Irrevocable Trusts

In last week’s blog, we offered information about Trusts Generally and Revocable Living Trusts and how they can be used as part of an estate plan to achieve certain goals, such as managing assets while the trustmaker is still living and sparing loved ones the hassle and cost of probate court proceedings to distribute property after the trustmaker’s death.  This week we address irrevocable trusts, which serve different purposes than revocable trusts.

There are various types of irrevocable trusts, each of which achieves specific goals. In elder law, irrevocable trusts are typically used to assist an individual in qualifying for public benefits, such as Medicaid, TennCare, SSI, or VA Aid and Attendance.  These trusts include special needs trusts, qualified income or “Miller” trusts, and asset protection trusts.  Irrevocable trusts allow the trustmaker to preserve funds for his or her own care or to pass a legacy to their loved ones. Below are the irrevocable trusts commonly used in planning for public benefits.

Special Needs Trusts

There are two main types of special needs trusts (SNTs) which can be established for the benefit of an individual with a disability: third party and first party trusts. Third party trusts contain money or assets of a third party for the benefit of a person who is disabled.  First party trusts contain money or assets belonging to the person with the disability.  Below is a brief description of some of the SNTs which we most often use for our clients at Elder Law of East Tennessee.

First Party d4A Trust. A d4A trust gets its name from federal law 42 USC 1396p(d)(4)(A). This type of trust is limited to people who are under the age of 65. It must be established by a parent, grandparent, conservator, or court, not the individual with special needs. This type of trust is ideal for individuals with a disability who need to put assets into a trust to qualify for Supplemental Security Income, Medicaid/TennCare benefits, Qualified Medicare Beneficiary programs, and other benefit programs that are income and asset tested. This kind of trust is self-settled, which means that it is funded with the beneficiary’s own money or assets (such as injury settlements or inheritances) rather than someone else’s assets.

Benefits:

  • Allows person with special needs to receive lump sum of money (inheritance, legal settlement, etc.) without losing public benefits (Medicaid/TennCare, SSI, or VA)
  • Positions person with special needs to meet financial qualifications for public benefits
  • Enables person with special needs to set aside money for living expenses, education, vacations, purchases, recreation, and medical needs not covered by public benefits

Limitations:

  • Must be fully funded by the time the special needs beneficiary reaches age 65
  • Special needs beneficiary may not serve as trustee
  • Cannot be established by special needs beneficiary even if he or she has capacity to do so
  • Payback provision:  upon beneficiary’s death, State is entitled to reclaim funds up to the amount which Medicaid or other benefits program spent on the individual during his or her life

First Party d4C/Pooled Trust. A pooled trust is ideal for individuals with a disability who need to put their assets into a trust to qualify for Medicaid benefits while preserving those assets for their own use throughout their lifetime. This trust can be established by a parent, grandparent, conservator, court, or the individual with the disability and/or his attorney-in-fact. A pooled trust is usually self-settled (that is, funded with the beneficiary’s own money, often money which is gained from an injury settlement or an inheritance). If a pooled trust is funded with money belonging to someone other than the beneficiary, it is called a third-party SNT and is typically not subject to payback requirements. What makes a pooled trust different from other kinds of trusts is that the trustee is a nonprofit organization. When an individual joins a pooled trust, their trust, while maintaining a separate “identity,” is grouped with other people’s trusts for the purpose of investment and management. 

Benefits:

  • Positions person with special needs to meet financial qualifications for public benefits

  • Can be established by the special needs beneficiary or a third party (parent, grandparent, court, etc.)

  • Enables person with special needs to set aside money for living expenses, education, vacations, purchases, recreation, and medical needs not covered by public benefits

  • Not restricted by special needs individual’s age

  • Trustee is a nonprofit organization which invests trust funds conservatively for modest growth

Limitations:

  • Pooled trust fees:  joinder fee, annual fee, and closing fee deducted from trust funds

  • Payback provision (if funded with the special needs beneficiary’s own assets):  upon beneficiary’s death, State is entitled to reclaim funds up to the amount which Medicaid or other benefits program spent on the individual during his or her life

Third Party Trust. The third party trust is typically created by a parent or grandparent for the benefit of a disabled dependent, child, or grandchild.  The assets in the trust are provided by a third party during life or at death, and the beneficiary with a disability gets the benefit of the trust for his or her lifetime.  Because the trustee cannot be compelled to make a distribution to the beneficiary, the trust is not “countable” as an asset for the disabled party.  Benefits should continue for the person with a disability without a problem when the trust is properly drafted.  At the death of the beneficiary, if funds remain in the trust, the funds are passed to other beneficiaries either by the initial trustmaker’s instructions in the trust or by a power of appointment in the beneficiary.  The state is not entitled to any payback from this type of trust.

Benefits:

  • Enables person who wants to give to a loved one with special needs to set aside money for the loved one’s living expenses, education, vacations, purchases, recreation, and medical needs not covered by public benefits

  • Not restricted by special needs individual’s age

  • No payback provision; after beneficiary’s death, funds in the trust are distributed according to the beneficiary’s will

Limitation:

  • Must be created and funded by someone other than the special needs beneficiary

Sole Benefit Trust. The sole benefit trust is another type of third party trust, but it is for the benefit of both the third party and the special needs beneficiary. This kind of trust is generally established by a person who wishes to qualify for Medicaid/TennCare benefits and who has a child or grandchild with a disability. The elder can fund the trust for the family member and qualify for benefits without imposition of a penalty. This type of trust has a payback provision or will be paid out during the beneficiary’s lifetime, and that makes it unusual for a third party trust.

