When an applicant has more resources (assets) than are allowed by Medicaid, those resources must be spent down prior to becoming eligible for Medicaid. There are many ways that money can be legally spent, such as paying off debt, paying medical bills, prepaying funeral expenses, or purchasing assets that are exempt from being counted for Medicaid purposes, such as a home or an automobile. One thing the applicant cannot do is give away resources for the purpose of qualifying for Medicaid. Any gifts or transfers made within five years of applying for Medicaid will result in a period of ineligibility.
Federal law contains some exceptions to the rule disallowing transfers of resources. One rule is that an the assets of a disabled individual may be transferred to a special purpose trust. As long as the trust follows the specific rules, it will not be subject to the period of Medicaid ineligibility. These special purpose trusts are not for the purpose of sheltering assets, but for providing for the disabled individual. The two special purpose trusts for assets are the first-party trust and the pooled trust.
The most frequently used special purpose trust for a disabled applicant who has too many assets to qualify for Medicaid is the "first-party special needs trust." This trust is sometimes referred to as a d4a trust, which refers to the subsection of the federal law that established it, 42 USC 1396p(d)(4)(a). The d4a first-party special needs trust is a self-settled trust because it is funded with the assets of the applicant.
To qualify for this type of trust, the following requirements must be met:
Disability. If the individual is receiving disability benefits under either Title II (Social Security disability insurance) or SSI, the individual is presumed to be disabled. Even if the state is a 209(b) state, meaning the state has slightly different rules for Medicaid eligibility, the state must use the disability criteria of the SSI program.
Age. As long as the trust is created before the individual attained the age of 65, the trust can continue to be used without penalty even after the individual becomes 65 or older. However, no new assets can be added to the trust after the individual is 65. If assets are added after age 65, they will be subject to the normal transfer penalty rules.
Benefit of disabled individual. It is important to note that this type of trust must be established for the sole benefit of the disabled individual. If there is any other beneficiary of the trust, Medicaid transfer penalties may apply.
State as beneficiary. It is important that the trust provide that upon the death of the individual, any funds remaining in the trust go to the state agency, up to the amount paid in Medicaid benefits on the individual’s behalf. For this reason, these trusts have been called “pay-back trusts.”
Language of trust. To qualify for the favorable treatment accorded to supplemental needs trusts under federal and state law, the trust document must do all of the following:
The d4a trust is for assets, not income. Funds from the following sources are often placed into a self-settled trust:
Newly received income cannot be put into a d4a trust. But after income has been kept on deposit during the month it was received, the following month it can be transferred to the d4a trust. For example, a Social Security check for $1,000 is income during the month received. If it is deposited into a bank account for one month, it can then be transferred to a self-settled d4a trust as a resource. (For a regular stream of income, qualified income trusts are used in states with an income cap for Medicaid eligibility.)