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Elder Law & Special Needs, Estate Planning & Probate, Nonprofit Organizations
PLANNING WITH TRANSFERS FOR THE DISABLED* (article) (See Cautionary Remark)It has long been the case that individuals could assist disabled family members by placing funds in "special needs trusts" that would preserve the disabled person’s eligibility for government entitlement benefits while at the same time providing additional resources for unmet needs, although more recently it has been common to call these "supplemental needs trusts." In addition, gifts made outright to disabled children have long been exempt from the rules penalizing transfers made by those seeking Medicaid (Title XIX) benefits for their own long-term care. However, these two planning techniques were out of sync until 1993.
A federal law, the Omnibus Budget Reconciliation Act of 1993 (OBRA ‘93) put these planning techniques back in sync. The Act made gifts to certain "pay-back" special needs trusts for blind or disabled persons exempt from the Medicaid transfer penalties. In addition, the Act provided that these trusts will not affect an individual’s eligibility for Medicaid -- even if funded with the individual’s own assets. This means that: (1) an elderly person can make gifts to a "pay-back" special needs trust for a disabled person without jeopardizing the medical entitlement benefits of either; and (2) in the event that a disabled individual does receive funds outright, these funds may be sheltered in a trust without jeopardizing the individual’s Medicaid benefits.
Requirements of OBRA ‘93 Trusts. To be exempt from Medicaid transfer penalties, the transfer must be to a trust for the sole benefit of a "blind or disabled" individual. There can be only one beneficiary of the trust during the disabled person’s lifetime. There is no requirement that the beneficiary receive Medicaid or be likely to do so in the future. Trusts may be established by a parent, grandparent, guardian (conservator) or court, or, since Dec. 2016, by the disabled individual himself or herself. "Pooled" trusts operated by nonprofit organizations can be funded by or for a person over sixty-five, but different states have different rules about whether or not funding it by the beneficiary creates a "transfer of assets" penalty. (In CT, the individual has to show that the amount being contributed to a trust for someone over sixty-five will be spent over his or her actuarial life expectancy.)
The "Pay-Back"
Requirement: Upon the death of the disabled beneficiary, the
Trustee must first repay any Medicaid benefits that a state has
provided to the beneficiary, even before paying for any funeral
expenses. After "payback" is complete,
however, remaining assets may be distributed to other
beneficiaries or used for expenses. (A pooled trust might not
permit distribution to other beneficiaries but may require that the
charity operating the pooled trust retain the remaining assets.)
The payback requirement applies even if the person's estate might not
otherwise have had to pay anything back.
"Blind or Disabled." For all planning involving transfers to disabled persons, including OBRA ‘93 Trusts, the beneficiary must be either blind, or disabled as defined by the Social Security laws: "unable to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than twelve months (or, in the case of a child under the age of 18, if he suffers from any medically determinable physical or mental impairment of comparable severity)." Special problems arise if the disability stems from alcoholism or drug-addiction, and special provisions define "blindness." A beneficiary receiving Social Security Disability or SSI should qualify automatically as "disabled."
Trusts May Be
Established by Parent, Grandparent, Conservator -- or by the
Beneficiary. In 1998,
Connecticut’s
legislature authorized probate courts (and conservators with probate
court approval) to establish OBRA ‘93 Trusts, whether for the benefit
of the ward, or as a gift for the benefit of another person. In
addition, OBRA ‘93 Trusts are expressly authorized in settling lawsuits
brought on behalf of someone under conservatorship or guardianship,
once the State’s lien (for cash or mental health benefits paid, up to
50% of the injury, plus Medicaid payments relating to the injury) has
been repaid. Congress changed the law in 2016 so that now, a
disabled person may create his or her own "payback" trust.
Trustees.
OBRA ‘93 Trusts may be separately established and maintained.
Although the party making the gift may be a Trustee, tax implications
-- as well as appropriate successor Trustees -- should be considered
carefully. OBRA ‘93 Trusts may also be held as "pooled" trusts
administered by nonprofit organizations. There are many
organizations in other states that will act as Trustee of such
trusts. In Connecticut, PLAN of Connecticut operates a pooled trust and
will act as trustee forother kinds of special needs trusts.
Other Trust Issues.
Additional issues should be considered when establishing or making a
gift to an OBRA ‘93 Trust:
| 1. | The trust should permit amendment by the Trustee to comply with changes in the law. |
| 2. | A trust funded
as a gift for a disabled person should be "discretionary," with
payments left to the "sole, absolute and uncontrolled discretion" of
the Trustee, to avoid any impact on the beneficiary’s other
entitlements and to insulate the trust from other creditors.
Footnote: if the trust is the "payback" trust described above,
teh State of CT takes the view that the discretion can only be "sole"
and not "absolute." |
| 3. | Distributions
should be "intended" for the "supplemental needs" of the
beneficiary, but distributions for other needs do not have to be
prohibited, and it's unwise to prohibit distributions that "reduce"
benefits. That's because if the beneficiary expects to receive
Supplemental
Security Income, payments for the beneficiary’s "food or shelter"
will affect those benefits -- but in generally only to the
extent of one-third of the maximum benefit plus $20, per month. Sometimes it's better to reduce SSI than
prohibit the trustee from paying for shelter. |
| 4. | Disposition of the remainder should be considered together with any related tax issues. |
| 5. | Especially if
funded with the beneficiary’s own assets, and not as a gift,
interaction with the disabled beneficiary’s entitlement and other needs
(such as State "cash assistance" payments) will require careful
consideration. See CAUTIONARY
REMARK (Parkhurst case) |
| 6. | Effect on sensitive family relationships must be taken into account if the gift to a disabled relative is not balanced by generosity to others as part of the estate plan. |
| 7. | When any trust
is introduced into the Title XIX application process, significant delay
may result, as the trust may be referred to the Attorney General’s
office for review. In these cases it will be required that
the trust also state that it will pay back the State of CT for any
other state benefits the beneficiary has received, in addition to
paying back Medicaid. |
Conclusion. Medicaid planning with transfers to or for the benefit of disabled persons must be handled with care. With the assistance of an attorney familiar with the complex laws affecting the elderly and disabled, an individual may find such transfers to be a valuable tool in protecting family assets and providing for a disabled relative’s needs while at the same time preserving the individual’s own eligibility for medical assistance under Title XIX.
*A version of this article was published in the September, 1998 newsletter of PLAN of Connecticut, Inc. Rights of any further use, copying or publication are reserved.
Page updated on June 11, 2001 and in subsequent years, most recently, October 6, 2022
DISCLAIMER: THIS
INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND CREATES NO
ATTORNEY-CLIENT RELATIONSHIP. NO ENDORSEMENT IS
INTENDED BY ANY REFERENCES HEREIN. PLEASE CONSULT YOUR OWN LEGAL
AND
FINANCIAL ADVISORS BEFORE TAKING ANY ACTION.
I
can only provide general information, and will
not provide advice about a particular case without a formal engagement.
Writing
to me does not create
an attorney-client relationship.
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Lisa Nachmias Davis
Davis O'Sullivan & Priest LLC
59 Elm Street, Suite 540
New Haven, CT
06510
Phone: 203-776-4400
Fax: 203-774-1060