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.
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.
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.
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.
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.
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.
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:
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:
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.
When deciding whether a pooled trust is right for your family, consider the following points.
The main benefits of pooled trusts are:
While pooled special needs trusts work for many people, they do have some important limitations that you should consider. For example:
For more detailed help on special needs trusts and your options, read Special Needs Trusts, by Kevin Urbatsch (Nolo).