Exceptions to Medicaid Trusts

Under a 1993 change in federal law, three types of trusts were recognized as exceptions to the rules that would otherwise count the assets in a self-settled Medicaid trust and therefore disqualify the beneficiaries of such trust. These three trusts are commonly called the "under-65 trust," the "pooled trust," and the "Miller trust."

Miller Trusts

The Miller trust, named after a court decision on a Medicaid issue, is a trust that is suitable to be used only in income-cap states. The hard-to-understand rule in these states is that a person, even though certified to be in need of care and having zero assets, will not be able to qualify for Medicaid if her income exceeds the state prescribed amount. For instance, say that Sally lives in Florida, an income-cap state. She has advanced Alzheimer's and needs institutionalization. She has no assets but receives a company pension of $1510 per month. If the income-cap in Florida is $1500 per month, since Sally's income exceeds the cap, she cannot qualify for Medicaid.

The Miller trust law, however, provides that Sally's guardian can petition the Florida court to establish a Miller trust for Sally. The court would order that Sally's monthly pension be paid into the trust, and the trust would provide that the trustee may then pay to Sally (or to the nursing home) a monthly amount equal to $10 less than the income cap, thus allowing Sally to qualify for Medicaid. The law also requires, however, that any funds remaining in the trust on Sally's death be paid to the estate to help reimburse it for the benefits paid to Sally without interest. Any type of income, including Social Security income, may be paid into a Miller trust, but only income may be used to fund this type of trust.

Pooled Trusts

The pooled trust is a trust designed to hold the assets of more than one disabled individual (in separate accounts) and must be established by a nonprofit organization for this purpose. The same nonprofit organization must be the trustee of the trust. The individual's account within the pooled trust may be funded by the individual himself, his guardian, parent, grandparent, or by a court. Although the individual's funds are assigned to a separate account, they may be invested in a pool with the funds of other disabled individuals. While the funds are in the pooled trust, the trustee may distribute such funds attributable to the individual's separate account and/or the income from those funds to the disabled individual on a discretionary basis.

Since this is one of the excepted or safe harbor Medicaid trusts, the funds in the trust are not considered accessible to the individual, and do not affect his eligibility for Medicaid. Like the Miller trust, there must be a payback provision on death, but the pooled trust payback is slightly different. On the individual's death the remaining funds in his separate trust account must either be applied to pay down the amount owed to the state for Medicaid benefits paid to or for the individual (Without interest), or they may simply be added to the accounts of other individuals. If there are adequate funds to reimburse the state in full and the state is, in fact, reimbursed, then any funds in excess of such reimbursement may be paid to those beneficiaries outside the trust as the individual designates in the trust.

Under-65 Trusts

The under-65 trust is by far the most useful and common of the three, since it allows for a greater possibility of preserving some of the individual's funds for his desired beneficiaries while qualifying for Medicaid. The under-65 trust may be established by the individual's parent, grandparent, legal guardian, or by a court. Unlike the pooled trust, it may not be established by the disabled individual himself. Further, the trust must be established before the individual reaches age 65, though once established, it may continue beyond that age. The trust must be for the sole benefit of the individual. That is, no one but the individual nay benefit from the trust until the state is reimbursed in full (without interest) on the individual's death. Thereafter, family members or other beneficiaries may receive benefits, if any trust assets remain.

There are two distinct advantages to the under-65 trust. One is that transfers to this trust are not treated as disqualifying transfers for Medicaid purposes, so an under-65 disabled individual could have his assets transferred to this type of trust and immediately qualify for Medicaid. A second advantage is that the trust does not require an independent trustee, so a family member may have control over the trust investments, which in turn could be arranged to benefit the individual and his family.

In addition, the under-65 trust (as well as the pooled trust) allows the individual to take advantage of the spread between the amount the state pays for nursing home care (which must later be paid by the trust) and private pay costs of care, which are generally 20 percent to 50 percent higher. Therefore, even if full reimbursement were made to the state, it would inevitably be less than if the individual paid on his own.

Copyright 2007 LexisNexis, a division of Reed Elsevier Inc.