Use of Trusts in Medicaid Planning

If an individual is age 65 or older, the individual cannot create and fund a Special Needs Trust or a Pooled Trust account without incurring a transfer penalty. This does not necessarily mean that making transfers to fund a trust under these circumstances is always a bad idea. However, since the creation and funding of any trust to preserve the individual's assets would involve a transfer without fair consideration in any case, the individual may wish to use his or her assets to fund a trust that is not required to repay the State of Maryland for Medicaid benefits the individual may receive during his or her lifetime.

The regulations on self-settled trusts are such that a trust created by the individual and funded with the individual's own assets (other than one of the trusts exempt under OBRA '93) will prevent the individual from qualifying for Medicaid in the future, unless none of the assets or income in the trust can possibly be distributed to the individual or for the individual's benefit.

However, the individual may be able to create an irrevocable trust for the benefit of his or her children or grandchildren and fund that trust directly with his or her own assets, if the trust provides that:

The childrens' or grandchildren's trust shares will be funded with all trust income and principal. None of the trust income or principal may be distributed to the individual or for the individual's benefit during his or her lifetime.

Since none of the principal or income in that trust could be paid to or for the benefit of the individual, that principal and income would not be available to the individual for Medicaid eligibility purposes. Further, the trust can provide for distribution of the assets accumulated in the trust share after the grantor's death according to the grantor's instructions. The funding of such a trust would result in a transfer penalty, but no more so than if the assets used to fund the trust were transferred outright as part of a gifting plan.

Many individuals planning for future Medicaid eligibility may not wish to deprive themselves completely of the benefit of excess resources, as would be the case if these resources were transferred outright as gifts to others. Using excess resources to fund a self-settled, non-exempt trust for the individual's own benefit is not a good option if the individual ever wishes to qualify for Medicaid. However, any trust that is funded by a third party, with the individual as the sole beneficiary, would be exempt from the rules regarding self-settled trusts, so long as the trust is not created or funded at the individual's direction or request.

The assets in such a trust would not be deemed available to the individual by Medicaid, so long as the individual cannot force distributions from such a trust; the individual does not have authority to exercise discretion as a trustee; and the individual never transfers his or her own assets directly into the trust. Thus, the trust would not delay the start of the penalty period for transfers of assets, once the individual is in a nursing home or receiving long term care services at home.

As a result, an individual can provide for himself or herself indirectly by making gifts of remaining excess resources to his or her children, who, in turn, could voluntarily use those assets to fund a third party special needs trust for the individual's sole benefit. That trust would allow the individual to qualify for Medicaid, once the transfer penalty or look-back period has expired; the assets in the trust could be used to pay for the individual's long term care expenses during the penalty period or look-back period, and for the individual's supplemental needs after the individual begins receiving Medicaid benefits; and assets remaining in the trust after the individual's death would not be subject to Medicaid liens, estate recovery, or the type of state pay-back requirements applicable to Medicaid exempt special needs trusts or pooled trusts.

It would be very important to be able to demonstrate that the trust was not created at the individual's direction or request. Therefore, it is advisable for practitioners to prepare a statement for the individual to sign at the time the individual makes his or her gift transfers. This statement should provide that any gifts the individual makes are given freely and with the understanding that the individual will no longer need the property transferred to provide for his or her support or other needs; that the recipient of the gifts is under no obligation to ever use the property transferred for the individual's benefit or to return any of that property to the individual; and that the recipient is under no obligation to set the gifts aside in any trust or other arrangement for the individual's benefit.

Of course, this strategy does carry some risk. The person to whom the individual makes gift transfers could change his or her mind and decide not to create or fund the trust. Therefore, this strategy should only be used when the family relationships and other dynamics indicate that the recipient of the gifts will actually go through with creation and funding of the trust.
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