If a court sets up a special-needs trust funded by a personal injury settlement, do the new Medicaid trust rules under OBRA 1993 treat that trust as if the disabled person established it themselves?
Plain-English summary
In 1993 Congress overhauled the Medicaid trust rules in OBRA 1993, adding a new 42 U.S.C. § 1396p(d) that treats certain trusts as available assets when figuring out whether a person qualifies for Medicaid. The Director of NC's Division of Medical Assistance asked the AG whether the new rule reaches a trust that is set up by a court (rather than the disabled person personally) and funded by an insurance company paying out a personal injury settlement directly into the trust.
Senior Deputy AG Ann Reed and Assistant AG Jane T. Friedensen answered yes. Their reasoning ran through ownership of the settlement: the personal injury claim belongs to the injured person, and the settlement or judgment proceeds are the proceeds of that claim. So regardless of whether the legal mechanics route the money through a guardian, the court, or directly from the insurer, the injured person is the one whose money funds the trust. Section 1396p(d)(2)(A) is drafted to look through that kind of arrangement and treat the beneficiary as the trust grantor.
The Director also asked whether NC needed to change state law so that trust provisions prohibiting Medicaid-related spending could be set aside. The AG said amendment was not strictly necessary. Under N.C. Gen. Stat. § 36A-115(b), interests in discretionary, support, and spendthrift trusts are not alienable, and Lineback ex rel. Hutchens v. Stout, 79 N.C. App. 292 (1986), had already enforced trust provisions designed to supplement (not supplant) public benefits. But under the federal Supremacy Clause and § 108A-79(l), federal Medicaid law controls in the event of a conflict. The AG still recommended amending NC trust and Medicaid statutes to harmonize with OBRA 1993 and avoid litigation.
Currency note
This opinion was issued in 1994. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. Chapter 36A has since been substantially repealed and replaced by the North Carolina Uniform Trust Code (Chapter 36C) effective 2006, and Congress has further amended the Medicaid trust rules (including the (d)(4)(A) and (d)(4)(C) safe-harbor trusts). The general principle that federal Medicaid law preempts conflicting state trust law still holds, but the specific NC statute citations in this opinion are largely obsolete.
Background and statutory framework
Before OBRA 1993, the Medicaid program treated some trusts as "Medicaid qualifying trusts" under former 42 U.S.C. § 1396a(k). OBRA 1993 replaced that framework with a more detailed scheme codified at 42 U.S.C. § 1396p(d). The new rule generally treats the assets in a trust as available to the beneficiary for Medicaid eligibility purposes when the beneficiary (or someone acting on the beneficiary's behalf) established the trust with the beneficiary's own assets.
The drafting question in this opinion was whether a court-supervised trust funded by an insurance settlement counted as having been "established" by the beneficiary. The AG read the statute to look at the source of the money rather than the formal creator of the trust instrument. That reading later became the dominant approach under federal Medicaid rules and is the reason why most "first-party" special needs trusts have to fit into one of the statutory safe harbors (such as (d)(4)(A) for individuals under 65 with a disability) to avoid counting against eligibility.
On the state side, N.C. Gen. Stat. § 36A-115(b) (1991) made the beneficiary's interest in a discretionary, support, or spendthrift trust non-alienable. Lineback enforced supplemental-needs-style trust provisions for a nursing home resident on Medicaid. Together, NC trust law at the time reinforced rather than undermined the goal of the OBRA framework for properly drafted special needs trusts; but where federal Medicaid rules and state law conflicted, the Supremacy Clause and § 108A-79(l) gave federal law the upper hand.
Common questions
Could a parent or court protect settlement money for a disabled person without losing Medicaid?
In 1994, the AG's reading made clear that the structure of the trust mattered. A court-supervised trust funded by settlement proceeds was treated as the beneficiary's own asset under § 1396p(d) unless it qualified under one of the statutory exceptions. Modern practice relies on the (d)(4)(A) safe harbor, which Congress added expressly to address this gap; the AG's opinion predates the widespread use of that safe harbor.
Did this opinion change how NC trust law was applied?
No. The AG's conclusion was that existing NC trust law was generally consistent with the OBRA framework, but that federal law would control any actual conflict. The opinion recommended legislative housekeeping rather than substantive change.
What was the practical effect of Lineback ex rel. Hutchens v. Stout?
Lineback enforced a testamentary trust that the testator clearly intended to supplement rather than supplant Medicaid. The AG used it to show that NC courts respected trust grantor intent on Medicaid-related spending limits and would not strike those provisions as against public policy.
Has the underlying federal Medicaid rule changed?
Yes. Congress has amended § 1396p several times since 1994. The (d)(4)(A) "first party" special needs trust and (d)(4)(C) pooled trust safe harbors are now central to special-needs planning, and federal regulations have filled in many of the questions the 1994 AG was working through.
