Can Elderly Persons Use a Supplemental Needs Trust to Qualify for Long-Term Care Medicaid?

Summary

A Special Needs Trust (SNT) is used to protect assets for the sole benefit of a person with disabilities (as determined by the Social Security Administration) while still allowing them to qualify for government benefits, such as long-term care Medicaid. This Medicaid planning tool, used to meet Medicaid’s asset limit (generally $2,000), is also called a Supplemental Needs Trust, Special Treatment Trust, or Special Purpose Trust. Its name is derived from how trust funds are used; they are used to pay for “supplemental” or “special” needs of the disabled person. Intended to improve their quality of life, trust funds are used to pay for items, services, and supports that are not covered by Medicaid nor Medicare. Allowable expenses might include supplemental in-home care, vitamins, cell phone service, home repairs, and massages.

There are two types of Special Needs Trusts: First-Party and Third-Party. First-Party SNTs are restricted to individuals with disabilities under the age of 65. They are created and funded with assets (generally cash) owned by the individual with a disability and used to lower their countable assets to meet Medicaid’s asset limit (and qualify for benefits). Third-Party SNTs are available to persons with disabilities of any age. They are established and funded with assets owned by someone other than the person with a disability. It is generally a parent creating the trust for their child.

For seniors with disabilities 65+ years old, a Pooled Special Needs Trust might be an option. While this type of SNT can be utilized for persons with disabilities of any age and can be first-party or third-party funded, for the purpose of this article, we will focus on First-Party Pooled Trusts for persons aged 65+. In other words, Pooled Trusts that a senior with a disability funds with their own money. Unfortunately, Medicaid agencies do not permit Pooled Trusts in all states, and in those that do, it may violate Medicaid’s Look-Back Rule. This is a period of 60-months immediately preceding one’s long-term care Medicaid application, during which the Medicaid agency looks for any assets that were gifted or sold under fair market value. Making such transactions can result in a Penalty Period of Medicaid ineligibility based on the amount of “gifted” assets.

The rules and regulations of Supplemental Needs Trusts and Pooled Special Needs Trusts are complicated and vary by state. All states do not allow all types of trusts and may use different terminology than used in this article. For instance, Minnesota Health Care Programs (MN Medicaid) defines Special Needs Trusts as a “trust established for the sole benefit of a person under age 65 who is certified disabled”, while they define Supplemental Needs Trust as a “trust established and funded by a third party to provide for the supplemental needs of a person living with a disability while allowing the persons to remain eligible for Medical Assistance”. Therefore, while this article provides general information, a Professional Medicaid Planner can be indispensable in determining if, and what type of trust, can be used to allow persons with disabilities to qualify and / or remain eligible for Medicaid. Incorrectly implementing a SNT or creating a SNT that is not permitted by a state’s Medicaid agency can result in Medicaid ineligibility.

What Defines a Disability?

Special Needs Trusts, some of which are limited to persons under the age of 65, are for persons who are disabled based on SSA’s definition of disability. For persons 18+ years old, it is defined as the inability to participate in substantial gainful activity (work-related activities) due to a physical or mental health condition that has continuously lasted or is expected to continually last a minimum of 12 months OR is anticipated to result in death. In other words, one’s condition must be severe enough that they can no longer do the work they were previously doing, nor can they adapt to other work.

SSA’s definition of disability does not change significantly for persons 65+ years old: their level of education and prior work experience is still a consideration. The SSA does, however, maintain a Listing of Impairments for Adults, which lists 14 categories of conditions, some of which are associated with aging, that may be considered severe enough for one to qualify as disabled, given specific criteria is met. For instance, arthritis, stroke, some cancers, heart disease, chronic obstructive pulmonary disease, Parkinson’s disease, Lewy body dementia, and early-onset Alzheimer’s disease are all listed. To be clear, having one of these conditions does not ensure one will get a disability determination, nor does requiring a Nursing Home Level of Care or assistance with Activities of Daily Living (i.e., bathing, dressing, mobility, eating, transferring).

