Question:

Mom creates and funds a special needs trust for disabled child who’s under the age of 65. Mom plans to leave a 1/3 interest in the house to the trust. If child is over the age of 65 when mom passes on, I’m wondering if the Medicaid rules would prevent or disqualify the transfer, via mom’s will, to the existing special needs trust. It would seem that a transfer to a pooled trust of the child’s 1/3 interest in the house, outside the special needs trust, wouldn’t be an option at mom’s death. If mom were to transfer the 1/3 interest now and not make it through the 5-year look-back rule, would transferring the interest back to mom, if need be, disqualify the trust?

Response:

It looks like we’re mixing and matching a few rules here. There’s no Medicaid penalty for a transfer into trust for the sole benefit of a child with a disability no matter the child’s age or, in fact, the parent’s age. This exception applies to transfers to either a special needs trust or a pooled disability trust. So Mom should follow through with her plan to leave a third of the house in trust for her disabled child.

The question is whether to make that transfer now rather than waiting until her death. Here’s where things get a bit more complicated. There are three kinds of trusts into which she can transfer the funds—a third-party special needs trust, a (d)(4)(A) trust or a (d)(4)(C) pooled trust. The benefit of a third-party trust over the other two kinds is that it can have other beneficiaries either during the disabled child’s life or upon his death. But if the trust did have other beneficiaries, transferring the house interest into it during Mom’s life would make Mom ineligible for Medicaid benefits for up to five years after the transfer. There is no such transfer penalty for a transfer to either of the other trusts, but they would require that Medicaid be repaid its expenses on behalf of the disabled child (not Mom) upon his death.

So, if Mom is likely to be healthy for the next five years, she could transfer the disabled child’s interest in the house into a trust for his benefit with no Medicaid repayment provision. But if her need for care is imminent, she would have to use a (d)(4)(A) trust or a (d)(4)(C) pooled trust which she could do even after moving to a nursing home, just so she’s competent to make the transfer or someone else can do so at that time through a durable power of attorney.

Finally, you seem also to be asking what would happen at Mom’s death if she received Medicaid benefits during her life and had not transferred the a one-third interest in the house during her life. Then it would be subject to Medicaid estate recovery. However, it may qualify for a hardship exception depending on the rules for such exceptions in her state.

Related Articles:

Can My Son’s Special Needs Trust Own a Share of My House?

Transferring House to Child with a Disability

(d)(4)(C) or Pooled Disability Trusts Shelter Assets for the Disabled

The (d)(4)(A) Trust Safe Harbor for Medicaid and SSI