Medicaid Planning and the Use of Trusts

Colorado Statutory Exception Trusts and Third-Party Special  Needs Trusts: Planning with and using these tools in Colorado for Medicaid qualification and continued benefit


Medicaid is a public assistance program funded jointly by each state and the federal government.

Medicaid covers various medical services and is a needs-based program where eligibility is determined by three requirements:

1. The Categorical requirement, which refers to the medical needs of the individual;

2. The Income requirement, which limits the amount of income an eligible recipient may receive; and

3. The Resource requirement, which requires that to qualify for Medicaid benefits, the applicant must have no more than $2,000 in countable assets.


Medicaid Qualification

If an individual has more than $2,000 in countable assets, which would otherwise disqualify that individual from receiving Medicaid benefits, the individual may, with proper planning, convert assets to qualify.

First, the individual may convert “countable assets” into “exempt assets” by shifting value.  This can be accomplished by, among other things, improving the home, purchasing a vehicle equipped for wheelchair transfer, or purchasing irrevocable pre-paid funeral services. Additionally, with enough time, an individual who may need to qualify for Medicaid in the future can give away assets to family members or others without adverse qualification consequences.   It is important to consult with a trusted professional about these alternatives before implementing them.


The Resource Requirement and the Use of Trusts in Medicaid Qualification

There are two situations that could hinder the ability of an individual to either qualify for Medicaid or continue to receive benefits.  The first situation arises when an individual with more than the maximum amount of “countable assets” needs to qualify for Medicaid and does not have the ability or time to convert enough of these assets to “exempt assets”.  A Statutory Exception Trust may be a solution for this situation.  The second situation arises when an individual has or will qualify for Medicaid but has family or friends who wish to provide assets to the individual for care.  Without planning, the assets put aside for the Medicaid recipient would diminish the amount of value Medicaid would provide over the life of the recipient.  A Third-Party Special Needs Trust may be a solution in this situation.



Statutory Exception Trusts

In those instances where an individual will have more than the $2,000 allowed under the resource requirement at the time of Medicaid qualification, one of two statutory exception trusts may enable the individual to become Medicaid qualified.  These trusts operate by allowing a Medicaid applicant to place assets in trust, for the applicant’s future benefit, yet have the assets excluded from his or her countable assets.  The first such trust is known as a Disability Trust and must be established for the benefit of a disabled individual who is under the age of sixty-five.  At the termination of the trust, the remaining assets must be used to repay Medicaid for benefits received during the beneficiary’s lifetime.  The second trust is known as a Pooled Trust and must be managed by a non-profit corporation such as The Colorado Fund for People with Disabilities.  There is no age restriction as with the disability trust.  At the termination of the trust, the remaining assets are retained by the trust for charitable purposes.  Therefore, although the statutory exception trusts allow an individual with assets in excess of the $2,000 maximum under the Medicaid resource requirement to qualify for Medicaid benefits, the individual’s assets may not be preserved for transfer to family members at the individual’s death.

The Third-Party Special Needs Trust

In those instances where a family member or other person wishes to provide benefit to the Medicaid recipient, a Third-Party Special Needs Trust may be used to eliminate the reduction in benefits (or disqualification) that would otherwise happen if such person put assets aside directly for the care of the Medicaid recipient. These trusts are powerful tools to allow a loved one to ensure assets are made available for the disabled individual, during that person’s lifetime.  After the death of the disabled individual, the remaining assets in the trust are not used to repay Medicaid or for charitable purposes but instead may be moved to other family members.  The assets in these trusts are not available for Medicaid purposes because the trust is discretionary) and the trust is written so that it places a prohibition on distributions to the Medicaid beneficiary that would affect Medicaid qualification.

There is a third trust, known as a “Miller trust” or “Utah Gap Trust,” that can be used to provide an exception to the income requirement.

Planning with these trusts should only be initiated by families using the guidance of a trusted and experienced professional.

© Tanya Shimer.  All rights reserved.