Special Needs Trusts and Medicaid

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What Is a Special Needs Trust?

A special needs trust, also called a special treatment or special purpose trust, is a trust that is created to hold assets on behalf of an individual who is or would like to be eligible for Medicaid and other government benefits. Assets transferred to a special needs trust are administered by a trustee for the benefit of the individual. The trust beneficiary cannot control distributions or the assets in the trust.

Why Should I Consider Transferring Assets to a Special Needs Trust?

Individual states set guidelines for Medicaid eligibility based on the Federal Poverty Line Guidelines. If an individual has or obtains assets in excess of the state guidelines, he or she can become ineligible for Medicaid benefits, as well as many other government benefits. This can be an issue where a disabled, elderly, or ill individual has assets disqualify him or her, but are not substantial enough to provide or pay for necessary long-term medical care. Transferring assets to a properly formed special needs trust can retain Medicaid eligibility for yourself or a loved one, ensuring that he or she receives quality care, housing, and support.

How Do I Create a Special Needs Trust?

There are a few types of special needs trusts that an individual can use to protect his or her Medicare eligibility. 

First Party Special Needs Trust: Also called a self-settled trust, is a trust created with the beneficiary’s own assets. Such assets might include an inheritance or settlement or award from a civil lawsuit. When the beneficiary dies, the trust assets must pay back Medicaid for long-term care. The requirements to create a first party special needs trust are as follows:

Pooled Trust: A pooled trust is also created with the beneficiary’s assets. The trust is managed by a non-profit organization that pools the assets of several special needs trusts for investment and management. Upon the beneficiary’s death, the non-profit will reimburse Medicaid and receive the remaining trust funds. A beneficiary’s family members might also receive funds. To create a pooled trust, the beneficiary must be a Medicaid recipient or applicant of any age. 

Third Party Special Needs Trust: A third party trust is funded by assets that do not belong to the beneficiary. These assets might come from family members or friends. To create this type of special needs trust, the trustee must have sole discretion over distributions and must be careful to make sure that any distribution does not make the beneficiary ineligible for Medicaid benefits. Medicaid does not need to be reimbursed upon the death of the beneficiary.

It is important that a special needs trust is formed according to specific federal and state requirements in order to protect Medicaid eligibility. If the trust is not formed and funded according to these requirements, the beneficiary could lose his or her government benefits.   

Should I Consult a Lawyer to Create a Special Needs Trust?

Creating a special needs trust can be a very complex process. There are federal and state laws that must be observed in order to properly create a trust and ensure eligibility for government benefits. Additionally, there may also be tax and estate issues as well. A trusts and estates attorney can help you properly form a special needs trust, and may also serve as trustee or know a qualified professional to administer the trust. 

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Last Modified: 01-28-2014 04:19 PM PST

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