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Special Needs Trust

What are the options to protect our home?

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The Home Equity Rule

The home is the major asset for most Americans. In addition to its financial significance, it often has emotional significance as the place that parents have raised their children and lived for many decades. They have paid mortgages for up to 30 years and often built, repaired, maintained, and improved the properties themselves.

Medicaid law recognizes the special character of homes, in many states exempting them entirely as countable assets. Congress, however, through the Deficit Reduction Act has limited this exemption to the first $688,000 of equity unless a spouse or minor or disabled child is living in the house. States have the option of increasing the exemption to $1,033,000. This has added to the planning that clients with high-value homes should consider.

The Medicaid Payback Lien

In addition, while the house itself may be protected in terms of Medicaid eligibility, it is not protected from a claim for estate recovery upon the nursing home resident’s death. And the proceeds of the sale of the home are not protected if it is sold during the nursing home resident’s life.

One option for the house is aimed at the healthy spouse of someone who is likely to need nursing home care in the future. It simply states that the house is protected, but that it should be placed in the healthy spouse’s name in order to give him or her control and protect against estate recovery in the event he or she predeceases the nursing home spouse.

The House

Protecting the equity of a home is a universal goal for most families.

The house is a unique asset under the Medicaid rules. It is considered a “noncountable ” resource as long as you or your spouse lives there or states an intent to return there to live. This means that the applicant for Medicaid may continue to own a house, no matter what the value, if he or she claims the house as his or her residence, regardless of whether he or she has any realistic prospect of returning home. However, if the house remains in the Medicaid recipient’s estate, after his or her death the state has an automatic claim on the house to the extent of its expenses for the care of the Medicaid recipient. This estate recovery can be protected against by keeping the house outside of the Medicaid recipient’s probate estate.

The first step is to put the house in community spouses, the spouse not in the nursing home, name alone. This gives them complete control over the house and keeps it out of the institutionalized spouses, the spouse in the nursing home, probate estate. There is no penalty for transfers between spouses. Then, you can consider taking other steps to protect the house in case the community spouse ever require long-term care.

So how do you keep the house out of your probate estate so that the state has no access to it, and in your federal taxable estate so that it gets the stepped-up basis? There are two ways to do this. Both cause the house to pass automatically to your beneficiaries without going through probate.

  1. The Life Estate. One planning technique is for you to give the house to your children while retaining a life estate for yourself. This means that you retain current ownership of the property, while your children automatically have ownership after your death. You would be responsible for upkeep of the house and would receive any rental income. The advantage of this method is that it is relatively simple to put into effect. You simply deed the remainder interest to your children. You would also have to file a federal gift tax return, but no tax would be due at this time.
    There are some disadvantages to this approach. First, you give up some control of the house, since your children will have an ownership interest. They would have to sign any deed if you were to sell or mortgage the property or change your mind about who it should go to. If the house were sold during your lifetime, a portion of the proceeds would go to you and the balance to your children, the amount of each share depending on your age at the time of the sale. Finally, you would be ineligible for Medicaid for the five years following the transfer of the remainder interest to your children, though if worse came to worst, your children could deed back to you their interest in the house and thus “cure ” this transfer penalty.
  2. The Irrevocable Trust. The second method of keeping the house in your taxable estate but out of your probate estate is to place it in an irrevocable trust. After you do so, you cannot change your mind. Once the house is in the trust, it is there for good. If the trustee decides to sell the house, the proceeds of the sale must remain in the trust. Although this protects the cash proceeds, it limits your access to them. This would be an effective transfer at the time of creating the trust, causing your ineligibility for Medicaid for the subsequent five years. You would not have the same option to “cure ” the transfer that you would with the life estate. Though there are restrictions, there are also significant benefits to this trust. If drafted as a grantor trust, the creators of the trust would still be eligible for capital gains exclusions and the beneficiaries would receive a step-up in basis. Though no state will ever allow principal to be distributed from the trust to the grantors, many states will allow principal to go to children or heirs of the grantors – allowing for access to the principal that could be gifted from the children back to the grantors. Finally, trustees can sell real estate without risk of the proceeds being deemed countable resources.

