15 Mar Six Different Trusts Used In Public Benefits Planning
There are a variety of public benefits programs ranging from taking care of drug costs to long-term care costs to assistance for food and shelter. Although some public benefits programs such as Social Security Disability and Medicare are not “means-tested”, eligibility for most public benefits is determined by the amount and type of assets of an applicant. Other factors such as monthly income and transfers are also often considered. Since there are 109 Medicaid programs available (each with requirements that differ) in Texas, this article shall only briefly describe some of the types of trusts and the situations commonly used in protection for obtaining or retaining public benefits as set forth below:
- MEDICAID ASSET PROTECTION TRUSTS –
The cost of long-term care is often great (the average nursing home cost is over $7,000 per month in Texas and some facilities the cost exceeds $10,000 a month). Most people do not have long-term care insurance or adequate resources to pay for the cost of care for a prolonged period of time or they desire to protect assets for their family. A person who is single can only have $2,000 of countable resources (certain assets such as a home and one car generally do not count). If eligible for long-term care Medicaid, the applicant only has to give up his or her income (minus a few deductions) and the government subsidizes the difference. Since income (such as Social Security and pension) is generally far less than the cost of care, many plan to protect assets from “spend-down” by creating a certain type of irrevocable trust whereby the applicant retains some (but not all) elements of control so that the trust is “tax neutral” and will not count as a resource (subject to a five year look-back period) for Medicaid. As a result, the IRS would still consider the assets in the trust as that of the person who establishes the trust – (the “Grantor”) although Medicaid would consider it a transfer (subject to the five year look-back period) since the trust is irrevocable. This trust is often used to protect resources such as real estate from being sold and “spent-down” and other countable resources.
- QUALIFIED INCOME TRUSTS (a/k/a “QITs” and “Miller Trusts”) –
There are a couple of programs (long-term care Medicaid and Star + Medicaid) that have a monthly income cap (presently $2,523 per month). The Star + Medicaid program helps pay for care at home and at some assisted living facilities whereas long-term care Medicaid is a benefit for an applicant who is in a nursing home. Eligibility to meet the income eligibility requirement if monthly income exceeds the cap is to create a QIT and deposit the exact monthly income into the trust so the income doesn’t count toward the income cap. Resources are not deposited into the trust. The trust is not used for those seeking Supplemental Security Income, Community Attendant Services Medicaid and most other programs connected with Medicaid.
- VA ASSET PROTECTION TRUST –
Some wartime veterans (or their surviving spouse) who have a non-service connected disability are entitled to a monthly benefit (generally ranging from $1,244 for the widow of a wartime veteran to $2,431 for a veteran who is married) which helps pay for care if homebound or living in an assisted living facility. Although a homestead is not a resource that counts toward the resource limit of $138,488 for this particular veteran’s benefit program, if the homestead is sold, eligibility could be lost since the proceeds would be cash which would often exceed the resource limit. As a result, an irrevocable trust is established whereby part of the trust gives the Grantor the right to occupy the homestead property (for capital gains and other tax purposes) that is deeded into the trust, and there is a non-homestead portion of the trust in which there are no elements of control retained by the Grantor. The proceeds from the sale of the home are distributed to the portion of the trust that the Grantor has no control to be in compliance with the VA rules. Although VA has a three year look-back period, transfer of the home into the trust is an exception to the VA transfer rules (unlike Medicaid) since the homestead was a non-countable resource. If the home is sold within a few years of when the Grantor lived there, then up to $250,000 for a person who is single ($500,000 if married) of a gain would result in no capital gains tax in addition to not losing the VA benefit.
- SPECIAL NEEDS TRUSTS –
There are actually three types of special needs trusts (SNT). If someone receives Supplemental Security Income (SSI) before age 65 (which results in Medicaid eligibility for drugs and monthly income for food and shelter), eligibility can be lost if they are entitled to proceeds from a lawsuit such as personal injury or if they receive an inheritance. So, the SSI recipient (or their parent, grandparent, court or guardian) can establish a SNT that is used to supplement, not supplant Medicaid. The assets transferred into the trust are not subject to a transfer penalty (if made before age 65) and do not count as a resource. If the trust is established with the funds of the Medicaid recipient, then there must be a “payback” provision in the SNT to reimburse the state to the extent Medicaid benefits are advanced. If established with the funds of someone other than the applicant, then there is no payback requirement. Also, “pooled” trusts are similar to a SNT (that could be established with the funds of the Medicaid recipient or by someone else) although there is a master trust and a Medicaid recipient enters into a joinder agreement. Each beneficiary of a pooled trust will have a subaccount that is managed professionally. The most commonly used pooled trust in Texas is managed by the “Arc of Texas”. The Medicaid beneficiary can never be the trustee of a SNT and cannot retain elements of control.
- REVOCABLE LIVING TRUSTS –
Although this type of trust is generally not advisable in connection with long-term care Medicaid, there are certain situations where such trusts are useful. For example, usually long-term care Medicaid recipients avoid a successful claim against his or her home (a non-countable resource) from Medicaid estate recovery by a “Ladybird” deed (which is an enhanced life estate deed). However, if the beneficiary of the deed has creditor issues, marital issues, addiction issues or is a spendthrift or disabled, then the deed can name a revocable living trust as a beneficiary and the trust can be designed to meet the protective goal(s) of the client. It could also be useful if there are many beneficiaries to receive a portion of the home since you can name one trustee who would simply sell the property and distribute the proceeds in accordance with the terms of the trust (instead of having many needed to agree on selling the property and the price of the sale).
- SOLE BENEFITS TRUSTS –
If a long-term care Medicaid applicant wanted to reduce countable assets by transferring assets to benefit a disabled individual who may need a trust so that assets are properly managed, then transfers to a SNT would not work as an exception to the five year look-back period. However, transfers to a sole benefits trust would reduce the assets of the long-term care Medicaid recipient without a transfer penalty. This is only useful if the disabled individual is on Social Security Disability since the trust must be “actuarially sound” – which means there must be monthly distributions of income to the disabled individual. That would likely result in ineligibility for a Supplemental Security Income recipient (since they can have limited income) whereas Social Security Disability only looks at earned income of the recipient (based on the ability to be substantially gainfully employed).
There are many tools in the toolbox for elder law attorneys to protect valuable public benefits and planning depends on the facts and the goals of the applicant or recipient.
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