Medicaid law governing trusts is designed to prevent disabled individuals qualifying for benefits while still retaining full control over their assets. A third-party, however, is still free to plan with his own assets and either give them outright to a disabled individual or tie them up and restrict them in trust as he sees fit. Since a third party is not required to leave money to the Medicaid recipient, he can put whatever "strings" on the money that he desires.  Accordingly, trusts which are created by a third party with the third party’s own assets to benefit a beneficiary who is on Medicaid have their own separate rules and treatment.  An exception to this rule exists for trusts established using assets of married couples.  A spouse cannot establish a trust for the benefit of his partner, and have those assets ignored for Medicaid purposes, unless that trust is established through his will.  Inter vivos trusts (trusts established while the person is still alive) of married couples do not qualify as third party supplemental needs trusts. 

Generally, a properly drafted third-party, discretionary trust is not countable as an asset available to the beneficiary receiving Supplemental Security Income (SSI) and/or Medicaid benefits. Such a trust must be created by a party other than the SSI/Medicaid beneficiary, must not receive any assets belonging to the beneficiary, and must be restricted (not accessible or available) to the beneficiary. The operative principle is whether the trust assets or income are available to the beneficiary. If appropriate trust language is used, Medicaid will not treat the resources in the trust as a countable resource. Typically, a third-party trust provides that the trustee is given unfettered discretion to distribute (or not to distribute) principal or income for the benefit of the disabled beneficiary. Often, the trustee is directed only to make distributions for the "supplemental" or "special" needs of the beneficiary or as long as the distributions do not disqualify the beneficiary from governmental benefits. Frequently the trustee will be specifically prohibited from making distributions which provide the beneficiary with food or shelter (the two disqualifying categories under SSI and Medicaid regulations). There is no requirement that the trustee be so restricted, however; it may be preferable to permit the trustee to make the decision to make distributions which reduce or even eliminate public benefits in cases where the availability of trust resources is more important than continued eligibility for SSI and Medicaid.  These are issues which should be discussed in detail with the drafting attorney. 

A third-party special needs trust should not be drafted as a general support trust or mandate distribution of current income to the beneficiary. In such a case, the trust will be deemed to be "available" and can disqualify the beneficiary from Medicaid. The Medicaid beneficiary should not be given any power to revoke the trust or direct the trustee to make distributions to the beneficiary. The trust can be revocable by the third-party grantor. This means that a parent can fund a trust for a disabled child with the parent’s assets and give it a test run, revoking it later and re-acquiring the assets if the parent decides that it is not serving its purpose. Finally, and most importantly, unlike trusts established under 42 USC §1396p(d)(4)(A), the third-party trust does not need to include a "payback" provision reimbursing the State for the medical assistance of the beneficiary upon the beneficiary’s death.  This type of trust and the law surrounding it is complex, and should not be drafted by a person unfamiliar with Medicaid rules and regulations.