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USE OF TRUSTS FOR MEDICAID PLANNING IN COLORADO
By John J. Campbell, Esq., CELA
On August 10, 1993, President Clinton signed into law the Omnibus Budget Reconciliation Act of 1993 (“OBRA 93"). OBRA 93 is a massive piece of legislation affecting many federal programs and is codified in the United States Code at 42 U.S.C. §1396p. This article is solely concerned with the provisions in 42 U.S.C. §1396p(d) affecting the treatment of trusts in connection with Medicaid eligibility.
For purposes of determining an individual's eligibility for Medicaid benefits, §1396p(d) applies to all or portions of a trust "established by such individual," subject to important exceptions that will be discussed below. There are two requirements for a trust to be considered "established by such individual" under §1396p(d)(2). First, the individual's assets must form all or part of the corpus of the trust. Second, the trust must be a non-testamentary trust established by either the individual, his or her spouse, a third person with legal authority to act for the individual or the spouse (including a court or administrative body), or a third person acting at the direction or request of the individual or the spouse.
If such a trust is revocable, then, for determining Medicaid eligibility, its corpus is simply included in the individual's available resources. Payments from the trust to or for the individual's benefit are simply included in his or her income. If the trust is irrevocable, then, for Medicaid eligibility purposes, any portion of the trust corpus from which a payment could be made to the individual, under any circumstances, is included as an available resource. Any payment to the individual from the trust is included in his or her income. Any portion of the trust corpus that could not be made to the individual and any payment to another person from the trust is considered to be a transfer without fair consideration, resulting in a period of ineligibility.
The rather uncharitable provisions of §1396p(d)(3) are ameliorated somewhat by exceptions contained in §1396p(d)(4) (the "(d)(4) exceptions"). Under the (d)(4) exceptions, the treatment otherwise accorded to trusts does not apply to:
(A) A trust containing the assets of an individual under age 65 who is disabled (as defined in section 1382c(a)(3) of the Social Security Act) and which is established for the benefit of such individual by 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 by the state.
(This exception codified into law what is commonly known as a “Special Needs Trust,” “Supplemental Needs Trust” or “Disability Trust.”);
(B) A trust established in a State for the benefit of an individual if the trust is composed only of pension, Social Security, and other income to the individual (and accumulated income in the trust), and the individual’s income exceeds the income cap ($1,737 per month in 2005), but does not exceed the average cost of nursing home care in the region in which the individual will be receiving nursing home care, 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 by the state.
(This exception codified into law what is commonly known as a “Miller Trust” or “Utah Gap Trust”); and
(C) A trust containing the assets of an individual who is disabled (as defined in section 1382c(a)(3) of the Social Security Act) 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 by the individual, by the individual’s parent, grandparent, or legal guardian, or by a court; and (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 by the state.
(This exception codified into law what is commonly known as a “Pooled Trust.”)
In Colorado, similar provisions in the Colorado Probate Code allow income trusts, disability trusts and pooled trust accounts to be created in order to establish or maintain a person’s resource eligibility for medical assistance. (C.R.S. §§15-14-412.7, 15-14-412.8 & 15-14-412.9.) The Colorado statutes contain the same basic requirements as the federal statute.
Income Trusts: Medicaid Requirements Under
42 U.S.C. § 1396p(d)(4)(B) and C.R.S. §§ 15-14-412.7
An Income Trust is used solely to qualify an individual for Medicaid long term care or Home and Community Based Services (HCBS) benefits when the individual’s monthly income exceeds the income cap of $1,737, but is less than the average monthly cost of nursing home care in his or her region of the state. Medicaid will provide a form which will need to be completed and signed to create the Income Trust.
All of the individual’s current monthly income will need to go into the Income Trust each month. From the trust, the trustee can pay the individual’s monthly income allowance (usually $50 in Colorado); the Monthly Income Allowance to the individual’s community spouse (if applicable); and pre-approved Post Eligibility Treatment of Income (PETI) deductions (if any). The balance of the individual’s current monthly income will be paid from the Income Trust to the nursing home as his or her monthly patient contribution amount. The balance of the individual’s costs to the nursing home will be paid by Medicaid.
If an Income Trust is used to qualify the individual for HCBS benefits the “patient contribution amount” is limited to the amount of the income cap of $1,737. Any funds remaining after payment of that amount and any other permitted payments must be allowed to accumulate in the trust.
