First-Party Special Needs Trusts
A first-party special needs trust is a special needs trusts created with the assets of the person applying for government benefits.[1] When properly drafted and funded in accordance with the statutory rules, these trusts reduce the countable resources or income available to the applicant. Anything properly transferred to these trusts will not trigger the lookback penalty,[2] and the assets within the trust are not a countable resource.[3] However, all first-party trusts are subject to Medicaid payback if the applicant receives Medicaid benefits, including ICP Benefits.[4] Indeed, the payback is not just for benefits received after the creation of the trust or after receipt of the funds placed in trust; the payback is for all Medicaid benefits ever paid to the applicant.[5]
There are three kinds of first-party special needs trusts in Florida: the disability trust, the pooled trust, and the qualified income trust.
Disability Trust
A disability trust, also called a “d4a trust,”[6] is a first-party special needs trust for disabled individuals with significant assets. The trust is often the result of a lawsuit, settlement, or inheritance. The following are required to qualify for a disability trust in Florida:
the applicant must be under age 65 and disabled;[7]
the trust must be established for the sole benefit of the applicant by the applicant, a parent, a grandparent, a guardian, or a court;
the trust must provide that upon the death of the applicant, the state of Florida will be fully repaid for all expenses paid on behalf of the applicant under Florida Medicaid before any other beneficiaries receive anything from the trust.[8]
As long as the trust is set up before the applicant is age 65, the applicant may continue benefitting from a disability trust after turning 65. However, the applicant cannot add to the trust after turning 65.[9] Any transfers to a disability trust after the applicant turns 65 can result in a lookback penalty.
Pooled Trust
A pooled trust—also called a “d4c trust”—is a first-party special needs trust established by a nonprofit organization. The trust is funded with the assets of multiple individuals, and the money is pooled together for investment and management purposes. This can be useful for disabled individuals without substantial resources. The requirements of a pooled trust are:
the pooled trust must be established and managed by a nonprofit association;
separate accounts must be maintained for each trust beneficiary;
the assets of all beneficiaries must be pooled together for the purposes of investment and management;
the trust account must be established solely for the benefit of the applicant;
the account in the trust must be established through the actions of a parent, a grandparent, a legal guardian, a court, or the applicant directly;
the trust must provide that upon the death of the beneficiary, to the extent that any amounts remaining in the applicant’s account are not retained by the trust, the trust will pay to the state of Florida up to an amount equal to the total amount of medical assistance paid on behalf of the applicant under Florida Medicaid.[10]
Unlike the disability trust, nothing in 42 U.S.C. § 1396p(d)(4) restricts pooled trusts to people under age 65. If one looks only at federal authorities, the lookback penalty apparently must still apply to transfers to a pooled trust for all individuals aged 65 or older.[11] However, Florida’s ESS Manual indicates otherwise, asserting that pooled trusts can be established for individuals of any age and that all transfers to such trusts are not subject to lookback penalty.[12] Thus, Florida has chosen not to enforce the lookback penalty upon anyone who funds a pooled trust, despite having clear authority to do so when the individual is age 65 or older. This provides a potential option for disabled individuals age 65 and older to use a special needs trust to qualify for Medicaid.[13]
Qualified Income Trust
Qualified income trusts (QITs) are also called “d4b trusts” and “Miller trusts” after the court decision in Miller v. Ibarra.[14] Indeed, the QIT is a codification of Miller.[15] QITs are also called “income trusts” in the POMS.[16] Assets in QITs are only excluded from resource counting if the state opts to allow the exclusion.[17] Fortunately, Florida has chosen to exclude QIT assets from resource counting, making QITs an option for Florida residents.[18]
A QIT is “composed only of pension, Social Security, and other income to the disabled individual (and accumulated income in the trust).”[19] The trust is used as a receptacle for all of an institutionalized disabled individual’s income that exceeds the Medicaid income limit. By putting the income into a QIT, the disabled individual avoids being disqualified for having too much income.[20] However, a QIT is only available to those applying for long term care benefits, such as the Institutionalized Care Program (ICP) or Home and Community Based Services (HCBS) benefits. A transfer of income to a QIT will not cause a lookback penalty if and only if the QIT uses all income—except for the personal needs allowance of $130 monthly[21]—to pay for the disabled individual’s medical care.[22] Otherwise, the transfer will not be considered to be for fair market value and a lookback penalty will be incurred.
The requirements of a QIT are:
the trust must be established for the sole benefit of the person receiving government benefits;
the trust must be irrevocable;
the trust must be composed only of the beneficiary’s income;
and the trust must stipulate that upon the death of the trust beneficiary, the trust will pay the state of Florida up to an amount equal to the total amount of medical assistance paid on behalf of the beneficiary under Florida Medicaid.[23]
[1] 42 U.S.C. § 1396p(d)(2)(A); SSA POMS SI 01120.199.E.2.
[2] 42 U.S.C. § 1396p(d)(4)(A), (B), C(iv).
[3] See SSA POMS SI 01110.100.
[4] 42 U.S.C. § 1396p(d)(4)(A), (B), C(iv).
[5] SSA POMS SI 01120.203.B.10.
[6] This trust is also referred to as a “special needs trust” in the POMS, but this paper uses the term “special needs trust” to refer to all trusts that can be utilized for Medicaid planning.
[7] The inclusion of an upper age limit may strike some as odd, especially considering that Congress explicitly includes the aged as eligible for other benefits. See, e.g. 42 U.S.C. 1381a. The Supreme Court of Iowa speculates that Congress chose “to help younger disabled individuals with longer life expectancies conserve their resources.” Cox v. Iowa Dep't of Human Servs., 920 N.W.2d 545, 558-59 (Iowa 2018).
[8]42 U.S.C. § 1396p(d)(4)(a); SI 01120.203.B; ESS Public Assistance Policy Manual § 1640.0576.08.
[9] SSA POMS SI 01120.203.B.3; HCFA Transmittal No. 64, § 3259.7.A.
[10] 42 U.S.C. § 1396p(d)(4)(C); 01220.203.D; HCFA Transmittal No. 64, § 3259.7.B; ESS Public Assistance Policy Manual § 1640.0576.08.
[11] 42 U.S.C. § 1396p(c)(2)(B)(4); SSA POMS SI 01150.121.A.3; HCFA Transmittal No. 64, § 3259.7.B.
[12] ESS Public Assistance Policy Manual § 1640.0576.08.
[13] However, the practitioner should also inquire into whether other benefits, such as supplemental security income, might be lost.
[14] 746 F. Supp. 19 (D. Colo. 1990).
[15] Joseph B. McFarland, and Roger M. Bernstein, The Medicaid Disability Trust, 69 Fla. B. J. 89, 90 (Dec. 1995).
[16] SSA POMS SI 001120.203.F.
[17] SSA POMS SI 001120.203.F.
[18] Fla. Admin. Code Rules 65A-1.702(15)(a)-15(c); ESS Public Assistance Policy Manual § 1640.0576.08.
[19] SSA POMS SI 001120.203.F.
[20] Fla. Admin. Code Rules 65A-1.702(15)(a)-15(c); ESS Public Assistance Policy Manual § 1640.0576.08.
[21] Fla. Stat. § 409.904(3)(a); ESS Public Assistance Policy Manual § 2640.0118.
[22] HCFA Transmittal No. 64, § 3259.7.C.3; ESS Public Assistance Policy Manual § 1640.0576.08, 1840.0110.
[23] ESS Public Assistance Policy Manual § 1840.0110; HCFA Transmittal No. 64, § 3259.7.C.