Medicaid Trust Agreements

Medicaid is a federally subsidized state-run program that provides basic and catastrophic medical care coverage to the poor, indigent and handicapped. Medicaid provides a large share of custodial care services to the developmentally handicapped as well as to elderly residents who need nursing home care. However, in order to qualify for Medicaid, individuals cannot own significant assets. If they should come into possession of more than the state Medicaid guidelines allow, they disqualify themselves for Medicaid and must spend themselves back into poverty before they can qualify again. Medicaid trusts are an important tool in preventing the accidental disqualification of needy individuals for Medicaid and other need-based government services.

Medicaid Trusts

• A Medicaid trust -- also called a "special needs trust" is a legal entity set up to own assets on behalf of a Medicaid beneficiary. The Medicaid recipient, or prospective recipient, cannot own the assets directly. Instead, assets are transferred to a Medicaid trust, which owns the assets and dispenses as much in benefits or income as possible without disqualifying the recipient from receiving Medicaid, food stamps or other needed services.

Legal Basis

• The legal rationale for Medicaid trusts is in U.S. Code Ch. 42, Section 1396 (p)(d)(4)(B). The law sets forth the basic qualifications for Medicaid trusts and for their exemption from the normal Medicaid eligibility criteria.

Application to Other Government Programs

• In addition to the Medicaid eligibility income and asset limits, the Social Security Administration imposes an asset limit of $2,000 on SSI payments, made to the poor and disabled. Different states also impose different limits on income and asset eligibility for a variety of state health programs, food stamp programs, women-infant-children (WIC) programs, financial aid programs for education and many others. Assets held in trusts, including Medicaid trusts, do not generally count against individuals trying to qualify for these benefits, so long as the trusts are irrevocable -- meaning, there is no way for the beneficiary to reclaim the assets and control them.

Applicability

• Medicaid and special needs trusts are frequently set up by parents of handicapped children. The child needs access to Medicaid, food stamps and other forms of support, but he loses access to programs designed to support children when he turns 18. A special needs trust allows parents to leave assets for the benefit of the child without necessitating the transfer of the family's wealth to the Medicaid system as the their adult handicapped child spends himself back into poverty. If the child inherited assets directly, the law would require that these assets be spent on care and services before qualifying for government assistance. By setting up a trust and allowing the trust to inherit assets, the child will not be accidentally disqualified and the assets will be preserved.