• Lee Franks

Supplemental Needs Trust Case Study

Late last month, I posted some general information about trusts and a little more specific information about supplemental or special needs trusts. To help reinforce what I presented in that post, I thought I would give you an example inspired by an actual case.

Juanita, a widow living in Texas, died , and her will left everything outright to her three children equally: Jane (58), Judy (55), and John (50). At the time of her death, she owned a Texas residence and a car, both paid for, a checking account solely in her name with a balance of $12,000, and a $60,000 savings account jointly owned with Judy with rights of survivorship.

As a result of Juanita's death, all three children gained an undivided one third interest in the residence, the car, and the checking account, but the entire savings account went to Judy because she was the sole survivor on the account. However, all three knew that Juanita had intended that the savings account go to the children equally, and Judy intended to follow her mother's wishes.

BUT (there's always a 'but', right?) both Jane and John were disabled, and both were receiving Supplemental Security Income or SSI which is a means-tested Social Security Program that automatically includes Medicaid. Jane did not reside in Texas; she lived in a rented apartment in Georgia where she was receiving treatment for a rare condition costing approximately $10,000 each month. John, who was disabled from an accident when he was 27, lived in the Texas residence, and he was the only one using the car.

Juanita could have avoided the subsequent issues if she had worked with an attorney who understood both Medicaid and SSI. Although both programs have income limits, the problem here is that both SSI and Medicaid (in Texas and Georgia) limits recipients to less than $2,000 in countable resources. In general terms, Medicaid and SSI count EVERYTHING against the $2,000 resource limit EXCEPT a residence, a car, IRAs and 401(k)s if the person is over 65. And both programs penalize most transfers of assets made by a person to become or remain eligible for one or both of the programs.

There are some exceptions to the transfer penalty though, and one exception applies well in this case. Although the distributions to Jane and John were income in the month received, since they are under the age of 65, they both can create, or have created for them, self-settled or d4(A) supplemental needs trusts, and each can transfer the money received from Juanita's estate to the trustees of their respective trusts. Remember that Medicaid has first whack at anything left in a self-settled trust upon the death of the beneficiary.

As for the car, John or John's trust can buy Jane's and Judy's interest in the car which is exempt or not counted for SSI or Medicaid purposes.

The house creates no problems for John, since he has no other residence; neither SSI not Texas Medicaid would count his interest in the residence. For Jane, however, the rules are less clear. To exempt a residence, Texas Medicaid requires that the person must live in the residence with an ownership interest. John did not meet the ownership requirement until Juanita died, but if Georgia has the same rule as Texas, Jane can not exempt the residence because she does not live in it. SSI does not impose either requirement. Jane will have to seek local counsel to resolve the issue as it related to Georgia. (Since SSI more or less guarantees Medicaid eligibility, it would seem unlikely that either state would enforce the rule against an out of state residence.)

But what about the savings account? Since Judy intends to act on her mother's intent, Judy may create one trust naming Jane and John as beneficiaries or she may create two sole-beneficiary trusts for each each and use the savings account to do the funding. So long as the trusts are written to give neither John nor Jane rights to any withdrawal at all and restricts the ability of either Jane or John to interfere in the administration of the trust or trusts, the property in the trusts do not count against Jane's or John's SSI or Medicaid limits, AND Medicaid has no recourse to remaining funds upon the death either Jane or John. These kinds of trusts commonly are called third-party trusts, but often they are drafted almost exactly like the self-settled trusts (except of the part where the Medicaid gets what is left) out an abundance of caution against Medicaid or Social Security finding a technical reason to "count" the trust corpus against the person's resource limits.

And as usual:

All information offered here is educational and does not constitute advice or endorsement of any particular course of action. Complex information is presented here in summary form which necessarily represses multiple details and nuances. And, you are not my client until I agree to represent you, in what capacity that representation will occur, and the scope of the representation will be.

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