What happens to pooled trust funds when the beneficiary dies?

The first-party pooled trust conditions

The federal pooled trust exception covers trusts containing assets of individuals with disabilities as defined by the Social Security Act. A nonprofit association must establish and manage the trust.

Each beneficiary must have a separate account, with accounts pooled for investment and management. Each account must be established solely for a beneficiary with a qualifying disability by that beneficiary, a parent, grandparent, legal guardian or court.

The exception also requires the death-payment terms described above. First-party rules do not automatically apply to third-party pooled accounts.

Medicaid payment priority and permitted expenses

Under SSA guidance, states that provided Medicaid assistance must be first payees of unretained funds in a qualifying first-party pooled account at death. Their priority over other debts and administrative expenses is subject to these permitted expenses:

• Taxes due from the trust to state or federal governments because of the beneficiary’s death.
• Reasonable trust administration fees associated with termination and wrapping up, such as accounting and required document filings.

Before Medicaid reimbursement, SSA guidance prohibits payment of funeral expenses, debts to third parties, inheritance taxes for remainder beneficiaries and distributions to remainder beneficiaries. It also prohibits other beneficiary estate taxes except those arising from inclusion of the trust.

For this payment restriction, the pooled trust itself is not treated as a remainder beneficiary. Trust retention and payment to a remainder beneficiary are distinct.

Reimbursement can involve more than one state

For unretained funds in a qualifying first-party pooled account, the reimbursement provision must cover every state that provided Medicaid assistance. It cannot select only particular states.

If the remaining funds cannot reimburse every providing state in full, SSA guidance permits proportional reimbursement.

Documents to gather before asking about the remainder

Gather the actual trust instrument, any pooled account joinder agreement and records showing whose property funded the account. Bring Medicaid assistance records and a list of proposed closing expenses to the review.

Ask the reviewer to identify the retention provision, reimbursement language and remainder terms in those documents. Keep questions about a third-party account separate from the first-party reimbursement analysis.

Two related terms

Third-party special needs trust: Under SSA guidance, this is a trust funded with property belonging to someone other than the beneficiary or the beneficiary’s spouse. Its name alone does not establish benefit exclusion.

Remainder beneficiary: Under SSA guidance, this is someone who is not a current beneficiary and whose residual benefit depends on an event such as the primary beneficiary’s death. This general definition does not establish a particular account’s remainder terms or override applicable state law.

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