Sole benefits trusts are an exception to the transfer penalty rules for long-term care (i.e., nursing home, some assisted living facilities, etc.) Medicaid. Since most Americans have inadequate or no long-term care insurance and Medicare generally has very limited coverage for skilled care, many seek long-term care Medicaid to help subsidize the expensive cost of care. The average cost of skilled care in Texas is around $6,500 per month, and the cost of some nicer facilities is around $10,000 per month. Long-term care Medicaid is “means-tested”. In other words, the government will not help subsidize the care costs if the Medicaid applicant has countable resources (certain resources such as homestead, one car, a pre-need funeral, term life insurance, personal property items, etc. do not count as a resource) over the limit (which is only $2,000 in Texas if the applicant is single). As a result, the government presumes that potential Medicaid applicants will give away their countable resources to achieve Medicaid eligibility and not be responsible for the difference between the applicant’s income (typically Social Security and/or a pension) and the cost of care (average monthly nursing home care cost in Texas is presently $6,500). Under federal law, the government presumes that if a Medicaid applicant makes an uncompensated transfer within five years of applying for long-term care Medicaid that the transfer was made on purpose to reduce countable resources so that the government would help pay for this expensive care. Uncompensated transfers within five years would result in a transfer penalty calculated by dividing the uncompensated transfer by the average cost of care.

However, there are exceptions to every rule. One of the exceptions to the five year lookback period with no transfer penalty for “Medicaid spenddown” is a “sole benefits trust” which is a form of special needs trust. However, if the long-term care Medicaid applicant transferred his or her countable resources in a special needs trust for the benefit of a disabled beneficiary, this would not be an exception (unlike a sole benefits trust) to the transfer penalty rules. A sole benefits trust is a trust for the sole benefit of a disabled beneficiary. Usually the determination of whether the beneficiary is disabled is by the government (i.e., if the beneficiary is receiving Social Security Disability Income). In Texas, the distributions must be “actuarially sound”. In other words, the payments solely for the disabled beneficiary must be made within the life expectancy of the disabled beneficiary. Other states (not Texas) require that the sole benefits trust have a payback provision to the government to the extent Medicaid benefits were advanced. The disabled beneficiary does not have to be a relative. However, the long-term care Medicaid applicant has to be careful if the disabled beneficiary is on a Medicaid program since too much income (i.e., a disabled beneficiary receiving Supplemental Security Income) could jeopardize loss of Medicaid for the disabled beneficiary even though no transfer penalty would be assessed to the long-term care Medicaid applicant since there are also monthly income limits for Medicaid which vary by program. As a result, sole benefits trusts are most commonly used when the beneficiary is on a program such as Social Security Disability where assets and income (other than wages) are irrelevant.

There are several other exceptions to long-term care Medicaid’s transfer penalty rules which accomplishes Medicaid spenddown within the five year lookback or are simply not penalized including transfers: (1) between spouses; (2) to a disabled child (unlike a sole benefits trust which can be made on behalf of any beneficiary who is disabled); (3) to a Uniform Transfer to Minors Act account if the beneficiary is under the age of majority (21 in Texas); (4) were made for reasons other than to qualify for Medicaid; (5) imposed an undue hardship by the penalty; (6) change a joint bank account to establish separate accounts to reflect correct ownership; and (7) for the purchase of an irrevocable funeral arrangement for the benefit of the applicant or his or her spouse. An enhanced life estate (“Ladybird”) deed as well as a transfer on death deed (which avoid a successful claim for Medicaid estate recovery generally against the homestead) are not considered a transfer since the transferor of the deed retains control until death. There are other exceptions for the transfer of the homestead.

Sole benefits trusts are an often overlooked tool in the toolbox of a long-term care Medicaid applicant who seeks to accomplish Medicaid spenddown without the assets in the trust counting as a resource. The government has made this rule to encourage transfers for the benefit of disabled individuals.

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