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 new 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 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.  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 or wait 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 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 as long as she’s competent to make the transfer or someone else would be able to do so at that time through a durable power of attorney.

But what happens if Mom loses the bet? In other words, what if she transfers a third of the house into a third-party special needs trust for her disabled child’s benefit and then needs to apply for Medicaid herself before five years have passed? As you suggest, most disqualifying transfers may be “cured” by the return of the transferred asset. However, that’s not possible if the transfer has been made to an irrevocable trust. So, unless Mom is young and healthy and very likely not to need care within the next five years, I’d be inclined to leave her current estate plan in place and consider a transfer to a (d)(4)(A) trust or a (d)(4)(C) pooled trust only when and if she needs to apply for Medicaid in the future. That said, if she does go ahead and make a transfer now, she should consider transferring the entire house, not just one-third. The other two thirds could be protected in a trust for the rest of the family. This makes sense, since the other children would not qualify for the transfer penalty exemption.

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