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By Michael T. Lahti
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By Theresa Varnet
Of Counsel

The greatest fear that parents or grandparents of a special needs child1 (child refers to both minor or adult child) have is what is going to happen to their child or grandchild when the parent or grandparent dies. Due to their concerns, many parents or grandparents will include a supplemental needs trust in their estate plan. The supplemental needs trust will be funded with a lifetime gift or at the parent’s or grandparent’s death. A properly worded and managed supplemental needs trust will preserve the child’s eligibility for needs-based governmental benefits while providing the special needs child with a higher quality of care during their lifetime than he or she could otherwise afford on benefits alone. If parents die with their estate intact, the share of the inheritance for the special needs child will pour over into a 3rd Party Supplemental Needs Trust.

However, what happens to the intention to provide additional funds for a child or grandchild with special needs if the grandparent or parent requires long-term nursing home care? For many families, the high cost of potential long-term nursing home care presents a severe impediment to providing an inheritance for their disabled child.

Many families want to protect their assets from nursing home expenses. This article discusses strategies that can be used to protect assets, starting with a discussion of some Medicaid planning nursing home terminology, then highlighting the power of advance planning, and concluding with a discussion of how some protective trusts can be set up for children with disabilities and how these trusts can be woven into the estate plan when families are trying to protect assets from nursing home costs.

FIVE-YEAR “LOOKBACK”

Generally, strategies can be distinguished by whether the planning was done ahead of the look back period or within the lookback period. Elder Law Attorneys are familiar with a 5 year look back period but often our clients are not. A simple explanation to help our clients better understand the lookback period is to explain that the lookback period applies when one needs Medicaid funding to pay for nursing home bills. At that time, an applicant files a Medicaid application and asks the state for help paying the nursing home costs. Up to five years’ worth of financial statements may be reviewed when the Medicaid application is processed. If disqualifying gifts have been made within the five-year period, then the state will apply a “penalty period” measured by the amount given away. During the penalty period, the state will not help with medical costs, which is devastating.

Simply put, the laws prevent a person from giving his or her assets away one day and getting state help with a nursing home bill the next.

PRE-CRISIS PLANNING

The most effective planning is done well before a crisis occurs. A typical strategy involves creating and funding an irrevocable trust five years before an application for Medicaid is filed. Although very useful, 

this strategy is not perfect, and some resist doing this because there is an inherent loss of control over assets put inside the trust2. This reluctance to plan in advance can become an impediment to effective planning.

CRISIS PLANNING

If one’s health declines precipitously and assets are at risk of being spent down on long-term care, there are still options. For instance, married couples may consider wills that contain “testamentary” trusts3. These are specialized wills used for married couples. When the “first” spouse dies, assets passing under the deceased spouse’s will flow into a trust for the surviving spouse.  This trust protects assets within it without the five-year lookback constraints. Of course, this strategy has limits because (1) a spouse must pass away for the plan to work, and (2) in most instances, it is tough to predict which spouse will pass away first4. Other crisis strategies include spend-downs, last-minute gifts combined with promissory notes to save some, but not all, of the assets (for Rhode Island residents), and specialized annuities5. These crisis strategies are beneficial, yet they are not perfect.

SUPPLEMENTAL NEEDS TRUST OVERVIEW

Federal and state laws provide protections for children with disabilities. One of the most important strategies is a supplemental needs trust6. Supplemental needs trusts maximize the assets for a child’s care. Without such trusts, assets left directly to a child on a means-tested public benefits program (like SSI or Medicaid) cause the child to lose benefits. And those lost benefits remain unavailable until the child has spent down assets to a pittance, at which point the child can reapply for benefits. This result is nothing short of a disaster, as the assets help the state instead of the child. This problem can be avoided with a supplemental needs trust.

There are two broad categories of supplemental needs trusts: one that must, upon the child’s death, reimburse the state for care provided during the child’s lifetime, and one that does not have to reimburse the state (so assets go back to the family). Trusts that have the “payback” requirement can be further categorized as “first-party” supplemental needs trusts and “pooled” trusts7. Trusts that do not have the payback requirement are called “third party” supplemental needs trusts.

