Special Needs Trusts and Medicaid Planning in Puerto Rico

How Act 60 families can protect disabled or aging members while preserving government benefits and family wealth.

By Hans Riefkohl, Riefkohl Law • March 2026 • Part 6 of 12 in the Puerto Rico Trust Law Series

Introduction: Why Wealth Doesn’t Eliminate Medicaid Concerns

When you relocate to Puerto Rico as an Act 60 investor, asset protection is typically top of mind. But there’s another financial planning question that catches many families off guard: What happens when long-term care becomes necessary?

A single year in a Puerto Rico nursing facility can cost $50,000–$100,000 or more. Assisted living facilities, specialized memory care for dementia, in-home healthcare for aging parents, residential treatment for disabled family members—these aren’t hypothetical concerns. They’re eventualities many prosperous families face, regardless of wealth.

Here’s the uncomfortable truth: Medicaid planning isn’t just for the poor. It’s for anyone whose assets might be depleted by catastrophic long-term care costs. Even Act 60 investors with significant wealth benefit from structuring their assets intelligently to preserve family resources for living heirs rather than paying them to nursing facilities.

This article explores how Special Needs Trusts (SNTs) and Medicaid planning work in the Puerto Rico context—and critically, how they sometimes conflict with other asset protection goals that drew you to Act 60 in the first place.

Important Note: Puerto Rico’s Medicaid program (Plan Vital) does not cover nursing facility services for adults. This fundamentally changes the Medicaid planning calculus compared to the mainland. In PR, the primary reason for SNT planning is protecting Medicaid medical coverage and the modest AABD cash benefit—not nursing home eligibility. Readers should keep this critical distinction in mind throughout this article. Additionally, all trusts in Puerto Rico must comply with Law 219-2012, which requires execution by public deed (escritura pública), mandatory registration in the Special Registry of Trusts, and imposes default irrevocability and duration limits.

Understanding Medicaid’s “Any Circumstances” Test

The foundation of Medicaid planning is a deceptively simple rule buried in federal statute: 42 U.S.C.A. §1396p(d)(3)(B).

For Medicaid eligibility purposes, a beneficiary’s “countable resources” include not only assets they own outright, but also certain trust assets that could be paid to them under any circumstances, even if the trustee has discretion and even if distribution isn’t expected.

Let’s break down how different trust structures are treated:

Revocable Trusts: Entirely Countable

If you fund a revocable living trust during your lifetime and retain the power to revoke it, the entire trust corpus is countable as your resource for Medicaid purposes. From Medicaid’s perspective, you haven’t transferred these assets at all—you still control them.

PR-Specific Note: Under Puerto Rico Law 219-2012, trusts are irrevocable by default. The only exception is for Act 60 IRI decree holders, who may create revocable trusts under the Incentives Code (13 LPRA §10854a(b)). For all other settlors, revocable living trusts as understood on the mainland cannot be created in Puerto Rico. This section describes mainland Medicaid rules that have limited applicability in PR.

Irrevocable Trusts with Discretionary Distributions to Applicant

Suppose you create an irrevocable trust that gives the trustee discretion to pay principal to you if needed. Even if the trustee intends never to make distributions, Medicaid counts the maximum distributable amount because the funds could reach you under “any circumstances.”

Irrevocable Trusts with NO Distribution Provisions to Applicant

Here’s where Medicaid planning gains traction. If you create an irrevocable trust with absolutely no provision allowing distributions to you, the principal is not countable for Medicaid eligibility (subject to the lookback period penalty discussed below and other Medicaid rules). The trade-off: transferring assets into such a trust triggers a Medicaid penalty period if you apply for Medicaid within 60 months.

Income vs. Principal: Separate Analysis

Medicaid also distinguishes between trust income and trust principal. Income generated by trust assets that must or could be paid to the beneficiary is countable as income for monthly Medicaid purposes. Principal may be handled differently.

First-Party Special Needs Trusts: The Restricted Option

A first-party (self-settled) special needs trust is created with the disabled beneficiary’s own assets—assets they inherited, earned, or received as a personal injury settlement.

