Top Ten Tips Every Estate Planner
Needs to Know About
Special Needs Trusts
Katherine N. Barr
Richard E. Davis
Kristen M. Lewis
Table of Contents
Top Ten Tips (with appendices)
Special Needs Trusts: The Cornerstone of Planning for Disabled
Beneficiaries, by Kristen M. Lewis
What Estate Planners Need to Know About Special Needs Trusts
& Public Benefits, by Richard E. Davis
Reforming Trusts: Fixing Problems, by Stuart D. Zimring1
1
This outline was presented by Mr. Zimring at the 2009 annual meeting of The American College of Trust
and Estate Counsel, and is reproduced here with his permission. Mr. Zimring retains to copyright to his
outline.
TOP TEN TIPS for ESTATE PLANNERS
WHEN PLANNING FOR SPECIAL NEEDS
1)
Don't disinherit the family member with special needs. Instead, draft the SNT as a
common law pure discretionary trust with precatory supplemental needs language. See
Appendix 1.
2)
Carefully consider the division of assets among the children, as well as allocation of
administrative expenses and taxes among the shares of the estate. If parents of a child
with special needs either created a stand-alone 3rd party SNT during their lives or provided
for the establishment of one upon death, include a tax apportionment provision in parents’
estate plan and indicate whether or not state or federal estate taxes attributable to the
inclusion of the SNT in the estate of either parent should be charged against the SNT.
3)
Choose the trustee of the SNT carefully, as the trustee will be given sole and absolute
discretion. Family members are generally a poor choice, at least if they do not have a
professional or corporate co-trustee. See Appendix 3.
4)
Ask the parent to prepare a letter of intent to assist the trustee of the SNT. It serves
as a blueprint, providing valuable information concerning the daily life and health care
needs of the child with special needs. This is especially important when a new caregiver
steps in. The letter of intent also provides information concerning the day-to-day activities,
unique likes, dislikes, needs, preferences, and other critical information
concerning the child with special needs - all of which is helpful to the trustee and the
child's caregiver.
5)
Include contingent special needs provisions in your trust documents to deal with the
possibility of a future beneficiary having special needs or a disability. See Appendix 5.
6)
Include language in a parent's revocable living trust that permits the trustee to make
discretionary non-support distributions to or for the benefit of a child with special needs
during a parent's own period of incapacity. See Appendix 6.
7)
Include language in a parents’ POA to permit the agent to make discretionary non-support
distributions to or for the benefit of a child with special needs, and to establish the SNT
for the benefit of such child. See Appendix 7.
8)
Review all of the parents’ assets and beneficiary designations to make sure no funds or
resources could pass directly to the child with special needs, ensuring that all of his or her
share would pass to the SNT. See Appendix 8.
9)
Consider life insurance as a funding method for the SNT. A second-to-die policy that pays
upon the death of both parents is often very affordable. However, if the life insurance is
owned by an ILIT that includes SNT provisions for a beneficiary with a disability, make
sure that this beneficiary does not have a Crummey withdrawal right during periods when
he or she is receiving means-tested public benefits. See Appendix 9.
10)
Retirement plans are probably the most inefficient method of funding the SNT. If,
nevertheless, retirement benefits are to be paid to the SNT, do not use a conduit trust, as the
minimum required distributions would negatively affect means-tested public benefits.
Either pay the entire income tax liability up front or use the plan participant's remaining life
expectancy.
BONUS TIPS:
11)
Coordinate other relatives’ estate planning documents with parents’ 3rd-party created
SNT. Fortunately, a parent's stand alone, inter-vivos, 3rd-party created and funded SNT can
be structured to receive gifts, bequests, and inheritances from grandparents (and other
relatives/friends) for the benefit of the child with special needs. This avoids other family
members having to prepare a separate SNT. See Appendix 11.
12)
Don’t forget the estate plan of the child with the disability. Consider use of a self-settled
trust for his or her assets where means-tested benefits are needed. Also consider a Power
of Attorney or Health Care Directive for the child, if he or she has the requisite capacity to
establish these. See Appendix 12.
13)
What if the parent requires or may soon need nursing home Medicaid? In preparing an
estate plan for parents of a child with a disability, where Medicaid eligibility for the parents
could conceivably be necessary, have the parents execute a special limited power of
attorney authorizing the agent under their Powers of Attorney or living trusts to create and
fund a sole benefit trust. See Appendix 13 and Rick Davis' outline.
2
APPENDIX ONE1
1) Five Estate Planning Options Available To Special Needs Families concerning their
special needs child:
a. Distributing assets outright to the special needs child (not recommended since the
assets may disqualify the child from receiving means-tested government benefits).
b. Disinheriting the special needs child (generally not recommended since the child
will have no "safety net" if government benefits are subsequently reduced or
eliminated).
c. Leaving property to another family member with the "understanding" that the
property will be used for the benefit of the special needs child (generally not
recommended since the arrangement is not legally enforceable and the sibling's
creditors (including a potential ex-spouse) may he able to seize the assets).
d. Ignore the situation and do post-mortem planning with a self-settled (d)(4)(A) trust
(not recommended since a Medicaid payback is required in the self-settled trust;
however, this planning option is preferred to losing important government benefits and
health care. Consider a self-settled trust as "Plan B," if there is no 3rd-party SNT).
e. Establishing a 3rd-party created and funded SNT (with no support standard) for
the special needs child (highly recommended since the trust will not disqualify the
child from receiving means-tested government benefits).
1
Appendix 1, and the forms in most of the other appendices are by Sebastian V. Grassi, Jr., “Special Needs Requires Special Attention: Estate
Planning for a Family With a Special Needs Child,” 43rd Annual Heckerling Institute on Estate Planning (2009). Mr. Grassi retains the copyright
to his materials, which are reproduced here with his permission.
3
APPENDIX THREE
3) The trustee should:
a. understand and respond to the needs of the special needs child;
b. have a thorough knowledge of government benefit programs and the effect that trust
distributions will have on the special needs child's government benefits;
c. be honest and reliable;
d. possess financial acumen;
e. have no conflict of interest (i.e. should not serve alone and be a current or remainder
beneficiary); and
f.
not cause the loss of section 8 housing eligibility (a family member serving as trustee
often results in the loss of section 8).
4
APPENDIX FIVE2
The author makes no warranties or representations concerning the tax implications or efficacy of
any of the sample language provided herein.
5) In order to plan for the possibility that a child (or beneficiary under a trust or will) could
become severely disabled at a later date, the testator/trust settlor should include a
provision in the governing instrument that permits the fiduciary to establish a 3rd-party SNT
and to fund the trust with the property that would otherwise be paid outright to the (now) disabled
beneficiary. A possible alternative is to give a trustee a power to appoint (i.e., decant) the
trust assets to another trust that will preserve the beneficiary's eligibility for means-tested
government benefits. See, Alan S. Halperin and Lindsay N. O'Donnell, "Modifying Irrevocable
Trusts: State Law and Tax Considerations in Trust Decanting," 42 Heckerling Institute on
Estate Planning Chapter 13 (Matthew Bender/Lexis-Nexis, Newark, NJ 2008
Alternative A:
Power to Establish a Special Needs Trust, and To Amend Or Reform
A Trust. If an individual beneficiary-devisee has applied for or is
receiving government assistance that is based on financial eligibility
requirements, or if Trustee [Executor] reasonably anticipates that a
beneficiary-devisee may need such government assistance in the
foreseeable future, Trustee [Executor] may in its sole, absolute and
uncontrolled discretion withhold the trust [estate] property otherwise
distributable to such beneficiary- devisee and establish a third-party
created and funded discretionary non-support spendthrift special
needs trust; or if that is not possible or practicable, establish by court
order a first party (i.e., a self-settled) discretionary non-support
spendthrift special needs trust (such as a self settled special needs trust
permitted under 42 U.S.C. 1396p(d)(4)(A) or 42 U.S.C.
1396p(d)(4)(C)). Trustee [Executor] shall then fund the special needs
trust with the property that would otherwise be distributed to the
beneficiary-devisee. In establishing a special needs trust, Trustee
[Executor] may select a trustee and successor trustees (other than the
beneficiary-devisee or the beneficiary-devisee's spouse), establish
accounting requirements, and shall include all provisions determined to
be reasonable and necessary by Trustee [Executor] after consultation
with a qualified attorney. It is my intent that any special needs trust
established pursuant to this provision be drafted and administered so
as to provide the maximum benefit to the beneficiary-devisee and that
the assets of the special needs trust not be available to the
2
Id.
5
beneficiary-devisee for determining the beneficiary-devisee's
income or assets under rules by which any government agency
determines eligibility for need-based services or financial services
(such as SSI and Medicaid). To the extent required by law, the special
needs trust shall be for the sole benefit of the beneficiary-devisee during
his or her lifetime. To the extent not prohibited by law, distributions
from the special needs trust shall be made in the sole, absolute and
uncontrolled discretion of the special needs trustee to or for the
benefit of the beneficiary-devisee. In making such distributions, the
special needs trustee shall consider the effect such distributions may
have on the beneficiary-devisee's said government assistance
benefits. The special needs trust (or joinder agreement as concerns a
special needs trust established pursuant to 42 U.S.C. I 396p(d)(4)(C))
shall provide (to the extent possible) that upon the beneficiarydevisee's death and after all proper reimbursements and payment
of expenses have been made (to the extent such reimbursements
and payment of expenses are required by law), the special needs trustee
shall distribute the remaining trust property (if any) to such of my
descendants (other than the beneficiary-devisee, the beneficiarydevisee's estate or the creditors of either) as the beneficiary-devisee
shall appoint by the beneficiary-devisee's last will and testament that
makes specific reference to this testamentary limited power of
appointment. Any unappointed trust property shall be distributed to
the then living descendants of the beneficiary-devisee, by right of
representation, or if there are no then living descendants of the
beneficiary-devisee, the un-appointed trust property shall instead be
distributed: (i) to my descendants by right of representation, or (ii) to
such remainder beneficiaries as may be determined by a court of
competent jurisdiction at the time of Trustee's [Executor's]
establishment of the special needs trust. Trustee [Executor] shall
neither possess nor exercise its authority hereunder in a manner that
would impair or prevent a beneficiary's unexercised right of
withdrawal that has not yet lapsed, or prevent an existing bequest
from qualifying for the marital or charitable deduction, or would
impair the status or qualification of a trust that holds shares of
stock in a Subchapter S corporation, or would prevent a trust from
qualifying as a Look Through Trust with a Designated Beneficiary (or
Beneficiaries).
After my death, Trustee [Executor] may obtain an order from a court
of competent jurisdiction to amend or reform any trust (or any trust
created (or to be created) under this instrument to the minimum extent
necessary to comply with my intent and to comply with applicable federal
