Supplemental needs trust

A supplemental needs trust is a US-specific term for a type of special needs trust (an internationally recognized term). Supplemental needs trusts are compliant with provisions of US state and federal law and are designed to provide benefits to, and protect the assets of, individuals with physical, psychiatric, or intellectual disabilities, and still allow such persons to be qualified for and receive governmental health care benefits, especially long-term nursing care benefits, under the Medicaid welfare program. Supplemental or Special Needs Trusts are frequently used to receive an inheritance or personal injury litigation proceeds on behalf of an individual with a disability, in order to allow the person to qualify for Medicaid benefits.

Background of Medicaid law

Medicaid is the Federal program administered by the states which provides health care for those who can't afford it. See 42 U.S.C. § 1396 et seq. Federal law establishes certain mandatory requirements which each state must adopt in its local Medicaid program, and the states are also given options to elect certain other components in the health care plan which they may decide to provide. Accordingly, Medicaid does vary from state to state in certain aspects, but there are also mandatory Federal law provisions.

One significant governmental benefit which is available only through Medicaid is long-term nursing care which includes care for the physically disabled and the mentally disabled. Long-term nursing care can be extremely expensive. To qualify for Medicaid and its long-term nursing care benefits, the applicant must be “poor” and there is a limit to the countable assets which he or she can own. To qualify for Medicaid, the applicant must meet the asset guidelines for Supplemental Security Income (SSI). SSI allows a single applicant to own no more than $2,000 in countable assets and a married applicant to own no more than $3,000 in countable assets. Certain assets are specifically exempted and are not countable.

Trusts as Medicaid countable assets

A trust is a legal arrangement in which legal title to assets is held by a trustee under certain defined restrictions of a governing instrument (usually a will or a written trust agreement) for the benefit of another party known as the beneficiary. Trusts can be used as a vehicle to make assets available to a beneficiary but still significantly restrict them. Recognizing the gray area which trusts can provide concerning the ownership of assets, Federal Medicaid law places significant restrictions on the types of trusts which can be used to preserve assets of a beneficiary and still qualify the beneficiary for governmental benefits.

Prior to the enactment of the Omnibus Budget Reconciliation Act of 1993 (O.B.R.A), P.L. 103-66, it was possible to create a self-settled, discretionary trust for the benefit of the settlor and still allow the settlor to qualify for Medicaid’s long-term nursing care benefits. These trusts were called “special needs trusts” or “supplemental needs trusts” because restrictive language in the trust agreement allowed the trustee to pay only for the support needs of the settlor-beneficiary which the government did not pay. The trust was not for the unrestricted, general support of the beneficiary which is typical in normal estate plans. Special needs trusts were perceived by the United States Congress to be abusive and were effectively abolished by O.B.R.A.

In general, with limited exceptions, regardless of the purposes, provisions, or discretion contained in the trust, a self-settled trust which is created after August 11, 1993, will be treated as an available asset which can disqualify the settlor-beneficiary from Medicaid. 42 U.S.C. § 1396p(d)(2)(C). This means that generally a person cannot create his or her own trust, transfer his or her own assets into the trust, and still be qualified for Medicaid. However, spouses can leave property in a supplemental special needs trust at their death to care for their surviving spouses and not have the trust property considered as assets available for Medicaid. 42 U.S.C. § 1396p(d)(2)(A)(ii).

Medicaid exempt trusts

Since the effective date of O.B.R.A., only limited types of trusts can now be used and still preserve an applicant’s Medicaid eligibility. One major distinction should be made when analyzing Medicaid trusts. Trusts created by the disabled beneficiary (or a third party with legal authority over the disabled beneficiary) with the disabled person’s own assets for the disabled person’s own benefit are classified as first-party, self-settled trusts. These types of trusts must be distinguished from trusts created by a third party for the benefit of a disabled individual with the third party’s own assets (such as a grandparent creating a trust for a grandchild). Legal restrictions generally exist for first-party, self-settled trusts which do not exist for third-party trusts. These trusts are a good thing to have if someone is expecting a windfall, such as an inheritance.