Source
Citations
- 42 U.S.C. § 1396p(d) [OBRA 1993 § 13611]
- 42 U.S.C. § 1396p(b)
- U.S. Const. Art. VI, cl. 2 (Supremacy Clause)
- N.C. Gen. Stat. §§ 36A-59.10 to -59.20
- N.C. Gen. Stat. § 36A-115(b) (1991)
- N.C. Gen. Stat. § 108A-79(l)
- Forsyth v. Rowe, 5 Medicare & Medicaid Guide (CCH) New Developments ¶ 41,777 (Conn. Sup. Ct. Aug. 3, 1993)
- Lineback ex rel. Hutchens v. Stout, 79 N.C. App. 292, 339 S.E.2d 103 (1986)
Original opinion text
January 6, 1994
Barbara D. Matula
Director, Division of Medical Assistance
North Carolina Department of Human Resources
Kirby Building 1985 Umstead Drive
Post Office Box 29529
Raleigh, North Carolina 27626-0529
RE: Advisory Opinion; U.S. Constitution, Art. VI, cl. 2; 42 U.S.C. § 1396p(d) [Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 103-66, Title XIII, Ch. 2, Subch. B, Part II, § 13611]; N.C. Gen. Stat. §§ 36A-59.10 to -59.20; N.C. Gen. Stat. § 36A-115(b).
Dear Mrs. Matula:
The following is in response to your request for an opinion as to whether or not the provisions of new 42 U.S.C. § 1396p(d) [OBRA 93 § 13611] encompass a trust created with court approval and with proceeds paid by an insurance company (presumably in settlement of a personal injury claim, or in payment of a judgment) directly into the trust. It is the opinion of this office that § 1396p(d) does encompass such trusts. This is because settlement or judgment proceeds are the property of the individual with the personal injury claim, whether or not the insurance company pays those proceeds into the trust. The person with the personal injury claim should be considered to have provided the proceeds with which the trust was created, and thus to have established the trust. This is so even though in form the trust is created by someone else, such as a guardian or a court. See Forsyth v. Rowe, 5 Medicare & Medicaid Guide (CCH) New Developments ¶ 41,777 (Ct. S. Ct., Aug. 3, 1993). The text of the new 42 U.S.C. § 1396p(d)(2)(A) appears to be premised upon this type of analysis.
You further inquired whether or not it is necessary to change North Carolina law in order to negate trust instrument provisions which prohibit the use of trust monies for Medicaid-covered expenses, or which forbid the use of trust funds in a fashion that would render the trust beneficiary ineligible for Medicaid. It appears that such restrictions on the use of trust monies are enforceable under North Carolina's case law and statutes governing trust instruments, at least absent a conflict with federal Medicaid law.
N.C. Gen. Stat. § 36A-115(b) (1991) provides that a beneficiary's interest in a discretionary, support, or spendthrift trust is neither voluntarily nor involuntarily alienable (i.e., transferable). A discretionary trust is one which provides that the amount, if any, of the trust funds to be received by the beneficiary is within the trustee's discretion. A support trust is one that does not obligate the trustee to pay or distribute any particular amount, but only such sums as the trustee determines, in his discretion, are appropriate for the beneficiary's support, education or maintenance. A spendthrift trust is one in which the creating instrument provides that the beneficiary's interest shall terminate if the beneficiary alienates or attempts to alienate his interest, or becomes bankrupt or insolvent, or if the beneficiary's creditors attempt to reach the beneficiary's interest in the trust. It would seem that such an inalienable interest in a trust is not an available asset for Medicaid eligibility purposes. It further appears that a discretionary or support trust could include a restriction upon the trustee's discretion to distribute trust funds for use for Medicaid-covered expenses, or to make trust funds available to the beneficiary in a fashion that would render the beneficiary ineligible for Medicaid. Indeed, in Lineback ex rel. Hutchens v. Stout, 79 N.C. App. 292, 339 S.E.2d 103 (1986), the North Carolina Court of Appeals held that provisions in a testamentary trust showed that the creator of the trust intended the trust funds to be used to supplement, rather than supplant, public assistance funds for the beneficiary. The beneficiary was a disabled nursing home resident who apparently had received Medicaid benefits to cover the cost of her care. Courts in other states have refused to enforce trust provisions of this nature as contrary to public policy, but such considerations apparently do not trouble the North Carolina courts.
It nonetheless may not be strictly necessary to alter North Carolina law in order to enforce the provisions of § 13611 of OBRA 1993. It seems that the provisions of N.C. Gen. Stat. § 36A-115(b) and the holding in Lineback ought to have been equally problematic vis-a-vis the old Medicaid qualifying trust ("MQT") provisions of former 42 U.S.C. § 1396a(k). We are unaware, however, of any significant difficulty in enforcing the MQT provisions. We suspect this is because under the federal Supremacy Clause [U.S. Const., Art. VI, cl. 2] and N.C. Gen. Stat. § 108A-79(l), federal Medicaid law is controlling in the event that state law is in conflict with it. We nevertheless would recommend that North Carolina amend its Medicaid and/or trust statutes so as to conform with the dictates of OBRA 1993, as conflicts of the type that apparently exists can engender confusion and litigation.
Ann Reed
Senior Deputy Attorney General
Jane T. Friedensen
Assistant Attorney General