and state laws or regulations, including those pertaining to special needs
trusts. Trustee's [Executor's] authority hereunder is to be exercised
only in fiduciary capacity and may not be used to enlarge or shift any
6
beneficial interest except as an incidental consequence of the
discharge of fiduciary duties, and in no event shall any amendment or
reformation increase the class of beneficiaries. No Trustee [Executor]
(or court) shall have the power to amend or reform this instrument in a
manner that would thwart my intent, impair or prevent a beneficiary's
unexercised right of withdrawal that has not yet lapsed, or prevent an
existing bequest from qualifying for the marital or charitable
deduction, or would impair the status or qualification of a trust that
holds shares of stock in a Subchapter S corporation, or would
prevent a trust from qualifying as a Look Through Trust with a
Designated Beneficiary (or Beneficiaries). In no event shall this
power of amendment or reformation be construed or exercised in a
manner so as to bestow upon Trustee [Executor] a general power of
appointment (as that term is defined under the Internal Revenue Code).
Alternative B:3
DISTRIBUTIONS TO PERSON WITH A DISABILITY: If my trustee is
directed to distribute any share of my trust principal or income to a
beneficiary, other than my spouse, who is in the opinion of my trustee,
under any form of incapacity that renders the beneficiary unable to
administer distributions properly or is in need of means-tested
government benefits when the distribution is to be made, and if no
other trust is then to be held under this trust for the beneficiary’s
primary benefit, my trustee shall, in the trustee’s discretion, continue
to hold the beneficiary’s share as a separate trust until the
beneficiary overcomes the incapacity or is no longer in need of
means-tested benefits.
While any trust is being held under this Section, the trustee may pay
to the beneficiary for whom the trust is held such amounts, or none, of
the net income and/or principal as the Trustee determines to be in the
trustee’s sole, absolute discretion, and uncontrolled discretion.
[Optional: consider adding precatory language: Because the
beneficiary is disabled, it is my intention to establish a discretionary,
non-support, spendthrift supplemental needs trust which shall be used to
provide for the supplemental needs of such beneficiary with a disability
which needs are not covered by any means-tested public benefits to
which the beneficiary may be entitled.]
3
Alternative B is by Janet L. Lowder, “Irrevocability is a Relative Term (Especially When a Relative Has a Disability”, Stetson University
College of Law Special Needs Trusts X (2008), and it is reproduced here with her permission
7
APPENDIX SIX
The author makes no warranties or representations concerning the tax implications or
efficacy of any of the sample language provided herein.
6) Sample language for inclusion in a parent's revocable living trust.
Power Of Trustee Concerning Supplemental Non-Support Distributions
For The Benefit Of A Child With a Disability. During any period which
I, Jane Anderson Doe, am incapacitated or incompetent, if a child of mine is
disabled and is receiving Medicaid, SSI, or other government benefits (or
would otherwise be eligible for such benefits), Trustee may, in its sole,
absolute, and uncontrolled discretion, distribute to or apply for the benefit of
my disabled child such amounts of the trust's income and principal as Trustee
shall determine. Trustee shall have the absolute right to refuse to make any
distribution to or for the benefit of my disabled child, and neither the child
nor any representative of the child shall have the right to demand any
such distribution from Trustee. Such distributions by Trustee shall
supplement (and not supplant) such government benefits received by my
disabled child. In no event shall my disabled child serve as a trustee, nor
shall Trustee delegate any of Trustee's powers to such child.4
4
Supra, n. 1.
8
APPENDIX SEVEN 5
The author makes no warranties or representations concerning the tax implications or efficacy of any of
the sample language provided herein.
7) Sample language for inclusion in a parent's general durable power of attorney for financial
affairs.
Power Of Agent Concerning Supplemental Non-Support Distributions
For The Benefit Of A Disabled Child. If a child of mine is disabled and is
receiving Medicaid, SSI, or other government benefits (or would otherwise be
eligible for such benefits), my Agent shall have the power to pay to or apply for
the benefit of such child such amounts as my Agent, in my Agent's sole,
absolute, and uncontrolled discretion, may from time to time determine
concerning such child's special needs (and not for my disabled child's support
and maintenance). My Agent shall have the absolute right to refuse to make
any payment to or for the benefit of such child, and neither the child nor any
representative of the child shall have the right to demand any such
distribution from my Agent. Such payments by my Agent shall supplement
(and not supplant) such government benefits received by my disabled child.
My Agent may also establish and fund with my assets an inter-vivos thirdparty discretionary non-support special needs trust with spendthrift
provisions for the benefit of my disabled child during such child's lifetime,
and upon the death of my disabled child, the trust residue shall be distributed
to my then living descendants by right of representation. In no event shall my
disabled child serve as my Agent, nor shall my Agent delegate any of my
Agent's powers to such child. If it is determined by a court or administrative
agency that the existence of the foregoing powers granted to my Agent
renders my disabled child ineligible to receive SSI, Medicaid, or similar
governmental benefits, or if by reasons of the grant of such powers, my income
or assets are found by a court or an administrative agency to be subject to
garnishment, attachment, execution or bankruptcy proceedings by any creditor
of such child, then the special powers granted to provide benefits for such
child herein shall terminate and thereafter be null and void.
5
Id.
9
APPENDIX NINE
9)
Assets to review for beneficiary designations:
a. IRA, 401(k) and other retirement benefits
b. Life insurance
c. Employer provided death benefits, including life insurance, final paycheck
and vacation pay, etc.
d. Accidental death and travel insurance benefits provided through credit cards when
a person purchases a plane ticket, etc. using that credit card
e. Annuities
f.
Savings bonds
g. Any other non-probate property of the parents
i. POD
ii. TOD
iii. JWROS
h. UTMA accounts
i.
State homestead laws, if applicable. For example, Florida law, in certain
circumstances, gives a vested remainder interest in homestead property
10
APPENDIX ELEVEN6
The author makes no warranties or representations concerning the tax implications or
efficacy of any of the sample language provided herein.
11) Sample language to reference the SNT in a grandparent's estate planning documens.
Transfer Of Trust Estate Residue To Third Party Created and Funded Special
Needs Trust. Upon my death and after the proper administration of the
trust estate, Trustee shall distribute the residue of the trust estate to the
then acting trustee of The Jane Anderson Doe Third Party Special
Needs Trust MO [name of special needs child], dated December 1,
2008, to be held, administered, and distributed in accordance with the
terms of said special needs trust.
Special Provisions Concerning Distribution Of Property To A
Disabled Relative. If any property would otherwise be distributable
to my [nephew, niece, grandchild, etc.] whose name is [name of
disabled relative], my fiduciary shall not distribute the property to the
aforesaid individual (or to that individual's guardian or conservator)
but shall instead distribute the property to the then acting trustee of The
Jane Anderson Doe Third Party Special Needs Trust FBO [name of
disabled relative], dated December I, 2008, to be held, administered,
and distributed in accordance with the terms of said special needs trust.
6
Id.
11
APPENDIX TWELVE7
12) Consider these with regard to the assets or estate plan of the child with special needs.
a. Protect assets with a d4A or pooled account.
b. Once the child becomes an adult, a parent's right to know, monitor, advocate and
intercede in the special needs child's affairs may be limited or prohibited absent
the child's consent, a court order (such as a guardianship), or a GDPA. The child with
a disability should have a POA that authorizes the agent to take the action necessary to
join a (d)(4)(C) Pooled Account Trust or to transfer assets to a d4A
c. HCPOA with HIPAA authorization. Although the HIPAA privacy rules are well
intentioned, they can have horrendous implications for the medical care of an adult
special needs child if he or she is unable to give informed consent and knowingly
participate in his or her own medical treatment. If the special needs child is mentally
competent, prepare a medical power of attorney that includes HIPAA release
information and names each parent as a "personal representative" under the
HIPAA rules so that a parent can legally request and receive confidential medical
information; or if the special needs child is mentally incompetent, obtain a
guardianship over the special needs child for medical treatment purposes
d. Parent As Representative Payee of a Special Needs Child. Additionally, a parent
may become the "representative payee" of the special needs child's SSI, SSDI, and
Social Security benefits, thus avoiding a court-appointed "guardian of the
estate" or conservatorship. 20 C.F.R. Parts 404.2001 - 404.2065.
e. What if the parent requires nursing home Medicaid? In preparing an estate plan for
parents of child with a disability where Medicaid eligibility for the parents could
conceivably be necessary, have the parents execute a special limited power of attorney
authorizing the agent to create and fund a sole benefit trust.
7
Id.
12
APPENDIX THIRTEEN8
The author makes no warranties or representations concerning the tax implications or efficacy of any of
the sample language provided herein.
13) Sample language for establishing a parent's "sole benefit trust."
1.
My agent may make outright to, or for the benefit of, a person, a gift of any my
property, including by the exercise of a presently exercisable general power of appointment held
by me, in an amount per donee not to exceed the annual dollar limits of the federal gift tax
exclusion under Internal Revenue Code Section 2503(b), 26 U.S.C. Section 2503(b), as amended,
without regard to whether the federal gift tax exclusion applies to the gift, or if my spouse agrees
to consent to a split gift pursuant to Internal Revenue Code Section 2513, 26 U.S.C. 2513, as
amended, in an amount per donee not to exceed twice the annual federal gift tax exclusion limit;
provided, however, that subject to the provisions of paragraph 3, below, the dollar limitations set
forth in this paragraph 1 shall not apply to transfers of my funds to providers of educational and
medical services pursuant to I.R.C. § 2503(e).
2.
My Agent shall have the power to create on my behalf a trust pursuant to 42
U.S.C. § 1396p(c)(2)(B)(iii) and (iv) for the benefit of my child, [name of child], who is disabled,
as defined in 42 U.S.C. § 1382c(a)(3)(A), and to transfer my property to said trust, regardless of
amount; provided that such transfer does not disqualify me from receiving state-provided medical
care under a public benefit program if I am otherwise eligible.
3.
My Agent may only make gifts and transfers hereunder as my Agent determines is
consistent with my objectives and with my estate plan if actually known by my Agent and, if
unknown, as my Agent determines is consistent with my best interest based on all relevant factors,
including:
(a) the value and nature of my property;
(b) my foreseeable obligations and need for maintenance;
(c) minimization of taxes, including income, estate, inheritance, generation-skipping
transfer, and gift taxes; and
(d) eligibility for a benefit, a program, or assistance under a statute or regulation,
including but not limited to benefits under Title XIX of the Social Security Act.
4.
This power of attorney is currently effective and shall be considered durable. It
shall survive my incapacity and shall terminate at my death.
8
This form was prepared by Richard E. Davis.
13
Special Needs Trusts:
The Cornerstone of Planning
for Disabled Beneficiaries
Kristen M. Lewis, Esq.
Smith, Gambrell & Russell, LLP
3100 Promenade II
1230 Peachtree Street, N.E.
Atlanta, Georgia 30309-3592
(404) 815-3640
[email protected]
Special Needs Trust: General Definition

