When an individual applies for a means tested benefit, typically one based in the federal Social Security Act such as medical assistance long-term care or Supplemental Security Income (SSI), the program “counts” the applicant’s resources and income to determine eligibility. An individual with resources or income above a certain level will not qualify for medical assistance reimbursement. Because of this, a potential medical assistance or SSI recipient will be disqualified from receiving benefits if income or resources exceed eligibility levels.
However, through careful planning, an elder law lawyer can help a current or potential medical assistance or SSI applicant/recipient create a special needs trust that will protect resources while conforming to medical assistance or SSI requirements.
In determining whether or not establishing a special needs trust is right for a client, it is important to first understand the different types of federal and Maryland special needs trusts.
The federal statutory trusts get their seemingly cryptic names from their location in the U.S. Code in Title 42, Section 1396p. Under federal law, there are four statutory special needs trusts: an exempt pay-back trust, a pooled asset trust and two third-party trusts.
The first, the (d)(4)(A) medical assistance and SSI exempt “pay back” trust, is a trust that is created by someone other than the medical assistance applicant/recipient with the applicant/recipient’s funds. A parent, grandparent, legal guardian, court or administrative agency creates the trust with the applicant/recipient’s funds. The trust is created for the sole benefit of the applicant/recipient who must be under 65 years of age and disabled per Social Security.
The second type of federal statutory trust, the (d)(4)(c) pooled asset trust, can be created by the applicant/recipient or another party with the applicant/recipient’s funds. With this trust, the applicant/recipient, a parent, grandparent, legal guardian, court or administrative agency establishes a trust account with the applicant/recipient’s funds.
The pooled asset trust account is established for the sole benefit of the applicant/recipient who must be disabled (per Social Security) at the time the trust is created. The trust account is then pooled with other (d)(4)(c) trust beneficiaries and a non-profit association manages the pooled asset trusts. The non-profit association maintains a separate account for each applicant/recipient trust beneficiary. When the applicant/recipient beneficiary dies, to the extent the money is not retained by the trust, the remaining assets in the beneficiary’s account are used to reimburse the state an amount equal to the total amount of Medical Assistance paid on behalf of the beneficiary. The determination of whether funds are retained by the trust or paid back to the state with the potential for a remainder beneficiary is made at the time the beneficiary joins the trust.
Currently, there are four authorized (d)(4)(c) pooled asset trusts, managed by non-profit organizations, authorized to operate in Maryland:
- Penn-Mar Organization
- Shared Horizons, Inc.
- n ARC of Northern Virginia
- n First Maryland Disability Trust, Inc. (FMDT)
A group of elder law and disability attorneys created FMDT in 2005 after realizing that Maryland lacked a statewide pooled asset trust. Five years later, in April 2010, the Maryland Attorney General responded to a query from FMDT to determine whether or not a disabled beneficiary over 65 could transfer assets into FMDT without a penalty period of ineligibility. In the letter, the Attorney General determined that there is no age limitation for pooled asset trusts under federal or state law for Medicaid beneficiaries. SSI does impose a penalty of up to three years of ineligibility for transferring assets to a (d)(4)(C) pooled asset trust.
In the final two federal statutory trusts, the (c)(2)(B)(iii) and (c)(2)(B)(iv) third party trust, the beneficiary is the third party of funds put into the trust by someone else. With these trusts, the beneficiary is not the grantor or the grantor’s spouse. Assets that are transferred into this type of trust are not considered a disposal of assets for less than the fair market value. As a result, this asset transfer by the grantor is not subject to a penalty period of ineligibility for benefits. Additionally, depending on how the trust is drafted, federal law does not require the trust to reimburse the state for Medicaid payments made on behalf of the applicant/recipient or the trust beneficiary upon either individual’s death.
To qualify for a third-party trust, the grantor must demonstrate that the trust is created for the “sole benefit” of an individual, meaning, the trust cannot benefit anyone except the individual at the time the trust was created or anytime in the future. The trust document must either provide for the spending of trust funds for the individual on a basis that is actuarially sound or pay back the state and then name a remainderman to receive any funds remaining after Medicaid has been paid back.
The critical difference between the (c)(2)(B)(iii) and (c)(2)(B)(iv) trust is that the (c)(2)(B)(iii) must benefit the applicant/recipient’s son or daughter who is blind or disabled, while the (c)(2)(B)(iv) is for the benefit of any disabled individual under 65 years of age.
In addition to the four federal trusts, Maryland has three types of Maryland-specific special needs trusts: the Common Law Special Needs Trust, the Maryland Discretionary Trust Act Trust (MDTA), and the testamentary special needs trust.
The Common Law Special Needs Trust was challenged in First National Bank of Maryland v. Department of Health and Mental Hygiene, 339 A. 2d 891 (1979). In this case, the court found that the trust was a discretionary trust and not a support trust, and therefore the trust principal was not available to pay for the cost of care of the grantor’s child. Based on this case, if the principal is not available to pay the cost of care, the trustee cannot be compelled to invade the principal to defray the cost of care. However, any money transferred into this trust is a transfer subject to a “lookback” and a potential Medicaid penalty of ineligibility for five years for the person who created or funded the trust.
A trust created under the Maryland Discretionary Act Trust is also not considered a resource for Medical Assistance eligibility for the beneficiary. The beneficiary in an MDTA trust cannot have any interest in the trust property. However, like the Common Law Special Needs Trust, any money transferred into these trusts is a transfer subject to a potential penalty period of ineligibility for benefits for five years for the person who creates or funds the trust.
Finally, creating a testamentary trust for an individual who might need medical assistance or SSI is effective in providing a pool of funds for the beneficiary that does not affect the beneficiary’s eligibility for medical assistance or SSI. However, it is important to prepare for one situation where the trust may jeopardize the beneficiary’s eligibility for benefits. If the spouse of a decedent is the beneficiary of a testamentary trust created by the decedent and the terms of the testamentary trust do not provide access to the principal for the beneficiary’s benefit, the trust principal is considered unavailable to the beneficiary. However, if access to the principal is discretionary, then eligibility for benefits may be compromised under state law. In this situation, to protect the assets in the trust, the trustee must state that he/she refuses to exercise his/her discretion to utilize the principal for the beneficiary’s benefit. Be aware, medical assistance requires a beneficiary spouse to claim their statutory share of the pre-decedent spouse’s estate. A special needs trust does not satisfy this requirement. If the failure to claim the statutory share occurs within five years of the medical assistance application, it will be treated as a transfer subject to penalty.
Clearly, the world of special needs trust drafting is intricate and requires an understanding of the client’s current and future care needs. Despite their complexities, special needs trusts are a useful tool for clients who want to ensure they have adequate funding for their personal care/special needs while remaining eligible for medical assistance and SSI.
Jason A. Frank is President of the law firm of Frank, Frank & Scherr, LLC, as well as First Maryland Disability Trust, Inc.