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SEVEN DIFFERENT TYPES OF TRUSTS USED IN PUBLIC BENEFITS PLANNING

Public benefits can range from payment of expensive drugs (no matter what age) to long-term care costs such as skilled nursing care. There are 40-50 Medicaid programs in Texas in addition to strictly federal public benefits programs such as Supplemental Security Income (SSI), Social Security Disability Income (SSDI), Veterans benefits, and housing benefits. Many of the programs are “means-tested” (in other words, assets must be limited before the government will pay for costs of care) and many consider income of the applicant and if the applicant transferred assets in an effort to obtain these valuable benefits. Since there are so many programs (each with different rules), this article will briefly describe how seven different types of trusts (and there are more) are used in planning to either achieve or retain various types of public benefits often used by elder care attorneys to help the client reach their goals. The emphasis will be on long-term care Medicaid since this is the most common situation seen by this author.

Asset Protection Trust for Medicaid

Use: Since long-term care Medicaid is “means-tested”, some plan to protect their assets by transferring the assets into an irrevocable trust where the potential applicant has some elements of control so that the trust can be tax-neutral for income and estate planning purposes. This hybrid trust is thus considered as the assets of the person (the “trustor”) establishing the trust for tax purposes but not for Medicaid purposes since the assets have been “irrevocably” transferred.

Caveat: Long-term care Medicaid has a five year look-back period as the government presumes any transfers made within five years were purposefully done to reduce assets so that the government would pay for such care costs, drugs, etc. As a result, this trust is generally not done when care is immediate unless the assets are great enough that the potential applicant only desires to protect assets if care is needed for more than five years – assuming there is inadequate long-term care insurance or income. It should be noted that the trustor who intends to apply for Medicaid cannot be the beneficiary of the principal of the trust. Also, this trust is generally not used in applying for certain Veterans benefits.

Asset Protection Trust for Veterans Benefits

Use: Wartime veterans or the widow of a wartime veteran who have a non-service connected disability are entitled to payment ranging from $1,299 per month (widow of wartime veteran) to $2,266 per month if the veteran has a spouse. This benefit is used primarily when the veteran or the veteran’s spouse is in an assisted living facility or nursing home. Although a homestead is generally non-countable for the benefit, if the homestead is sold then the benefit could be lost if the assets exceed the resource limit (presently $129,094). Unlike the asset protection trust for Medicaid, the veteran can have no elements of control of the assets placed in the trust other than in connection with the home. The trust is designed so that the home could be sold without loss of Veterans benefits. It should be noted that (unlike Medicaid), transfers of a home are an exception to VA’s look-back period (three years) for penalizing transfers.

Caveat: Only tax benefits for this trust are in connection with the homestead. As a result, highly appreciated assets (other than the home) are not a good selection for this type of trust.

Qualified Income Trust (a/k/a QIT a/k/a Miller Trust)

Use: Long-term care Medicaid and Star+ Medicaid (i.e., skilled nursing care, assisted living and if a high level of care is needed at home) when the applicant’s income exceeds the cap (presently $2,349 per month). If the entire source of income is deposited into the QIT, the “income” test is often passed. Most commonly the income is paid to the facility unless the applicant is married and the “well” spouse has income less than $3,216.50 per month. The rules are different if the applicant desires home care as the applicant can keep income up to the cap.

Close up of Couples smiling

Caveat: Resources are not to be funded into this trust – only income such as Social Security or pension income. This is not used for Supplemental Security Income. Most states do not have an income cap for long-term care Medicaid (Texas does).

Revocable Living Trust (RLT)

Use:  Rarely used in public benefits planning (and often not advisable if that is the goal) since the applicant can get to his or her assets or income at any time. Furthermore, if the homestead is deeded into the RLT, it changes the nature of the resource from being “non-countable” to being “countable” for long-term care Medicaid. However, this could be beneficial in the limited situation where the Medicaid applicant and his or her spouse have non-countable resource income (i.e., Social Security and pension income) that exceeds $3,216.50 per month in 2020 and the couple’s countable resources exceed the protected resource amount. The maximum protected resource amount is $128,640 in 2020. So, if the home is deeded out of the RLT back to the applicant, then it reduces the countable resources.

If the couple’s income is below $3,216.50 per month, there can be “expansion” whereby the couple can have more than $128,640 of countable resources and still achieve Medicaid eligibility. If the homestead is deeded out of the RLT, then the applicant is generally advised (if the applicant is single) to do a Ladybird Deed back to the RLT to avoid the state having a successful claim for reimbursement for benefits advanced after the Medicaid recipient’s death. This is also often helpful if there are several beneficiaries and the applicant only wants one of them in charge (due to potential disagreement) by naming that beneficiary as trustee or there is a need to protect a beneficiary who is disabled or has creditor, marital or additional issues or is a spendthrift.

Caveat: If the applicant is married and the RLT is joint (typically the case in Texas), Texas long-term care Medicaid requires the institutionalized spouse to reduce his or her resources to $2,000 within one year. Although transfers to a spouse are permissible, assets kept in a joint RLT would result in Medicaid ineligibility after one year since there would likely be over $2,000 of resources.

1st Party Special Needs Trust

Use: Often used when the disabled individual under 65 years of age receives proceeds from a personal injury (i.e., accident, medical malpractice, etc.) or an inheritance which results in too much resources for eligibility for Supplemental Security Income and Medicaid. The funds put into this type of irrevocable trust, which are to be used solely for the disabled person, will not count as a resource and are not subject to a look-back period for transfers.

Caveat: The government is a remainder beneficiary of the trust to the extent government benefits are advanced (unlike 3rd party trusts – if the trust is funded with someone else’s funds). As a result, if you have a beneficiary who is disabled, estate planning documents should be prepared whereby the disabled beneficiary is not an outright beneficiary. Since Supplemental Security Income also considers income of the Medicaid applicant or recipient, the trustee should not distribute income to the beneficiary (the Medicaid recipient).

Pooled Trust (1st Party)

Use: A type of special needs trust where the assets of many disabled beneficiaries are pooled into a special needs trust that has sub-accounts for each disabled beneficiary. There is a professional trustee, and it is administered by a non-profit organization. It is often used when there is not a large sum of funds.

Caveat: In most states, there is a transfer penalty if assets are deposited after age 65 (for most states). The government must be paid back for benefits advanced. Although it is a form of a 1st party special needs trust, most pooled trusts do not accept real estate (unlike special needs trusts).

Sole Benefits Trust

Use: If long-term care Medicaid applicant has excessive countable resources for eligibility and would like to give assets to a disabled individual (doesn’t need to be a family member) who needs help managing assets or income, an irrevocable trust can be created for the sole benefit of the disabled beneficiary to accomplish the Medicaid spend-down which is an exception to the five year look-back period.

Caveat: The trust must be “actuarially sound” (under Texas rules) so the distributions should be on a regular basis. As a result, this trust is used when the disabled individual is on SSDI (which is not “means-tested” and the income would not affect eligibility) and not on Supplemental Security Income (since income received reduces the SSI, dollar for dollar and which has a maximum of $783 per month in 2020 for a single person). If the SSI is reduced to zero due to excessive income, Medicaid is lost.

There are other trusts used in planning for public benefits. The goals of the client regarding public benefits planning should be ascertained so that appropriate options are considered. 

If interested in learning more, consider attending our next free “Estate Planning Essentials” workshop by calling us at (214) 720-0102 or sign up by clicking here.

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