Privately and professionally managed

Administered by a Trustee, ideally an experienced professional
fiduciary

Administered for the benefit of a person with disabilities or
other impairments

Trustee holds legal title to SNT funds

Beneficiary holds equitable title to SNT funds

SNT established by one or more Settlors

Most states (including Georgia) have no specific statutory
provisions governing single beneficiary SNTs (however, see
infra for statutory authority governing the “pooled” SNT in
Georgia)

State Medicaid Programs may have specific guidelines or
“requirements” for SNTs (see Appendix)

Social Security Administration’s Program Operations Manual
System (“POMS”) sets forth guidelines for SNTs (see
Appendix)
-1-
Source of Trust Funds


“Self-settled” or “first-party” SNT: funded with assets owned
by the Beneficiary, or to which the Beneficiary is already legally
entitled
♦
Many SNTs derive from litigation proceeds payable to the
disabled Beneficiary, including lump sums and annuity
payments
♦
Other assets belonging to the Beneficiary may be used to
fund a SNT, e.g., an inheritance or gift
♦
Divorce settlements and child support payments may
fund first-party SNTs with proper planning and
coordination
♦
Some types of income are effectively non-assignable to a
SNT, including Social Security Disability Income and
Supplemental Security Income payments, veteran’s
pension and assistance payments, certain federal
retirement and pension payments. See POMS SI
01120.200.G.1.c.
“Third-party” SNT: funded with assets of a person other than
the Beneficiary
-2-
“Support” SNT

Serves as the primary source of benefits for the Beneficiary

Provides for the Beneficiary’s support and maintenance,
including food and shelter (as well as extraordinary needs)

Support SNT will be counted as a disqualifying asset for
purposes of determining the Beneficiary’s eligibility for meanstested government benefits, such as Medicaid and
Supplemental Security Income
♦
The vast majority of clients (even those of great wealth)
will elect against a support SNT when given a choice in
order to preserve the Beneficiary’s eligibility for meanstested benefits and related programs, e.g. “life skills”
programs which require the participant to be “Medicaideligible” even if not actually receiving Medicaid assistance
-3-
“Supplemental Care” SNT

Beneficiary cannot access a supplemental care SNT for support
or maintenance; Trustee is not obligated to provide for
Beneficiary’s support and maintenance

Beneficiary relies on local, state or federal governments or
agencies for basic support and maintenance

Supplemental care SNT provides for needs of the Beneficiary
that are not fully funded by government programs

If drafted properly, a supplemental care SNT does not supplant
means-tested government benefits for which the Beneficiary
may be eligible as a result of his disabilities
♦
Means-tested government benefits include Supplemental
Security Income (“SSI”) under Title XVI of the Social
Security Act, 42 U.S.C. Section 1380 et seq., and Medicaid
under Title XIX of the Social Security Act, 42 U.S.C.
Section 1396 et seq.
•
♦
Caveat: Certain Veterans Administration pension
benefits may be adversely affected by a first-party
supplemental care SNT
In addition to SSI and Medicaid, a Beneficiary can often
qualify for local or private programs which require the
Beneficiary to be “Medicaid-eligible,” e.g. life skills
programs
-4-
Self-Settled Supplemental Care SNT
Under 42 U.S.C. Section 1396p(d)(4)(A)

Federal statutory requirements for a self-settled, first-party
“(d)(4)(A)” supplemental care SNT:
♦
Specifies permissible Settlors (see infra at page 16)
♦
Beneficiary is “disabled” under 42 U.S.C. Section
1382c(a)(3)(A), i.e. “unable to engage in any substantial
gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to
result in death or which has lasted or can be expected to
last for a continuous period of not less than twelve
months” (or if Beneficiary is a child, has such an
impairment which results in “marked and severe
functional limitations”)
♦
SNT is irrevocable and for the sole benefit of the
Beneficiary
♦
Beneficiary is under age 65 when SNT is established and
funded, i.e. no additions are permitted after age 65
♦
Upon the death of the Beneficiary, medical assistance
providers (i.e. Medicaid, but not SSI) will be reimbursed
up to the total amount of medical assistance benefits paid
on behalf of the Beneficiary during his lifetime (thus also
known as a “pay-back trust”)
•
Courts are split as to the scope of the “total amount”
concept. See e.g. In the Matter of Ruben N. v.
Elizabeth T. (N.Y. App. Div., 2d Dept., No. 200605776, September 16, 2008), which held that
Medicaid should be paid back only for assistance
-5-
paid after the SNT was established, and In the
Matter of Abraham XX, Deceased v. State of
New York (N.Y., No. 165; Nov. 20, 2008), which
held that Medicaid should be paid back for
assistance paid even before the SNT was
established, not only for assistance paid after the
effective date of the SNT.
•
New POMS provisions issued after the two decisions
noted above take the position that Medicaid’s
pay-back “cannot be limited to the period after
establishment of the trust.” See POMS SI
01120.203.B.1.h.

Case law requirement: In the context of a personal injury
claim that yields a settlement or recovery for the disabled
Beneficiary of a SNT, before a (d)(4)(A) SNT may be funded,
Medicaid must first be reimbursed for certain benefits paid on
behalf of the Beneficiary prior to the establishment of the SNT,
i.e. for medical care necessitated by the wrongful acts of a third
party that generated the settlement or recovery. This “pretrust lien” may be satisfied only from that portion of the
Beneficiary’s recovery that is specifically allocable to past
medical expenses and costs. See Arkansas Dep’t of Health &
Human Services v. Ahlborn, 547 U. S. 268 (2006).

Transfers of a Beneficiary’s assets to a (d)(4)(A) SNT are not
penalized for purposes of means-tested benefits. See 42 U.S.C.
Sections 1396p(c)(2)(B)(IV) and 1382b(c)(1)(C)(ii)(iv).

Assets held in a (d)(4)(A) SNT are not deemed to be available
resources to the Beneficiary for purposes of means-tested
benefits. See POMS SI 00120.200 and 01120.203, and
Section 2346 of the Georgia Medicaid Manual in the Appendix.
-6-
Third-Party Supplemental Care SNT

Federal statutory requirements set forth on page 5 do not
apply, including the Medicaid “pay-back” requirement; no
particular definition of “disability;” no age limitation on
Beneficiary
♦

Third-party supplemental care SNTs may be established
inter vivos, i.e., during the Settlor’s life, or as part of the
Settlor’s estate plan, e.g., under a Will or “Will substitute”
such as a probate-avoidance “Revocable Living Trust”
♦

Thus, do not add third-party assets to a self-settled
supplemental care SNT, unnecessarily subjecting thirdparty assets to a “pay-back” requirement
Caveat: 42 U.S.C. Section 1382b(e) provides that if the
Settlor’s spouse is the beneficiary of the third-party
supplemental care SNT, it will be disregarded as an
available resource to the spouse only if it is created under
the terms of the Settlor’s Will (and not pursuant to a Will
substitute such as a Revocable Living Trust)
POMS Section 01120.200.D.2 provides that if the Beneficiary
of a third-party supplemental care SNT does not have the legal
authority to revoke or terminate the SNT, or to direct the use
of the SNT assets for his or her own support and maintenance,
then the SNT assets are not an available resource to the
Beneficiary for purposes of means-tested benefits
-7-
“Convertible” SNT

Option to begin with a support SNT while retaining the right to
“convert” to a supplemental care SNT at a later date, e.g.
especially if Beneficiary’s disability determination has not been
secured

Although current law and policy allow supplemental care SNT
planning, there is no guarantee that will be the case
indefinitely if the “wait and see” approach is taken

