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Life Planning and Independence

Financial Planning

Income Cap Trusts May Help Those Too Rich to Be Poor
By Laura Cooper, Esq.

Medicaid is the medical element of our national social safety net. It is designed to help people who cannot pay for their health or long-term care. However, Medicaid does not help everybody who is in need of financial assistance. Many people who need long-term care have insufficient funds to pay for it but too much income to qualify for Medicaid. One device that may be helpful in this circumstance is something called an income cap trust.

Consider Mary Brown. Mary has severe chronic-progressive MS. After a recent exacerbation, Mary required full-time nursing care. She moved into a nursing home and does not expect that she will be able to return to her apartment. The nursing home charges $2,600 per month. Mary's income from Social Security and an employer's disability policy is in excess of her state's Medicaid limits. She is not eligible for assistance. Her savings have now been exhausted to pay for her medical expenses.

If Mary establishes an income trust to take control of the income she receives that is in excess of the Medicaid cutoff, she can qualify for Medicaid. The "excess" funds will be retained in the trust and cannot be used to pay for her support or care. But, that money can be used for her special needs, perhaps a personal telephone, transportation, or cable television service. It can also be used to pay administrative costs, including her attorney fees.

Mary's income up to the Medicaid-eligible amount will be available to pay for her care. From this Medicaid-eligible amount, deductions will be made for a personal needs allowance, a community spouse income allowance (if Mary is married), and medical expenses not covered by Medicaid. Mary will pay the rest to the nursing home. The state will pay the rest of the cost of her care at Medicaid rates. When Mary dies, the money in the income trust will go to repay the state, up to the total amount of Medicaid assistance she has received.

The main function of an income cap trust is to change the way that Medicaid measures a person's available income. The goal is to eliminate from consideration the income that would otherwise make a person ineligible for Medicaid.

In an income cap trust, any income over the Medicaid limit (the "excess" income) is sheltered in a special needs trust. This special needs trust cannot be used for basic support or for care covered by Medicaid.

The trust will have a "trustee" who administers it for the beneficiary (the person whose income is in trust). This person will be responsible for spending or investing the funds in the special-needs trust. The trustee can pay for many items or services not provided by Medicaid that would provide some benefit to the beneficiary.

A person can establish an income trust for her own benefit if she is able to understand and make decisions about it. If the beneficiary lacks the necessary mental capacity to establish a trust, an attorney-in-fact (created by a power of attorney) or a conservator may do so. In some situations, a relative or friend will have to get special authority from a court to establish an income trust.

The only reason to create an income trust is to obtain Medicaid benefits for a person who would otherwise not be able to pay for long-term care. Here is the major disadvantage: Money placed in a special-needs trust cannot be used for one's spouse. Since the state is entitled to proceeds of the trust after the beneficiary's death, up to the total spent by Medicaid for care, an income trust is not a means for passing money or property on to other family members.

Adapting: Financial Planning for a Life with Multiple Sclerosis

A 72-page publication addressing financial organization, planning, insurance options, employment concerns, and benefit issues important to people with MS and their families. This financial planning guide provides information and strategies to help families plan wisely for the future and meet financial challenges that often accompany life with MS.

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Title Page
Table of Contents
Chpt. 1: Where I Am Today
Chpt. 2: Moving Forward After Initial Diagnosis
Chpt. 3: Taking Control of Finances
Chpt. 4: If MS Progresses
Chpt. 5: Handling Estate Issues

This financial planning guide is a collaborative project of the National Endowment for Financial Education, the National MS Society, and Paralyzed Veterans of America.

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Each state's Medicaid agency may impose different requirements on the trust, and may have its own form. Anyone considering an income cap trust should first contact their state Medicaid agency (www.cms.hhs.gov/) and ask to be sent specific requirements for such trusts.

Because state laws may be revised, I also recommend consulting an attorney familiar with state law.


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Last updated August 23, 2004