Use Different Trusts for Different Purposes

This is Strategy #9 from Lamson & Cutner’s publication, “25 Strategies to Prevent Financial Ruin from Long-Term Health Care Costs.”  Click here to see the other strategies.

Another way trusts can be used is to shield cash, and monetary assets that are readily convertible to cash. For example, if you own bank accounts, Certificates of Deposit and securities, Medicaid will insist you use these assets to pay for your care, before it provides a dime of benefits, thereby leaving you completely responsible for your medical costs. By transferring these financial reserves to a trust, they can no longer be regarded as your “resources” for Medicaid purposes. The assets are protected, and the income generated by them can be used to pay for your costs of living.

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Medicaid Trusts are structured so that the money or income can be used to cover your expenses. That means the income can be spent to maintain the lifestyle you’ve worked hard to create. Aside from protecting your assets from Medicaid eligibility requirements, use of a trust is almost always preferable to transferring money to children directly.

Here’s why.  Most trusts protect the money from exposure to future creditors, lawsuits, and legal liability. If a child is holding your money, and either a) gets in an auto accident and is at fault, b) suffers a business failure or a divorce, or even c) dies before you, the money could be exposed to potential loss. Money placed in most trust structures has far better protection than funds held by individuals.

There is a different kind of trust that is designed to protect income you receive. Most senior citizens receive Social Security every month and many have pensions. Medicaid limits income you can keep for yourself to a specific amount each month.  The number increases by a small amount each year. If you’re an individual who needs home care, and you do not act to protect your income, your monthly income in excess of the Medicaid limit would have to be contributed to the cost of your own care. Please refer to our Medicaid Quick Reference Chart for the current income limits for this year.

It is difficult in New York to live on the monthly Medicaid income limit.  Once again, trusts come to the rescue. With a Pooled Income Trust, you can retain the benefit of all your income and have Medicaid pay for home care. Here’s how it works.

Pooled Income Trusts can be established with several non-profit organizations that are authorized to operate them for the benefit of disabled persons. For investment and management of funds, your income is “pooled” together with the resources of other participants.  However, your contributions are held in a separate account, segregated for your needs only. As an example, let’s say you receive $2,500 per month in Social Security and pension benefits. The excess amount over Medicaid’s “income limit” (see the Quick Reference Guide for the current limit), is sent to the trust every month. The trust will use this money to pay your bills and expenses, following your instructions.

Through the Pooled Income Trust, your excess income can be used for food, monthly rent or mortgage, phone, electric, home repairs – just about anything you’d normally pay for (except medical insurance and many medical bills, which aren’t counted toward your monthly limit). The non-profit essentially functions like a bill paying service, and takes a small monthly processing fee. When you pass on, whatever is left in your account will be used by the organization for charitable purposes.

The net result of this strategy is you’re able to save what Medicaid deems your “surplus income” and use it to pay for the same things you regularly would. The alternative is having to contribute it to the cost of your care under Medicaid regulations. With this approach, you retain your lifestyle while still qualifying for Medicaid benefits.

In an actual case involving an elderly woman who needed 24-hour care, her condition deteriorated to a point where her family was no longer able to attend to all her needs. We protected her income with a Pooled Income Trust. Next, all her assets were transferred to a second protective trust. Then a Medicaid application was filed for home care assistance, which was approved. The result: she obtained and continues to get around-the-clock, fully paid care. In fact, we recently processed her recertification. Just as important, she can comfortably remain in her own home with her family, maintaining her quality of life and dignity.

Disabled people under the age of 65 also gain special advantages through First Party Supplemental Needs Trusts.  If you’re disabled and have received a substantial sum through a personal injury lawsuit, an inheritance or a gift, these trusts can protect you from loss of your government benefits. Without an asset protection strategy, Medicaid will insist that you use it to pay for your care.

Compounding this difficulty, receiving a gift or settlement will also cause you to lose any Supplemental Security Income (SSI) you may be receiving from the Social Security Administration, until the entire amount is spent down to a level of $2,000. Transferring the money to someone else doesn’t solve the problem either – if you do, you’ll lose your SSI for three years. So that means instead of your cash windfall supplying a lifelong financial and quality of life improvement, you now have significant out-of-pocket medical expenses Medicaid used to cover, and you’ve lost income. Here’s a trust strategy that gives you a way around it.

If you qualify, have a First Party Supplemental Needs Trust set up for your benefit. By federal law, this structure will protect your assets without jeopardizing Medicaid or SSI benefits. One condition you’ll have to accept is that these are “pay back” trusts, meaning that, if anything is left in the trust after you pass on, Medicaid will be reimbursed for the cost of your care from the remaining balance.

If a relative or other person wants to provide money for your benefit, whether as an inheritance or a gift, there’s an even better variation of the strategy. It’s called a Third Party Supplemental Needs Trust. The funds go into the trust rather than to you directly, and you get to keep your government benefits. With this trust, your age doesn’t matter, and there’s no “pay back” provision. Any person who wants to financially assist you can create this type of trust while he or she is alive, or have the trust become operative after he or she dies. If the creator of the trust is your spouse, he or she must set it up in a Will.

Additionally, just as with most of the other trust vehicles already mentioned, a Third Party Supplemental Needs Trust gives you excellent protection against future creditors, not just Medicaid. If you end up in a lawsuit, the money is more effectively sheltered than it would be outside of a trust, giving you greater peace of mind about your financial security.

Here’s a specific example of how these proven methods are used to safeguard your benefits, and preserve the money you received for your long-term financial support:

In a case Lamson & Cutner handled involving disability, a young man was severely injured when he was improperly shoved by a security guard. He received a substantial cash settlement because of this injury. L & C assisted his grandmother with the creation of a First Party Supplemental Needs Trust. The young man got a major financial benefit through effective planning, as he was able to use the money from the cash settlement, without losing his SSI and Medicaid benefits.

Once again, every case is individual and unique, and you’ll need proper advice on what trust configuration will deliver the maximum advantage. Different trust strategies apply to various economic and family situations, and according to whether you need home or nursing facility care. The bottom line is that to qualify for Medicaid benefits, money and assets must be moved out of your name. Trusts are the most effective way to do it, and they’re fully authorized for this purpose under Federal and New York laws.

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