Beware “reverse” conversion, i.e. begin with a (d)(4)(A)
supplemental care SNT while retaining the right during the
Beneficiary’s lifetime to “convert” to a support SNT (or other
arrangement) after satisfying Medicaid’s “pay-back” interest
♦
Well-respected SNT practitioners believe that this
provision will disqualify a (d)(4)(A) SNT even if
Medicaid’s “pay-back” interest is fully satisfied prior to
conversion; POMS are reportedly being clarified to
confirm this position
-8-
Coordination of Trusts for the
SNT Beneficiary

Once a supplemental care SNT is in place, whether first-party
or third-party, all future trusts for the Beneficiary must also be
drafted as supplemental care SNTs to maintain the
Beneficiary’s eligibility for means-tested benefits

Any non-qualifying SNT, or any transfer such as an outright
gift or bequest, will count against the Beneficiary as an
available asset for purposes of means-tested benefits

Typical “bypass/credit shelter” trust provisions will disqualify
the Beneficiary of properly drafted supplemental care SNTs
from ongoing eligibility for means-tested benefits

Existing SNTs may be rendered ineffective without proper
planning by well-intentioned benefactors

Coordinate efforts with others who may wish to benefit the
SNT Beneficiary, e.g. utilize a third-party “stand-by”
supplemental care SNT designed to receive gifts and bequests
from family or friends
-9-
Primary Consideration

Consider whether the Beneficiary’s assets and other resources
are likely to cover the full cost of his lifetime needs, or whether
means-tested government benefits should help fund such
needs
♦
Even if a Beneficiary does not financially need to rely on
Medicaid for health insurance or on SSI for the monthly
payments, the Beneficiary may need to be “Medicaideligible” to participate in beneficial state or local
programs, e.g. life skills training

Procure a Life Care Plan to establish an objective estimate of
Beneficiary’s future expenses

Current law encourages persons with disabilities to utilize the
public-private partnership embodied in a SNT arrangement
♦
Proper SNT planning is not contrary to public policy or
against the law!
-10-
Attorney Liability for Failure to Use SNTs

Do not overlook the issue of maintaining a disabled
Beneficiary’s eligibility for means-tested government benefits!

Numerous cases hold attorneys liable for failure to consider
the option of supplemental care SNTs as part of the litigation
settlement process, as well as in the estate planning context.
See, e.g. Grillo v. Pettiette et al., Cause No. 96-145090-92, and
Grillo v. Henry, Cause No. 96-167-9213-97, 96th District Court,
Tarrant County, Texas; Board of Overseers of the Bar v.
Brown, 2002 Me. Lexis 190.

Connecticut Supreme Court recently held that a state Probate
Court could have been “in dereliction of [its] duties” had it not
approved the establishment of a first-party SNT funded with
settlement proceeds to which an adult ward was entitled. See
Department of Social Services v. Saunders, 247 Conn. 686,
724 A.2d 1093 (1999).
-11-
SNT versus Conservatorship

Conservatorship assets are generally considered “available”
resources for purposes of means-tested government benefits
eligibility

Certain conservatorship assets may be exempt under eligibility
rules for means-tested benefits, e.g., a home and one vehicle
used to transport the disabled ward

Probate Court will often allow conservatorship assets to be
transferred to a (d)(4)(A) SNT, characterizing the SNT funding
as an “exchange” of such assets for Medicaid and SSI benefits
(see e.g. O.C.G.A. Sections 29-3-35(c) and 29-5-35(c))
-12-
Court Approval Required for Many SNTs

If the Beneficiary is a competent adult, it is not necessary for a
court to approve a self-settled, first-party SNT
♦
However, if a competent adult Beneficiary has no living
parent or grandparent, a Court may need to order the
establishment of the (d)(4)(A) SNT, as required by the
federal enabling statute (see infra at page 16)

Approval of the Probate Court is generally necessary if the
Beneficiary is a minor or an incapacitated adult, and the
Beneficiary’s assets are used to fund the SNT, especially in the
context of personal injury settlements (see e.g. O.C.G.A.
Sections 29-3-3(h), 29-3-22(c)(5) and 29-5-23(c)(5))

No court approval necessary for third-party SNTs, if drafted
properly from the outset
-13-
Requirements of Government Agencies

State Medicaid Program may require pre-approval of a selfsettled (d)(4)(A) SNT and the inclusion of certain provisions in
the trust agreement designed to secure its “pay-back” interest
(see e.g. Section 2346 of the Georgia Medicaid Manual in the
Appendix)
♦
Some states reportedly restrict the purposes for which
SNT disbursements may be made by the Trustee in the
exercise of its fiduciary discretion

POMS SI 01120.203.D.1 sets forth a “checklist” of
requirements for a self-settled (d)(4)(A) SNT if the Beneficiary
is also receiving Supplemental Security Income (see Appendix)

Include provisions in SNT that allow Trustee to amend SNT
without court approval if required by state Medicaid agency,
Social Security Administration, or as otherwise necessary to
ensure ongoing compliance with relevant law
-14-
Settlor of SNT

Settlor is a person willing and able to establish a SNT by
executing the SNT agreement with the Trustee

Settlor not required to have any further or ongoing
responsibilities, but may continue to be involved as
appropriate

No restrictions on identity of Settlor of a third-party SNT

A competent adult Beneficiary cannot serve as the Settlor of his
own (d)(4)(A) supplemental care SNT; however, he could serve
as the Settlor of a support SNT or a “pooled” SNT under 42
U.S.C. Section 1396p(d)(4)(C), discussed infra at page 35
♦
See next page for permissible Settlors of a (d)(4)(A) SNT
-15-
Permissible Settlors of Self-Settled
Supplemental Care SNT
Under 42 U.S.C. Section 1396p(d)(4)(A)

Legal guardian/conservator of a minor or incapacitated adult
Beneficiary

Parent or grandparent of Beneficiary
♦

Notwithstanding the clearly stated statutory authority of
a “parent or grandparent” to serve as the Settlor of a
(d)(4)(A) SNT, SSA requires that such person (i) also
have independent legal authority to act with respect to
the Beneficiary’s assets, e.g. as the Beneficiary’s courtappointed guardian/conservator, or (ii) establish the
(d)(4)(A) SNT as a “seed-trust” and initially fund it
nominally with such person’s own property. See POMS
SI 01120.203.B.1.g.
Court or other administrative entity
♦
If Beneficiary has no living parent or grandparent, and is
mentally competent and thus cannot qualify for the
appointment of a guardian/conservator, this is the
only option for establishing a (d)(4)(A) SNT. The
creation of the SNT must be required by a court order;
mere approval of the SNT by a court is not sufficient. See
POMS SI 01120.203.B.1.f.
-16-
Income Tax Issues
for Self-Settled SNT

Regardless of who serves as the Settlor of a (d)(4)(A) SNT, the
IRS considers it to be a “grantor trust” with respect to the
Beneficiary for income tax purposes if neither the Trustee nor
any other person is an “adverse party” who must consent to
distributions for the Beneficiary. See I.R.C. Section 677.

If a (d)(4)(A) SNT is a “grantor trust,” then all income,
deductions and credits with respect to the assets of the SNT are
reported by the Beneficiary under his Social Security Number
on his individual Income Tax Returns, regardless of whether
the income or gains are actually distributed to, or for the
benefit of, the Beneficiary. See I.R.C. Section 671.
♦

The Trustee of a (d)(4)(A) SNT that is treated as a
“grantor trust” may nevertheless obtain a separate
Federal Employer Identification Number for the SNT,
and file an “informational” Income Tax Return for the
SNT on IRS Form 1041, indicating that the income, gains,
deductions and credits of the SNT will be fully reported
by the Beneficiary on his Form 1040.
If the Trustee of a (d)(4)(A) SNT is also an “adverse party” with
respect to the Beneficiary, e.g. a named remainderman after
Medicaid is “paid back,” there are other methods to help assure
“grantor trust” status for the SNT, if desired.
♦
A (d)(4)(A) SNT will be a “grant0r trust” if the Beneficiary
has the power to reacquire the corpus by substituting
other property of equivalent value, under I.R.C. Section
675(4)(C). Caveat: some Medicaid agencies have held
that such a power is tantamount to an impermissible
right to revoke the SNT.
-17-

Other mechanisms for assuring “grantor trust” status for a
(d)(4)(A) SNT may include vesting the Beneficiary with a nontestamentary special power of appointment over the trust
corpus remaining at death after the Medicaid pay-back is
satisfied, under I.R.C. Section 674, or allowing the Trustee to
pay insurance premiums on the life of the Beneficiary, under
I.R.C. Section 677(a).

Vesting the Beneficiary of a (d)(4)(A) SNT with a testamentary
general power of appointment would cause “grantor trust”
status under I.R.C. Section 673 as a “reversionary interest.”
(Note: such an approach could result in an inadvertent
violation of the “Doctrine of Worthier Title” or the “SettlorSole Beneficiary Rule” in some jurisdictions, causing the SNT
to be deemed revocable, and thus available, for purposes of
means-tested benefits.)

If a (d)(4)(A) SNT is not taxed as a “grantor trust,” it is taxed as
a “complex trust” under I.R.C. Section 641. The Beneficiary of
a (d)(4)(A) SNT is often in a lower tax bracket than an
irrevocable non-grantor trust. In 2009, a single person
reaches the 35% bracket at $372,950, while an irrevocable
non-grantor trust reaches the 35% bracket at $11,150.

Furthermore, a (d)(4)(A) SNT that is not a “grantor trust” may
also qualify as a “qualified disability trust” under I.R.C. Section
642(b)(2)(ii), and be entitled to a deduction equal to the
exemption that a single taxpayer could claim under I.R.C.
Section 151(d).

