As most residents of the Boston area know, Medicaid is a federal economic assistance program that is designed to provide financial help to persons with disabilities and limited income. In order to qualify for Medicaid, a person’s income and assets cannot exceed the amounts established by federal regulations. Nevertheless, many people who need the assistance that Medicaid can provide have personal assets or income that exceed the prescribed limits. What to do?
The answer is to establish what is called a special needs trust. A trust is a legal arrangement in which one person called the trustee manages assets for another person, known as the beneficiary. Trusts are used in many ways, but a special needs trust has a limited purpose: to manage assets that would disqualify a person from receiving Medicaid assistance with medical expenses.
Two kinds of trusts are routinely used in this manner: a third party special needs trust in which the assets contributed to the trust come from a person other than the Medicaid recipient, and a first party trust in which the assets are contributed by the person who will ultimately receive the Medicaid payments. The existence of these types of trusts is made possible by the Internal Revenue Code and regulations issued by the IRS and the Department of Health and Human Services.
Both kinds of trust are established by filing a form with the Department of the Treasury and transferring the assets that will comprise the trust to the trustee. The trustee should be either a family member who can be trusted to carry out the wishes of the person establishing the trust (hence the title “trustee”) or an institutional trustee such as a bank. The person serving as trustee must have the skills and knowledge the assets that have been deposited into the trust. The trustee must also understand which expenses are eligible for payment by the trust. All of the transfers necessary to establish and operate the trust have no income tax consequences if the terms of the trust comport with the applicable laws and regulations.
Except for the most basic kind of special needs trust, a person who is interested in establishing a special needs trust should seek the assistance of an experienced estate planning attorney. A capable attorney can review the plan for the trust and ensure that none of the terms will threaten the tax-free status of the trust.