Protecting Assets While Qualifying for Medicaid: Which Trust is Right for You?

A Special Needs Trust (“SNT”) is a trust created for a disabled beneficiary with the specific purpose of supplementing government benefits such as Medicaid rather than supplanting those benefits. While Medicaid Planning involves more than preparing a trust, it is a core planning step. Developing the most effective plan often requires implementing the right trust vehicle.
There are two general types of SNTs. One type is known as a Third Party Trust or a “Supplemental Benefits Trust”. It is established for a disabled person with the funds of someone other than the disabled person, and is often used as an estate planning mechanism for the person funding the trust. The second type is known as a First Party Trust or self-settled SNT because it is funded with the assets of the disabled person, who is also the beneficiary of the trust.

Medicaid Eligibility

In order to determine the eligibility for Medicaid and other government benefits programs, the applicant must qualify under a means-tested analysis, which weighs the available resources and income of an individual, and the individual’s spouse, if married. The extent to which a Third Party Trust impacts a disabled beneficiary’s eligibility for government benefits will depend on the beneficiary’s power to compel distribution. The applicant bears the burden of establishing eligibility.

New Jersey law defines a resource as any real or personal property which is owned by the applicant and which could be converted to cash to be used for his or her support and maintenance. The resource must be available which means that the person has the right, authority, or power to liquidate real or personal property, or his or her share of that property. Unavailable resources are not included for Medicaid purposes and certain available resources may also be excluded for Medicaid purposes. A properly drafted SNT will not be treated as an available resource and will not jeopardize the beneficiary’s eligibility for Medicaid.

Federal and state law allows disabled persons under the age of 65 to establish First Party Trusts. First Party Trusts often serve as a fallback planning option for those instances where the disabled beneficiary has received an unexpected windfall, an inheritance under a will, has acquired property through a retirement plan, is the recipient of life insurance proceeds, or obtained a personal injury award. If the disabled person is over the age of 65, asset planning protection can still be accomplished, but a First Party SNT is not an available planning vehicle.

There are several types of First Party Trusts, such as a “Miller Trust”, Pooled Trust”, “Litigation Special Needs Trust” or “Payback Special Needs Trust”. Each serves a specific purpose, however, one commonality is that they generally require a payback provision. In these cases, a carefully drafted First Party SNT must contain the requirement that the State will receive all amounts remaining in the trust upon the death of the beneficiary, up to an amount equal to the total amount of Medicaid benefits paid on behalf of the beneficiary. There are several other requirements which include that the trust must be irrevocable, the beneficiary must be under the age of 65, there must be no additions to the trust after the beneficiary is over 65, the beneficiary must have been determined to be disabled as defined by the Social Security Administration, and that the trust must be established for the benefit of the beneficiary by a parent, grandparent, legal guardian, or a court.

Lookback Period

For Medicaid eligibility purposes, there is a five year lookback period for uncompensated transfers. This means that on an application for Medicaid benefits, there is a question which asks if the applicant or applicant’s spouse has made any uncompensated transfers to an individual or trust within the previous five years. If so, all such transfers must be disclosed to Medicaid, and a failure to do so constitutes Medicaid Fraud. Any uncompensated transfer of assets made within the five year lookback period results in a penalty period, which is a period of ineligibility for Medicaid long-term care. The penalty period can last several months or years, depending on the value of the transfer. The period of ineligibility does not begin when the transfer is made, but rather when the person enters the nursing facility, applies for Medicaid, and is otherwise eligible for Medicaid.

In many cases, without proper planning and asset protection strategies, a disabled person will be ineligible for Medicaid. Similarly, improperly drafted planning documents will result in the trust included as an available resource. Before engaging in any Medicaid planning, it is important to develop a careful, well thought out game plan to ensure maximum asset protection while qualifying for Medicaid.

Mark S. Balian is a Partner at Wells, Jaworski & Liebman whose practice is in the Tax, Trusts, and Estates and Business

Leave a Reply

Your email address will not be published. Required fields are marked *