Trust agreement should affirm that if the SNT is a “grantor
trust” for income tax purposes, the Trustee is authorized to
make distributions from the SNT to satisfy the Beneficiary’s
federal, state and local tax liabilities.
-18-
Gift Tax Issues for SNTs

If a self-settled SNT provides that the Beneficiary shall have a
testamentary power of appointment over the property
remaining in the SNT at his death (and after the Medicaid
“pay-back” is satisfied), then funding an irrevocable SNT with
the Beneficiary’s assets does not result in a completed gift for
federal gift tax purposes. See Treas. Reg. Section 25.2511-2(c).
♦
Even if the Beneficiary is not capable of exercising the
power of appointment, the mere possession of the power
is sufficient to preclude a completed gift upon funding.
See Rev. Rul. 55-518, 1955-2 C.B. 384; Boeving v. U.S.,
493 F. Supp. 665 (D. Mo. 1980), rev’d 650 F.2d 493
(8th Cir. 1981), Alperstein v. Commissioner, 613 F.2d
1213 (2d Cir. 1979), cert. denied, 446 U.S. 981 (1980).

If the funding transfer to a self-settled SNT is deemed to be a
completed gift to the remainder beneficiaries for purposes of
the federal gift tax under I.R.C. Section 2501, the Beneficiary
may shelter the first $1 million of any gift by applying his
federal lifetime gift tax exclusion. See I.R.C. Section
2505(a)(1).

Gifts to a third-party SNT generally will not (and should not)
qualify as a “present interest” with respect to the Beneficiary
under I.R.C. Section 2503(b). Giving the Beneficiary a
“Crummey” right of withdrawal will impact his means-tested
benefits.
♦
With third-party SNTs, consider adding other secondary
permissible beneficiaries who may safely hold rights of
withdrawal under the rationale of Estate of Cristofani v.
Commissioner, 97 T.C. 74 (1991).
-19-
Trustee of SNT

Professional Trustee recommended due to labor-intensive
nature of SNT administration
♦
Trustee must be capable of recognizing and discharging
“regular” fiduciary duties, in addition to undertaking an
appropriate ongoing analysis of relevant means-tested
government programs and the impact of trust distributions
on the Beneficiary’s eligibility for same

Many judges insist on a professional Trustee when the SNT is
to be funded with assets that would otherwise be subject to a
Conservatorship

Some states specifically prohibit parents, guardians or other
family members from serving as Trustee; these persons are
often remainder beneficiaries of the SNT (or heirs-apparent of
the Beneficiary) and may be tempted to “skimp” on
disbursements for the Beneficiary to assure that a larger fund
is available for them at the death of the Beneficiary

Beneficiary should not serve as Trustee under any
circumstances
-20-
Duties of SNT Trustee

Investing assets of SNT to reflect the needs and risk tolerances
of the Beneficiary; risk tolerance tends to be low

SNT funds should be invested to produce an appropriate mix
of current income and long-term growth

Flexibility necessary to achieve balance is enhanced if Trustee
is not “locked in” to a particular investment posture, as
happens with a structured settlement

Both annuity and lump sum payments derived from personal
injury settlements are tax-free upon receipt by SNT, under
I.R.C. Section 104(a)(2); taxability of reinvested funds depends
on chosen investment vehicle

Disbursements of income and principal “for the sole benefit” of
the Beneficiary, preferably directly to providers of goods and
services to avoid misuse of funds or inadvertent impact on
means-tested benefits

Reimbursement of persons who have expended their own
funds for items that are permissible SNT disbursements

Consultations regarding current and anticipated needs of
Beneficiary, including Life Care Plan preparation and updates

Accurate accounting, periodic reporting of receipts and
disbursements, and assistance to Beneficiary with income tax
reporting obligations

Verification that SNT distributions do not defray a legal
obligation of support owed by another to the Beneficiary
-21-
Benefits Eligibility Determinations

Prior to any disbursement from SNT, Trustee must determine
whether government or private benefits or programs may
satisfy the need fully

SNT should contain provisions allowing Trustee to delegate
benefits eligibility issues to health care consultants or “allied
professionals” and requiring annual review/update of relevant
government programs

Once determined that no programs will satisfy the
Beneficiary’s need fully, Trustee must verify that the manner of
disbursement will not jeopardize any benefits for which
Beneficiary is eligible and upon which he currently relies

See “Seven-Step Chart for SNT Disbursement Decisions”
prepared by David J. Lillesand, Esq., on page 36

Benefits Committee and Trust Protector used by some, but
difficult to implement; allow limited power to remove “for
cause” only
-22-
Trustee Fees

Corporate fiduciaries generally charge “market value” fees
according to a regularly published schedule; alternative
minimum fee may apply

Some may have fee schedules that specifically apply to SNTs

Additional hourly rates may apply for specified services, e.g.
tax return preparation

If corporate fiduciary is necessary or advisable, nominal initial
corpus often makes corporate fiduciary cost-prohibitive (e.g. if
SNT is funded solely or largely with annuity payments rather
than a lump sum)

Corporate fiduciaries are often more cost-effective than an
individual, non-professional fiduciary who must separately
retain the paid services of investment advisors, accountants,
claims processors, bonding agents, etc.
-23-
Resignation and Removal of Trustee

Due to the irrevocable and long-term nature of a SNT, both
Beneficiary and Trustee should have the ability to disengage
from an unsatisfactory fiduciary relationship

Specify mechanism for Trustee resignation and procedure for
appointment of successor

Contemplate arbitration, mediation or court-facilitated
resolution of disputes

“For cause” grounds for removal of Trustee could include
breach of fiduciary duty; mismanagement of funds; failure to
comply with fee agreement; uneconomical fee schedule

Additional Trustee removal grounds could include
documented lack of cooperation regarding client inquiries
about investments or disbursements; high turnover of trust
officers; failure to consult with caregivers regarding needs of
Beneficiary
-24-
Dispositive Terms of SNT

SNT should state that it is designed to supplement, not
supplant, any means-tested benefits for which the Beneficiary
is otherwise eligible

SNT should state that Trustee is not obligated to provide for
Beneficiary’s basic support and maintenance, and that the
Beneficiary cannot access the SNT for such purposes

SNT should provide that, in general, no distribution should be
made to, or for the benefit of, the Beneficiary if:

♦
a governmental or other program or resource can fully
satisfy the need
♦
the manner of disbursement would adversely affect the
eligibility of the Beneficiary for such programs
SNT document should provide flexibility for Trustee to “opt
out” of government benefits that are not “reasonably available”
♦

Government benefits alone may be insufficient to provide fully
for Beneficiary’s basic support needs (especially housing), and
SNT may have to “make up the difference”
♦

Nominal government benefits may not be worth the
expense to the SNT of obtaining the benefits
Drafting attorneys should not prohibit disbursements by
Trustee of SNT for shelter-related and household
expenses, but Trustee must be mindful of impact on
means-tested benefits if such disbursements are made
Detailed list of permissible expenditures preferred by Trustee
and Beneficiary
-25-

Some states restrict certain types of SNT disbursements

“Life Care Plan” is an invaluable source of information about
anticipated needs; if no Plan is available at outset, SNT should
authorize Trustee to obtain at expense of SNT

♦
Even if an expense is contemplated by the Life Care Plan,
the Trustee must still use good judgment in the exercise
of its discretion
♦
Payments to a third party that result in the receipt by the
Beneficiary of goods or services are considered “for the
sole benefit of” the Beneficiary under POMS SI
01120.201.F.1.
Permissible “routine” expenditures for the Beneficiary, that
should not affect his means-tested benefits, could include:
♦
reasonable compensation of SNT Trustee, and allied
professionals advising the Trustee, e.g. investment
manager, attorney, fiduciary accountant
♦
reasonable compensation of care providers, including
family members, where appropriate (Medicaid is often
resistant to paid family or friends of Beneficiary due to
frequent abuses)
♦
medical services and equipment not covered by
government programs
♦
domestic and personal care services (housekeeper,
grooming, meal preparation)
♦
household costs other than food, mortgage or rent, real
property taxes, heating fuel, gas, electricity, water, sewer
and garbage removal (see POMS SI 00835.465.D.1)
-26-
♦
pre-paid funeral and burial arrangements (note: if the
Beneficiary dies before arrangements have been pre-paid,
no payments for same may be made from the SNT until
after Medicaid pay-back is fully satisfied, under POMS SI
01120.203.B.3.b)
♦
computer or augmentative communications devices, and
internet service
♦
television or other electronic equipment
♦
apparel, including maintenance and repair of same
♦
one vehicle used for transporting the Beneficiary (not
including a purely recreational vehicle)
♦
membership in recreational clubs, cultural institutions
♦
professional services: attorneys, accountants, claims
processors, advocates, coaches
♦
academic or recreational courses or classes
♦
home décor, furniture, furnishings, appliances
♦
dry cleaning and laundry services and supplies
♦
fitness equipment and club membership
♦
auto maintenance and supplies
♦
home security alarm and monitoring service
♦
yard service and maintenance
♦
insurance for home, auto, liability
♦
linens, towels, bedding
-27-
♦
personal care items and supplies
♦
music lessons, cost of instruments
♦
non-food groceries and sundries
♦
educational needs and supplies
♦
over-the-counter medications
♦
pet, service animal and supplies, veterinary services
♦
sporting goods and equipment
♦
stationery, stamps
♦
telephone service and equipment
♦
therapies not covered by benefits programs
♦
tickets to cultural or sporting events
♦
transportation costs (bus, subway, paid driver)
♦
cable TV
♦
vacation for Beneficiary and one attendant
♦
catch-all: “such uses and purposes as the Trustee deems
appropriate under all circumstances” for the sole benefit
of the Beneficiary
• Note: Many thanks to Patricia Kefelas Dudek, Esq. for
widely disseminating her suggested list of permissible
SNT expenditures for use by practitioners and
Trustees, many of which are included in the above list.
-28-
“Big Ticket” Expenses

SNT document should carefully address disbursements for “big
ticket” expenses, especially in the case of a self-settled
(d)(4)(A) SNT in which Medicaid has a “pay-back” interest
♦
Medicaid will be wary of SNT disbursements to improve
assets not titled in name of the SNT, e.g. SNT-funded
renovations or improvements to a home owned by the
Beneficiary’s parents
♦
SNT should provide detailed procedures for balancing the
interests of the Beneficiary with governmental entities such
as Medicaid

Certain “exempt” assets funded by the SNT, e.g. an automobile
or van used to transport the Beneficiary, are frequently titled in
the name of the Beneficiary, or his Guardian or Conservator,
for liability purposes; however, if SNT funds were used to
purchase the vehicle, the interest of the SNT should be noted
on the vehicle title, and the Trustee should outline clearly the
duties and responsibilities of any authorized driver(s)

Although the Trustee of a (d)(4)(A) SNT may, in the exercise of
its fiduciary discretion, make disbursements to provide
housing for the Beneficiary, or to defray the household costs
listed in POMS SI 00835.465.D.1, such disbursements
generally count against the Beneficiary as “In-Kind Support
and Maintenance” and could reduce the Beneficiary’s SSI
payment in accordance with the “Presumed Maximum Value”
Rule (POMS SI 00835.300) or the “One-Third Reduction”
Rule (POMS SI 00835.200)
♦
WARNING: If the Beneficiary’s Medicaid eligibility is
tied to SSI benefits, Trustee must assure that trust
-29-
disbursements do not reduce the Beneficiary’s SSI
payment to below $1 or Medicaid coverage may also be
lost.