First-party, self-settled trusts

Most self-settled trusts holding the disabled beneficiary’s own assets created after August 11, 1993, are countable resources for Medicaid. The Medicaid statute, however, provides for three specific types of trusts which can be funded with the applicant’s own assets and which will not disqualify the applicant from Medicaid. These trusts are called “D-4A Trusts” after the subsection of the law which authorizes them. They are also called “Federalized Special Needs Trusts” because the Federal Medicaid statute makes them available in every state.

Because of the requirement that the State be reimbursed for medical assistance, D-4A Special Needs Trusts (named after code section 42 U.S.C. 1396p(d)(4)(A)) may have limited utility when the goal is to pass assets of the disabled individual to family members. The main benefit of the D-4A Trusts is to provide a quality of life for the Medicaid beneficiary. Assets can be held in the trust and used to pay for the beneficiary’s special or supplemental needs which the government does not provide, while Medicaid pays the significant medical bills. If the medical assistance provided during life does not turn out to be costly, then upon the death of the beneficiary, there is a chance that assets may be preserved in the trust and pass to loved ones.

Disabled Individual’s Special Needs Trust

Under the provisions of 42 U.S.C. § 1396p(d)(4)(A), a Disabled Individual’s Trust will not be counted as a Medicaid asset even when it is funded with the applicant’s own assets. The requirements for the trust are that the individual must be under age 65 at the time the trust is created (and funded), and disabled under the Social Security definition. Further, the trust must be for the "sole benefit" of the disabled individual. The trust must be created by a parent, grandparent, guardian, or court. Upon the death of the individual, the State Medicaid agency must be reimbursed for the costs of the medical assistance which was provided by Medicaid during the disabled individual's lifetime. This is often called the “payback” provision.

Until enactment of the 21st Century Cures Act in late 2016, a first party/self-settled trust had to be created by a parent, grandparent, guardian, or court. The statute did not allow the disabled individual to create his or her own trust, even if he or she was otherwise legally competent. The 21st Century Cures Act amended 42 U.S.C. §1396p(d)(4)(A), by adding "the individual" to the list of people who can establish a fist party trust.

"Miller" Trust

A "Miller" Trust can be used to qualify a Medicaid applicant with income in excess of the eligibility limit (not imposed in all states) for long-term care assistance from Medicaid. Such a trust is not really a "special needs" trust at all; it is not funded with the beneficiary's assets. The Miller trust can be named as recipient of the individual's income, from a pension plan, Social Security, or other source. The Miller trust takes its name from the Colorado case of Miller v. Ibarra, 746 F. Supp. 19 (D. Colo. 1990), and is specifically sanctioned by 42 U.S.C. § 1396p(d)(4)(B). As with a self-settled special needs trust (referred to above as a "Disabled Individual’s Trust"), upon the death of the beneficiary, the State Medicaid agency must be paid back for its medical assistance from any remaining assets in the Miller trust. An older name for the Miller trust, still occasionally used, is “Utah Gap" trusts, reportedly coined by a Colorado advocate describing the gap between the income cap for eligibility and the actual cost of nursing home care as similar to the yawning chasm between mesas dotting the Southern Utah landscape. The Miller trust is significant only in those states which impose an income cap on Medicaid long-term care eligibility; ironically, Utah is not one of those states. Income caps are in place in about half of the states.

Also referred to as a qualified income trust.

A Miller Trust only helps with the income eligibility requirement of Medicaid. Income that is routed into a Miller Trust each month, as received, is no longer counted for Medicaid eligibility. The trust provides a specific manner in which funds in the trust will be spent each month. A Miller Trust does not provide any assistance with the "countable resources" requirement for Medicaid, and assets (other than monthly income) are not contributed to a Miller Trust.

