From The Certified Elder Law Attorney's Desk:

William W. “Bill” Erhart

It Is Too Late Baby

Medicaid Planning Part 3

Previously we looked at the timelines for Medicaid Planning, the Medicaid Asset Protection Trust (MAPT) and how the MAPT protects assets for someone who may need long term care Medicaid. Today we will look at how the MAPT protects its beneficiaries, typically our children.

Public benefits, such as Medicaid, are based upon financial need. “Need” is based upon arbitrary standards and rules set out in broad terms by Congress, and then refined and narrowed by regulations. The first such agency is the Centers for Medicare and Medicaid Services (“CMS”) which imposes rules and guidelines on the States which receive Medicaid funds appropriated by Congress. As a condition of receiving Medicaid funds, the States promised to follow the federal Medicaid rules. There are several different methods of receiving funds. The States have several options.

Delaware decided to follow the Social Security rules to administer Medicaid. Social Security promulgates Program Operations Manual System (“POMS”). Then Delaware, like all States, has its own statute and its own regulations governing who is eligible for Medicaid in its many different forms and programs. The MAPT is designed to comply with all of these rules and is quite complex. Nonetheless, many of our clients have saved their live savings using MAPTs.

The primary purpose of the MAPT is to preserve selected assets from being considered available resources when the client applies for long term care Medicaid. As illustrated in the previous newsletters, MAPTs consider estate planning and tax issues. They also provide protection for beneficiaries and control for the Trustmaker.

Outright gifts or inheritances from a parent or friend to a beneficiary with a disability usually results in the beneficiary losing eligibility for public benefits that are based upon financial need, chiefly Medicaid and Supplemental Security Income. Such gifts often disqualify a beneficiary from group homes which are funded with Medicaid.

When an outright gift is made to a beneficiary with a disability, often the best solution is a “self-settled supplemental needs trust” which the beneficiary has to create to protect the gifted assets. Self-settled supplemental needs trusts have many drawbacks. There are strings or conditions attached to them. The primary disadvantage of such trusts are that when the beneficiary dies, the State is entitled to reimbursement from a this First-party trust and hence any benefit that might be passed down to the beneficiary’s family is lost. First party trust means the trust’s assets were once the beneficiary’s property, that is in the beneficiary’s name before the trust is created.

The better solution is for the gift or inheritance to be made into a third-party irrevocable supplemental needs trust for the beneficiary with a disability. A Third-party trust is a trust that has property in it that was not in the beneficiary’s name when the trust was created. Such as a trust created by a parent for a child. The funds and can be managed to enhance the quality of life of the beneficiary. For example, transportation, entertainment, clothing, vacations, trips, any of the little incidentals of life can be purchased from a third-party supplemental needs trust. The trustee of a third-party supplemental needs trust frequently has the discretion to ignore the restrictions of public benefits and make distributions to the beneficiary regardless. When the beneficiary dies, any remaining funds in the trust will be passed to other beneficiaries. Third-party trusts are flexible with few restrictions if properly drafted by a knowledgeable attorney.

Ability to Specify Terms and Incentives for Beneficiaries’ Use of Trust Assets All trusts, not just MAPTs, permit trust-makers to craft trusts for their children and grandchildren with incentives and goals. These include that the trust assets are used for the beneficiary’s education, to finance a business, buy a home, pay for a wedding etc. Terms can be set restricting distributions to a beneficiary unless the beneficiary participates in substance abuse programs or modifies undesirable behavior. A frequent incentive is that discretionary distributions will not be made to the beneficiary unless certain educational or professional goals are met. For example, receiving a bachelor’s degree or being certified in some trade or profession. Many trusts simply state that at certain ages distributions of principal will be made to beneficiaries, such as at age is twenty-five and then thirty and thirty-five years of age. Those trusts fail to take into account the maturity, education and circumstances surrounding an individual beneficiary. It is more effective to provide aspirational goals and incentives for individuals than to make outright distributions that are subject to all the liabilities the world may throw at any beneficiary.

Although MAPT’s are irrevocable as the Trust-maker cannot unilaterally amend or make changes in the trust, a properly drafted irrevocable trust will permit the Trust- maker to change who inherits and how they inherit. For example, a trust may originally state that all four children take equally in a general needs trust. As time goes on, one of the four beneficiaries may have some special need because of injury or other misfortune, therefore instead of four equal shares, the disadvantaged beneficiary may receive 50% of the trust assets. And instead of an outright distribution or a general needs trust; have a supplemental needs trust established. This ability is called a Power of Appointment. A power of appointment is usually limited so the Trust-maker can redesignate beneficiaries who are descendants of the Trust-Maker or charities. Special tax rules apply to a power of appointment which preserve special capital gains treatment or trust assets upon the death of the Trust-maker. Powers of appointment also permit the Trust-maker to disinherit a beneficiary.

Typically, whether Medicaid planning, asset protection planning or otherwise, we are concerned with who will be the beneficiaries after our beneficiaries die. If property passes outright, the beneficiary controls the assets and income and who ultimately receives anything the initial beneficiary does not use. Additionally, the beneficiary’s creditors, business partners, spouses, girlfriends or other individuals may gain control over the assets given to the initial beneficiary. If the trust-maker wishes, only blood descendants, descendants and spouses and/or charitable organizations benefit by the trust assets. An irrevocable trust is the key to creating such plans. Even modest amounts of assets can be left in trust and protected for more than one generation. Often there is real estate, such as a family farm or a vacation home that can be protected by use of an irrevocable trust. Limited powers of appointment to the named beneficiaries give them some control over the property as well.

Medicaid Asset Protection Trusts are not suitable for every circumstance and situation, but are useful tools to create preserve benefits and protect assets. Transferring assets into the name of an individual is almost always in error since it subjects those assets to the liabilities of the individual. The key to asset protection is to get the assets out of your name but retain control. This is achieved by use of the irrevocable trust. If planned properly, irrevocable trusts can enhance the value of an estate plan beyond outright gifting.