CFP - Retirement Savings and Income Planning (18% of the exam) - Section F.46

Elder care and special needs planning

Planning for an ageing client's care and capacity: care options and their costs, Medicaid eligibility and look-back rules, ABLE accounts and special needs trusts that preserve means-tested benefits, and coordinating family caregiving and guardianship decisions.

ABLE accountsSpecial needs trustsMedicaid look-back period

Practice question for this objective

Free sampleRetirement Savings and Income Planningmedium

Ravi is 34 and has been unable to work since a road accident at 22. He receives Supplemental Security Income and is enrolled in Medicaid, and his countable resources are under the 2,000 dollar limit. His personal injury claim has settled and 450,000 dollars will be paid to him personally within weeks. His parents want the money to improve his quality of life without ending his benefits, and they are not in a position to contribute anything themselves. Which vehicle should the planner recommend for the settlement proceeds?

AA third-party supplemental needs trust created by his parents and funded with the settlement money paid to him
BAn outright payment of the settlement to his sister, who would hold the money informally and spend it on his behalf
CA support trust directing the trustee to pay for his food, shelter, clothing and routine medical care as needed
DA first-party special needs trust holding the settlement, established for his sole benefit before age 65 and repaying Medicaid at his death Correct

A special needs trust funded with the beneficiary's own money must be established before age 65 and repay Medicaid at death. The source of the money decides the structure. Settlement proceeds payable to Ravi are his own property, so any trust holding them is self-settled. Benefit rules disregard a self-settled trust only where it is established for the sole benefit of a disabled individual under age 65, is funded with that individual's own assets, and provides that the state Medicaid agency is repaid from what remains on his death for the medical assistance it has paid. A third-party trust carries no payback duty, but it cannot hold his own assets. Giving the money away instead of placing it in a qualifying trust is an uncompensated transfer and produces a period of ineligibility. A support standard defeats the whole purpose, because assets a trustee must spend on maintenance are treated as available to the beneficiary.

Why A is wrong: This is tempting because a third-party trust avoids any repayment duty, but the defining feature of such a trust is that it holds money that never belonged to the beneficiary, and a settlement paid to Ravi is his own asset.

Why B is wrong: Handing the money to a relative looks simple, but an uncompensated transfer of his own funds triggers a transfer penalty for benefit purposes and leaves the fund exposed to his sister's creditors and divorce with no enforceable duty to Ravi.

Why C is wrong: A support standard reads as generous but it is the classic drafting error: because the trustee can be compelled to provide maintenance, the trust assets are treated as available to him and the benefits he relies on are lost.

Why D is correct: A self-settled special needs trust is the recognised route for a beneficiary's own money: assets in it are disregarded for benefit purposes provided it is established before age 65, is for his sole benefit and repays the state at his death.

See more CFP practice questions, answers explained.

Exam traps in Retirement Savings and Income Planning

Answers that look right on this material and are not. Each one is a distractor from a different question in the CFP bank for this domain.

Leave the bequest outright and rely on him spending the money down to the resource limit within the first month
Why it is wrong: A spend-down sounds practical, but an outright legacy is a countable resource the moment it vests, benefits stop, and spending it on anything other than exempt items risks a transfer penalty as well as wasting the whole 200,000 dollars.
Petition the court to appoint her daughter as guardian of her property, so that the authority cannot later be questioned
Why it is wrong: Guardianship does produce authority that is hard to challenge, which is why it appeals, but it is a public court proceeding that strips Margaret of the right to manage her own affairs and courts treat it as a last resort where no less restrictive alternative exists.
No penalty at all, because the gift was made more than twelve months before the Medicaid application was filed
Why it is wrong: This borrows a twelve month window that does not exist in these rules; the look-back reaches back 60 months from the date of application, so a gift made 18 months ago sits squarely inside it and has to be reported.

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