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Lisa Nachmias Davis,
Attorney at Law

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New Haven, CT
06510
Phone: 203-776-4400
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PLANNING WITH TRANSFERS FOR THE DISABLED* (article) (See
Cautionary Remark)

 It has long been the case that individuals could assist disabled family members by placing funds in "special needs trusts" that would preserve the disabled person’s eligibility for government entitlement benefits while at the same time providing additional resources for unmet needs. In addition, gifts made outright to disabled individuals have long been exempt from the rules penalizing transfers made by those seeking Medicaid (Title XIX) benefits for their own long-term care.   However, these two planning techniques were out of sync until 1993.

 A federal law, the Omnibus Budget Reconciliation Act of 1993 (OBRA ‘93) put these planning techniques back in sync.  The Act made gifts to certain "pay-back" special needs trusts for blind or disabled persons exempt from the Medicaid transfer penalties.  In addition, the Act provided that these trusts will not affect an individual’s eligibility for Medicaid -- even if funded with the dividual’s own assets.  This means that: (1)  an elderly person can make gifts to a "pay-back" special needs trust for a disabled person without jeopardizing the medical entitlement benefits of either; and (2) in the event that a disabled individual does receive funds outright, these funds may be sheltered in a trust without jeopardizing the individual’s Medicaid benefits. 

Requirements of OBRA ‘93 Trusts.  To be exempt from Medicaid transfer penalties, the transfer must be to a trust for the benefit of a "disabled" individual.  (Special "pooled trusts" exist in some states that may be used for individuals over sixty-five.)  There can be only one beneficiary during the disabled person’s lifetime. There is no requirement that the beneficiary receive Medicaid or be likely to do so in the future.  Trusts may be established by a parent, grandparent, guardian (conservator) or court.  Only "pooled" trusts can be funded by the individual on his or her own.

The "Pay-Back" Requirement:  Upon the death of the disabled beneficiary, the Trustee must first repay any Medicaid benefits that a state has provided to the beneficiary.  After "payback" is complete, however, remaining assets may be distributed to other beneficiaries. 

"Blind or Disabled."  For all planning involving transfers to disabled persons, including OBRA ‘93 Trusts, the beneficiary must be either blind, or disabled as defined by the Social Security laws: "unable to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than twelve months (or, in the case of a child under the age of 18, if he suffers from any medically determinable physical or mental impairment of comparable severity)."  Special problems arise if the disability stems from alcoholism or drug-addiction, and special provisions define "blindness."  A beneficiary receiving Social Security Disability or SSI should qualify automatically as "disabled."

Trusts May Be Established by Conservators.  In 1998, Connecticut’s legislature authorized probate courts (and conservators with probate court approval) to establish OBRA ‘93 Trusts, whether for the benefit of the ward, or as a gift for the benefit of another person.  In addition, OBRA ‘93 Trusts are expressly authorized in settling lawsuits brought on behalf of someone under conservatorship or guardianship, once the State’s lien (for cash or mental health benefits paid, up to 50% of the injury, plus Medicaid payments relating to the injury) has been repaid. 

Trustees.  OBRA ‘93 Trusts may be separately established and maintained.  Although the party making the gift may be a Trustee, tax implications -- as well as appropriate successor Trustees -- should be considered carefully.  OBRA ‘93 Trusts may also be held as "pooled" trusts administered by nonprofit organizations.  There are many organizations in other states that will act as Trustee of such trusts. 

Other Trust Issues.  Additional issues should be considered when establishing or making a gift to an OBRA ‘93 Trust:
 

1. The trust should permit amendment by the Trustee to comply with changes in the law.
2. A trust funded as a gift for a disabled person should be "discretionary," with payments left to the "sole, absolute and uncontrolled discretion" of the Trustee, to avoid any impact on the beneficiary’s other entitlements and to insulate the trust from other creditors.
3. Payment should generally be limited to the "supplemental needs" of the beneficiary.  If the beneficiary expects to receive Supplemental Security Income, payments for the beneficiary’s "food, clothing and shelter" will affect those benefits -- but in general only to the extent of one-third of the maximum benefit plus $20, per month.  They may be permitted but should not be required.
4. Disposition of the remainder should be considered together with any related tax issues.
5. Especially if funded with the beneficiary’s own assets, and not as a gift, interaction with the disabled beneficiary’s entitlement and other needs (such as State "cash assistance" payments) will require careful consideration.  See CAUTIONARY REMARK (Parkhurst case)
6. Effect on sensitive family relationships must be taken into account if the gift to a disabled relative is not balanced by generosity to others as part of the estate plan.
7. When any trust is introduced into the Title XIX application process, significant delay may result as the trust will be referred to the Attorney General’s office for review. 

 Conclusion.  Medicaid planning with transfers to or for the benefit of disabled persons must be handled with care.  With the assistance of an attorney familiar with the complex laws affecting the elderly and disabled, an individual may find such transfers to be a valuable tool in protecting family assets and providing for a disabled relative’s needs while at the same time preserving the individual’s own eligibility for medical assistance under Title XIX.

 *A version of this article was published in the September, 1998 newsletter of PLAN of Connecticut, Inc.  Rights of any further use, copying or publication are reserved.

Page updated on June 11, 2001; some updates November 22, 2004.

DISCLAIMER:  THIS INFORMATION IS NOT PROVIDED AS  LEGAL ADVICE AND CREATES NO ATTORNEY-CLIENT RELATIONSHIP.  NO ENDORSEMENT IS INTENDED BY ANY REFERENCES HEREIN.  PLEASE CONSULT YOUR OWN LEGAL AND FINANCIAL ADVISORS BEFORE TAKING ANY ACTION. 

I can only provide general information, and will not provide advice about a particular case without a formal engagement. Writing to me does not create an attorney-client relationship.
 

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Lisa Nachmias Davis
Attorney at Law
129 Church Street, Suite 805
New Haven, CT  06510
Phone: 203-776-4400
Fax: 203-774-1060 or 776-4411
email:  davis@sharinglaw.net