Funds which accumulate in an Income Trust may not be spent on the individual’s supplemental needs or support. (Therefore, an Income Trust is not useful as a means to reduce assets to qualify for Medicaid.) These accumulated funds must remain in the trust until the individual dies or the trust is terminated, whichever occurs sooner. Any funds remaining in the trust after the individual’s death must be made available to repay the state for any Medicaid benefits provided to the individual.
Normally, when a person qualifies for Medicaid in the nursing home or for HCBS, that person also will be entitled to full Medicaid coverage for hospitalizations, doctor visits and other expenses not necessarily associated with long term care. However, if a person's income exceeds the income cap for long term care benefits, so that the person must use an Income Trust to qualify, Medicaid will only cover that person's long term care expenses. If, for example, that person needs to go into the hospital, those additional expenses would not be covered by Medicaid.
If an individual will require an Income Trust to qualify for Medicaid long term care benefits or HCBS, he or she will need to maintain coverage under Medicare Part A and Part B to cover other medical expenses that will not be covered by Medicaid. Further, if the individual has a Medicare supplemental, or "Medigap" policy, he or she should continue to pay the premiums to keep that policy in effect, even after going on Medicaid. Otherwise, a hospital visit or even routine doctor's visits outside the nursing home could present an unexpected and significant expense that Medicaid will not cover.
Disability Trusts and Pooled Trusts: Medicaid Requirements Under
42 U.S.C. § 1396p(d)(4) and C.R.S. §§ 15-14-412.8 & 15-14-412.9
Section 1396(d)(4)(A) of 42 U.S.C. and Colorado Revised Statutes (C.R.S.) § 15-14-412.8 permit a disabled individual to preserve assets in trust to pay for basic medical care while maintaining eligibility for public benefits. To qualify as an exempt resource under section 1396p(d)(4)(A) of the federal statute and C.R.S. § 15-14-412.8, the trust must meet the following requirements: (1) the beneficiary is under 65 years of age; (2) the beneficiary is “disabled”; (3) the trust is established by the beneficiary’s parent, grandparent, or guardian, or a court; and (4) the trust provides that after the beneficiary’s death, the state is reimbursed for all of the medical assistance paid to, or for, the beneficiary.
Upon the death of the beneficiary or the earlier termination of the disability trust, the trustee is required to reimburse the state for medical assistance provided to the beneficiary from the date the trust was funded. Medical assistance provided prior to the funding of the trust may be subject to a Medicaid lien which must be paid before the trust is funded. However, once any Medicaid lien is paid and the trust is funded, the state has a claim for reimbursement only to the extent of the medical assistance dollars paid from assets remaining in the trust.
A recent decision by the Colorado Supreme Court provides that a trustee of a disability trust may pay state and federal taxes from the trust before repaying the state for Medicaid benefits it has provided to the beneficiary. Stell v. Boulder County Dept. of Social Services, et al., 92 P.3d 910 (Colo. 2004). However, the state must be repaid before any other distributions from the trust after the beneficiary's death.
Congress provides under 42 U.S.C. §1396(p)(d)(4) for the creation of two types of supplemental needs trusts, one trust is for disabled persons under 65 years of age and one trust is for disabled persons who may be either under age 65 or 65 years of age and older. The trust for those under 65 is known as the disability trust or the (d)(4)(a) trust, and is the direct result of the history of special or supplemental needs trusts. The trust for claimants who may be 65 and over is a hybrid, and is known as the pooled charitable trust or (d)(4)(c) trust, codified under federal law at 42 U.S.C. §1396(d)(4)(c), and under Colorado law at C.R.S. § 15-14-412.9.
Colorado is one of a select number of states in the nation that have established procedures for implementing a pooled charitable trust. The reason why all states have not established pooled charitable trusts is that to qualify for exempt treatment under the statute, the trust must be established and managed by a non-profit organization. Colorado has established a non-profit organization to monitor the pooled charitable trust. This organization is known as the Colorado Fund for People With Disabilities, Inc.. Colorado has also adopted the federal requirements for a pooled charitable trust, as well as supplemented with some requirements of its own. Section 15-14-412.9 of the Colorado statute provides that:
(a) The trust is established and managed by a nonprofit association that is approved by the United States internal revenue service [sic];
(b) A separate account is maintained for each beneficiary of the trust; except that the accounts are pooled for purposes of investment and management of funds;
(c) The sole lifetime beneficiaries of the trust are the individual for whom the trust is established and the state medical assistance program. After the death of the person for whom the trust is created or after the trust is terminated during the beneficiary’s lifetime, whichever occurs sooner, no person is entitled to payment from the remainder of the trust until the state medical assistance agency has been fully reimbursed for the assistance rendered to the person for whom the trust was created;
(d) The account is established by the parent, grandparent, or legal guardian of such individual, by such individual, or by a court;
(e) The trust provides that, upon the death of the beneficiary or termination of the trust during the beneficiary’s lifetime, whichever occurs sooner, to the extent that amounts remaining in the beneficiary’s trust account are not retained by the trust, the state medical assistance program receives any amount remaining in that individual’s trust account up to the total medical assistance paid on behalf of the individual;
(3) A pooled trust is not valid for the purpose of establishing or maintaining a person’s eligibility for any category of public assistance other than medical assistance;
(4) No pooled trust shall be valid unless the department of health care policy and financing [sic], or its designee, has reviewed the trust and determined that the trust conforms to the requirements of this section and any rules adopted by the medical services board pursuant to section 26-4-506.6, C.R.S.
