A recent decision of the United States Court of Appeals for the First Circuit sheds light on a very interesting issue concerning the intersection of the laws governing the Medicaid program and other means-tested government programs, such as HUD housing. A circuit court is a federal appeals court immediately below the Supreme Court of the United States, the highest court in our country.  The first circuit court of appeals serves the New England states such as Massachusetts.

Medicaid is a federal payment program for needy individuals.  If a person qualifies for Medicaid benefits, the Medicaid program will pay for many of that individual’s health needs.  As an elder law attorney, I frequently qualify clients who reside in nursing homes or assisted living residences for benefits.  Medicaid will pay for the care provided in a nursing home or assisted living residence.

Medicaid is asset- and income-based program.  An individual must have a very limited amount of assets, typically less than $2,000, and his income must be insufficient to pay for his care.

The United States Department of Housing and Urban Development (HUD) maintains programs that subsidize needy individual’s housing.  A person who qualifies for HUD housing only has to pay a limited percentage of his monthly income toward his rent.  HUD will pay the remainder of his rent.

HUD housing programs are income-based.  An individual’s income must be below a certain level in order to qualify for HUD housing subsidies.

The laws governing the Medicaid program permit the establishment of certain trusts that cause the assets and the income of the Medicaid beneficiary to be excluded from the determination of his eligibility for Medicaid.  These trusts are commonly known as special needs trusts.  A special needs trust can be established by a disabled individual under the age of sixty-five to hold his assets and income.

For instance, assume that John Smith, aged 55, is disabled.  Mr. Smith receives $300,000 from a lawsuit settlement.  Prior to receiving the settlement, Mr. Smith had been a Medicaid beneficiary for ten years and was reliant upon the services for which Medicaid was paying.  Now that Mr. Smith received $300,000, he will be disqualified from receiving Medicaid benefits until such time as he spends down the settlement.  Much of the settlement might be spent on the medical services for which Medicaid was paying.

Because Mr. Smith is under the age of sixty-five and disabled, he can establish a special needs trust.  By placing his settlement in the special needs trust, Mr. Smith can continue to receive Medicaid benefits.

Let’s assume further that Mr. Smith lives in a HUD subsidized apartment.  He pays 30% of his income toward the cost of the apartment and the HUD housing program pays the remainder of his rent.  Mr. Smith depends upon the HUD program to pay his rent.

Now that Mr. Smith has the $300,000, the investment income he earns from his assets might cause him to lose his HUD subsidy by putting his total income over the limit for HUD housing eligibility.  But what if Mr. Smith places the $300,000 into a special needs trust?  Will this cause the asset and the income those assets earn to be excluded from his personal income?  Remember, a special needs trust is a creature of Medicaid law, not HUD.

In the recent First Circuit case, the court was faced with a situation in which the HUD housing authority was treating all disbursements from a special needs trust as income to the HUD housing beneficiary.  A law governing the HUD housing program holds that settlement proceeds are exempt for purposes of HUD income.

The court held that the exemption for settlement proceeds is not lost when the assets are placed into a special needs trust.  The assets remain exempt.  The income those assets earn would count against a HUD housing beneficiary, though, irrespective of the funds being held in a special needs trust.  So, the Trust adds no benefit for HUD housing purposes, but according to this case, isn’t a detriment to eligibility for the HUD program.  This is a good holding for those individuals seeking to maintain their Medicaid benefits.