Treatment of OBRA '93 Trusts

Once a trust has been categorized as an OBRA ‘93 Trust, review the terms of the trust to determine if it is revocable or irrevocable.

Revocable OBRA ‘93 Trusts

The entire amount of trust principal and trust income retained in the trust is treated as available property. Any actual payment from the trust, whether from trust income or principal, paid to or for the benefit of the individual or spouse, is treated as income. Any actual payment from the trust, whether from trust income or principal, paid to another person which is not for the benefit of the individual or spouse, is treated as a transfer of property.
ExampleExample

On 3/1/96, Mr. Baker established a $100,000 revocable trust. He then enters a LTC facility on 11/15/96 and applies for MC at that time. The trustee has full discretion in disbursing trust funds. Each month the trustee gives $100 personal allowance to Mr. Baker and $500 to a property management firm for the upkeep of Mr. Baker’s home. On 10/1/96, the trustee gave $50,000 from the trust principal to Mr. Baker’s brother.

The trust meets all the characteristics of an OBRA ‘93 Trust and is revocable. Therefore, the entire amount of trust income and principal remaining in the trust ($50,000 plus any accrued trust income) is considered available property. The $100 personal allowance and the $500 paid for the upkeep of Mr. Baker’s home are treated as income. The $50,000 given away on 10/1/96 is considered a transfer of property.

Irrevocable OBRA ‘93 Trusts

If the OBRA ‘93 Trust is irrevocable, refer to the terms of the trust to determine whether payments can, under any circumstance, be made from the trust to or for the benefit of the individual or spouse. It does not matter when, or if the payment is actually made.

Note: Effective January 1, 2024, the principal of a revocable or irrevocable trust is disregarded because resources are no longer a factor in determining Non-MAGI MC eligibility. Payments from a trust continue to count as unearned income to the individual.

Irrevocable Trust with Disbursements Allowable

For trusts where there is any circumstance under which payment can be made, the following rules apply:

An actual payment from trust income or trust principal is treated as available income.
Trust income or principal that could be distributed, but is not, is treated as available property.
Trust principal or income that must be paid in the future, is treated as available property, regardless of when the payment is, or can be, made.
Any actual payment from the trust, whether from trust income or principal, paid to another person which is not for the benefit of the individual or spouse, is treated as a transferred asset.

ExampleExample

On 3/1/96, Mr. Baker established a $100,000 irrevocable trust. He then enters a LTC facility on 11/15/96 and applies for Medi-Cal at that time. The trustee has full discretion in disbursing trust funds. Each month, from the trust income, the trustee gives $100 to Mr. Baker as a personal allowance and $500 to a property management firm for the upkeep of Mr. Baker’s home. On 6/15/96, the trustee gave $50,000 from trust principal to Mr. Baker’s brother.

The trust meets all the characteristics of an OBRA ‘93 Trust and is irrevocable. Therefore, the remaining $50,000 of trust principal is considered available property because the trustee has full discretion to disburse the entire amount (there is a situation under which payment could be made). The $100 personal allowance and the $500 paid for upkeep of the home are treated as income to Mr. Baker. The $50,000 gift to Mr. Baker’s brother is treated as a transferred asset (transfer of property).

Note: Disbursements from the trust to third parties that result in the trust beneficiary receiving non-cash items other than housing, utilities, or food are not counted as in-kind income.

Irrevocable Trust with NO Disbursements Allowable

For trusts where payments from all or some portion of the trust cannot, at any time or under any circumstance, be made to or for the benefit of the individual or spouse, the following rules apply:

When all, or a portion, of the trust principal cannot be paid out to or for the benefit of the individual or spouse because provisions for distribution never existed or because provisions for distribution have been stopped, that portion of trust principal is treated as a transferred asset (transfer of property).
When all, or a portion, of the trust income cannot be paid out to or for the benefit of the individual or spouse because provisions for distribution never existed, treat the trust income as principal. Review the terms of the trust to determine the provisions for distribution of trust principal. If trust principal can also not be distributed, treat as a transferred asset (transfer of property).
When all, or a portion, of the trust income cannot be paid out because the provisions for distribution have been stopped treat in accordance with the following:
- If according to the terms of the trust, undistributed income becomes principal, review the terms of the trust regarding the treatment of principal. If trust principal can also not be distributed, treat as a transferred asset (transfer of property).
- If according to the terms of the trust, undistributed income remains income, treat as a transferred asset (transfer of income).

Example
On 3/1/96, Mr. Baker established a $100,000 irrevocable trust. He then enters a LTC facility on 11/15/96 and applies for Medi-Cal at that time. The trustee has full discretion in disbursing trust income but is precluded by the terms of the trust from disbursing any of the trust principal to or for the benefit of Mr. Baker. Each month the trustee gives, from the trust income, a $100 personal allowance to Mr. Baker and $500 to a property management firm for the upkeep of Mr. Baker’s home.

This trust meets all the characteristics of an OBRA ‘93 Trust, is irrevocable and provides for a portion of the trust that cannot, under any condition be distributed. The $100 personal allowance and the $500 paid for upkeep of Mr. Baker’s home are counted as income. Since none of the principal can be disbursed to Mr. Baker, the entire value of principal at the time the trust was created ($100,000) is treated as a transferred asset (transfer of property). See Treatment of Income, Transfer of Property.
ExampleExample

A $100,000 irrevocable trust provides that $40,000 of the trust principal can be made to the trustee only in the event that the trustor needs a heart transplant. The remaining $60,000 cannot be disbursed, under any circumstance.

Since there is a circumstance, however remote, when a payment can be made ($40,000) from the principal, the full $40,000 is considered available property, regardless of when or whether the actual payment is made. The remaining $60,000 cannot, under any circumstances, be paid to, or for the benefit of that individual and is considered a transferred asset (transfer of property).

Undue Hardship

Prior to denying or discontinuing an individual due to excess property from an OBRA ‘93 Trust, determine if undue hardship exists.

For undue hardship to exist, all of the following conditions must be met:

The trust assets cannot, under any circumstances, be used to provide for health care or medical needs of the individual, and
Health care cannot be obtained from, and medical needs cannot be met by, any source other than Medi-Cal without depriving the individual of food, clothing, shelter, or other necessities of life, and
The individual’s parents (if the individual is under 21) or the individual’s spouse, do not have assets to provide for health care and medical needs, or health care coverage for the individual without depriving themselves of food, health care or medical needs, clothing, shelter, or other necessities of life, and
The courts have denied a good faith petition to release the trust assets to pay for the required medical care. A petition to release the trust assets must not be considered a valid good faith petition if the petition contains language that suggests or requests the courts do anything other than release the trust assets needed to pay for the required medical care. The EW must verify the petition by viewing both the petition and the court order.

If undue hardship applies, only the treatment of the trust under the OBRA ‘93 provisions are waived. The trust must still be evaluated as an “Other Trust”.

When Undue Hardship Doesn’t Apply

If undue hardship doesn’t apply:

Evaluate for excess property, or
Evaluate for a Period of Ineligibility if a transfer without adequate consideration exists.
(The Notice of Action (NOA) must include a statement indicating that the provisions of undue hardship were considered and found not to exist.