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Irrevocable Trusts and Medicaid (Part 3)

       I promised in last week’s blog post that I would explain another solution to Mary’s Medicaid dilemma.  Her uncle left assets in a trust for Mary but the terms provide that the funds can be used for Mary’s health support and maintenance.  I explained to Mary and her sister, Betty, who is trustee, that Medicaid is likely to count the assets as Mary’s for eligibility purposes, even though the trustee has the discretion to spend or not spend the money.

       I told Mary and Betty that they could appeal a Medicaid denial but I cannot guarantee that they would succeed, although I believe that a Medicaid approval is the right outcome.  They were not comfortable with a long legal battle.  There was, however, another solution which would give them more certainty.

       Because Mary is 57 years old and has been disabled by Social Security, another option is to withdraw the remaining funds from the trust and distribute them to Mary.  Instead of spending those funds towards her care, however, I told Mary and Betty that we could establish a special needs trust for Mary’s benefit and place the assets into that trust.  The transfer of assets by Mary would be exempt from Medicaid’s transfer penalty because a 1st party special needs trust – one established by and funded with the disabled beneficiary’s own assets – is exempt from Medicaid’s transfer penalty rules and is also not counted as an asset for Medicaid eligibility purposes.

       The SNT is a safer bet when it comes to achieving Medicaid approval, however, there are some downsides to it.  First, it is only available to disabled individuals and can only be funded until they reach age 65.  This isn’t a problem for Mary who is 57.

       Secondly, the trust must provide that if there is anything left when the beneficiary passes away, the state must first be reimbursed up to the amount of government benefits paid out.  Only then can the remaining assets be passed to heirs.   I explained to Mary and Betty that it is impossible to know how much – if anything – that would be left for reminder beneficiaries.  That depends, of course, on how long Mary lives and what happens at the Medicaid application and appeal levels.  But I did tell them that with the SNT, Medicaid approval of their application was easier to obtain.