Self-Settled Trusts

By: Martha A. Churchill and Patricia E. Kefalas Dudek

When a trust is funded with money which came from the beneficiary, it is a self-settled trust. This commonly happens when a person with a disability has prevailed in a legal action and wishes to place the settlement into a trust. An inheritance can create the same situation, if it is placed in a trust after it is distributed by the estate to the person with a disability.

To avoid loss of Medicaid¹⁹ when establishing a self-settled trust, it is not enough to create an irrevocable spend thrift trust, even if it is discretionary. Consult 42 U.S.C. §1396p(d)(4), which explains how a trust can peacefully co-exist with Medicaid benefits. First, the beneficiary must be "disabled" as defined in the Social Security statute²⁰. A parent, grandparent, legal guardian, or the court must establish the trust. And the residual, after the beneficiary's death, must be payable to the State of Michigan²¹. Here is some language to accomplish that purpose:

Upon the death of Freddie, the trustee shall distribute an amount of the remaining trust assets, principal and accumulated income, as required under 42 U.S.C.

13 96p(d)(4)(A), or any regulations promulgated thereunder, or the corresponding provisions of any subsequent Federal law, to any state providing medical assistance on Freddie's behalf, equal to the total previously unreimbursed medical assistance paid on Freddie's behalf under the State's plan under Title 42 U.S.C. 1396(a) et seq., and shall forthwith distribute the balance of the trust to the person(s) and/or entity(s) designated by Freddie.

Depending on the size of the estate, it is unlikely that any money will be left over after Medicaid is reimbursed. But at least the beneficiary will have the pleasure of going to summer camp and having a few other enjoyable experiences, which would not have been possible without the trust.

Another option when Medicaid problems arise for a self-settled trust, is to join a pooled accounts trust for the benefit of the person with a disability. If the money is placed in a pooled accounts trust, the residual funds will be left to the trust for the benefit of other persons with disabilities. Medicaid will exclude such a trust in counting the beneficiary's financial resources²².

Next section:  Conclusion

Martha A Churchill
Milan, Michigan.

Patricia E. Kefalas Dudek
Royal Oak, Michigan.

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