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      - page 8 / 14

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provide flexibility within the trust documents to allow for changed circumstances. The terms of the trust should always allow the trustee to reform the trust to protect eligibility for benefits.

A.

Third Party Trusts

A third party-settled trust is a trust funded with assets provided by a person other than the beneficiary. This can be done either in a living (or “inter-vivos”) trust or a testamentary trust, which is established in a will. A third party-settled Special Needs Trust can provide that the remaining trust assets be distributed to the chosen remainder beneficiaries of the grantor at the death of the beneficiary, and thus be preserved for future beneficiaries.

B.

Self-Settled Trusts

In 1993, Congress provided in 42. U.S.C. § l396p that a person could not attain Medicaid eligibility by transferring her own assets to an inter vivos trust, even if the trust was irrevocable and the Medicaid applicant had no further control over the assets, unless the transfer took place more than 5 years before the Medicaid application. A transfer to the trustee within the 5 year period results in the assets being attributed to the applicant for the period of time that it takes to use up those assets to pay for the care of the applicant. This “penalty period” can put the applicant in the worst possible situation, i.e., not having the assets to pay for care, but being penalized as if the applicant has the assets, and therefore being unable to obtain Medicaid. Transferring one’s own assets to a trust as a planning method 5 years in advance of need is only feasible when the disability can be planned for, such as with a Parkinson’s patient or an Alzheimer’s patient. For persons with disabling conditions, this is not an option. Even if a court establishes a special needs trust, the assets are attributed to the person who is disabled. However, under 42 U.S.C. § l396p (d)(4), two types of safe harbor trusts have been created that can relieve this dilemma for Medicaid eligibility. Transfers of the assets of the disabled person to these statutory self-settled trusts are exempt from the penalty period.

The first type of trust is provided for in 42 U.S.C. § l396p (d)(4)(A) and is commonly

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