Benefits:

  • Enables person who wants to give to a loved one with special needs to set aside money for the vulnerable loved one
  • Allows the person gifting money to qualify for public benefits, such as Medicaid, SSI, or VA, without incurring a penalty for making the gift

Limitations:

  • Must be created and funded by someone other than the special needs beneficiary

  • Payback provision:  upon beneficiary’s death, the State is entitled to reclaim funds up to the amount which Medicaid or other benefits program spent on the beneficiary during his or her life

Miller/Qualified Income Trust

A Miller Trust, also known as a Qualified Income Trust (QIT), is used by people who are trying to qualify immediately for Medicaid benefits but whose income is too high to meet the strict financial qualifications. The trust holds excess income so that the applicant can receive benefits. Funds held within a Miller Trust can only be used to pay for certain needs, including the medical expenses of the beneficiary, health insurance premiums, spousal support for a current spouse, and minimal monthly bank charges. This type of trust has a payback provision so that Medicaid/TennCare may reclaim all of the funds in the trust up to the amount which Medicaid ever spent on the beneficiary after his or her death.  

QIT Benefits

Benefits:

  • Allows an individual with too much income to qualify immediately for Medicaid benefits

  • Acts as a checking account to hold excess income for a short time

QIT Limitations

Limitations:

  • Funds can only be used to pay for certain medical needs and living expenses

  • Payback provision:  upon beneficiary’s death, State is entitled to reclaim funds up to the amount which Medicaid spent on the individual during his or her life

Asset Protection Trusts for Public Benefits

For those who wish to plan ahead to meet the financial qualifications for Medicaid/TennCare or VA, there are two types of trusts which can be used to achieve this goal.  They are the Family Asset Protection Trust (FAPT) and Veterans Asset Protection Trust (VAPT).  Both of these types of trusts require advance planning.

Family Asset Protection Trust (FAPT). A Family Asset Protection Trust (FAPT) is a type of trust used by people with resources who want to plan for the eventuality of needing Medicaid/TennCare benefits in the future but who do not need to become immediately eligible. This kind of trust enables the individual to qualify for Medicaid/TennCare after a five-year waiting period for transfers of assets has passed. That means that a person who establishes a FAPT typically must wait five years after funding it before applying to become eligible for Medicaid/TennCare benefits. There are some exceptions to this approach, however.

A FAPT may hold a variety of assets, including homes and all accounts except IRAs. All of the income generated by this trust is payable to the trustmaker for life.  The trustmaker will also have the lifetime right to reside in the residence owned by the trust. Trust funds can be withdrawn by the other beneficiaries named in the trust, who are usually the trustmaker’s adult children.

FAPT Benefits

Benefits:

  • Enables the trustmaker to protect his or her own assets while preparing to apply for Medicaid benefits in the future

  • Trustmaker has lifetime right to reside in home which is owned by the trust

  • Trust income is payable to trustmaker for life

  • No payback provision; assets can be preserved for loved ones’ inheritance

FAPT Limitations

Limitations:

  • After creating a FAPT, trustmaker generally must wait five years before he or she can qualify for Medicaid benefits
  • Not suitable for someone needing to qualify for Medicaid immediately

Veterans Asset Protection Trust (VAPT). A Veterans Asset Protection Trust (VAPT) is very similar to a FAPT, with only a couple of notable differences. The most significant difference is that it is more restrictive. The income from the trust is not paid to the trustmaker; it is paid to the income beneficiary, usually the adult child(ren). This permits the trustmaker to exclude this trust as an asset for purposes of applying for VA pension, including the Aid and Attendance allowance.

Unlike in the Medicaid/TennCare rules, currently there is no lookback period to qualify for VA benefits, although that may change at any time. That means that for the time being, once a VAPT is established and fully funded, the applicant can immediately apply for VA benefits. However, this may change in the near future.  The VA has proposed rules to introduce a three-year lookback for transfers of assets.   

Benefits:

  • Enables the trustmaker to protect his or her own assets while preparing to apply for VA pension benefits in the future
  • Currently does not prevent immediate qualification for VA benefits; however, new rules will change this when they take effect
  • No payback provision; assets can be preserved for loved ones’ inheritance

Limitations:

  • Trust income is paid to beneficiary, not the trustmaker
  • When new VA rules take effect, will delay trustmaker’s qualification for VA benefits by three years

When it comes to trusts, there are many different options which can be used toward different ends.  If you think a trust might be right for you, consult a qualified professional to help you think about your goals and create the trust that fits your unique situation.  The potential benefits of trusts are significant, but when utilizing this powerful estate planning tool, proceed with trustworthy advice.

For help getting started, get in touch with Elder Law of East Tennessee.  We will be happy to help you refine your goals and choose the best strategy to protect your assets, obtain needed care, or preserve current benefits.