I received this question from H.W., of Brooklyn, N.Y., who wrote:

I am 74 years young and have been discussing with my family the creation of a Medicaid Trust. Can you tell me what this is and some of the issues involved?

Dear H.W.:

My pleasure!

A Medicaid Trust, basically, is a trust which holds your assets for your benefit, while allowing you to continue eligibility for Medicaid and SSI. If you qualify for SSI, you are automatically eligible for Medicaid. Recently, there have been major changes to the Medicaid eligibility rules, as part of a Federal tax bill called the Omnibus Budget Reconciliation Act of 1993. Medicaid, as you know, will pay for certain medical assistance, like long term health care in a nursing home or at home, if resources do not exceed certain limits. As an editorial comment, it appears the rules give these trusts greater flexibility when they provide payback of the medical assistance provided.

The resource limits, or property exempted from eligibility requirements, may include, depending on the specific state, all or part of your family home (but subject to a lien upon your decease, or "estate recovery"), household goods and personal items; cash (in New York, up to $3200, if single, or $4650, if married); funds for funeral and burial arrangements (in New York, $1500, if single, or $3000, if married, and this must be kept in a separate account -please note, if funeral arrangements are prepaid, these amounts may be much greater); a car or cars; life insurance with limitations such as face amount or cash value; and a resource allowance for the medically-able spouse, of $72,660. Income limits are $775 per month, in New York, but may be as much as $1817 per month for a medically-able spouse, if they can prove necessity.

Two issues should be determined up-front. The first is whether, in transferring your assets, you can survive for the requisite "look back" period which, for a nonexempt trust, to the extent the income or principal can be used for the benefit of the Grantor, can be as long as 60 months. Note, if you gift your assets to other than a spouse or disabled child, the "look back" period is shorter, as long as 36 months. Both of these periods are extended from 30 months.

The other issue, which I spoke of earlier, is whether the assistance will be paid back. If you create a Special Needs Trust, an irrevocable discretionary trust, with payback language, the assets used to fund such trust may escape consideration as countable resources. This trust is generally for a disabled or handicapped individual under 65 years of age. A trust for a disabled person, established and managed by a non-profit organization which maintains investments which combine, or pool, income, may also shelter the resources as long as their is a payback provision. Finally, an income only-funded trust - such as from pension and Social Security benefits - a so-called "Miller Trust", with a payback provision, may also shelter the resources during life.

As I've always written here, it's best to consult with a professional to assure yourself the results you intend are obtained, especially in this highly technical situation. For more information on estate planning issues, pre- or post-mortem, contact an attorney or other professional in your area who specializes in this field.