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.


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 or by e-mail at or or via mail 650 S. Cherry St., Suite 710, Denver, CO 80246.

The Irrevocable Income Only Trust

A Guest Post by Brian Mahoney, Esq.

An often discussed mechanism in Medicaid/Nursing Home planning is the IIOT, an Irrevocable Income Only Trust.

Aside from Nursing Home issues and look back periods we need to first ask about financing issues. Consider whether the Trustee might ever need to obtain financing on the realty, perhaps for a new burner or roof. Most Lenders will not mortgage realty owned by any irrevocable Trust. Would deeding realty into an IIOT make a pre-existing mortgage due and payable?

If the sale of realty after it is deeded into the IIOT is a possibility we can structure the IIOT as a Grantor Trust. If an Elder Trustmaker later moves into Assisted Living or into a Nursing facility, there is no spouse at home and that realty is sold by the Trust we want the Trustmaker to be able to elect the $250K capital gain exclusion.

To that end I insert a testamentary power of appointment allowing the Trustmaker to appoint Trust property by Will to a class of persons described in the IIOT. I do not include a lifetime power to appoint because it may be considered too much power in the skeptical eye of a Medicaid caseworker especially in this era of recession. Their position might be this would render the IIOT a “Medicaid qualifying trust.” It can be overcome but do we want to go into the trial Court to refute their arguments?

The Trustmaker should have no power to appoint trust principal to himself, his creditors, his estate or his estate’s creditors. The ultimate goal of an IIOT is for Trust owned assets to be non-countable and the less the IIOT contains for “escape mechanisms,” the more certain our objective becomes.

We do provide an “escape hatch,” in the IIOT in case the look back period is not met to avoid the worst of both worlds, i.e., principal that is “countable,” for Medicaid purposes, but which cannot be accessed by the Trustmaker. Provide for appointment of a Trust Protector who could be a corporate fiduciary, Attorney, C. P. A. or an individual who is not related or subordinate to a transferor or any Beneficiary within the meaning of Section 672(c) of the Internal Revenue Code.

The IIOT may provide that during the Trustmaker’s lifetime the Trust Protector may in writing, direct the Trustee to pay to or apply for the benefit of the children or grandchildren of the Trustmaker or their spouses, so much of trust principal as the Trust Protector in its sole discretion deems advisable.

To preserve Grantor Trust status then, along with the testamentary POA and “Trust Protector escape hatch,” we need to add a so-called Designating Person who can add a class of Beneficiaries. The class might consist of: children, grandchildren, spouses, or charities. The Trustmaker, the Trust Protector, any Beneficiary of the IIOT (including any person who may be added as a Beneficiary) any so-called “adverse party,” as defined in Section 672(a) of the Code, or any so-called “related or subordinate party,” as defined in Sect. 672(c) of the Code should not be appointed to serve as a Designating Person.

Can the Trustmaker(s) be Trustee? There appears to be no express prohibition against that, but with the current government deficits and budget cuts, why risk a higher level of scrutiny. If we have decent prospects as Trustee it may be safer to not have the Trustmaker in the position of power as a Trustee.

We all know the number of potential Adult Child/Trustee pitfalls that can develop. Will the existence of the Trustmaker’s testamentary POA be enough to keep an Adult Child/Trustee in line if he can be “disinherited,” from the very Trust that Child administers?

Include a provision allowing the Trustmaker to remove any Trust Protector or Trustee with or without cause at any time to allow the Trustmaker some much needed control in the event a relationship with a fiduciary sours in the future. Is that too much power for Medicaid? Can a Client afford not to have such removal powers?

Many practitioners are now acting as Trustees or Trust Protectors for their Clients’ IIOT’s knowing they’ll never act in a manner contrary to the Trustmaker’s best interests.

About the Author: Brian F. Mahoney is an estate planning and elder law attorney in Canton, MA.  He has been practicing for 26 years, and can be reached at

Understanding Assisted Living Residency Agreements – Part 1

Hope everyone is well.

Before we get started, I want to update you on the survey.  So far, over 130 people have taken the Inside Assisted Living – Family Attitudes and Preparedness Survey since we announced it on Thursday, August 7.  Thank you!   We’re hoping to get a few hundred in the next 30 days.

Now on to the purpose for the post…

What is a Residency Agreement?

One of the most daunting tasks of a transition to assisted living is the signing of the residency agreement.  Similar to a rental agreement or lease on an apartment, the residency agreement governs cost, services and termination options for your loved one’s stay in assisted living.

It always struck me as odd how little families pay attention to these agreements.  We spend hours test driving  cars or strolling through the mall, but oddly, very few people read these agreements in detail.  And even fewer take them to an attorney for review.

But I guess it’s not so hard to understand, since many of them can run 20+ pages.

At Least a Five-Part Series

I’d like to dedicate a series of posts to help you better understand a typical residency agreement.  My goal is not to drown you in legalese (legal speak for 25 pages of run-on sentence separated by commas), but rather to educate you on their core components and things to avoid.

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