Statutory Requirements

First-party SNTs are governed by 42 U.S.C.A. §1396p(d)(4)(A), which imposes strict requirements:

Created by: Parent, grandparent, guardian, court, or the disabled individual themselves (per the Special Needs Trust Fairness Act of 2016, P.L. 114-255)
Beneficiary age: Must be under age 65 at the time the trust is created
Medicaid payback provision: At the beneficiary’s death, any remaining trust principal must be used to reimburse the state for Medicaid benefits paid on the beneficiary’s behalf

Medicaid Exempt Status

If these requirements are met, the trust principal is not counted as a resource when determining Medicaid eligibility. This allows a disabled child or young adult to receive a substantial inheritance or settlement without immediately losing Medicaid coverage.

The Constraint: Limited Family Wealth Planning

The age 65 restriction and mandatory payback requirement make first-party SNTs much less useful for Act 60 families planning ahead. If your disabled adult child is over 65, a first-party trust won’t work. And even if you establish one early, the state ultimately claims trust assets at death rather than preserving them for the family.

Third-Party Special Needs Trusts: The Practitioner’s Tool

A third-party special needs trust is created with someone else’s assets—typically a parent’s or grandparent’s property, created for a disabled child or dependent.

Why Third-Party SNTs Are Superior for Act 60 Families

Third-party SNTs are far more flexible than their first-party cousins:

No age restriction: The beneficiary can be any age
No Medicaid payback: Remaining trust assets pass to remainder beneficiaries at the beneficiary’s death, not to the state
Extended duration (PR): Under PR Law 219-2012, disability trusts may last up to 90 years or the life of the disabled beneficiary (whichever is longer); perpetual trusts are not permitted in PR
Full discretion: The trustee controls whether and when to supplement government benefits

The Critical Principle: Supplement, Don’t Replace

The key to effective special needs trust drafting is ensuring the trustee understands that SNT distributions must supplement public benefits, not replace them. A beneficiary on Medicaid shouldn’t receive large lump sums from the SNT—that triggers resource counting and loss of benefits.

Instead, the SNT trustee purchases items and services Medicaid doesn’t cover: dental work, glasses, therapy beyond what Medicaid funds, respite care, education, travel, vocational training, and adaptive equipment. The trustee pays vendors directly, not the beneficiary.

This requires experienced drafting. The SNT must include language that restricts distributions, clarifies the trustee’s authority, and educates trustees (both initial and successor) on the Medicaid interaction.

Pooled Trusts: The Age 65+ Workaround

Pooled trusts under 42 U.S.C.A. §1396p(d)(4)(C) offer an alternative for individuals age 65 and older.

A pooled trust is managed by a nonprofit organization. The nonprofit pools assets from many individual beneficiaries while maintaining separate accounting for each person’s funds. This structure allows:

Individuals age 65+ to transfer assets into the pooled trust
The assets to be Medicaid-exempt (under certain conditions)
Individual control over the subaccount (with some limitations)

PR-Specific Note: No Puerto Rico-based nonprofit currently administers a d4C pooled trust. While two mainland nonprofits (CPT Institute and Legacy Enhancement Trust) claim to serve PR residents, significant logistical and legal barriers exist. Law 219-2012’s escritura pública requirement may require each joinder agreement to be executed as a public deed, adding cost and complexity. PR Medicaid’s recognition of mainland pooled trusts is uncertain.

The 60-Month Lookback Period and Penalty Calculation

Here’s where Medicaid planning becomes strategic and time-sensitive.

The Basic Rule

Any transfer of assets for less than fair market value within 60 months before applying for Medicaid triggers a penalty period during which you’re ineligible for Medicaid coverage.

Calculating the Penalty

The penalty period is calculated as:

Penalty = Total Transferred Amount ÷ Average Monthly Nursing Home Cost = Months of Ineligibility

If Puerto Rico’s average monthly nursing home cost is $6,000, and you transfer $60,000 to a third-party SNT, the penalty would be 10 months of Medicaid ineligibility (this is a simplified calculation; actual penalty calculations depend on the precise definition of “average monthly long-term care cost” in the jurisdiction and other factors).

PR-Specific Note: Because Puerto Rico Medicaid does not cover nursing facility services, the above penalty calculation is largely inapplicable in practice. Transfer penalties under the 60-month lookback specifically delay payment for long-term institutional care—which PR does not provide through Medicaid. Multiple sources describe the lookback as “dormant” or “effectively neutralized” in PR.