Understanding this, one may ask why anyone would ever want to establish a trust that pays assets to the state upon the child’s death. The answer is that sometimes, it is the only option. The first situation would be when the assets belong to the child, or the child has a legal right to the funds (such as child support).  When the child has a legal right to or ownership rights to the funds, a payback supplemental need trust is required. So, instead of requiring the child to spend down all of his or her assets and then forcing the child to live entirely off of his or her government benefits, the first-party Supplemental Needs Trust allows the beneficiary to receive the needs-based benefit and enjoy a higher quality of life by supplementing his or her benefit with the assets which have been placed in the first party (payback) supplemental needs trust.

The second situation when a payback-type supplemental needs trust might be used is when a parent or grandparent requires medical care, nursing home care, or in-home supports and cannot wait out the five-year lookback period. By transferring his or her own assets to a first-party supplemental needs trust for the sole benefit of a child or grandchild with a disability, which is not subject to the five-year lookback period, the assets will be preserved for the disabled child’s benefit. In other words, a parent or grandparent can give his or her money today to a first-party supplemental needs trust and qualify for Medicaid tomorrow to pay for his or her long-term medical needs. Note: In some cases, a Sole Benefit Trust can be used without adding a payback clause8.  In this case, the trust must make actuarially sound distributions, as no one else can benefit from the trust. Depending on the age, amount transferred to the trust, and the annual needs of the beneficiary, the Sole Benefit Trust may work. When in doubt about whether it is practical for the trust distributions to be made on an actuarially sound basis, it is recommended to use a d4A or d4C supplemental needs trust.

It is recommended that the parent or grandparent sign a durable power of attorney for property that authorizes one’s agent to transfer their assets to a first-party supplemental needs trust for the benefit of a child or grandchild who is disabled in the event it is ever in the parent’s or grandparent’s best interest to qualify for Medicaid funded medical or nursing home care. The reason it is recommended to sign a durable power of attorney is if a senior has a stroke or other serious illness, he or she may no longer be competent to transfer his or her own assets. A signed durable power of attorney with a specific gifting power to transfer assets to a supplemental needs trust will enable the transfer to occur and the application made to Medicaid without delay. It may also be recommended to create a ‘stand by’ first party supplemental needs trust as the law allows a parent, grandparent, legal guardian, court of law, or the individual with a disability himself or herself (if competent to do so), to create a first-party supplemental needs trust. If a standby trust is created, the agent under the power of attorney can simply make the transfer to the first party supplemental needs trust. Otherwise valuable time may be lost petitioning a court of law to create the first-party supplemental needs trust if the disabled individual is incapable of creating the trust.

Here are some quick examples below that show how important this can be:

Example 1: Susan Smith is 80 years old, and her health is rapidly declining. All indications are that she will need nursing home-level care within five years. She is the surviving parent of Peter Smith. Peter is 60 years old and has been disabled since birth. Susan’s primary goal is to maximize what is left to Peter, and she wants to know if it is too late to protect her assets from being spent on nursing home care. In this situation, Susan could establish and transfer assets into a ‘first-party” supplemental needs trust (that contains a payback provision to the state) for Peter. The supplemental needs trust will benefit Peter, and upon Peter’s death, any remaining assets in the trust will be paid back to the state for Medicaid-funded benefits provided to Peter during his lifetime.

Example 2: Assume the same facts above, except in this example, Susan has suffered a stroke and has become incompetent, with a prognosis of an extended nursing home stay. In this second example, Susan’s appointed “agent” under her durable power of attorney could transfer Susan’s assets into a first-party supplemental needs trust (with a payback provision) for Peter, and Susan’s assets will be preserved for Peter to use throughout his lifetime.9

Wrapping this all together, we might instruct an otherwise healthy client who wants to (1) protect assets from nursing home costs and (2) preserve assets for a child with a disability to set up an irrevocable third-party supplemental needs trust (which does not have to pay the state back upon the child’s death).  If this is done five years before the parent’s nursing home crisis, the assets placed in the supplemental needs trust should be insulated from the parent’s nursing home costs and remain protected for the child with a disability, enhancing the child’s quality of life until the child deceases, at which point assets remaining would pass back to family members free of any claim by the state. Alternatively, if the declining health of a parent prevents this optimal planning from working, we could still instruct the client on how to protect assets from the nursing home and protect such assets for the child’s lifetime, subject to the payback requirement10.

