There are severe restrictions under the federal Medicaid law on trusts that preserve assets for the welfare of the physically challenged or the mentally disabled.
When the grantor launches self settled trusts by transferring his own properties to such entity for his self benefit, those are considered as countable assets of the disabled beneficiary, which may render him liable to disqualification from Medicaid benefits.
However, trusts set up by relations or third parties with their assets for the benefit of the disabled beneficiary, will not be counted as the asset of the handicapped person as long as certain conditions are fulfilled. Those trust assets or the income from there must not be available or accessible to such beneficiary or used for his general support. The distribution from such trust must be to meet only the special needs of the beneficiary and never diverted towards his food or shelter.
According to 42 U.S.C. § 1396p (d) (4) (A), a trust created by a parent, grandparent, guardian, or court will not be deemed to be a Medicaid asset even when set up with the applicant’s own assets for his sole benefit. However, the individual must be below 65 years at the time the trust is instituted. Moreover, the concerned disabled individual must fall within the Social Security definition. Upon the death of the individual, the State Medicaid agency must be paid back with the costs of the medical assistance provided by Medicaid during the disabled individual's lifetime.
The Disabled Individual’s Trust must be created by a parent, grandparent, guardian, or court. The statute does not allow the disabled individual to create his own trust, even if he is otherwise legally competent. Action by a third party is required in creating the trust. Further these types of special needs trusts are often established by a court to protect a disabled person in course of a serious personal injury lawsuit.
When the countable assets including trust properties of any married disabled beneficiary is greater than $ 3000 and unmarried disabled is higher than $2000, the concerned person usually becomes disqualified for Medicaid. However, such trusts on observance of specified stringent conditions may be able to avoid the undesirable consequence of the beneficiary loosing eligibility to government benefits program.
(More http://www.cms.hhs.gov/home/medicaid.asp)
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