Case Law Update: Funding a Special Needs Trust for Someone Over Age 65


By: Jerold E. Rothkoff, Esquire

The 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 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 PA Department of Public Welfare from barring individuals age 65 and older from using a pooled trust for 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 Pennsylvania law is unenforceable because it is more restrictive than what is permitted under federal Medicaid law.

The Lewis decision 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.

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