SUMMARY

Supplemental needs trusts offer essential solutions for families who have children with disabilities.  Families who plan well in advance can achieve asset protection from nursing home costs and for their children without diminution of the assets upon the child’s death.  Families who have not planned well in advance still have powerful planning options to protect their property from the high costs of nursing home care.  

If an attorney has elderly clients or a younger client with health challenges, who have a child or grandchild with a disability, he or she may want to consider having a discussion of the five year look back period for qualifying for Medicaid and the need to plan for the possibility of needing nursing home care to preserve assets for a special needs child or grandchild.

(1) Discuss with clients the possibility of funding and making an irrevocable third-party supplemental needs trust that does not contain payback provisions, 

(2) Consider preparing and nominally funding a first-party supplemental needs trust that does have payback provisions, to be on “standby” to receive assets in a crisis and, 

(3) Discuss updating the client’s powers of attorney so that it contains the specialized language needed to transfer assets to the standby trust in a crisis.

Being proactive in Medicaid Planning can preserve funds for the future enjoyment of a child or grandchild who is disabled.

  1. In this article, “children” or “child” refers to relationship as opposed to age.  For instance, “my child” could refer to a minor or adult child. ↩︎
  2. Valuable protections can nonetheless be built into the trust to retain “income” and the right to “occupy” property. ↩︎
  3. A “testamentary” trust begins upon a person’s death, as opposed to being created while a person is living (a “living” trust). ↩︎
  4. Typically, assets are titled one-half in one spouse’s name and one-half in the other spouse’s name, with the idea that if one spouse dies (whoever it is), at least some assets will be protected.  Thus, this “fallback” strategy is not always perfect because, by its nature, it protects only a portion of the assets. ↩︎
  5. Some annuities can be used as a spend-down for married couples where one spouse enters the nursing home, and the couple has “too many assets.” ↩︎
  6. Supplemental” needs trust is synonymous with “special” needs trust. ↩︎
  7. Both “first party” supplemental needs and “pooled” trusts are typically funded with the child’s assets, but a significant distinction between the two types of trusts is how they are administered.  A first-party trust is private, whereas, with a pooled trust, assets are combined and managed collectively with other children’s assets. ↩︎
  8. Transfers to 1st party or to a Sole Benefit SNT are authorized under 42 USC S 1396p
    ( c ) (2)(b)iv.   “Any individual shall not be ineligible for medical assistance to the extent that the assets were transferred to a trust (including a transfer to a trust described in subsection (D)(4) established solely for the benefit of an individual under the age of 65 who is disabled (as defined in Section 1382C of this title) ….”     ↩︎
  9. There are some good lessons in these examples.  First, it shows the value of creating and funding a third-party supplemental trust well ahead of time (to avoid the requirement of a “payback”).  Second, it shows how important it is to have a well-prepared power of attorney that allows the creation and funding of these specialized trusts, even if one has lost capacity. ↩︎
  10. This payback requirement is a strong incentive to plan ahead of time, as assets transferred in advance of a crisis do not have to be paid back to the state. ↩︎

About the Author
Theresa M. Varnet is a Special Needs Attorney in the firm’s Trust & Estate department. She is active in many special needs organizations, including the Special Needs Law Committee of the National Academy of Elder Law Attorneys, of which she is co-chair. Ms. Varnet is a former certified teacher and a former licensed social worker. Her practice focuses upon Special Needs Planning for families and individuals with special needs of all kinds.
About the Author
Michael T. Lahti is a Trust & Estate Attorney and Chair of the Elder Law practice group. He has practiced law since 1995 and is a prolific public speaker, having conducted hundreds of educational seminars on a number of legal topics related to his practice, including how to reduce estate taxes and how to avoid probate. His practice includes estate planning, taxation, probate, estate and trust administration, elder law, and long-term-care planning. He regularly counsels families on how to protect assets from nursing home and long-term medical care expenses.
Posted on
Supplemental Needs Trusts and Nursing Home Planning: The Intersection of Elder Law Planning and Special Needs Law Planning
By Theresa Varnet
Of Counsel