The advantage of the pooled charitable trust is that while the beneficiary is alive, his share in the trust can be used for supplemental existence expenses, such as the cost of a case manager or for special needs, while he is on Medicaid. For an individual 65 years of age or older, the pooled charitable trust is the only way to shelter his assets. However, due to the wording of the federal statute, some states, Colorado included, currently treat the funding of a pooled trust by a person over age 65 as a transfer without fair consideration and will impose a penalty period of ineligibility for Medicaid benefits. Therefore, the funding of a pooled trust account for an individual over age 65 requires careful planning to ensure that there will be sufficient resources available to the individual to privately pay for his or her care during the period of ineligibility.
Trusts Not Subject To The Strict Laws On Self-Settled Trusts
The federal statute and Colorado’s Medicaid regulations provide exceptions to the harsh treatment of self-settled trusts. The first exception is for trusts created by a will. These trusts are commonly known as “Testamentary Special Needs Trusts.” Such trusts are commonly created in the will of a spouse, family member or friend of the Medicaid beneficiary.
The second exception is for trusts that are not self-settled trusts at all, but rather are created and funded solely with property not belonging to the beneficiary or the beneficiary’s spouse. Such trusts are permitted and will not be considered an available resource to the beneficiary for purposes of determining the beneficiary’s eligibility for Medicaid. However, the trust must be created and funded fully by a third party. If the trust ever accepts funds that are property of the beneficiary or the beneficiary’s spouse, those funds will either be considered an available resource or will constitute a transfer without fair consideration and will trigger a Medicaid ineligibility period under the regulations.
Both Testamentary Special Needs Trusts and Third Party Supplemental Needs Trusts must meet the following conditions to be considered exempt as a resource:
1. The beneficiary must have no authority to compel distributions from the trust or to exercise any powers of ownership over assets in the trust;
2. The assets in the trust must be used only for the beneficiary’s supplemental needs and not for support – otherwise, payments from the trust for support will be treated as income to the beneficiary;
3. The trust may only have one lifetime beneficiary; and
4. The trust must be irrevocable.
Testamentary Special Needs Trust for a Surviving Spouse
After several conflicting administrative rulings, Colorado passed regulations concerning the treatment of Testamentary Special Needs Trusts for Medicaid eligibility. The regulations now provide that if an applicant for Medicaid refuses or fails to make a reasonable effort to secure a potential resource or income, amount of potential resources or income foregone will be considered a transfer without fair consideration and medical assistance will be denied during the resulting penalty period. This regulation is specifically aimed at beneficiaries who attempt to exclude their community spouses as beneficiaries by leaving all of their property in a Testamentary Special Needs Trust.
In Colorado, one cannot legally disinherit one’s spouse. The Colorado Probate Code guarantees that a surviving spouse is entitled to an elective share, a family allowance and an exempt property allowance from the deceased spouse’s estate. In most, but not all cases, these entitlements amount to approximately one-half of the deceased spouse’s estate.
If a Medicaid beneficiary refuses or fails to obtain his or her statutory elective share, family allowance, or exempt property allowance from the spouse’s estate, the regulations provide that this refusal or failure to obtain those assets is treated as being a transfer without fair consideration. Staff Manual, Volume 8, §8.110.53(D) et.seq. A period of ineligibility will be imposed for such a transfer, based on the amount of assets that could have been obtained from the deceased spouse’s estate.
The effect of this regulation is that the applicant will be required to elect against a deceased spouse’s will where the will leaves everything to a Testamentary Special Needs Trust. It is important to note that the rest of the deceased spouse’s estate can be left into a Testamentary Special Needs Trust and will not be considered a transfer or an available resource to the Medicaid beneficiary. However, the Medicaid beneficiary will be disqualified from eligibility until he or she “spends down” his or her elective share, exempt property and family allowance to an amount less than $2,000.
