How Does a Medicaid Pooled Trust Work?

A Medicaid pooled trust offers a financial planning tool for individuals with disabilities. These trusts play a role in helping beneficiaries maintain their eligibility for government benefits, such as Medicaid and Supplemental Security Income (SSI), while allowing them to use their own assets for supplemental needs. A non-profit organization establishes and manages these trusts for multiple beneficiaries.

What a Pooled Trust Is

A Medicaid pooled trust is a specialized type of irrevocable trust established and managed by a non-profit organization. Its primary purpose is to allow individuals with disabilities to hold assets without losing eligibility for means-tested government benefits like Medicaid and Supplemental Security Income (SSI). These trusts are specifically authorized under federal law, 42 U.S.C. § 1396p. The structure involves a master trust document created by the non-profit, under which individual beneficiaries have separate sub-accounts.

While each beneficiary’s sub-account is distinct, the funds within these sub-accounts are “pooled” together for investment and management purposes. This pooling can lead to professional investment management and potentially better returns, especially for smaller amounts, due to economies of scale. The assets placed into a pooled trust are not counted as available resources when determining eligibility for benefits, thereby allowing individuals to preserve funds for needs not covered by government programs.

Who Can Join a Pooled Trust

Individuals generally must meet the Social Security Administration’s (SSA) definition of disability. This definition typically refers to a physical or mental impairment expected to last at least 12 months or result in death, which prevents the individual from engaging in substantial gainful activity. While federal law does not impose an age limit for establishing a pooled trust, state-specific rules can vary, and transfers of funds for individuals aged 65 or older may be subject to transfer penalties for Medicaid long-term care services.

There are two main types of pooled trusts based on who funds them: “first-party” and “third-party” trusts. A first-party pooled trust is funded with the assets of the individual with the disability, such as personal injury settlements, inheritances, or accumulated savings. These trusts typically include a “payback” provision to the state upon the beneficiary’s death. Conversely, a third-party pooled trust is funded by someone other than the beneficiary, such as a parent, grandparent, or another family member. Assets in third-party trusts are generally not subject to Medicaid payback requirements upon the beneficiary’s death, offering more flexibility for remaining funds.

Setting Up a Pooled Trust Account

Establishing a sub-account within a pooled trust involves several preparatory steps to ensure compliance and proper management. Initially, the beneficiary or their authorized representative must gather essential personal and financial information. This includes details such as proof of disability (e.g., an SSA award letter), current benefit statements (e.g., Medicaid, SSI), and comprehensive financial records outlining the assets to be placed into the trust.

Key documents required for setup usually include the pooled trust’s master agreement and a joinder agreement, which the beneficiary signs to formally join the trust. A power of attorney or guardianship documents may also be necessary if the beneficiary requires assistance with legal and financial decisions. When selecting a pooled trust organization, it is prudent to consider factors such as the organization’s fee structure, the range of services offered, its reputation, and whether it operates in the beneficiary’s geographic area. Fees can vary, often including a one-time enrollment fee (e.g., $250 to $1,000) and monthly or annual administrative fees (e.g., 1-3% of assets or fixed monthly charges like $45-$350).

Once the necessary documentation is complete and the trust organization is chosen, the initial transfer of assets into the trust sub-account occurs. This funding can take various forms, such as a lump sum from a settlement, an inheritance, or ongoing deposits of surplus income. This initial funding formally activates the sub-account, moving the assets out of the beneficiary’s countable resources for benefit eligibility purposes.

Managing Funds and Distributions

Once a pooled trust account is established, ongoing financial management focuses on contributions and distributions to meet the beneficiary’s supplemental needs. Additional funds can be contributed to the trust over time, which may include regular income, gifts, or future inheritances. For individuals with surplus income that exceeds Medicaid limits, monthly deposits into a pooled income trust sub-account can ensure continued eligibility for benefits.

Requesting distributions from the trust typically involves submitting a request form, often accompanied by invoices or receipts for the desired expense. The non-profit trustee reviews these requests to ensure they comply with Medicaid rules and the trust agreement. Funds from a pooled trust can only be used for the sole benefit of the beneficiary and for “supplemental needs” not covered by Medicaid or SSI. Examples of allowable expenses include assistive technology, personal care items, educational expenses, recreational activities, dental care, travel, and housing modifications.

It is important to understand that pooled trust funds generally cannot be used for basic support items that Medicaid or SSI already cover, such as cash disbursements directly to the beneficiary, or payments for food, shelter, and utilities if these would reduce SSI benefits. The non-profit trustee plays a role in managing the pooled funds, ensuring that distributions adhere to federal and state regulations, and approving expenditures that enhance the beneficiary’s quality of life without jeopardizing their public benefits.

What Happens to Funds After Death

The disposition of funds remaining in a pooled trust account after the beneficiary’s death depends significantly on the type of trust. For first-party pooled trusts, which are funded with the beneficiary’s own assets, federal law mandates a “Medicaid payback” provision. This means that upon the beneficiary’s death, the state Medicaid agency has a claim against any remaining funds in the trust sub-account, up to the total amount of Medicaid benefits paid on behalf of the beneficiary during their lifetime.

Before the Medicaid payback, only specific disbursements, such as taxes due from the trust or reasonable administrative fees for closing the account, may be made. Any funds remaining after the state’s claim is satisfied are typically handled according to the trust agreement. Some pooled trusts are permitted by federal law to retain a portion or all of the remaining funds for the benefit of other disabled individuals, supporting the non-profit’s charitable mission.

In contrast, if the trust agreement allows and state law permits, any leftover funds after both the Medicaid payback and the non-profit’s retention may be distributed to designated remainder beneficiaries. Third-party pooled trusts are generally not subject to the Medicaid payback requirement, allowing remaining funds to be distributed to designated beneficiaries as outlined in the trust agreement.