A supplemental needs trust is a special type of trust established to help people qualify for Medicaid and to live while receiving Medicaid assistance. A supplemental needs trust is quite similar to a special needs trust in form and function, as discussed here, except that the term most often applies to Medicaid recipients, and is almost exclusively associated with the United States’ Medicaid program. Supplemental needs trusts are generally set up to provide for the needs of someone receiving Medicaid, but planning for Medicaid generally requires advanced planning. Advanced planning can be tough, but the benefits care be great.
What are the Benefits of a Supplemental Needs Trust?
Supplemental needs trusts can pay for items above and beyond what is paid for by public assistance programs run by the government. Money in a trust can be used to help pay for costs that are not covered by government programs, but might be necessary for life. For instance, if a person is receiving money from Medicaid to cover the cost of long term care, money from Medicaid can be used to pay for medical care, which could include the cost of staying at a long term care facility. Long term care facilities provide a place to stay, food, medical care, and other similar services, but the facilities generally do not provide clothing, or other personal items.
A supplemental needs trust can help provide these things to the special needs person. Money from a supplemental needs trust can also cover medical expenses, or long term care expenses that are not covered by Medicaid, usually at the Trustee’s discretion.
Assets held in a supplemental needs trust can be protected from Medicaid as a creditor, and prevent Medicaid from recovering assets once a Medicaid recipient dies. Of course, there are many different kinds of trusts that can have provisions allowing the trust to be used as supplemental needs trust, so choosing the correct structure is important. As a general rule, supplemental needs trusts should be irrevocable, so that assets are not considered available to, or owned by, the Medicaid recipient. This trust setup can be helpful for asset protection.
How Far in Advance do I need to Plan?
A common misconception about planning for Medicaid and using a Trust is that if you simply put your assets into a trust, then you can qualify for Medicaid immediately. This is not the case.
Medicaid has a 5 year look-back period for transfers of assets, where fair market value consideration was not received in return. This means that if someone transfers assets to someone else (including a person, business, trust, etc.), and is not paid the fair market value in return, then the value of the transferred asset will counts against the transferor. This could disqualify the person from receiving Medicaid because of the transfer.
As an example, if a person puts $50,000 into a trust, and then applies for Medicaid within 5 year of that transfer, Medicaid will look at the $50,000 transfer and say that money could have been used for paying for medical care, so the individual will need to pay the first $50,000 of medical expenses out of pocket, or be disqualified for Medicaid for a calculated number of months before Medicaid will pay for anything.
In contrast, if a person pays a caregiver $50,000 over the course of a year, and then applies for Medicaid within 5 year of that payment, Medicaid will look at the $50,000 payment and say that the person received $50,000 of value in services, so the $50,000 spent does not need to be repaid. The 5 year look-back rule applies to transfers for less than full fair market value received in return. When transferring assets out of your name an into a trust to qualify for Medicaid, it is best to start more than 5 years before you need Medicaid. Or, in other words, before you get sick.
What are the Drawbacks of a Supplemental Needs Trust?
As with everything else in life, you cannot have everything at once.
In order for a supplemental needs trust to protect assets, the person creating the trust needs to give up direct control over an asset. If someone has direct control over an asset, that asset would be counted against the person in determining Medicaid eligibility. Some people are uncomfortable giving up direct control over an asset, while others seem fine with giving up direct control, so long as they have a trustworthy person running the trust, like a trusted child or other family member.
However, a supplemental needs trust is not an all or nothing type of proposition. Many times, certain assets can be put into a supplemental needs trust, like a paid off house, while other asset remain outside of the trust, like a bank account or other financial asset. This way, a person can use the financial asset to live, while still living in a house that a supplemental needs trust owns. Determining what the correct mix of assets inside and outside of the trust should be is a decision that can only be made after a full analysis of each individual situation and circumstances. This short discussion does not cover all of the aspects of a supplemental needs trust, and a more comprehensive discussion of your individual needs is necessary.
Is a Supplemental Needs Trust Right for You?
An evaluation of the individual’s asset picture, medical needs, income and expenses and future goals is essential to deciding is a supplemental needs trust should be part of your estate plan. To determine if the time is right, and decide if you could benefit from a supplemental needs trust, schedule an appointment here.