the transfer of funds into a pooled trust as a transfer without consideration and will impose a penalty period.  During any applicable penalty period, the individual will not be able to receive Medicaid benefits.

Third Party Discretionary Trust

A third party discretionary trust (TPDT) is different from a disability trust and a pooled trust because it is funded with assets that do not belong to the trust beneficiary.  A TPDT is commonly established by a relative of the trust beneficiary, such as a parent or grandparent, for the purpose of gifting money or property that can be used for the benefit of the beneficiary, while allowing the beneficiary to remain eligible for SSI and Medicaid.

Another difference is that a TPDT does not contain a payback provision to reimburse the state Medicaid agency for benefits provided on behalf of the beneficiary.  Also, there is no requirement that the beneficiary be disabled under Social Security’s criteria.  Finally, there are no restrictions on the beneficiary’s age.

One advantage to establishing a TPDT is that it can receive gifts of money and property from many different sources.  For example, a TPDT established by the beneficiary’s parent can receive gifts of money or property, not only from the parent, but also from the beneficiary’s grandparents or other relatives.  The TPDT can even be a beneficiary under a will.  The TPDT can continue to be funded, even after the death of the person who created it.

Another advantage of the TPDT is that it is extremely flexible and diverse in terms of funding, use, and longevity.  Further, establishing a single entity to hold property simplifies administration and allows for greater flexibility in managing property.

Testamentary Special Needs Trust

A testamentary special needs trust (TSNT) is similar to a TPDT in that it can be created by anyone under their will to hold property to be used for the benefit of the trust beneficiary upon the death of the person who created the trust.

The disadvantage to the TSNT is that it is not funded until the person who created it dies, and it can only hold assets belonging to the person who created the trust.

This trust is generally used by parents of a special needs child who want to leave their child property in a manner that will not affect the child’s eligibility for SSI and Medicaid.

A TSNT can also be used by the spouse of a disabled person who receives certain types of Medicaid benefits.  However, in the case of spouses, there are limitations on the amount of the spouse’s assets that can be used to fund the trust.

Income Trust

An income trust is necessary for an individual who requires long-term care and whose income exceeds 300% of the SSI limit.  For 2010, the 300% limit is $2,022.  Each month, the individual’s income is deposited into the income trust.  The location where the individual receives long-term care services, such as at home, in assisted living, or in a skilled nursing facility, determines how his income is used each month.

For example, if the individual receives home and community based services (HCBS) at home, he may be able to keep $2,022 of his income each month to use for his living expenses.  However, if the individual receives HCBS in an assisted living facility, or receives skilled nursing care in a nursing facility, then most of his income will be paid to the facility each month as his patient payment.  He will be allowed to keep a small amount, usually less than $100, each month for his personal needs.

There are also some allowances for the use of all or part of the individual’s income for use by his spouse if the spouse does not require care, as well as for health insurance premiums, deductibles, co-insurance, and special medical services.

Conclusion

There a several different ways of creating a special needs trust to enhance the quality of life for the trust beneficiary without jeopardizing his or her eligibility for public assistance.  The disability trust, pooled trust, third party discretionary trust, testamentary special needs trust, and income trust are the main trusts used for disability and special needs planning.  The goals for funding and use of the trust will determine which type of trust is most appropriate.  You should work closely with an elder law attorney who is experienced with these types of trusts as well as the different public benefits programs to decide which trust works best for your situation.

About the Authors: Marco Chayet is a partner, and Dawn Hewitt is an associate, in the law firm Chayet & Danzo, LLC, (303) 355-8500.  Their practice emphasizes elder law, guardianships, conservatorships, public benefits, probate, estate planning, Medicaid planning, VA planning and long-term care planning.  They can be reached online at www.ColoradoElderLaw.com or by e-mail at Marco@ColoradoElderLaw.com or Dawn@ColoradoElderLaw.com or via mail 650 S. Cherry St., Suite 710, Denver, CO 80246.

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  • gerryfioriglio

    Excellent explanation of trusts in healthcare. So many people don't even know about these. As a geriatric care manager I am always helping families find ways to secure the funds for their long term care and still qualify for medicaid. Thank you.

  • nt

    If a person owns a house and is a member of a pooled trust, what happens to the house when the person passes? Does it pass on to their heirs per the will or is it used to reimburse medicaid?
    Thank you.

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