The greatest fear that parents or grandparents of a special needs child1 (child refers to both minor or adult child) have is what is going to happen to their child or grandchild when the parent or grandparent dies. Due to their concerns, many parents or grandparents will include a supplemental needs trust in their estate plan. The supplemental needs trust will be funded with a lifetime gift or at the parent’s or grandparent’s death. A properly worded and managed supplemental needs trust will preserve the child’s eligibility for needs-based governmental benefits while providing the special needs child with a higher quality of care during their lifetime than he or she could otherwise afford on benefits alone. If parents die with their estate intact, the share of the inheritance for the special needs child will pour over into a 3rd Party Supplemental Needs Trust.

However, what happens to the intention to provide additional funds for a child or grandchild with special needs if the grandparent or parent requires long-term nursing home care? For many families, the high cost of potential long-term nursing home care presents a severe impediment to providing an inheritance for their disabled child.

Many families want to protect their assets from nursing home expenses. This article discusses strategies that can be used to protect assets, starting with a discussion of some Medicaid planning nursing home terminology, then highlighting the power of advance planning, and concluding with a discussion of how some protective trusts can be set up for children with disabilities and how these trusts can be woven into the estate plan when families are trying to protect assets from nursing home costs.

FIVE-YEAR “LOOKBACK”

Generally, strategies can be distinguished by whether the planning was done ahead of the look back period or within the lookback period. Elder Law Attorneys are familiar with a 5 year look back period but often our clients are not. A simple explanation to help our clients better understand the lookback period is to explain that the lookback period applies when one needs Medicaid funding to pay for nursing home bills. At that time, an applicant files a Medicaid application and asks the state for help paying the nursing home costs. Up to five years’ worth of financial statements may be reviewed when the Medicaid application is processed. If disqualifying gifts have been made within the five-year period, then the state will apply a “penalty period” measured by the amount given away. During the penalty period, the state will not help with medical costs, which is devastating.

Simply put, the laws prevent a person from giving his or her assets away one day and getting state help with a nursing home bill the next.

PRE-CRISIS PLANNING

The most effective planning is done well before a crisis occurs. A typical strategy involves creating and funding an irrevocable trust five years before an application for Medicaid is filed. Although very useful, 

this strategy is not perfect, and some resist doing this because there is an inherent loss of control over assets put inside the trust2. This reluctance to plan in advance can become an impediment to effective planning.

CRISIS PLANNING

If one’s health declines precipitously and assets are at risk of being spent down on long-term care, there are still options. For instance, married couples may consider wills that contain “testamentary” trusts3. These are specialized wills used for married couples. When the “first” spouse dies, assets passing under the deceased spouse’s will flow into a trust for the surviving spouse.  This trust protects assets within it without the five-year lookback constraints. Of course, this strategy has limits because (1) a spouse must pass away for the plan to work, and (2) in most instances, it is tough to predict which spouse will pass away first4. Other crisis strategies include spend-downs, last-minute gifts combined with promissory notes to save some, but not all, of the assets (for Rhode Island residents), and specialized annuities5. These crisis strategies are beneficial, yet they are not perfect.

SUPPLEMENTAL NEEDS TRUST OVERVIEW

Federal and state laws provide protections for children with disabilities. One of the most important strategies is a supplemental needs trust6. Supplemental needs trusts maximize the assets for a child’s care. Without such trusts, assets left directly to a child on a means-tested public benefits program (like SSI or Medicaid) cause the child to lose benefits. And those lost benefits remain unavailable until the child has spent down assets to a pittance, at which point the child can reapply for benefits. This result is nothing short of a disaster, as the assets help the state instead of the child. This problem can be avoided with a supplemental needs trust.

