QUESTION: Special Needs, Third Party and Self Settled Trusts – What’s with all the Names?
ANSWER: When a person applies for Medicaid eligibility there are many pitfalls that an unsuspecting or unsophisticated applicant can run afoul of. To help them retain the benefit of certain monies that they would normally have access to third parties or the applicant themselves can create a special needs trust to help keep the public benefits and still benefit from the money in the trust. The various different trusts have different legal requirements that must be met to qualify as that type of trusts.
Moreover, different trusts accomplish different goals and yet other types of trusts exist that have nothing to do with Medicaid or other public entitlement program eligibility but help to reduce tax liability. Some trusts accomplish two tasks, such as a third party special needs trusts, which allow seniors to live a relatively modest and respectable life and qualify for Medicaid at the same time. While other types of trusts only satisfy just one legal goal, such as a grantor retained annuity trust, which allows a person to make a gift of an asset that will likely appreciate rather quickly, but incur no gift tax liability. Finally, there are other types of trusts that outlive their utility, such as pooled trusts.
SPECIAL NEEDS TRUSTS – APPLY TO MEDICAID ELIGIBILITY
Special needs trusts are trusts that allow for a person to benefit from public entitlement programs, such as Medicare or Medicaid, without running afoul of statutory asset limits. To help parse through some of the confusion with respect to the different types of trusts as they apply to Medicaid eligibility it is best to understand the various types of trusts. Under the umbrella of special needs trust there are two general distinctions. The distinctions arise as a result of the answer to the question of who had the right to the money immediately prior to its deposit into the trust. For example, a father may leave money to his daughter in a will.
If that money is given to her outright and she then deposits that money into a trust, it is a self-settled trust. If the will leaves the money to the daughter via a trust, it is a third party trust. In either event the daughter benefits from the money. In the case of leaving the money outright, she can use all, some or none of the money for whatever she chooses. In the case of leaving the money to the trust, the trustee acts as a fiduciary and according to the terms of the trust with respect to whether she can use all, some or none of the money as she chooses. As such, if immediately prior to deposit of the funds into the trust, the money can be used solely at the discretion of the beneficiary, it is a self settled trust. If immediately prior to deposit of the funds into the trust, the money cannot be used at the sole discretion of the beneficiary, it is a third party trust.
- Self settled special needs trust characteristics:
- Must include a proviso that pays the state the full amount left in the trust at the time that the beneficiary passes away, but no more than what the state is due.
- Have limitations on what the trustee is permitted to pay for. These conditions vary from state to state and even county to county.
- The trust must be for the sole benefit of the beneficiary (except a residuary beneficiary which may be entitled to whatever is in the trust after the state is repaid 100 percent of it’s own expenditures).
- Third party special needs trust characteristics
- The Medicaid beneficiary may be one of several beneficiaries.
- Beneficiaries may even include charities.
- The trust may terminate if the beneficiary improves and no longer needs Medicaid or other public entitlement program (such as SSI).
Expenditures to the beneficiary may reduce the monthly benefit amount depending on various factors.
Today’s Answer was provided by Michael Ettinger, Esq., from the Ettinger Law Firm in Albany, New York. Mr. Ettinger is a Partner Member in the national ElderCare Matters Alliance.
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Today"s Elder Care / Senior Care Q&A is about Medicaid Eligibility