If members of the Beneficiary’s family also reside in a home
owned by the SNT, beware violation of “the sole benefit” rule.
♦

Trustee should consider requiring such family members
to contribute their share of household costs and expenses
(Medicaid may insist), or to otherwise “earn their keep”
by rendering services to, or for the benefit of, the
Beneficiary that they are not already legally obligated to
provide.
“Joint” ownership of a home by a SNT and other persons living
in the home is highly inadvisable.
-30-
Funding Considerations and
Lifetime Care Issues

Major concerns are “running out of money” to fund the
Beneficiary’s lifetime needs, and the ready availability of funds
for both anticipated and unexpected needs

No Life Care Plan is fool-proof; unexpected care needs always
arise

Annuity contracts typically provide for a rigid schedule of
payments that cannot be altered regardless of the Beneficiary’s
needs; beware over-funding a SNT with annuity contracts, as
often recommended by plaintiff’s attorneys in the context of
personal injury litigation

Lump sums held by the Trustee are available for the
Beneficiary’s needs at all times, and may be utilized for
recurring or unexpected needs, as well as big ticket items

Ideal funding of SNT will typically include a combination of
annuity and lump sum options
-31-
Distributions At Death of Beneficiary:
“Pay-Back” Obligation

When the Beneficiary of a (d)(4)(A) SNT dies, the Trustee must
work with Medicaid to verify the amount of its “pay-back”
interest for medical assistance paid for the Beneficiary during
his lifetime.
♦
A careful review of Medicaid’s itemized print-out often
reveals significant errors!

“Pay-back” of Medicaid benefits must occur before
Beneficiary’s funeral and burial expenses may be paid by SNT,
if not pre-paid at time of death. See POMS SI 01120.203.B.3.b.
(Thus, Trustee should always “pre-pay” for such expenses
during the Beneficiary’s lifetime.)

Certain “winding up” expenses of SNT, e.g. final accounting to
court, Trustee’s fees, may be paid before Medicaid. See POMS
SI 01120.203.B.3.a.

Reminder: pay-back requirement generally does not apply to a
third-party supplemental care SNT.

Pay-back obligation may require Trustee to liquidate SNT
assets, e.g. home where Beneficiary (and family) resided at
time of death (advise them of this possibility in writing before
SNT buys the home, as they will not remember this!).

Pay-back claims of multiple Medicaid agencies should be
satisfied pro rata if insufficient funds remain to fully satisfy all
claims.
-32-
Distributions At Death of Beneficiary:
Estate Obligations

Property remaining in a self-settled (d)(4)(A) SNT is included
in the gross estate of the Beneficiary at death under I.R.C.
Section 2036 (if the funding of the SNT was not a completed
gift)
♦


“Present value” of remaining future guaranteed annuity
payments to a self-settled SNT is fully includable in the
Beneficiary’s gross estate under I.R.C. Section 2039
♦
Annuity contracts do not typically provide for future
payments to be accelerated to help pay estate tax liability
♦
Right to “commute” annuity stream for payment of estate
taxes may be available for a hefty charge of 5% or more
Estate of Beneficiary of a self-settled SNT can claim an estate
tax deduction for Medicaid “pay-back” under I.R.C. Section
2053(a)(2)
♦

Third-party SNT is not included in the gross estate of the
Beneficiary, if drafted properly
Alternatively, POMS SI 01120.203.B.3.a allows payment
of Beneficiary’s state and federal estate or inheritance
taxes attributable to inclusion of SNT in Beneficiary’s
gross estate, prior to satisfaction of Medicaid pay-back
interest
“Stepped-up” basis available for assets remaining in a selfsettled SNT at death of Beneficiary under I.R.C. Section
1014(b)(9), minimizing capital gains tax payable upon sale of
assets to satisfy “pay-back” interest of Medicaid
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Distributions At Death of Beneficiary:
SNT Remainder Beneficiaries

In the case of a self-settled SNT, specifying remainder
beneficiaries can be problematic if the Beneficiary is a minor or
an incapacitated adult, tantamount to impermissibly “making
a Will” for the Beneficiary.
♦
Beware the applicability of the “Doctrine of Worthier
Title” or the “Settlor-Sole Beneficiary Rule” when
designating the Beneficiary’s heirs or estate as remainder
beneficiaries. See, e.g., POMS SI ATL 01120.201 (which
incorrectly asserts the viability of these concepts under
Georgia law). In such cases, the application of the
Doctrine or Rule results in the SNT being deemed
revocable, and thus available to the Beneficiary. See
POMS SI 01120.200.D.3.
♦
To address this problem, consider a nominal distribution
of $100 to a named remainder Beneficiary, e.g. the
Beneficiary’s parent, sibling or other living relative, with
the remaining property to pass by Beneficiary’s Will or by
intestacy.

Beneficiary of self-settled SNT can be given testamentary
power of appointment, which also avoids a completed gift to
the SNT remainder beneficiaries upon funding, per Treas. Reg.
Section 25.2511-2(c).

Beneficiary of a third-party SNT should only be given a
“limited” power of appointment to assure that the assets are
not included in the gross estate of Beneficiary under I.R.C.
Section 2041. If not exercised, remaindermen are generally
specified by Settlor, e.g. descendants, siblings or other
relatives of Beneficiary, or charity.
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Additional Planning Opportunity: “Pooled” SNT
Under 42 U.S.C. Section 1396p(d)(4)(C)

“Pooled” SNT, established and managed by a non-profit entity,
is useful for a person who is disabled (as defined in 42 U.S.C.
Section 1382c(a)(3)) whose assets are sufficient to disqualify
him for means-tested benefits but insufficient to warrant the
expense of establishing an individual (d)(4)(A) trust

Each Beneficiary maintains a separate account, but assets of all
Beneficiaries are pooled for investment and management

Accounts for the Beneficiary may be either “first-party” or
“third-party”

First-party accounts may be established by the Beneficiary
himself, or by his parent, grandparent or legal guardian/
conservator, or by a court

Accounts are governed by a “Master Trust Agreement”

Medical assistance providers have a “pay-back” interest, as
with a (d)(4)(A) SNT, or the pooled trust may elect to retain
the assets remaining in the Beneficiary’s account at death for
the benefit of other account beneficiaries

Some states allow the establishment of (d)(4)(C) SNT accounts
for persons over age 65 without penalty; others (including
Georgia) will penalize transfers to a (d)(4)(C) account if the
Beneficiary is over 65