There are two broad categories of supplemental needs trusts: one that must, upon the child’s death, reimburse the state for care provided during the child’s lifetime, and one that does not have to reimburse the state (so assets go back to the family). Trusts that have the “payback” requirement can be further categorized as “first-party” supplemental needs trusts and “pooled” trusts7. Trusts that do not have the payback requirement are called “third party” supplemental needs trusts.

Understanding this, one may ask why anyone would ever want to establish a trust that pays assets to the state upon the child’s death. The answer is that sometimes, it is the only option. The first situation would be when the assets belong to the child, or the child has a legal right to the funds (such as child support).  When the child has a legal right to or ownership rights to the funds, a payback supplemental need trust is required. So, instead of requiring the child to spend down all of his or her assets and then forcing the child to live entirely off of his or her government benefits, the first-party Supplemental Needs Trust allows the beneficiary to receive the needs-based benefit and enjoy a higher quality of life by supplementing his or her benefit with the assets which have been placed in the first party (payback) supplemental needs trust.

The second situation when a payback-type supplemental needs trust might be used is when a parent or grandparent requires medical care, nursing home care, or in-home supports and cannot wait out the five-year lookback period. By transferring his or her own assets to a first-party supplemental needs trust for the sole benefit of a child or grandchild with a disability, which is not subject to the five-year lookback period, the assets will be preserved for the disabled child’s benefit. In other words, a parent or grandparent can give his or her money today to a first-party supplemental needs trust and qualify for Medicaid tomorrow to pay for his or her long-term medical needs. Note: In some cases, a Sole Benefit Trust can be used without adding a payback clause8.  In this case, the trust must make actuarially sound distributions, as no one else can benefit from the trust. Depending on the age, amount transferred to the trust, and the annual needs of the beneficiary, the Sole Benefit Trust may work. When in doubt about whether it is practical for the trust distributions to be made on an actuarially sound basis, it is recommended to use a d4A or d4C supplemental needs trust.

It is recommended that the parent or grandparent sign a durable power of attorney for property that authorizes one’s agent to transfer their assets to a first-party supplemental needs trust for the benefit of a child or grandchild who is disabled in the event it is ever in the parent’s or grandparent’s best interest to qualify for Medicaid funded medical or nursing home care. The reason it is recommended to sign a durable power of attorney is if a senior has a stroke or other serious illness, he or she may no longer be competent to transfer his or her own assets. A signed durable power of attorney with a specific gifting power to transfer assets to a supplemental needs trust will enable the transfer to occur and the application made to Medicaid without delay. It may also be recommended to create a ‘stand by’ first party supplemental needs trust as the law allows a parent, grandparent, legal guardian, court of law, or the individual with a disability himself or herself (if competent to do so), to create a first-party supplemental needs trust. If a standby trust is created, the agent under the power of attorney can simply make the transfer to the first party supplemental needs trust. Otherwise valuable time may be lost petitioning a court of law to create the first-party supplemental needs trust if the disabled individual is incapable of creating the trust.

Here are some quick examples below that show how important this can be:

Example 1: Susan Smith is 80 years old, and her health is rapidly declining. All indications are that she will need nursing home-level care within five years. She is the surviving parent of Peter Smith. Peter is 60 years old and has been disabled since birth. Susan’s primary goal is to maximize what is left to Peter, and she wants to know if it is too late to protect her assets from being spent on nursing home care. In this situation, Susan could establish and transfer assets into a ‘first-party” supplemental needs trust (that contains a payback provision to the state) for Peter. The supplemental needs trust will benefit Peter, and upon Peter’s death, any remaining assets in the trust will be paid back to the state for Medicaid-funded benefits provided to Peter during his lifetime.