Important Exceptions

Not all transfers trigger penalties:

Court-ordered transfers (e.g., settlement of a lawsuit)
Transfers when Medicaid need wasn’t anticipated (the “couldn’t anticipate” defense)
Transfers of fair market value (sales, not gifts)
Returned assets (if transferred back within the lookback period)

There’s also a hardship waiver available if denying Medicaid would cause severe hardship, but this requires aggressive advocacy and state approval.

The Scylla and Charybdis Problem: Asset Protection vs. Medicaid Planning

Here’s the critical insight that makes Act 60 legal planning in Puerto Rico fundamentally different from mainland planning: asset protection and Medicaid planning often work at cross-purposes.

Example 1: The DAPT Strategy

Suppose you establish a Domestic Asset Protection Trust (DAPT) under Puerto Rico law, retaining discretion for the trustee to distribute to you (self-as-beneficiary structure). This provides excellent creditor protection—the trust assets are outside your estate and generally protected from judgment creditors.

But for Medicaid: The fact that you could receive distributions means Medicaid counts the maximum distributable amount as your resource. You’ve optimized for creditor protection while undermining Medicaid planning.

Example 2: The Irrevocable Discretionary Trust

Now suppose you create a truly irrevocable trust with discretionary distributions to yourself. This limits creditor protection (you’ve transferred assets and don’t retain control) while also failing Medicaid planning (maximum distributable amount is countable).

You’ve achieved neither goal perfectly.

The Reconciliation: Specialized Counsel

This is why Act 60 investors need specialized Puerto Rico counsel rather than relying on generic mainland asset protection or Medicaid planners.

The optimal structure depends on your specific circumstances:

Are you primarily concerned about creditors or Medicaid?
Which is more likely and more damaging in your situation?
Can you structure trusts that hedge both risks?
What are your family’s specific needs and timelines?

A skilled PR-focused estate planner balances these competing objectives, sometimes by layering multiple trusts or by accepting some limitation in one area to achieve stronger protection in another.

Estate Recovery: The State’s Claim at Death

Most people don’t realize that Medicaid isn’t just a program for the poor—it’s also a creditor of your estate in many circumstances.

How Estate Recovery Works

Most states (including Puerto Rico) have adopted estate recovery programs under 42 U.S.C.A. §1396p(b). These programs allow the state to recover Medicaid expenses from:

Permanently institutionalized individuals
Individuals age 55 and older who received Medicaid-covered long-term care

The state files a claim against the individual’s probate estate.

Expanded Estate Definitions

Many states define “estate” broadly to include non-probate property, such as:

Trust assets with the deceased as settlor
Assets passing through joint tenancy
Assets with payable-on-death designations
Certain transferred assets within the lookback period

This means even if you’ve carefully structured a trust to protect assets from Medicaid for eligibility purposes, the state may nonetheless recover those assets after death.

Puerto Rico-Specific Medicaid Considerations

Medicaid in Puerto Rico operates somewhat differently from the mainland:

No Nursing Facility Coverage

The most critical difference: PR Medicaid (Plan Vital) does not cover nursing facility services for adults. This is confirmed by CMS, MACPAC, and all available sources. While CMS approved SPA 24-0009 in December 2024 (effective July 1, 2024), which added home health services, hospice, and durable medical equipment (DME) coverage to Plan Vital, nursing facility services remain excluded. This fundamentally changes Medicaid planning considerations compared to mainland states.

Block Grant Funding, Not Open-Ended

Puerto Rico receives a capped block grant from the federal government rather than open-ended matching funds. This means Medicaid eligibility and coverage can be tighter in PR than in wealthier states.

Medicare Applies Fully; SSI Does Not

Medicare operates the same in Puerto Rico as on the mainland. However, Supplemental Security Income (SSI) does not apply in Puerto Rico. It’s replaced by the Aid to the Aged, Blind, or Disabled (AABD), administered by ADSEF (Administración de Desarrollo Socioeconómico de la Familia) with lower benefits.

This matters for families with disabled members who might otherwise qualify for SSI. If they move to PR under Act 60, they may face reduced benefits.