The Georgia Community Trust, Georgia’s first (d)(4)(C) pooled
SNT, and The Georgia Community Pooled Trust administered
by the Center for Special Needs Administration, Inc., are
statutorily authorized by O.C.G.A. Section 30-10-1 et seq.
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Lillesand’s SSI Trust Compliance
Seven Step Chart for Special Needs Trust Disbursement Decisions
STEP 1. IN MAKING THE DISTRIBUTION, WILL THE TRUSTEE BE IN COMPLIANCE WITH STATE TRUST CODE RULES? –
Is the distribution consistent with trustee’s duties to avoid conflict of interests, avoid self-dealing, not act arbitrarily, use best
judgment, act in good faith, follow the trust terms, use reasonable skill and care, act in the beneficiary’s best interests, and use
trustee’s special skills, if any - - or any other state trust code requirements.
If YES, GO TO STEP 2
If NO, STOP (DENY)
STEP 2. IS THE PROPOSED DISTRIBUTION “FOR THE SOLE BENEFIT” OF THE DISABLED INDIVIDUAL? – See the Sole
Benefit Rule in POMS SI 01120.201.F as modified by traditional trust law (a self-settled or first party grantor trust cannot legally
avoid creditors’ claims) and criminal law (e.g., felony child neglect to fail to provide food, clothing shelter and medical care for minor
children; failure to pay IRS and state taxes, etc.): Does the disabled beneficiary reasonably receive some benefit, even if not
exclusive benefit, from the distribution. Examples: trustee paying the mother’s admission tickets to Disney World to accompany of a
disabled minor; discharging the child support or alimony obligation of a disabled adult beneficiary, or paying obligations to avoid
criminal penalties for nonpayment of income taxes, traffic tickets, or neglect of children and spousal maintenance.
If YES, GO TO STEP 3.
If NO, STOP (DENY)
STEP 3. IS IT A SERVICE OR CONSUMABLE ITEM? (e.g., tank of gas for car, travel, medical service, caretaker, baseball tickets,
etc.)
If YES, GO TO STEP 6
If NO, GO TO STEP 4
STEP 4. FOR RESOURCES – WOULD THE PURCHASED RESOURCE BE WITHIN THE SPECIAL SSI RULES THAT LIMIT
THE AMOUNT, TYPE OR TITLING OF THE RESOURCE TO BE PURCHASED? IS THE PURCHASE ONE OF THE
FOLLOWING?
- the only principal residence for the beneficiary – POMS SI 01130.100; SI 01120.200.F;
- one vehicle in accord with POMS SI 01130.200
- household effects of the disabled individual – POMS SI 01130.430
- personal effects of the disabled individual – POMS SI 1130.430
- other limited or excluded resources listed in POMS SI 01130, including burial plots, prepaid burial contracts, limited life
insurance, etc.
If YES, GO TO STEP 6.
If NO, GO TO STEP 5.
STEP 5. IF THE DISABLED BENEFICIARY CANNOT HOLD TITLE TO RESOURCE (ASSET), CAN THE OVER-LIMIT
RESOURCE BE HELD BY THE TRUSTEE, IN THE TRUST, AS A TRUST ASSET? For example, buying a camper (second
vehicle), time share or vacation condo, held in trust’s name
- Should resource/asset be held in name of trust [auto liability laws exposing trust assets if there is an accident with the
second car], or create a second trust to hold the asset, e.g., a “Transportation Trust”, for example; and
- Does the Institutional Trustee have a rule against holding, in trust, real property, cars, etc
If YES, GO TO STEP 6.
If NO, STOP (Deny)
STEP 6. DOES THE METHOD OF PURCHASING THE GOODS OR SERVICES, VIOLATE THE SSI INCOME RULES? – The
trustee must consider POMS SI 01120.201.I. - the three rules for distributions from a trust and the impact on benefits: 1) cash
payments to a beneficiary are unearned income; 2) payments of items to third parties directly f/b/o beneficiary that are NOT “food or
shelter” have no effect on amount of SSI benefit check; and 3) direct third party payments for “food or shelter” items reducing the
SSI check, but the reduction is capped by the PMV rule (permissible unless the SSI check is already less than the PMV amount);
Be aware also of the special limitations on Gift Card [POMS SI 00830.522] and Travel Tickets [POMS SI 01120.150].
If YES, STOP (Look for a different method)
If NO, PROCEED WITH DISBURSEMENT FROM
TRUST
STEP 7. ARE THERE REASONS TO GO AHEAD ANYWAY, AND PURPOSELY GIVE UP SSI AND SSI-RELATED MEDICAID
BENEFITS FOR A PERIOD OF TIME? [e.g., family going to live in Europe for three months]
If YES, MAKE THE DISBURSEMENT but only if it results in an income disqualification (temporary disqualification) vs. a
sole benefit transfer violation (disqualification for up to 36 months).
If NO, STOP (DENY)
© David J. Lillesand 2008
Law Blog: www.FloridaSpecialNeedsLaw.com Email: [email protected]
CORP\1305419.14
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Appendix
RESOURCES
SPECIAL NEEDS TRUST
2346 - SPECIAL NEEDS TRUST
POLICY
STATEMENT
A Special
Needs
Trust (SNT)
is a trust that contains
the assets of
certain individuals for his/her benefit. It also limits the trustee's
discretion as to the purpose of the distributions.
BASIC
CONSIDERATIONS
A Special Needs Trust (SNT) must meet the following specific
guidelines:
•
Be established for the sole benefit of the individual by a parent,
grandparent, legal guardian of the individual, or a court. Refer
to Section 2502-7, Chart 2502.1 for definition of "sole benefit
Of'.
•
Provide that the State will receive all amounts remaining in the
trust upon the death of the individual up to an amount equal to
the total medical assistance paid on behalf of the individual
• May contain the assets of individuals other than the disabled
individual.
• Must be established by a disabled individual under 65 and
contain only their assets (income and resources).
• Must have had no additions to or augmentation of since member
turned 65.
NOTE: Certain payments are not assignable by law and, therefore, are
income to the individual entitled to receive payment under regular
Income rules. They may not be paid directly into a trust, but
individuals may attempt to structure trusts so that it appears that they
are so paid. Important examples of non-assignable payments include:
•
•
•
•
•
•
TANF
Railroad Retirement Board - administered pensions
Veterans pensions and assistance
Federal employee retirement payments administered by the
Office of Personnel Management
Social Security title II and SSI payments
Private pensions under the Employee Retirement Income
Security Act
Effective April 1, 2005, DCH Legal Services will determine the
validity of all SNTs.
To be a valid SNT, attorneys drawing up the SNT should adhere to the
following guidelines:
Step 1 The attorney should send the SNT to DCH Legal Services two months
prior to execution and/or judicial approval. Use the "Special Needs
Trust Review Routing Form" found in Appendix F of the Medicaid
Manual.
VOLUME II/MA, MT 28 - 11/07
SECTION 2346-1
RESOURCES
SPECIAL NEEDS TRUST
BASIC
CONSIDERATIONS
(cont.)
Step 2
If the trust is to be funded with the proceeds of a settlement, a certified
copy of the settlementandthe courtordermustbe submittedwith the
trust.
Step 3
Notice of the time and place of any hearing regarding a Court approval
of the settlement and SNT should be served upon the DCH at least 15
business days before the hearing.
Step 4
The DCH will not recognize the validity of any SNT until all liens in
favor of the DCH shall be first satisfied in full.
Step 5
All SNTs are subject to a yearly audit by DCH or its agents. DCH may
also audit prior years of the trust.
Step 6
No payment can be made from the trust except for the benefit of the
beneficiary and may not exceed the amount that can be determined to
reasonably meet the special needs of the beneficiary. Refer to Section
2502-7, Chart 2502.1 for definition of"sole benefit of".
Step 7
The SNT shall specifically identify, in an attached schedule, the initial
source of the trust, all assets of the trust, all assets purchased with trust
funds and all wages or payment for caregiver or other services. The
trustee must update the schedule yearly. Schedules must be submitted
to DFCS and to DCH Legal Services.
Step 8
The SNT shall specifically state the age of the trust beneficiary and
affirm that the trust beneficiary is disabled within the definition of 42
U.S.C.
Section 1382c(a)(3), and whether the trust beneficiary is
competent or incompetent at the time the trust is established.
Step 9
The SNT shall specifically state that its purpose is to permit the use of
SNT assets to supplement, and not to supplant, impair or diminish
benefits or assistance of any Federal, State or other governmental entity
for which the beneficiary may otherwise be eligible or for which the
beneficiary is competent at the time the trust is established.
Step 10
The DCH shall be given a minimum of 30 days notice if there is a
change in the trustee.
Step 11
The DCH must be given notice within 5 days of the death of the
beneficiary.
Step 12
Beneficiaries are required to comply with SSI income rules.
CFR 416.
Step 13
Failure to comply with policy will result in the SNT being counted as
an asset or transfer of resources.
VOLUME II/MA, MT 28 - 11/07
See 20
SECTION 2346-2
RESOURCES
SPECIAL
PROCEDURES
Follow the procedures
containing SNTs:
below
for processing
NEEDS TRUST
applications/reviews
Step 1 For applications pending on or after April 1, 2005, send a copy of the
SNT to DCH Legal Services Section, along with proof of disability,
prior to approval of the case.
Use the routing form in Appendix F,
entitled "Special Needs Trust Review Routing Form". Some attorneys
may submit SNTs to DCH prior to the application at DFCS. Obtain
copies of the submission to DCH and its determination. If not, submit
SNT upon receipt during application process.
Submit the same
documents that are required above.
For currently eligible cases, with a SNT, send a copy of the SNT to
DCH Legal Services Section, along with proof of disability, prior to
completion of the annual review or special review. Submit two months
prior to the review. Use the routing form in Appendix F, entitled
"Special Needs Trust Review Routing Form".
Step 2
Do not finalize the application or review until DCH Legal has either
approved or denied the validity of the trust.
Step 3
If the trust is irrevocable and cannot be used by the A/R for his/her
support and maintenance, it is not a resource. If the A/R does not have
the legal authority to revoke the trust or direct the use of the trust assets,
the trust principal is not the A/R's resource.
Step 4
Treat disbursements from the trust as follows:
Step 5
•
Cash paid directly to the A/R is unearned income.
•
Food, clothing or shelter received as a result of a disbursement from
the trust is income in the form of in-kind support and maintenance.
Use the presumed maximum value (PMV) rule. See Section 2430,
Living Arrangement and In-Kind Support and Maintenance for ABD
Medicaid."
•
Disbursements by the trustee to a third party that result in the A/R
receiving items that are NOT food, clothing or shelter are not
considered income (example personal sitters, handicapped van, etc.).
•
If the trust principal is a countable resource to the A/R,
disbursements from the trust principal received by the A/R are not
income, but a conversion of a resource. However, the trust earnings
(interest) are counted as unearned income.
If you find there have been additions to or augmentations of the trust
since the member reached age 65, then count as an asset or transfer of
asset.
VOLUME II/MA, MT 28 - 11/07
SECTION 2346-3
RESOURCES
PROCEDURES
(cont.)
Step 6
SPECIAL NEEDS TRUST
Should you discover during an annual or special review that the
requirements of the trust are not being followed, consult your Medicaid
Program Specialist for instructions.
VOLUME II/MA, MT 28 - 11/07
SECTION 2346-4
SSA - POMS: SI 01120.200 - Trusts - General, Including Trusts Established Prior to l/I/... Page 1 of 18
S_x.lalSecunt_Onhne
POMS Section SI 01120.200
www.socialsecurity,gov
Table of Contents I Search [ Previous I Next
