Medicaid is a public assistance program funded jointly by each state and the federal government. It is administered by the state (the state sets eligibility requirements, payout amounts, etc.). In Colorado, Medicaid is administered by the Colorado Department of Health Care Policy and Finance (DHCPF) and the Department of Human Services (known as Social Services).
Medicaid covers various medical services and is a needs-based program where eligibility is determined by three requirements:
The use of trusts in Medicaid qualification focusing on the Resource Requirement is the topic of this article.
If an individual has more than $2,000 in countable assets, which would otherwise disqualify that individual from receiving Medicaid benefits, the individual has several options available. First, the individual may convert “Countable Assets” into “Exempt Assets” by shifting value. This can be accomplished by, among other things, improving the home, purchasing a vehicle equipped for wheelchair transfer, purchasing irrevocable pre-paid funeral services, etc.
Additionally, with enough time, typically either three or five years depending on the method, an individual who may need to qualify for Medicaid in the future can give away assets to family members without adverse qualification consequences.
All too often, two situations are encountered that would hinder the ability of an individual to either qualify for Medicaid, or continue to receive full Medicaid benefits once qualified.
The first problem situation arises when an individual with more than the maximum amount of “Countable Assets” needs to qualify for Medicaid and does not have the ability to convert enough of these assets to “Exempt Assets” nor does the individual have enough time to plan around this problem. A solution for this problem may lie in a Statutory Exception Trust, discussed below.
The second situation arises when an individual has qualified for Medicaid (or will qualify) but has family members or others wishing to provide assets to the individual for care. Without planning, the assets put aside for the Medicaid recipient would diminish the amount of value Medicaid would provide over the life of the recipient. A solution for this problem may lie in a Third-Party Special Needs Trust for the benefit of the Medicaid recipient.
In those instances in which an individual will have more than the $2,000 allowed under the Resource Requirement at the time of Medicaid qualification, one of two statutory Exception Trusts may help to enable the individual to become Medicaid qualified. These trusts operate by allowing a Medicaid applicant to place assets in trust, for the applicant’s future benefit, yet have the assets excluded from his or her “Countable Assets” (hence the name “Exception Trusts”).
The first such trust is known as a Disability Trust and must be established for the benefit of a disabled individual who is under the age of sixty-five. At the termination of the trust (by reason of the death of the beneficiary or otherwise), the remaining assets must be used to repay Medicaid for benefits received during the beneficiary’s lifetime.
The second such trust is known as a Pooled Trust and must be managed by a non-profit corporation such as The Colorado Fund for People With Disabilities. There is no age restriction as with the Disability Trust. At the termination of the trust (by reason of the death of the beneficiary or otherwise), the remaining assets are retained by the trust for charitable purposes.
Therefore, although the Statutory Exception Trusts allow an individual with assets in excess of the $2,000 maximum under the Medicaid Resource Requirement to qualify for Medicaid benefits, the individual’s assets may not be preserved for transfer to family members at the individual’s death.
[NOTE: This article discusses only two of the Exception Trusts available under Colorado and Federal law. There is a third trust, known as a “Miller Trust” or “Utah Gap Trust,” that may be used by certain individuals to provide an exception to income being counted under the Income Requirement.]
In those instance in which there is a family member or other person who seeks to provide benefit to the Medicaid recipient (or applicant), a Third-Party Special Needs Trust may be used to eliminate the reduction in benefits (or disqualification) that would otherwise happen if such person put assets aside directly for the care of the Medicaid recipient.
These trusts are powerful tools to allow a loved-one to insure assets are made available for the disabled individual during that person’s lifetime. After the death of the disabled individual, the remaining assets in the trust are not used to repay Medicaid or for charitable purposes but instead may be moved to other family members or elsewhere. The assets in these trusts are not available for Medicaid purposes because the trustee is under no obligation to distribute assets to the disabled individual (the trust is discretionary) and the trust is written so that it places a prohibition on distributions to the Medicaid beneficiary that would affect Medicaid qualification. Planning with these trusts should only be initiated by families using the guidance of a trusted and experienced advisor.
It is extremely important that the extended family’s estate planning be integrated to utilize the Third-Party Special Needs Trust for the benefit of the Medicaid beneficiary. The “Grandparent Problem” illustrates this best. Often, Medicaid planning will be done for a disabled child requiring the investment of time and money. Thereafter, a grandparent of the disabled child will die leaving assets to the child either complicating a future Medicaid qualification (if the child is not yet qualified) or resulting in the loss of some or all of the lifetime benefits Medicaid offers (if the child is already receiving Medicaid benefits). Although it may be difficult for a loved one to consider disinheriting a disabled family member, this is usually the best option to avoid problems with Medicaid qualification or continued benefit. If a Third-Party Special Needs Trust has been established for a disabled family member, this trust may be included in the family’s estate plan in lieu of the disabled individual.
Colorado is an exceptional jurisdiction to locate a Third-Party Special Needs Trust. Updated trust legislation has been adopted in many jurisdictions (including most of the states that border Colorado—Kansas, Nebraska, New Mexico, Utah, and Wyoming) that significantly weakens Special Needs Trust planning. If you have a situation in which a Special Needs Trust may be of benefit, yet you live in a jurisdiction that does not provide strong protections for this type of planning, a trust may nevertheless be established in Colorado. Multiple options exist to use professional trustees and other service providers in Colorado.
