On its face, Medicaid doesn't seem to have a whole lot do with estate planning or wealth management. It is, after all, a needs-based (or means-tested) government benefit program. And even after Obama-care's Medicaid eligibility expansion takes effect, patients will need to have incomes near the poverty line to qualify.[1] But for testators/donors with special-needs family members, Medicaid has long been a consideration in estate and gift planning. This article will briefly examine Medicaid's historic role in wealth planning, as counterintuitive as that sounds, and look at how the health bill may change things.
It is not news that until the health overhaul takes full effect, insurers are free, as they have been, to pick and choose insureds, to drop coverage easily, and to impose lifetime limits on claims. As a result, disabled individuals, even those with means, or with families with means, often find themselves both unable to work and unable to buy insurance. In most states, if such individuals are "lucky enough" to be "poor enough" to qualify for Supplemental Security Income (SSI) (a means-tested cash benefit for the elderly and medically disabled), they qualify for Medicaid automatically[2].
If, on the other hand, a disabled person has the "misfortune" of having more than $2,000 in resources[3] and/or $694 in monthly income, she would be either uninsurable or eligible for Medicare alone - a far less substantial benefit[4] that requires a two year waiting period from the time disability payments begin for coverage to take effect.
And so, if Testator leaves Disabled Daughter, currently eligible for Medicaid, a $100,000 bequest, she would generally lose her Medicaid coverage until the inheritance is spent down. Thus, without a specialized method of providing for medically disabled loved ones, testators would have to choose between disinheriting them (rock) and interrupting their medical coverage (hard place).
Enter the Special Needs Trust. An advent of social security law, a so-called "special needs trust" can be set up either by the Medicaid beneficiary herself, with her own assets (first party SNT) or by a family member or other third party, with his own assets (third party SNT). As long as a testator/donor sets up the SNT to comply with certain guidelines, funds in the SNT will not be imputed to the beneficiary and therefore will not affect her Medicaid eligibility. Although this is an oversimplification, the primary difference between third-party and first-party SNTs is that upon the death of the Medicaid beneficiary in a first party trust, the trust administrator must "pay back" the state for reimbursements made under Medicaid during the life of the trust[5].
What all this means for estate/gift planning in the face of the new health care bill is a little hard to pin down just yet. But one thing is clear - the landscape of planning for special-needs family members has fundamentally changed. Once the Patient Protection and Affordable Coverage Act of 2010, as amended, reaches its full effect in a few years, the problems that created a need for SNT's to begin with will largely be solved, or at least, less acute.
As a caveat, I don't pretend to be an expert in the new bill or to have read many of its 2000+ pages in great detail. But based on the widely reported features of the bill, a few remarks are in order regarding SNT planning in the future.
Since insurance companies will not be able to exclude applicants based on their health histories, insurance will be "buyable" by even the sickest insurance applicants. Depending on the features of available private plans, some disabled people, who are on Medicaid with the help of SNTs, may choose to pay for private plans with desirable features.
And although those who are currently funding, or planning to fund, an SNT may see this change of landscape as reason to drastically change course, conservatism should probably carry the day. The chips from health care reform have yet to fall; private plans may not be able to compete with Medicaid benefits.
[1] 133% of the poverty line, to be exact. Crowell Moring, Summary of Health Care Reform Legislation. Prior to the health care overhaul, patients with over $2000 in resources, excluding some basis assets, were excluded. See David J. Lillesand and Marjorie E. Wolasky, Chapter 17, Special Needs Trusts, in Administration of Trusts in Florida, 6th Edition, 2009, at 17-9.
[2] Id. at 17-10.
[4] See Id. at 17-9. See also, The Government's Medicare Website,
[5] Note that this is hardly as ominous at it might first seem. See David J. Lillesand and Marjorie E. Wolasky, at 17-28. Lillesand and Wolasky note that the government essentially makes a loan of medical care at reduced Medicaid rates which can only be called, with no interest, when the person dies, if there are funds available. Id. In addition, no federal rules require the trustee to set aside funds in anticipation of Medicaid payback. Id.
Leave a comment