Eligibility of Beneficiaries of Third-Party Trusts for Public Benefits

The cost of medical care for an individual that is mentally or physically disabled is expensive. Disabled individuals often turn to public benefits (government programs) to fund the costs of their health care, but such benefits are only available to those who are financially needy. For purposes of this article, public benefits refers to government programs that are “needs based” or sometimes referred to as “means tested”—the recipient must demonstrate financial need to qualify for the benefit. In determining the financial eligibility of a disabled individual, assets held in a trust of which that individual is a beneficiary may or may not be countable. While the Supreme Court of Pennsylvania issued several seminal opinions related to trust assets more than 20 years ago and the dust seemingly has settled from these decisions, issues persist. For example, such issues recently arose in a matter for which I represented the applicant, Aitchison v. Department of Public Welfare, No. 1897 CD 2014 (Pa. Commw. Ct.), that settled in June 2015, on terms favorable to the applicant. In that situation, the applicant, a mentally disabled individual, was the beneficiary of third-party trusts established under the wills of her parents. For decades, the applicant resided at several psychiatric hospitals owned, operated, and funded by the state. However, the state closed those facilities, so the applicant sought public benefits to cover the cost of a private long-term care facility. This article highlights some of the issues concerning the eligibility of beneficiaries of third-party trusts for such benefits.

A third-party trust is any trust where the settlor (the creator of the trust and contributor of its assets) is a person different from the beneficiary. For example, a parent or grandparent may create a third-party trust for a child or grandchild. In Aitchison, the applicant’s parents created the trusts at issue. In contrast, a trust in which the settlor is also the beneficiary is deemed a self-settled trust. In comparison to the legal authority regarding the eligibility of beneficiaries of third-party trusts for public benefits, the eligibility of beneficiaries of self-settled trusts is governed by a more-detailed set of rules set forth in the Omnibus Budget Reconciliation Act of 1993, known as OBRA 93. The rules related to third-party trusts are less precise and opportunities for confusion arise.