Using Pooled Special Needs Trusts When You Have Too Many Assets for Medicaid

Pooled trusts allow you to qualify for Medicaid while setting aside some assets for personal and supplemental needs.

By , Attorney (Washburn University School of Law)

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, the individual's excess assets can be transferred to a first-party (or "self-settled") special needs trust. (Third-party special needs trusts, which are funded by assets from someone other than the disabled individual, are also an option.). Another option to preserve Medicaid eligibility is a pooled trust. While the general rule is that trusts count as income and resources when determining Medicaid eligibility, special needs trusts and pooled trusts are exceptions, and both can help a person with disabilities qualify for and retain Medicaid.

Pooled trusts, also known as community or master trusts, are managed by nonprofit organizations. Pooled trusts are a reasonable alternative to doing your own special needs trust if you can't come up with a logical choice for trustee or if you don't have enough money to justify creating an individual trust. However, they're not ideal for every family.

What Is a Pooled Trust?

As the name suggests, a pooled trust contains the assets of multiple individuals. Special needs pooled trusts are run by nonprofit organizations set up to expertly and efficiently administer a master special needs trust on behalf of individual beneficiaries with disabilities. Assets are combined and invested together; funds are spent on beneficiaries in proportion to their share of the total amount.

No two pooled trusts are exactly alike. Each has its own fees, menu of available services, and contracts under which it operates. Some offer many options, complicated contracts, and complex fee schedules. Others offer a single agreement and an easy-to-understand fee schedule. Some are organized to provide complete care of beneficiaries while others just manage the money in an appropriate manner.

Individuals of any age may participate in a pooled trust. (This differs from first-party special needs trusts.) However, transfers by individuals over 65 to their own trust could be subject to transfer penalties, depending on the state.

Basic Requirements of a Pooled Trust for Medicaid

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 sole benefit of the disabled individual.
  • A sub-account may be created by the disabled individual, a parent, grandparent, or guardian or by a court.
  • Upon the death of the disabled individual, the amount remaining in the trust may be used either to reimburse the state, or retained in the trust for the benefit of other disabled individuals, up to the total amount of medical costs paid on behalf of the individual under the state's Medicaid plan.

"Nonprofit Association" Defined

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.

"Disability" Defined

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 medical eligibility for disability.)

"For the Sole Benefit of the Individual" Defined

All of the assets contributed by the individual and held in the sub-account must be used only for the benefit of the disabled 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.

Payback Provision

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.

Pooled Trust Allowable Expenses

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.

Expenses That Are Not Allowed in a Pooled Trust

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.

Beware that some states do impose a transfer penalty on transfers of assets to pooled trusts if the disabled individual is 65 or older.

Pros and Cons of Pooled Trusts for Medicaid

When deciding whether a pooled trust is right for your family, consider the following points.

Advantages of Pooled Trusts

The main benefits of pooled trusts are:

  • The people managing the trust and its assets will be knowledgeable about agency rules regarding income and resources and will be able to deal with any questions from the SSI or Medicaid programs.
  • The trust directors usually are relatives of people with disabilities and are attuned to that community.
  • Even if you don't have a lot of money to leave to your loved one, a pooled trust can give your loved one the benefits of a special needs trust.

Disadvantages of Pooled Trusts

While pooled special needs trusts work for many people, they do have some important limitations that you should consider. For example:

  • Pooled trusts are only as good as the nonprofit that is managing it. Some may do a good job for a while, but in the face of financial problems or management changes, may end up doing a terrible job or even going out of business altogether.
  • Some pooled trusts distribute assets only at certain times of the month. This can be a problem for a beneficiary who may need distributions more frequently.
  • Pooled trusts can be very expensive. Find out exactly how much a pooled trust charges before you join. Generally, there is a one-time setup fee that can run from a few hundred dollars to several thousand dollars. Plus, there is an annual fee—based on a percentage of the assets that are put into the trust—that can be several thousand dollars a year. If you're only putting a modest amount of assets into the trust, the fees of the pooled trust can seriously deplete these assets. In contrast, a friend or family member may not charge anything to serve as the trustee of an individual trust.
  • Pooled trust are inflexible. Once the assets are in the pooled trust, it is difficult if not impossible to move the assets to another trust. Your beneficiary is then stuck with this pooled trust even if the trustee does not do a good job.
  • Many pooled trusts will not agree to own real estate or authorize other nontraditional investments. If your inheritance will include these types of investments, an individual special needs trust would serve you better.

For more detailed help on special needs trusts and your options, read Special Needs Trusts, by Kevin Urbatsch (Nolo).

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