Overview of Medicaid Rules for Trust Beneficiaries

Eligibility for medicaid is determined by applying certain income and asset tests. Medicaid is only available to individuals with insufficient assets and income. An important question in applying these tests is: to what extent will trust assets be deemed available to a trust beneficiary so as to disqualify the beneficiary from Medicaid?

This overview looks at certain "self-created" trusts and trusts created by a third party. Since different rules apply to these two different types of trusts, it is imperative to determine when a trust will be classified as a "self-created" trust.

Rule: If the trust is established with the individual's assets and is set up by a court, spouse, guardian, or other person legally representing the individual, then the trust will be classified as a self-settled trust.

Types of Self-Settled Trusts Medicaid availability rule

Revocable	Trust corpus is available to settlor
Irrevocable/income only "income paid to settlor for life, then to child"	Only the income is available, but the transfer is subject to the look-back rules and will create a period of ineligibility
Irrevocable/support trust "trustee shall apply income and corpus as needed for settlor's support"	Medicaid can reach any trust assets that are available for settlor's support. Settlor will be ineligible for Medicaid until trust is depleted.
Irrevocable/discretionary trust "trustee has discretion to use income and corpus for benefit of settlor"	Medicaid can reach any trust assets that trustee may use for settlor. Settlor will be ineligible for Medicaid so long as trust funds exist.
Irrevocable/supplemental needs trust Created by settlor	Same as discretionary trust
Irrevocable/supplemental needs trust Created by court, guardian, parent, or grandparent of a settlor/beneficiary who is disabled and under age 65	Provided the state can reach any remaining assets at death of the settlor/beneficiary, the funds will not be available during lifetime. Nor will creation of the trust trigger ineligibility under the look-back rules.
Irrevocable/supplemental needs trust Created by the individual, a parent, guardian, grandparent or court for a settlor/beneficiary who is disabled and under age 65, provided the trust assets are part of a pooled fund managed by a non-profit.	Same as above, provided the state can reach assets at death or the assets remain with the non-profit for its charitable use. Note: A disabled individual can set up the trust herself under this option. See §1396p(d)(4)(C) [omitted from the version I handed out in class]
Irrevocable/supplemental needs trust Same as above except the disabled settlor/beneficiary is over age 65	Trust assets will not be deemed available, but the transfer in trust will trigger the look-back rules and create a period of ineligibility. See §1396p(c)(2)(B)(iv)
Irrevocable/supplemental needs trust Funded only with income rights such as social security or pension benefits (i.e., not income producing assets) and funded by and for an individual whose income exceeds medicaid eligibility limit but is insufficient to cover actual cost of nursing care.	Provided the assets are available at death of the individual to reimburse the state, these assets will not be deemed available to make individual ineligible for medicaid benefits. The result is that the trust income will be used to pay for nursing care and medicaid will pick up any remaining amount. These trusts were approved judicially before OBRA'93 was enacted and are known as Miller trusts. They are sometimes called Utah gap trusts. OBRA'93 approved this type of trust. See §1396p(d)(4)(B)[omitted from class handout]

General Rule for Trusts Created by Third Party: Medicaid as a creditor can only reach the interest in the trust that the beneficiary could reach. Thus medicaid can reach any vested interest. The right to demand support from a support trust is a vested right. Thus, medicaid can reach assets in a support trust, e.g., a trust that provides "trustee can use income and invade corpus for support of beneficiary." Discretionary supplemental needs trusts do not create vested interests in the beneficiary. Thus, medicaid cannot reach the assets in such trusts. Classification as a support trust or a supplemental needs trust is a key issue. Classification depends on the language used by the creator of the trust.

Type of third party trust Medicaid Rule

Any intervivos trust created by spouse of beneficiary	Will be treated the same as self-created trusts above
Testamentary trust created by spouse of beneficiary	Will be treated the same as other third-party created trusts. If interest of beneficiary is discretionary or only for supplemental needs, then medicaid cannot reach.
Discretionary/supplemental needs trust "trustee may use income and corpus as trustee determines is best for benefit of A during A's life; trustee shall not use funds for basic support that is being provided by medicaid or similar public assistance program; trustee may use funds for supplemental needs of A, not covered by public assistance, including, but not limited to, private rooms, companions, travel, and entertainment; any assets not consumed will paid to A's estate at A's death."	Trust assets are not available to medicaid. Beneficiary will qualify for medicaid. Creation of the trust could affect the creator's medicaid eligibility under the look-back rules. BUT, if the trust is solely for the benefit of a disabled person under age 65, then the transfer will not disqualify the creator of the trust under the look-back rules. See §1396p(c)(2)(B)(iv). AND, if the trust is solely for the benefit of the creator's child, provided the child is blind or permanently disabled, then the transfer will be exempt from the look-back rules. See §1396p(c)(2)(B)(iii) [omitted from class handout] NOTE: To be exempt from the look-back rules, the trust must be solely for the benefit of the disabled individual. There is no requirement that the trust provide that the assets be available to reimburse medicaid. The effect of the "solely" requirement is that the assets will be available for reimbursement since any remaining assets must go to the beneficiary rather than someone else.

Note 1: The Department of HHS has written an opinion letter that interprets the age 65 requirements in §1396p to mean that so long as the trust is created before age 65, the trust will remain exempt after the beneficiary turns age 65.

Note 2: Iowa has enacted a separate statute that applies to "medical assistance income trusts" (defined in §1396p(d)(4)(B) of the federal statute) and "medical assistance special needs trusts" (defined in §1396p(d)(4)(A) and (C) of the federal statute). Those provisions can be found at Iowa Code §633.707 et seq. These statutes provide the rules that determine how income and assets from such trusts will be allocated. These statutes apply to self-created trusts.