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Trust Law/Level IV · Trusts that care/4.1 Disability/Lesson 5

Payback rules

How first-party special needs trusts, pooled trusts and ABLE accounts repay state Medicaid at death, and why third-party trusts do not.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Payback-free route: relatives fund a third-party SNT instead of giving money outright. Because the assets never belonged to the disabled person, no federal payback applies, provided none of the beneficiary’s own money is ever added.
  2. ABLE accounts pay outstanding qualified disability expenses, including funeral and burial, before any state claim under IRC §529A(f), and the state recovers only Medicaid paid after the account opened, less buy-in premiums.
  3. In a first-party (d)(4)(A) trust, lawful spending on the beneficiary’s sole benefit during life reduces what is left to repay. At death only death-related taxes and reasonable wind-up fees come first; write the clause to cover ‘the State(s)’.
  4. A pooled (d)(4)(C) account may let the nonprofit keep some of the remainder instead of the state, but that money still does not return to the family; compare each nonprofit’s written retention terms before enrolling.

MaterialsA copy of the trust document, if there is one, open at the clause about what happens at the beneficiary’s deathThe beneficiary’s Medicaid approval letter, if they are comfortable sharing itA list of every state where the beneficiary has received Medicaid

Wonder

  1. What expenses can be paid from the trust before the state gets its share?
  2. Does a third-party trust funded by a parent also have to reimburse Medicaid?
  3. How does the payback rule apply if my relative lived in two different states?

Explore

  1. In the United States, a first-party special needs trust under 42 U.S.C. §1396p(d)(4)(A) holds the disabled person’s own money, such as an inheritance received outright or an injury settlement. To qualify, the trust must provide that when the beneficiary dies, the state receives what remains, up to the total Medicaid paid on the beneficiary’s behalf. ABLE accounts have a similar but separate rule in 26 U.S.C. §529A(f). Third-party trusts funded by relatives fall outside the federal payback rule. This lesson describes the rules; it is not advice on any particular trust.
  2. The payback terms must be written in the trust. SSA’s Program Operations Manual System (POMS), at SI 01120.203, says that merely labeling a trust a ‘Medicaid payback trust’, an ‘OBRA 1993 payback trust’ or a ‘Medicaid Qualifying Trust’ is not enough, and an oral trust cannot meet the requirement. If the wording falls short, SSA may count the trust as the beneficiary’s resource for SSI, which can affect SSI and, in many states, Medicaid. State Medicaid agencies apply their own review as well.
  3. The clause must cover any state that provided Medicaid, not only one. SSA gives examples: a trust naming only ‘Maryland’, or only ‘Maine and Vermont’, does not qualify. Wording that refers to ‘the State(s)’ that provided medical assistance is one way to meet this. If the trust does not have enough at death to repay every state in full, SSA says it may repay them on a pro-rata, or proportional, basis. Families whose relative has moved between states sometimes list every state where Medicaid was received.
  4. SSA, in POMS SI 01120.203E, limits what may be paid from a (d)(4)(A) trust after death and before the state is repaid. Allowed: taxes owed by the trust to a state or the federal government because of the beneficiary’s death, and reasonable fees for winding up the trust, such as an accounting to a court or filing required documents. Not allowed first: funeral expenses, debts owed to third parties, other estate or inheritance taxes, and payments to the people who inherit what is left. Expenses during the beneficiary’s life are a separate matter.
  5. ABLE accounts follow §529A(f). At death, outstanding qualified disability expenses, which can include funeral and burial costs, are paid first. Then a state that files a claim is repaid for Medicaid paid after the account was opened, less any premiums paid to a Medicaid buy-in program. The statute treats the state as a creditor of the account, not a beneficiary. A third-party special needs trust funded by relatives has no federal payback requirement, because the money never belonged to the disabled person, so what remains passes to whoever the trust names.
  6. Pooled trusts under 42 U.S.C. §1396p(d)(4)(C) are run by nonprofit associations. At the beneficiary’s death, the nonprofit may keep some or all of what remains in the account if its terms allow. To the extent it does not keep it, the trust must repay the state(s) for Medicaid paid, up to the total. How much a nonprofit keeps differs from one organization to another and is set by its written terms, not by federal law. Lesson 4.1.3 covers pooled trusts in more detail.

Key facts

  • A first-party trust under 42 U.S.C. §1396p(d)(4)(A) must repay the state(s) from what remains at death, up to the total Medicaid paid.
  • SSA says a label such as ‘Medicaid Qualifying Trust’ is not enough and an oral trust cannot qualify; the payback terms must be in the document.
  • The payback clause must cover any state that provided Medicaid; if funds are short, SSA allows the states to be repaid pro rata.
  • Before a (d)(4)(A) payback, only taxes due from the trust because of the death and reasonable wind-up fees may be paid; funeral costs and payments to heirs may not.
  • Under 26 U.S.C. §529A(f), an ABLE account repays a claiming state after outstanding qualified expenses, which can include funeral costs; third-party trusts have no federal payback.
  • A pooled trust under §1396p(d)(4)(C) may keep amounts at death if its terms allow; whatever it does not keep repays the state(s).

Exercise nine, six, three, one

9CollectList up to 9 money sources or accounts connected to your relative (some families have fewer), such as an inheritance, an injury settlement, back benefits, an ABLE account, a trust set up by grandparents, or savings.
6ClusterSort them into 6 categories: the person’s own money in a first-party trust, money in a pooled trust account, money in an ABLE account, money in a trust funded by others, money held outright, and source unknown.
3DistillReduce the 6 categories to 3 groups: money a payback rule would likely apply to, money it would likely not apply to, and money to ask SSA, your state Medicaid agency or a benefits planner about.
1CrystallizeWrite 1 sentence explaining, in your own words, why it matters whether money in a trust came from the disabled person or from someone else.

Fact check

Dates, figures and claims checked against the published sources listed below.

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