How Supplemental Needs Trusts Work

There are four instrumental roles when establishing a Special Needs Trust: grantor, trustee, trust beneficiary, and residual beneficiary.

1) Grantor – the person who funds the trust.
2) Trustee – the person / non-profit association who manages the trust and decides how the trust funds will be spent. This must be someone other than the trust beneficiary.
3) Trust Beneficiary – the person for whom the trust is created for their benefit. In this case, it is the person with a disability.
4) Residual Beneficiary (also called Remainderman) – the person(s) who receives any remaining trust funds following the death of the trust beneficiary.

Since the trustee is someone other than the Medicaid applicant (the person with a disability), the assets within the trust are not considered to be owned by the Medicaid applicant, given state-specific rules governing these trusts for Medicaid-eligibility are met. As a result, the assets are exempt from Medicaid’s asset limit. As mentioned above, in some states, Pooled Trusts created and funded by persons with disabilities aged 65+ years old might violate Medicaid’s Look-Back Period, resulting in a period during which they are not eligible for long-term care Medicaid.

SNT Requirements to be Medicaid-Compliant

The rules and regulations that govern if a Special Needs Trust is disregarded (not counted) during the Medicaid eligibility process varies based on the specific type of Special Needs Trust and the state. General requirements follow.

1) The trust must be irrevocable. This means the terms of the trust cannot be changed, nor terminated. (An exception exists for Third-Party SNTs)
3) The person benefiting from the trust must be disabled (based on SSI criteria).
4) Funds in the trust are to be used strictly for the sole benefit of the individual with a disability.
5) Following the death of the disabled person (trust beneficiary), Medicaid must be reimbursed costs for which Medicaid paid while the individual was living. In other words, the state must be named as the residual beneficiary. This is part of the Medicaid Estate Recovery Program. (An exception exists for Third-Party SNTs)

It is strongly recommended that one contact a Professional Medicaid Planner prior to implementing a Special Needs Trust. Incorrect implementation, or implementing a SNT when they are not permitted, can result in Medicaid denial.

First-Party and Third-Party SNTs

As mentioned above, Special Needs Trusts can be first-party funded or third-party funded. While we cover both, as a Medicaid planning strategy for a person with a disability with “excess” assets, it is the First-Party Special Needs Trust that is relevant.

First-Party SNTs
First-Party Special Needs Trusts (or Self-Funded Trusts) are restricted to persons with disabilities under the age of 65, and therefore, must be created before the individual turns 65 years old. While these trusts are funded with assets (generally cash) that belong to the person with a disability, the trust can be established not only by the person themselves, but also by their parent, grandparent, guardian, or the court.

First-Party SNTs do not violate Medicaid’s Look-Back Period, given the trust is established and funded prior to the person with a disability turning 65 years old. Once they reach age 65, additional funds cannot be put in the trust without violating the “look back” and resulting in a Penalty Period of Medicaid ineligibility.

Following the death of the Medicaid beneficiary (the person with the disability), any remaining First-Party SNT funds must go towards reimbursing Medicaid the costs for which it paid during the life of the individual. While one may see repayment as a con, the Medicaid reimbursement rate is much less costly than is the cost of paying privately. Furthermore, after Medicaid reimbursement, any additional funds can go to family as inheritance.

Alternative names for First-Party Trusts include (d)(4)(A) Trusts, d4a Trusts, Self-Settled Supplemental Needs Trusts, and Medicaid Pay Back Trusts.

Third-Party SNTs
Unlike with First-Party SNTs, Third-Party Special Needs Trusts are not restricted to persons with disabilities under the age of 65; there is no age restriction. They cannot, however, be used as a Medicaid planning tool for a person with a disability to qualify for Medicaid. These trusts are established and funded with assets belonging to someone other than the person with the disability. In other words, the person with a disability never owned the assets nor had any legal interest in them.

