Photo Credit: MicrosoftThe general rule relative to Medicaid eligibility is that all transfers from a person are considered to be available to them for 5 years from the date of transfer, thus denying the person making the transfer from obtaining institutionalized benefits. This includes any portion of a trust that could be payable to him. However, with all ‘rules,’ there are exceptions, and Congress has exempted certain trusts from Medicaid’s available resource provisions, and from the transfer penalty provisions that apply to Medicaid long-term care services, so long as the trusts meet certain requirements.

For example, a special needs trust allows money to be set aside to provide for the special needs of individuals who require or may someday require Medicaid benefits, without affecting the beneficiary’s eligibility for these benefits. Likewise, a pooled trust is a type of special needs trust that is managed inexpensively by pooling large numbers of accounts, while providing disabled people with financial resources to be used for a variety of their needs.

In 2005, Pennsylvania enacted limitations (Section 1414) on the use of pooled trusts that imposed restrictions based on: the disabled individual’s age; the characteristics of the expenditures trusts can make to the disabled person; and what percentage of any funds remaining in the trust after the individual’s death can be retained by the trust to assist other individuals. The act also included a death penalty provision that allowed for termination of the entire trust for all beneficiaries if the trustee violated the act as to any single beneficiary. 

In response to this legislation, two Pennsylvania pooled trusts and related plaintiffs filed suit seeking to prohibit the Department of Public Welfare from barring the provisions of section 1414 that restrict Medicaid eligibility and require a minimum of 50% state reimbursement from the pooled trust. A federal court, in the recently decided case of Lewis v. Alexander, ultimately held that much of Section 1414 is unenforceable because it is more restrictive than what is permitted under federal Medicaid law. 

Specifically, the Lewis court held the following provisions unenforceable because they are in conflict with, and more restrictive than, controlling federal law:

 

  • The special needs requirement which requires that the beneficiary must have special needs that cannot be met without the trust;
     
  • The age requirement, and the court concluded that disabled persons age 65 and older may form a pooled special needs trust;
     
  • The expenditure restrictions that required all distributions to have a reasonable relationship to the needs of the beneficiary;
     
  • The 50% pay-back provision, which states that a pooled trust may only keep 50% of the remainder left in the account after the death of a beneficiary, without an obligation to reimburse the state for Medicaid expenses. The court held that pooled trusts may elect to keep the entire amount remaining in the beneficiary’s account at death; and
     
  • The court negated the death penalty provision.

 

Although the court prohibited the Department of Public Welfare from applying or enforcing the aforementioned restrictions, the remaining provisions of Section 1414 are still valid. 

The decision in Lewis is a significant victory for special needs individuals, as it clarifies that disabled people age 65 and older are permitted to form pooled special needs trusts. This provides elder law attorneys and their clients with an additional planning tool to allow the creation and funding of trusts for a disabled person, even when it appears that a long term institutionalization may be at hand. 

Of course, there are some adverse consequences, such as the fact that the funds are not repaid to the family after the death of the beneficiary. However, the funds are available during that person’s life, without the need to spend them for daily care, which is usually a preferred option, as opposed to spending the funds on long term care expenses, which would otherwise cause the entire sum to be expended without any possibility of use of the funds for non-necessary expenses. 

This case is an important victory for individuals with disabilities and their families since it provides an alternative in the long term planning process. The area of special needs trust planning often requires updating and conforming to laws and regulations that may change. Therefore, one considering establishing a pooled trust or similar option should be sure to engage a qualified legal professional before merely signing up to fund a pooled trust.

.