Caretaker Child Exception

You can receive Medicaid coverage while still keeping an ownership interest in your home. However, at your death the state will have the right to recover from your probate estate—essentially your home—whatever it pays out for your care. Your home could escape this claim if it were transferred to one or more of your children. A problem with doing this is that under the general transfer penalty rule, you would be ineligible for Medicaid benefits for up to 60 months following the conveyance.

However, an exception to the transfer penalty allows a Medicaid applicant to transfer his or her home to a qualified caregiver child. The law defines a caregiver-transferee as a child of the Medicaid applicant “who was residing in the applicant’s…home for a period of at least two years immediately before the date of the applicant’s…admission to the institution, and who (as determined by the physician) provided care to the applicant…that permitted him or her to reside at home rather than in an institution. ” In order to qualify under this exception, an applicant should be prepared to submit a certification by his or her attending physician which basically states that, but for the caregiver, the applicant would have had to move to a nursing home.

An important exception to Medicaid transfer penalties is for transfers into trust for anyone who is disabled and under the age of 65. Prior to that, transfers directly to the disabled child of a Medicaid applicant were not penalized. But in many cases, it was inappropriate to give funds to a mentally retarded or mentally ill child. At least some states strictly construed the exception to bar the funding of trusts for such children. OBRA ’93 corrected that narrow thinking and broadened the exception to include trusts for anyone under age 65 and disabled, whether or not he/she is a child of the Medicaid applicant. This form describes this planning option. You will need to check with your state Medicaid agency to determine how it construes the requirement that the trust be “solely for the benefit “ of the disabled individual. Some states require that no remaindermen be listed on the trust, that instead it be payable to the disabled beneficiary’s estate on his or her death, or that a (d)(4)(A) trust be used for this purpose.

Exceptions to the Transfer Penalty

Transferring assets to certain recipients will not trigger a period of Medicaid ineligibility. These exempt recipients include:

  1. A spouse (or anyone else for the spouses benefit);
  2. A blind or disabled child;
  3. A trust for the benefit of a blind or disabled child; or
  4. A trust for the benefit of a disabled individual under the age of 65 (even for the benefit of the applicant under certain circumstances).

Special rules apply with respect to the transfer of a home. In addition to being able to make the transfers without penalty to one’s spouse or blind or disabled child, or into trust for other disabled beneficiaries, the applicant may freely transfer his or her home to:

  1. A child under age 21;
  2. A sibling who has lived in the home during the year preceding the applicant’s institutionalization and who already holds an equity interest in the home; or
  3. A “caretaker child, ” who is defined as a child of the applicant who lived in the house for at least two years prior to the applicant’s institutionalization and who during that period provided such care that the applicant did not need to move to a nursing home.

A transfer can be cured by the return of the transferred asset in its entirety. And in some instances the applicant for benefits may be eligible for a “hardship ” waiver.

Still have questions as to how to protect your home? Call us for a no obligation consultation.

House Passes Health Package with SNT Fairness Act

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Passage by the House clears way for new ways of creating Special Needs Trusts

On November 30, 2016, the House passed H.R. 34 – 21st Century Cures Act, a major health care package that included the Special Needs Trust (SNT) Fairness Act (Sec. 5007). The health package covers a wide array of issues, including new disease research funding, mental health reform, and combating opioid abuse.

The SNT Fairness Act would allow individuals with disabilities, who have capacity, to set up their own d-4-a special needs trust. Passage of the SNT Fairness Act has been National Academy of Elder Law Attorney’s top public policy priority for this congressional session.

In September, the House passed an amended version of the SNT Fairness Act that contained several additional non-controversial provisions related to Medicaid. A year prior, the Senate unanimously passed the original version of the SNT Fairness Act.