Creating a Testamentary Special Needs Trust is still a valid and advisable Medicaid planning tool. It will result in the creation of an exempt source of funds to provide for those of the institutionalized spouse’s needs that are not covered by Medicaid. However, in the case of a married couple, it is a tool that is now limited to preserving only those funds to which the surviving institutionalized spouse is not entitled as his or her elective share, exempt property or family allowance.
Sole Benefit Trusts
A special type of Third Party Supplemental Needs Trust, called a “Sole Benefit Trust”, provides additional flexibility in Medicaid planning. It is a trust that you can create and fund with your or your spouse’s assets for the sole benefit of a disabled person under age 65 or your disabled child or any age. The funding of such a trust will not be considered a transfer without fair consideration and will not incur a penalty period; and the assets in the trust will not be considered available to the trust beneficiary for purposes of his or her Medicaid eligibility.
A Sole Benefit Trust must meet all of the conditions applicable to Third Party Supplemental Needs Trusts. However, a Sole Benefit Trust must also meet additional requirements. The trust must provide that the assets in the trust will be spent or distributed in a manner that is “actuarially sound.” In other words, the assets must be distributed each year in an amount that is calculated to deplete the trust within the beneficiary’s remaining life expectancy. Typically, a minimum annual distribution amount must be identified in the trust before the Colorado Medicaid agency will approve the trust.
A Sole Benefit Trust does not have to meet the “actuarially sound” requirement if it contains a “state pay-back” provision, as with a trust established under OBRA ‘93.
Conclusion
OBRA `93 established new rules for treatment of trusts created after August 10, 1993. The general rule is that, in determining an individual's eligibility for Medicaid benefits, trusts "established by such individual" will be included in income or available resources. A trust is "established by such individual" when 1) the assets of the individual or the individual’s spouse form all or part of the corpus of a non-testamentary trust; and 2) the trust is settled by a) the individual, b) his or her spouse, c) a third person with legal authority to act for the individual or the spouse, or d) a third person acting at the direction or request of the individual or the spouse. In short, a trust created with the Medicaid applicant's funds generally cannot be used to keep the applicant under the income or available resource ceilings for Medicaid eligibility.
Exceptions to this general rule are contained in 42 U.S.C. § 1396p(d)(4), which provides for the creation of an Income Trust, a Disability Trust or a Pooled Trust account. Virtually identical provisions are also contained in the Colorado Probate Code. Such trusts will be excluded as a resource for purposes of determining Medicaid eligibility if they comply with the respective statutory requirements for each type of trust.
Both the Colorado and the federal statutes require that after the death of the trust beneficiary or after the trust is terminated during the beneficiary’s lifetime, (whichever occurs sooner), the state must be reimbursed to the extent of the total medical assistance dollars paid from the assets remaining in the trust.
Testamentary Special Needs Trusts and Third Party Supplemental Needs Trusts, including Sole Benefit Trusts, can be much more flexible Medicaid planning tools because they are not governed by the provisions of 42 U.S.C. § 1396p(d)(4). However, even these trusts do have restrictions and limits on their use. These trusts must be irrevocable; they may only have one lifetime trust beneficiary; they must prohibit the beneficiary from having any authority to compel distributions from the trust; and they must be used solely for the beneficiary’s supplemental, non-support needs.
Medicaid planning, especially when it incorporates the use of trusts, is extremely complex. If a trust is not correctly drafted or if it does not fit your particular situation, it could actually prevent or significantly delay Medicaid eligibility. You should never create a trust of any kind to qualify for Medicaid without first seeking the advice of an attorney experienced in Medicaid, Medicaid eligibility planning and trust laws.
Mr. Campbell, the founder and principal attorney of the Law Offices of John J. Campbell, P.C., has practiced law for nineteen years and has concentrated in the practice of Elder Law since 1996; and is certified as an Elder Law Attorney by the National Elder Law Foundation.* Mr. Campbell is licensed to practice law in Colorado and is also licensed and on inactive status in Missouri. He is a member of the Colorado Bar Association, the Arapahoe County Bar Association, the Missouri Bar Association, the National Structured Settlements Trade Association, the National Alliance of Medicare Set-Aside Professionals and the National Academy of Elder Law Attorneys. Mr. Campbell has published numerous articles and has presented numerous seminars on issues relating to Elder Law across the country.
*The State of Colorado does not certify attorneys as experts in any field.
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