Medicaid Trust Rules, generally

The Medicaid Trust “Rules” are often irrational, and change frequently. “Once a State voluntarily chooses to participate in Medicaid, the State must comply with the requirements of Title XIX and applicable regulations.”[1]

The beginning point (which is far from the end) when determining how Medicaid evaluates a trust, is 42 U.S.C. § 1396p(d), which is as follows:

(d)Treatment of trust amounts

(1)For purposes of determining an individual’s eligibility for, or amount of, benefits under a State plan under this subchapter, subject to paragraph (4), the rules specified in paragraph (3) shall apply to a trust established by such individual.

(2)

(A)For purposes of this subsection, an individual shall be considered to have established a trust if assets of the individual were used to form all or part of the corpus of the trust and if any of the following individuals established such trust other than by will:

(i)The individual.
(ii)The individual’s spouse.
(iii)A person, including a court or administrative body, with legal authority to act in place of or on behalf of the individual or the individual’s spouse.
(iv)A person, including any court or administrative body, acting at the direction or upon the request of the individual or the individual’s spouse.

(B)In the case of a trust the corpus of which includes assets of an individual (as determined under subparagraph (A)) and assets of any other person or persons, the provisions of this subsection shall apply to the portion of the trust attributable to the assets of the individual.

(C)Subject to paragraph (4), this subsection shall apply without regard to—

(i)the purposes for which a trust is established,
(ii)whether the trustees have or exercise any discretion under the trust,
(iii)any restrictions on when or whether distributions may be made from the trust, or
(iv)any restrictions on the use of distributions from the trust.

(3)

(A)In the case of a revocable trust—

(i)the corpus of the trust shall be considered resources available to the individual,
(ii)payments from the trust to or for the benefit of the individual shall be considered income of the individual, and
(iii)any other payments from the trust shall be considered assets disposed of by the individual for purposes of subsection (c).

(B)In the case of an irrevocable trust—

(i)if there are any circumstances under which payment from the trust could be made to or for the benefit of the individual, the portion of the corpus from which, or the income on the corpus from which, payment to the individual could be made shall be considered resources available to the individual, and payments from that portion of the corpus or income—

(I)to or for the benefit of the individual, shall be considered income of the individual, and
(II)for any other purpose, shall be considered a transfer of assets by the individual subject to subsection (c); and

(ii)any portion of the trust from which, or any income on the corpus from which, no payment could under any circumstances be made to the individual shall be considered, as of the date of establishment of the trust (or, if later, the date on which payment to the individual was foreclosed) to be assets disposed by the individual for purposes of subsection (c), and the value of the trust shall be determined for purposes of such subsection by including the amount of any payments made from such portion of the trust after such date.

(4)This subsection shall not apply to any of the following trusts:

(A)A trust containing the assets of an individual under age 65 who is disabled (as defined in section 1382c(a)(3) of this title) and which is established for the benefit of such individual by the individual, a parent, grandparent, legal guardian of the individual, or a court if the State will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State plan under this subchapter.

(B)A trust established in a State for the benefit of an individual if—

(i)the trust is composed only of pension, Social Security, and other income to the individual (and accumulated income in the trust),
(ii)the State will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State plan under this subchapter; and
(iii)the State makes medical assistance available to individuals described in section 1396a(a)(10)(A)(ii)(V) of this title, but does not make such assistance available to individuals for nursing facility services under section 1396a(a)(10)(C) of this title.

(C)A trust containing the assets of an individual who is disabled (as defined in section 1382c(a)(3) of this title) that meets the following conditions:

(i)The trust is established and managed by a non-profit association.
(ii)A separate account is maintained for each beneficiary of the trust, but, for purposes of investment and management of funds, the trust pools these accounts.
(iii)Accounts in the trust are established solely for the benefit of individuals who are disabled (as defined in section 1382c(a)(3) of this title) by the parent, grandparent, or legal guardian of such individuals, by such individuals, or by a court.
(iv)To the extent that amounts remaining in the beneficiary’s account upon the death of the beneficiary are not retained by the trust, the trust pays to the State from such remaining amounts in the account an amount equal to the total amount of medical assistance paid on behalf of the beneficiary under the State plan under this subchapter.

(5)The State agency shall establish procedures (in accordance with standards specified by the Secretary) under which the agency waives the application of this subsection with respect to an individual if the individual establishes that such application would work an undue hardship on the individual as determined on the basis of criteria established by the Secretary.

(6)The term “trust” includes any legal instrument or device that is similar to a trust but includes an annuity only to such extent and in such manner as the Secretary specifies.

The Medicaid program disfavors trusts, at least to the extent individuals seek to create discretionary trusts where they can both use their funds and qualify for means-tested benefits.[2] Prior to 1986, asset protection planners established Medicaid Qualifying Trusts (MQT) with varied success. In 1986, Congress passed legislation to limit the effectiveness of MQTs.[3] A “Medicaid qualifying trust” is a trust . . . established (other than by will) by an individual . . . under which the individual may be the beneficiary of all or part of the payments from the trust and the distribution of such payments is determined by one or more trustees who are permitted to exercise any discretion with respect to the distribution to the individual. See Skindzier v. Comm’r of Soc. Services, 258 Conn. 642 (2001).[4]

In 1993, in the Omnibus Budget Reconciliation Act of 1993 (“OBRA 93”), Congress fine-tuned the trust rules, replacing the MQT rule with 42 U.S.C. § 1396p(d); the intention was to tighten perceived “loopholes.”[5]

Notes:

1. Alexander v. Choate, 469 U.S. 287 (1985), citing Harris v. McRae, 448 U.S. 297 (1980).

2. See C. Kruse, Third-Party and Self-Created Trusts: Planning for the Elderly and Disabled Children 3rd (ABA Section of Real Property, Probate and Trust Law 2002), at 3-4. See also Ramey v. Reinertson, 268 F.3d 955 (10th Cir. 2001) (“Congress responded to the use of [irrevocable trusts] with condemnation.”).

3. See H.R. Rep. No. 99-265, pt. 1, pp. 71-72 (1985).

4. Provisions relating to Medicaid Qualifying Trusts were originally codified at 42 U.S.C. § 1396a(k). In 1993, that provision was repealed and replaced with the trust provisions at 42 U.S.C. § 1396p(d).

5. The OBRA 93 provisions apply to trusts created on or after August 11, 1993. The 1993 act did not relax any of the 1986 requirements and is viewed as being more restrictive. Ramey v. Reinertson, 268 F.3d 955 (10th Cir. 2001). The Foster Care Independence Act of 1999 (Public Law 106-169), incorporated most of the OBRA 1993 transfer-of-asset and trust provisions into the SSI cash assistance program, effective January 1, 2000. See POMS SI 01120.201.A.1. Thus, the Medicaid rules discussed in this document generally apply to SSI eligibility as well.

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