Nonprofit Pooled Income Special Needs Trust

A Nonprofit Pooled Income Special Needs Trust is authorized by 42 U.S.C. § 1396p(d)(4)(C). Again, the individual must be disabled under the Social Security definition. Unlike the other exempt trusts which can be administered by a private trustee who is an individual (such as a family member), the Pooled Income Trust is run by a nonprofit association, and a separate account is maintained for each individual beneficiary. All accounts are pooled for investment and management purposes. The trust (or more accurately, an account in the pooled trust) may be created by a parent, grandparent, guardian, or court, and it can also be created by the disabled individual himself. Upon the death of the disabled individual, the balance is either retained in the trust for the nonprofit association or paid back to the State Medicaid agency for its medical assistance.

In some states, a disabled individual over age 65 is entitled to transfer assets to a pooled trust and then be immediately eligible for Medicaid. In other states, the transfer must be made before the disabled individual attains the age of 66.

All 50 States have at least one Pooled Special Needs Trust.Directory of Pooled Special Needs Trusts

Third-party trusts

Medicaid law governing trusts is designed to prevent disabled individuals qualifying for benefits while still retaining full control over their assets. A third party (the beneficiary and trustee are the first and second parties) however, is still free to plan with his or her own assets and either give them outright to a disabled individual or tie them up and restrict them in trust as they see fit. Accordingly, trusts which are created by a third party with the third party’s own assets to benefit a beneficiary who is on Medicaid have their own separate rules and treatment which are based upon case law rather than Federal regulations.

Generally, a properly drafted third-party, discretionary trust is not countable as an asset available to the beneficiary receiving Supplemental Security Income (SSI) and/or Medicaid benefits. Such a trust must be created by a party other than the SSI/Medicaid beneficiary, must not receive any assets belonging to the beneficiary, and must be restricted (not accessible or available) to the beneficiary. The operative principle is whether the trust assets or income are available to the beneficiary. If appropriate trust language is used (and the appropriate language varies from state to state), Medicaid will not treat the resources in the trust as a countable resource.

Benefits of a Third-Party Special Needs Trust

When a special needs trust is created and funded by someone other than the beneficiary, the trust can provide the trustee with much greater latitude to make distributions. Furthermore, the government is not entitled to recover any expenditures made for the beneficiary from the trust corpus remaining at the end of the beneficiary's life. These two benefits make third-party special needs trusts strongly preferable to any of the self-settled special needs trusts established under federal law.

Distributions from a Third-Party Special Needs Trust

The trustee does not have to be restricted to distributions for supplemental needs, which are defined by the eligibility rules of Supplemental Security Income as food and shelter. Instead, the trustee can weigh the benefit of the distribution against the potential cost to the beneficiary's SSI or Medicaid benefits and choose to make a distribution that reduces the beneficiary's SSI or even eliminates the beneficiary's eligibility for Medicaid. However, some trust creators choose not to provide this increased discretion to the trustee and limit distributions to supplemental needs only, excluding any distributions for food or shelter.

No State Recovery Required

At the end of the beneficiary's life, the balance remaining in the trust can be distributed directly to the remainder beneficiaries of the trust with no right for the government to first receive reimbursement for the expenditures it made for the beneficiary during that person's life. If, however, the trust is drafted with an unnecessary "payback" provision, the trustee must comply with this direction which creates an enforceable right in favor of the government.

Revocation of a Third-Party Special Needs Trust

A third-party special needs trust should not be drafted as a general support trust or mandate distribution of current income to the beneficiary. In such a case, the trust can be deemed to be “available” and can disqualify the beneficiary from Medicaid. The Medicaid beneficiary should not be given any power to revoke the trust or direct the trustee to make distributions to the beneficiary. The trust can be revocable by the third-party settlor. This means that a parent can fund a trust for a disabled child with the parent’s assets and give it a test run, revoking it later and re-acquiring the assets if the parent decides that it is not serving its purpose. Note, however, that revocable trusts are not completed gifts for gift and estate tax purposes.

References

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