It is vital that the person with the disability be unable to obtain any trust funds for themselves to avoid them counting towards Medicaid’s asset limit. Following the death of the disabled individual, any remaining trust funds do not have to go to Medicaid as reimbursement for costs paid. In other words, Medicaid’s Estate Recovery Program will not try to collect these funds. This is because they were never (and are not) owned by the Medicaid beneficiary.

Pooled Special Needs Trusts

Pooled Special Needs Trusts can be used for individuals with disabilities of any age. Our focus here is on First-Party Pooled Trusts, or in other words, those funded with assets belonging to the individual with a disability. This type of trust can be created by the individual with a disability, a parent, grandparent, legal guardian, or a court.

Pooled Special Needs Trusts stand apart from traditional Special Needs Trusts in that a non-profit organization is the trustee who manages the trust. Furthermore, while each person with a Pooled Trust has a separate account, everyone’s assets are “pooled” together and invested by the non-profit organization.

While disabled persons 65+ years old can create a Pooled-Asset Trust, in most states, doing so will violate Medicaid’s Look-Back Rule. For instance, in Illinois and Minnesota, transferring assets into a Pooled SNT after one turns 65 years old is a violation of the “look back” and triggers a Penalty Period of Medicaid ineligibility. However, in some states, like Wisconsin, persons 65+ years old can create a Pooled SNT without violating the Look-Back Period.

Following the death of the Medicaid beneficiary, any remaining funds generally must be used to repay Medicaid for costs paid while the Medicaid beneficiary was living. Any remaining funds after reimbursement can then go to family. In some cases, remaining trust funds are retained by the Pooled Trust to benefit other persons with disabilities.

Alternative names for Pooled Special Needs Trusts are Pooled-Asset Trusts, (d)(4)(C) Trusts, or d4C Trusts.

Ways in Which SNT Funds Can be Spent

Trust funds can only be used to “supplement” the benefits provided by Medicaid or Medicare and only for the benefit of the person with a disability. Examples of potential allowable expenses follow.

– Home Repairs / Improvements
– Vehicle Repairs
– Insurance (i.e., health, life, home, car)
– Entertainment (television, radio, books, videos)
– Transportation (i.e., bus passes, taxis)
– Recreation
– Vacations (including paying for an aide to provide assistance)
– Rent / Utilities
– Massages
– Alternative Medical Therapies
– Non-Food Grocery Items
– Out-of-Pocket Medical & Dental Expenses
– Medical Equipment
– Hair / Nail Care
– Over-the Counter Drugs
– Vitamins
– Supplemental Nursing Care
– Home Care Services (not covered by Medicaid or other programs)
– Furniture / Home Appliances & Furnishings
– Cell phone & Service Fees
– Internet Fees
– Cable Bills
– Cleaning Supplies / Service
– Clothing / Shoes
– Vehicle Purchase / Maintenance
– Educational Expenses
– Lawn Care
– Upgrade to Private Nursing Home Room (from Medicaid-funded shared room)

Funds can never be used to purchase gifts. Furthermore, not all states allow SNT funds to be spent in exactly the same manner. For instance, in Mississippi, funds cannot be used to pay the difference between the cost of a shared nursing home room and a private nursing home room.

SNT Comparison Chart

Is an Attorney Required?

An attorney is required to create a Special Needs and all the related trusts described in this article. Creating such a trust for the purpose of becoming Medicaid-eligible can be facilitated by working with a Certified Medicaid Planner (CMP). Typically, CMPs have direct relationships with attorneys and manage the majority of work associated with the creation of a SNT, working directly with the attorney on just legal components of creating a SNT.It is vital that these trusts be implemented correctly, following state-specific rules. Incorrectly creating and funding these trusts can result in Medicaid denial or a Penalty Period of Medicaid ineligibility due to violating Medicaid’s 60-month Look-Back Period. It is strongly recommended one contact a CMP or an elder law attorney.