Now, the Senate must take up the health package for the provisions to become law.

Special Needs Trusts are trusts designed to hold assets for the benefit of a disabled individual while allowing that individual to receive and benefit from available government services. There were 2 types of SNT’s: 1. Created with the assets of the disabled individual (so called (D)(4)(a) Trust); and 2. Created with assets other than those of the disabled individual.

The current law limited who could create a SNT with assets of the disabled individual. This new law removes the restrictions as to who can create a SNT for a disabled individual.

Want to learn more about Special Needs Trusts? Contact our office for a no-cost consultation.


Special Needs Trust Fairness Act Passed Committee

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Breaking News: Committee Approves Special Needs Trust Fairness Act in Package!

On July 13, 2016, the House Energy and Commerce Committee approved the Special Needs Trust Fairness Act (H.R. 670) as part of a small legislative package to improve Medicaid!

The Special Needs Trust Fairness Act lets individuals with disabilities, who have the capacity, to create their own special needs trusts.

Special needs trusts allow persons with disabilities to supplement daily living expenses when government benefits alone are insufficient and protects them against the risk of impoverishment.

But under the current law, only a parent, grandparent, legal guardian of the individual, or a court can establish a special needs trust.

Empower persons with disabilities with responsibility for their own life decisions.

The package also includes Medicaid coverage of tobacco cessation services for mothers of newborns and limiting the use of federal Medicaid funds to cosmetic drugs except when medically necessary.


The Special Needs Trust Fairness Act of 2015 seeks to correct a problem many view in the current law that presumes all individuals with disabilities lack the mental capacity to establish their own special needs trusts. Proponents of the bill state this is false and unfair presumption imposes unnecessary legal fees and costs, court delays, and uncertainty on people who can little afford it. The suggested fix is: H.R. 670 which seeks to add the words “the individual” to 42 U.S.C. § 1396(d)(4)(A) to allow people with disabilities to establish their own individual special needs trusts. The Senate passed a companion version of this bill (S. 349) by unanimous consent on September 9, 2015


People with disabilities who want to live active lives face daunting costs to pay for what others do as a matter of course – from getting out of bed, taking a bath, or feeding or clothing oneself – to more complicated tasks – travel, reading and writing, or working productively. Medicaid may cover the medical and remedial costs for many, but of course there are many more expenses incurred during everyday living. Congress has long recognized the limits of Medicaid; in 1993, it authorized two types of special needs trusts that allow people to set aside funds to pay for supplemental care and meet their non-medical needs while retaining Medicaid. And, prior, Congress added ABLE Accounts, which provide tax incentives for individuals with disabilities to save funds for their non-medical disability needs without loss of Medicaid.

The Problem: “The Individual” is Missing from the Statute

In 1993, Congress authorized two kinds of trusts – individual and pooled non-profit trusts. The law, as drafted, allowed individuals with disabilities to place their funds in a pooled non-profit trust, but in another section left out the words “the individual” thereby failing to allow individuals to establish their own special needs trust:

  • Individual trusts “must be established by a parent, grandparent, legal guardian of the individual, or a court.” 42 USC §(d)(4)(A).
  • Pooled Trusts accounts “must be established by a parent, grandparent, legal guardian of such individual, the individual, or a court.” 42 USC (d)(4)(C)(emphasis added).

More recently, in the related ABLE Act, Congress permitted these accounts to be “established by an eligible individual.” P.L. 113-295

Proponents believe there is no valid public policy reason for prohibiting competent individuals with disabilities from establishing their own individual special needs trusts where all of the other, much more significant requirements are met. These requirements are plainly more important than who signed the document; they are, briefly, that the trust or trust account be:

  • Irrevocable.
  • Provide payback to Medicaid following the death of the beneficiary for all of its expenditures for the beneficiary.
  • Managed by a trustee for the “sole benefit” of the disabled individual.

This legislation would, of course, keep all of these requirements in place.