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Elder Law Newsletter: (c)(2)(B), or (c)-not-(2)(B)? That is the Question of Elder Law.

Chambliss Law Firm Monthly Editorial – August 2017

(c)(2)(B), or (c)-not-(2)(B)? That is the Question of Elder Law.
Remaining Eligible for Medicaid

by Peter Harrison, Attorney

In 1993, Congress enacted major changes to Medicaid dealing with trusts. Among those changes was a provision found at section (c)(2)(B), laying out exceptions to the rules imposing Medicaid ineligibility for transfers of assets. The general rule for transfers in Medicaid is that you will be subject to a penalty period of ineligibility if you gifted away some or all of your assets within the 5 years prior to your application. This transfer rule forces you to make a choice:

  • Do you keep and spend down your assets to maintain your eligibility? Or...
  • Do you gift your excess assets away so your children have an inheritance and hope you don't need Medicaid before the 5 years pass?

Like Hamlet, you must decide whether to "suffer the slings and arrows outrageous fortune" (keep and spend) or "take up arms against a sea of troubles" (gift and hope). Thanks to section (c)(2)(B), you – unlike Hamlet – may have a third option.

Section (c)(2)(B) lists several exceptions to this transfer penalty rule. The relevant exception here is a transfer to a special needs trust for a child (or certain other family members) with a disability. The special needs trust can then be used for the beneficiary's supplemental needs, increasing his or her quality of life without affecting the beneficiary's eligibility for public benefits. In exchange, however, the state will have a lien against the assets remaining at that beneficiary's death equal to the benefits paid (also known as a "payback" provision).

This exception by itself is useful, but thanks to the wording of section (c)(2)(B) and the rules of trust law, we can make this technique even more powerful. Under Tennessee law, you can create and fund a trust for your family and include a power to convert the trust to a special needs trust for that child with a disability. Now if you need Medicaid and the gift you made to fund the trust was within the past five years, you can convert the trust to a special needs trust and avoid the penalty.

Having the ability to convert a trust to a special needs trust is a powerful tool, but you shouldn't use it as an excuse to wait on your planning. If you have concerns about planning for long term care, and especially if you have a child (or certain other family members) with a disability, you don't need to debate this like Hamlet. Each day that passes is another day you could have put into the five-year wait. If you can make that five years, you can create the same special needs trust without a payback provision, and without affecting your own eligibility for benefit. If you're in this situation, we advise you to take action now.

If you have any questions about benefits planning, large gifts, or elder law, please reach out to Peter or a member of the Elder Law Team. We are just a call or email away.