Special needs trusts can be very useful to disabled individuals who have too many assets to qualify for Medicaid. For individuals under the age of 65, excess assets can be transferred to a “first-party,” or “self-settled,” trust. There is another option available to assist individuals to maintain eligibility for Medicaid, known as a pooled trust.
What Is a Pooled Trust?
As the name suggests, a pooled trust contains the assets of multiple individuals. The assets are pooled together for administration purposes, but segregated into a sub-account for the exclusive benefit of the disabled individual. This arrangement is similar to a bank; the bank pools all deposits together, but each customer maintains a separate account.
What is most significant about a pooled trust is that individuals of any age may participate (however, transfers by individuals over 65 could be subject to transfer penalties--see below).
Basic Requirements of a Pooled Trust
A pooled trust is a special purpose trust created under federal law. The law requires that the trust be established in accordance with strict rules. Below are the key components of a properly drafted pooled trust.
- The pooled trust is established and maintained by a nonprofit association.
- Each individual has a separate account, known as a sub-account, but all assets are pooled together for investment and management purposes in accordance with the terms of a master trust.
- Each sub-account can be used only for the benefit of the disabled individual.
- A sub-account may be created by the disabled individual, a parent, grandparent, or guardian or by a court.
- The trust will pay to the state(s) the amount remaining in the trust upon the death of the disabled individual, up to an amount equal to the total amount of medical costs paid on behalf of the individual under the state's Medicaid plan(s).
In order for the pooled trust exception to apply, the beneficiary of the trust must be disabled, as that term is defined for purposes of qualifying for SSI. That definition requires that the individual to meet the following criteria.
The individual must have a severe impairment that has lasted, or can be expected to last, for at least one year.
- The impairment must be severe enough to prevent the individual from engaging in substantial, gainful employment. (For more information, see our section on medical eligibility for disability on disabilitysecrets.com.)
A nonprofit association, for purposes of this pooled trust exception, is any organization that has been established and certified under a state’s nonprofit statutes.
For the Sole Benefit of the Individual
All of the assets contributed by the individual and held in the sub-account must be used only for the benefit of the individual. If the trust allows for any benefit to any other person or entity during the individual’s lifetime, the trust will no longer qualify as a special purpose trust.
Who May Establish the Trust Account
A first-party, or self-settled, special needs trust may only be established by a parent, grandparent, guardian or a court. The disabled individual may not establish a first-party special needs trust independently.
A pooled trust, however, has the added benefit of being able to be established by the disabled individual, so long as the individual is legally competent.
While some states have required that some or all of the trust funds remaining at the death of the disabled individual be repaid to the state Medicaid agency, many states allow the beneficiary to elect that the charitable organization that manages the pooled trust retain the balance at the individual's death.
The trustee of a pooled trust may use the assets for the following purposes:
- personal needs allowance
- health insurance premiums for the disabled individual
- medically necessary medical expenses
- family or spouse's maintenance allowance
- legal and professional expenses, including trustee, accounting, guardian, conservator and attorney fees
- prepaid burial expenses
- living expenses for food, clothing and shelter, and
- entertainment, educational, or vocational needs or items consistent with the needs of the individual.
Disbursements That Are Not Allowed
If disbursements are made from the trust that are not for the benefit of the individual, the improper payments or disbursements may be treated as a transfer subject to a penalty. Non-allowable disbursements include the following:
- gifts, payments, or loans to or for the benefit of anyone other than the disabled individual
- child support and alimony payments
- paying all of the shelter costs for a shared household
- vacation expenses for family members
- payments on past debts
- health insurance premiums for other individuals
- burial funds that do not meet the requirements of state law, and
- income taxes (unless an actual tax liability is established).
When Transfer Penalties Apply
One of the primary advantages of using a special purpose trust is to avoid a Medicaid transfer penalty for transferring excess assets to a trust. Federal law says that because one of the requirements of a special purpose trust is that the state is entitled to reimbursement for its expenditures after the death of the individual, no transfer penalty should be imposed.
Due to a particular quirk in the law, however, some states do impose a transfer penalty on transfers of assets to pooled trusts if the disabled individual is 65 or older. This problem has been addressed by the courts in some states where lawsuits have been brought, but still needs to be resolved by state legislatures.
If the disabled individual is under age 65, on the other hand, there will be no transfer penalty if the trust also qualifies as a first-party special needs trust (read our article on the requirements of a first-party trust).