Example 2: Assume the same facts above, except in this example, Susan has suffered a stroke and has become incompetent, with a prognosis of an extended nursing home stay. In this second example, Susan’s appointed “agent” under her durable power of attorney could transfer Susan’s assets into a first-party supplemental needs trust (with a payback provision) for Peter, and Susan’s assets will be preserved for Peter to use throughout his lifetime.9

Wrapping this all together, we might instruct an otherwise healthy client who wants to (1) protect assets from nursing home costs and (2) preserve assets for a child with a disability to set up an irrevocable third-party supplemental needs trust (which does not have to pay the state back upon the child’s death).  If this is done five years before the parent’s nursing home crisis, the assets placed in the supplemental needs trust should be insulated from the parent’s nursing home costs and remain protected for the child with a disability, enhancing the child’s quality of life until the child deceases, at which point assets remaining would pass back to family members free of any claim by the state. Alternatively, if the declining health of a parent prevents this optimal planning from working, we could still instruct the client on how to protect assets from the nursing home and protect such assets for the child’s lifetime, subject to the payback requirement10.

SUMMARY

Supplemental needs trusts offer essential solutions for families who have children with disabilities.  Families who plan well in advance can achieve asset protection from nursing home costs and for their children without diminution of the assets upon the child’s death.  Families who have not planned well in advance still have powerful planning options to protect their property from the high costs of nursing home care.  

If an attorney has elderly clients or a younger client with health challenges, who have a child or grandchild with a disability, he or she may want to consider having a discussion of the five year look back period for qualifying for Medicaid and the need to plan for the possibility of needing nursing home care to preserve assets for a special needs child or grandchild.

(1) Discuss with clients the possibility of funding and making an irrevocable third-party supplemental needs trust that does not contain payback provisions, 

(2) Consider preparing and nominally funding a first-party supplemental needs trust that does have payback provisions, to be on “standby” to receive assets in a crisis and, 

(3) Discuss updating the client’s powers of attorney so that it contains the specialized language needed to transfer assets to the standby trust in a crisis.

Being proactive in Medicaid Planning can preserve funds for the future enjoyment of a child or grandchild who is disabled.

  1. In this article, “children” or “child” refers to relationship as opposed to age.  For instance, “my child” could refer to a minor or adult child. ↩︎
  2. Valuable protections can nonetheless be built into the trust to retain “income” and the right to “occupy” property. ↩︎
  3. A “testamentary” trust begins upon a person’s death, as opposed to being created while a person is living (a “living” trust). ↩︎
  4. Typically, assets are titled one-half in one spouse’s name and one-half in the other spouse’s name, with the idea that if one spouse dies (whoever it is), at least some assets will be protected.  Thus, this “fallback” strategy is not always perfect because, by its nature, it protects only a portion of the assets. ↩︎
  5. Some annuities can be used as a spend-down for married couples where one spouse enters the nursing home, and the couple has “too many assets.” ↩︎
  6. Supplemental” needs trust is synonymous with “special” needs trust. ↩︎
  7. Both “first party” supplemental needs and “pooled” trusts are typically funded with the child’s assets, but a significant distinction between the two types of trusts is how they are administered.  A first-party trust is private, whereas, with a pooled trust, assets are combined and managed collectively with other children’s assets. ↩︎
  8. Transfers to 1st party or to a Sole Benefit SNT are authorized under 42 USC S 1396p
    ( c ) (2)(b)iv.   “Any individual shall not be ineligible for medical assistance to the extent that the assets were transferred to a trust (including a transfer to a trust described in subsection (D)(4) established solely for the benefit of an individual under the age of 65 who is disabled (as defined in Section 1382C of this title) ….”     ↩︎
  9. There are some good lessons in these examples.  First, it shows the value of creating and funding a third-party supplemental trust well ahead of time (to avoid the requirement of a “payback”).  Second, it shows how important it is to have a well-prepared power of attorney that allows the creation and funding of these specialized trusts, even if one has lost capacity. ↩︎
  10. This payback requirement is a strong incentive to plan ahead of time, as assets transferred in advance of a crisis do not have to be paid back to the state. ↩︎

About the Author
Theresa M. Varnet is a Special Needs Attorney in the firm’s Trust & Estate department. She is active in many special needs organizations, including the Special Needs Law Committee of the National Academy of Elder Law Attorneys, of which she is co-chair. Ms. Varnet is a former certified teacher and a former licensed social worker. Her practice focuses upon Special Needs Planning for families and individuals with special needs of all kinds.