Special Needs Trust and Medicaid Eligibility

By Fredrick P. Niemann, Esq. of Hanlon Niemann, a Freehold, NJ Special Needs Trust Attorney

Elderly parents concerned about Medicaid or other means-tested public benefits to cover the future costs of their own custodial care, may transfer their assets to protect them; however, such a transfer may compromise their own Medicaid eligibility for a period of time. An exception exists, however, for parents who transfer their assets to supplemental benefits trusts created for the sole benefit of their disabled child. Thus, parents confronting their own long-term care needs can protect assets for the lifetime care and support of their disabled child and access Medicaid benefits for themselves by transferring their assets to a trust created for the sole benefit of their disabled child.

Both federal and New Jersey law, as well as New Jersey regulations, define a transfer for the “sole benefit of” a disabled child as a transfer arranged in a way that no individual except the disabled child “can, in any way, benefit…at the time of the transfer, or at any time in the future” from the transferred assets. U.S. Dept. of Health and Human Services Health Care Financing Administration State Medicaid Manual (Trans. No. 64, Nov. 1994) and N.J.A.C. 10:71-4.10(b) 8. Federal law provides that no transfer penalties will apply if a trust created for the sole benefit of a disabled child is “actuarially sound” or has a “payback provision.” New Jersey regulations are more restrictive than federal law, however, since New Jersey has added a requirement that the trust must contain a payback provision naming New Jersey as the first remainder beneficiary, regardless of actuarial soundness. N.J.A.C. 10:71-4.10(f). If a disabled child receives a transfer and the money leaves his bank account by the end of the month whether that will disqualify him for Medicaid.

Based on what I read it appears that would count as income.

A person should not be entitled to qualify for means-tested benefits while a beneficiary of a trust funded with significant assets, unless strings are attached. Those strings limit the amount of resources the beneficiary can own, and the amount of income he or she can receive. Thus, while assets in a properly drafted special needs trust or supplemental benefits trust are exempt from being counted while the beneficiary’s eligibility is determined, how the trust assets are paid or applied for the beneficiary thereafter may well affect his or her eligibility. The trustee of a special needs trust or supplemental benefits trust must always be mindful of the resource and income limitations related to different programs for which the beneficiary may be eligible.

The purchase by the special needs trust or supplemental benefits trust of a resource that is not exempt from being counted (principal residence, household good and personal effect, a vehicle, etc…) will adversely affect the beneficiary’s eligibility. In order to be eligible for Medicaid, the beneficiary’s income cannot exceed the monthly income cap. The calculation of income includes earned income, such as wages, and unearned income, such as pensions, Social Security and disability benefits, spousal support and inheritances. New Jersey regulations provide a list of third-party payments not counted by New Jersey Medicaid as income. N.J.A.C. 10:71-5.3.

A parent, spouse or other relative or third party who leaves a disabled individual his or her assets outright by will or living trust may jeopardize the disabled individual’s eligibility to receive public benefits. To avoid that outcome, the will or living trust of a parent, spouse or other relative or third party can provide that the assets, including the home, if desired, be held in a supplemental benefits trust for the disabled individual’s benefit. If the trust is not to be funded with assets of the beneficiary, then most of the federal and New Jersey requirements with respect to special needs trusts do not apply. Supplemental benefits trusts are private matters between the grantor or testator, the trustee and the beneficiary.

While the terms of a supplemental benefits trust are not mandated by law, the availability of trust assets to the disabled beneficiary will determine whether his or her eligibility for public benefits programs is compromised. If the beneficiary has the rights, authority or power to liquidate the property, the value of the property is counted as a resource for Medicaid eligibility purposes. 20 C.F.R. §416.1201(a). N.J.A.C. 10:71-4.1(c). If a disabled beneficiary has legal authority to revoke a trust and then use the funds to meet his or her food or shelter needs, or direct the use of the trust principal for his or her support and maintenance under the terms of the trust, the trust principal is a resource for SSI purposes. Social Security Administration Program Operations Manuel System (POMS), SI 01120.200.

Mandatory disbursements from a trust to a disabled beneficiary without restriction on the anticipation, assignment or sale of the right to future payments may also be a resource to the beneficiary. For example, if the trust provides for payment of $100 per month to the beneficiary for spending money, absent a prohibition to the contrary, the beneficiary may be able to sell the right to future payments for a lump sum settlement. Social Security Administration Program Operations Manuel System (POMS), SI 01120.200.

Under the terms of a properly drafted supplemental benefits trust, the disabled individual has no control or access to the trust funds. As a result, the funds are not considered a resource available to the disabled individual for purposes of Medicaid, SSI eligibility or Division of Developmental Disabilities residential services. N.J.A.C. 10:71-4.1©. 20 C.F.R. §416.1201(a). N.J.A.C. 10:46-1.3.

An irrevocable trust funded with assets of a third party for the benefit of a disabled individual: 1) is not a special needs trust subject to the federal requirements of 42 U.S.C.A. Section 1396p(d)(4)(A) or state requirements prescribed in New Jersey regulations at N.J.A.C. 10:71-4.11 (g), and 2.) the trust assets and income are unavailable to the disabled beneficiary and are an excludable resource for Medicaid because a trustee other that the disabled beneficiary has sole discretion to disburse funds and the disabled beneficiary cannot compel a distribution. A.M. v. Div. of Med. Assistance & Health Servs., HMA8525-05 (Final Agency Decision, June 26, 2006), http://lawlibrary.rutgers.edu/oal/search.shtml.

If a mother transfers money to a self-settled special needs trust whether that qualifies for the disabled child exemption.

Before 1993, some elders placed their otherwise countable resources in a self-settled irrevocable special needs trust, and then tried to qualify for long term care Medicaid services (to pay the huge monthly nursing home bill).

Now, a self-settled special needs trust does not work if the grantor/settlor is over the age of 65 years. Since 1993, the use of a self-settled special needs trust has been restricted by 42 U.S.C. 1396p(d)(4)(A) to those under the age of 65 years. Thus, since 1993, elder law attorneys refer to the self-settled special needs trust as an “under-65” or “payback” or “d(4)(A)” special needs trust, and distinguish it from the third party gift receptacle SNT’s, which are funded by third parties for the benefit of an ill disabled beneficiary. Cynthia L. Barrett, The Special Needs Trust, SH059 ALI-ABA 395 (February, 2003).

To discuss your NJ special needs trust matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com. Please ask us about our video conferencing consultations if you are unable to come to our office.