The Carta de Derechos de la Persona de Edad Avanzada

Puerto Rico enacted the Charter of Rights for the Elderly (Carta de Derechos de la Persona de Edad Avanzada), recognizing rights and protections for elderly persons. This should inform trust drafting, guardianship arrangements, and healthcare directives for aging Act 60 beneficiaries.

Filial Support Obligations

Here’s a provision often missed in planning: Puerto Rico law imposes maintenance obligations from adult children to elderly parents. This interacts with trust planning.

If an elderly parent’s income is insufficient, PR courts may order adult children to provide support. Well-structured trusts can provide this support while preserving family assets by making distributions to parents rather than creating conflicting family litigation.

Puerto Rico’s Aging Population

PR has 425,000+ elderly residents today, with projections suggesting 900,000+ by 2030. This demographic shift creates both demand and (potentially) scarcity in long-term care services. Act 60 investors should plan accordingly.

ABLE Accounts: An Alternative for Younger Disabled Individuals

For disabled individuals who can’t benefit from SNTs (for instance, because the SNT threshold has been exceeded or other circumstances prevent it), ABLE accounts under 26 U.S.C.A. § 529A offer an alternative.

An ABLE account allows a disabled individual to accumulate up to $20,000 per year (2026) in tax-advantaged savings without losing AABD/Medicaid benefits (SSI does not apply in PR) if balances remain below $100,000. ABLE accounts have significant limits compared to SNTs, but they’re worth considering for younger beneficiaries with modest savings needs.

Advance Directives as Essential Companion to Trust Planning

A special needs trust manages assets. But who decides healthcare, medical treatment, and end-of-life care?

Advance directives must be coordinated with trust planning. Puerto Rico recognizes:

Living wills (instrumento de voluntades anticipadas)
Healthcare proxy designations (designación de apoderado para decisiones en materia de salud)

These documents allow you (or your disabled family member, if capacity permits) to appoint someone to make medical decisions if you become incapacitated.

For Act 60 families with aging or disabled members, a complete plan includes:

Special needs trust (manages money)
Healthcare proxy (controls medical decisions)
Living will (expresses end-of-life wishes)
HIPAA authorization (allows chosen person to access medical information)

Practical Recommendations for Act 60 Families

1. Plan Ahead of Crisis

Don’t wait until a parent has a stroke, a child receives a disability diagnosis, or long-term care becomes imminent. Trust design takes time, and the 60-month lookback period means timing matters.

2. Know Your Exposure

Calculate realistic long-term care costs for your family’s situation. How many of you are aging or disabled? What level of care might they need? What’s the realistic cost?

3. Layer Your Strategies

Consider combining trusts: A DAPT for general creditor protection, a third-party SNT for a disabled beneficiary, an irrevocable trust with no distribution provisions for other assets, and adequate liquid reserves for unexpected costs.

4. Document Your Intention

Make clear written records of why you structured trusts the way you did. If Medicaid questions your transfer, contemporaneous documentation showing you planned ahead (rather than frantically sheltering assets) helps with lookback exception defenses.

5. Work with Specialized Counsel

Generic estate planners and Medicaid specialists often miss Puerto Rico’s unique combination of Act 60 tax benefits, PR trust law, PR Medicaid rules, and mainland Medicaid law. You need someone who practices at the intersection.

6. Revisit Regularly

Medicaid rules change. Your family’s needs change. Tax law changes. What made sense in 2024 might need adjustment in 2026. Plan to review your structures every 3–5 years with your attorney.

Conclusion

Special needs trusts and Medicaid planning aren’t peripheral concerns for Act 60 investors—they’re central to preserving wealth and ensuring disabled or aging family members receive appropriate care without depleting family resources.

The challenge is that Medicaid planning in Puerto Rico requires balancing competing objectives: asset protection, tax efficiency, Medicaid eligibility, and family autonomy. There’s no one-size-fits-all answer. What works for a single investor differs from what works for a family with dependent adults or aging parents.

That’s why the specialized intersection of Act 60 law, Puerto Rico trust law, and federal Medicaid law requires experienced counsel. The payoff—preserving hundreds of thousands of dollars in family wealth across generations—makes that investment worthwhile.