TN 40 (01-09)
SI 01120.200 Trusts - General, Including Trusts
Established Prior to 1/1/00, Trusts
Established with the Assets of Third
Parties and Trusts Not Subject to
Section 1613(e) of the Social Security
Act
Topic
Introduction to Trusts
Glossary of Terms - Trusts
Reference
SI 01120.200A
81 01120.200B
Policy - Accounts That May Or May Not Be Trusts
Policy - Trusts As Resources
Policy - Disbursements From Trusts
Policy - Home Ownership/Purchase Of A Home By A Trust
Policy - Earnings/Additions To Trusts
SI 01120.200C
SI 01120.200D
SI 01120.200E
SI 01120.200F
SI 01120.200G
Policy - Medicaid Trusts And Medicaid Qualifying Trusts
Policy - Representative Payees And Trusts
Procedure - Development And Documentation of Trusts
Procedure - Discussing SSI Trust Policy With The Public
Examples of Trusts
References
SI 01120.200H
SI 01120.2001
S I 01120.200J
SI 01120.200K
SI 01120.200L
SI 01120.200M
A. Introduction to Trusts
1. General
A trust is a legal arrangementinvolving property and ownershipinterests. Propertyheld in trustmay or
may not be considered a resource for SS1purposes. The general rules concerning resources apply to
evaluating the resource status of property held in trust.
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2. Applicabilityof this Section
Generally,this section applies to trusts not subject to the statutory trust provisions in section 1613(e) of
the Social Security Act, instructions for which are found in SI 01120.201
SI 01120.204. Use the
instructions in this section to evaluate the following types of trusts:
a. Trusts Established prior to 111100that Contain Assets of the Individual
Trusts established before 1/1/00 that containassets of the individual,any of which were transferred
belbre 1/1/00. If the trustwas established prior to 1/1/00, but no assets of the individualwere transferred
to the trust prior to 1/1/00, see Sl 01120.201.
b. Trusts that Contain Assets of Third Parties
• Trusts established before 1/1/00 that contain assets of third parties.
• Trusts established on or after 1/1/00 that contain only assets of third parties or the portion of a
commingled trust attributable to assets of third parties. (Trusts established on or after 1/!/00 that
contain assets of a Supplemental Security Income (SSI) claimant or recipient or the portion of a
commingled trust attributable to assets of an SS1claimant or recipient must be evaluated under SI
01120.201 through SI 01120.204.)
c. Other Trusts Not Subject to Section 1613(e) of the Social Security Act
Trusts established on or after 1/1/00 to which the instructions in Sl 01120.201 SI 01120.204 do not
apply. (The instructions in those sections will refer you back to this section where applicable.)
3. Case Processing Alert
Trusts are often complex legal arrangements involving State law and legal principles that a claims
representative (CR) may not be able to apply without legal counsel. Therefore, the following instructions
may only be sufficient for you to recognize that an issue is present that should be referred to your
regional office (RO) for possible referral to the Regional Chief Counsel. When in doubt, discuss the
issue with the RO staf£ Many issues can be resolved by phone.
B. Glossary of Terms -- Trusts
1. Trust
A trust is a property interest whereby property is held by an individual or entity (such as a bank) called
the trustee, subject to a fiduciary duty to use the property for the benefit of another (the beneficiary).
2. Grantor
A grantor (also called a settlor or trustor) is the individual who provides the trust principal (or corpus).
The grantor must be the owner or have legal right to the property or be otherwise qualified to transfer it.
Therefore, an individual may be a grantor even if an agent, or other individual legally empowered to act
on his/her behalf (e.g., a legal guardian, representative payee for Title II/XVI benefits, person acting
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under a power of attorney, or conservator), establishes the trust with funds or property that belong to the
individual. The individual funding the trust is the grantor, even in situations where the trust agreement
shows a person legally empowered to act on the individual's behalf as the grantor. Where more than one
person provides property to the trust, there may be multiple grantors. The terms grantor, trustor, and
settlor may be used interchangeably.
3. Trustee
A trustee is a person or entity who holds legal title to property for the use or benefit of another. In most
instances, the trustee has no legal right to revoke the trust or use the property for his/her own benefit.
4. Trust Beneficiary
A trust beneficiary is a person for whose benefit a trust exists. A beneficiary does not hold legal title to
trust property but does have an equitable ownership interest in it. As equitable owner, the beneficiary
has certain rights that will be enforced by a court because the trust exists for his/her benefit. The
beneficiary receives the benefits of the trust while the trustee holds the title and duties.
5. Trust Principal
The trust principal is the property placed in trust by the grantor which the trustee holds, subject to the
rights of the beneficiary, and includes any trust earnings paid into the trust and left to accumulate. Also
called "the corpus of the trust."
6. Trust Earnings (Income)
Trust earnings or income are amounts earned by the trust principal. They may take such forms as
interest, dividends, royalties, rents, etc. These amounts are unearned income to any person legally able
to use them for personal support and maintenance.
7. Torten Trust
A Totten trust, or "bank account trust" is a tentative trust in which a grantor makes himself/herself
trustee of his/her own funds for the benefit of another. Typically this is done by an individual depositing
funds in a savings account and either titling the account or filing a writing with the bank indicating
he/she is trustee of the account for another person. The trustee can revoke a Totten trust at any time.
Should the trustee die without revoking the trust, ownership of the money passes to the beneficiary.
Totten trusts are valid in most jurisdictions, but other jurisdictions have held them invalid because they
are too tentative, i.e., they lack tbrmal requirements and do not state a trust intent or purpose.
8. Grantor
Trust
Subject to State law, a grantor trust is a trust in which the grantor of the trust is also the sole
beneficiary of the trust. See SI 01120.200B.2. for who may be a grantor. State law on grantor trusts
varies. Consult with your Regional Office if necessary.
9. Mandatory Trust
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A mandatory trust is a trust that requires the trustee to pay trust earnings or principal to or for the
benefit of the beneficiary at certain times. The trust may require disbursement of a specified percentage
or dollar amount of the trust earnings or may obligate the trustee to spend income and principal, as
necessary, to provide a specified standard of care. The trustee has no discretion as to the amount of the
payment or to whom it will be distributed.
10. Discretionary
Trust
A discretionary trust is a trust in which the trustee has full discretion as to the time, purpose and
amount of all distributions. The trustee may pay to or for the benefit of the beneficiary, all or none of the
trust as he/she considers appropriate. The beneficiary has no control over the trust.
11. Medicaid
Trust or Medicaid
Qualifying
Trust
See SI 01730.048 for definitions of a Medicaid trust or a Medicaid qualifying trust and see Sl
01120.200H. for additional guidance on these trusts. See Sl 01120.203 for SSI treatment of Medicaid
trust exceptions.
12. Residual Beneficiary
A residual beneficiary (also referred to as a contingent beneficiary) is not a current beneficiary of a
trust, but will receive the residual benefit of the trust contingent upon the occurrence of a specific event,
e.g., the death of the primary beneficiary.
13. Supplemental
Needs Trust
A supplemental needs trust is a type of trust that limits the trustee's discretion as to the purpose of the
distributions. This type of trust typically contains language that distributions should supplement, but not
supplant, sources of income including SSI or other government benefits.
14. Inter
Vivos Trust
An inter vivos trust is a trust established during the lifetime of the grantor. It may also be called a
living trust.
15. Testamentary Trust
A testamentary trust is a trust established by a will and effective at the time of the testator's death.
16. Spendthrift
Clause or Spendthrift
Trust
A spendthrift clause or trust prohibits both involuntary and voluntary transfers of the beneficiary's
interestin the trustincome or principal.This means thatthe beneficiary's creditorsmustwait until
money is paid fromthe trustto the beneficiary before they can attemptto claim it to satisfy debts. It also
meansthat, for example, if the beneficiaryis entitledto $100 a month from the trust, the beneficiary
cannot sell his/her rightto receive the monthlypaymentsto a third party for a lumpsum. In other words,
a valid spendthriftclause would makethe value of the beneficiary's right to receive paymentsnot
countableas a resource. However, spendthrift clausesare not recognized in all States. Additionally,
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States that recognize spendthrift trusts generally do not allow a grantor to establish a spendthrift trust for
his/her own benefit, i.e., as a beneficiary. Thus, using the example from above, in those States where
spendthrift clauses are not recognized (whether at all or because the trust is a grantor trust), the value of
the beneficiary's right to receive monthly payments should be counted as a resource because it may be
sold for a lump sum.
17. Third-Party
Trust
A third-party trust is a trust established with the assets of someone other than the beneficiary. For
example, a third-party trust may be established by a grandparent for a grandchild. Be alert for situations
where a trust is allegedly established with the assets of a third party, but in reality is created with the
beneficiary's property. In such cases, the trust is a grantor trust, not a third-party trust.
18. Fiduciary Duty
Fiduciary duty is the obligation of the trustee in dealing with the trust property and income. The trustee
holds the property solely for the benefit of the beneficiary with due care. The trustee owes duties of
good faith and loyalty to exercise reasonable care and skill, to preserve the trust property and make it
productive and to account for it. Because the trustee is a fiduciary does not mean that he/she is an agent
of the beneficiary. The person who establishes a trust should not be confused with the grantor, who
provides the assets that form the principal of the trust.
19. Revoke
The grantor of a trust may have the power or authority to revoke (i.e., reclaim or take back) the assets
deposited in the trust. If the individual at issue (a claimant, recipient, or deemor (see S l 01310.127)) is
the grantor of the trust, the trust will generally be a resource to that individual if that individual can
revoke the trust and reclaim the trust assets. However, if a third party is the grantor of the trust, the trust
will not be a resource to the beneficiary of the trust merely because the trust is revocable by the grantor.
In a third party trust situation, the focus should be on whether the individual (claimant, recipient, or
deemor) can terminate the trust and obtain the assets for him or herself.
20. Terminate
In rare instances, a trustee or beneficiary of a third-party trust (i.e., a trust established with the assets of a
third party) can terminate (i.e., end) a trust and obtain the assets for him or herself.
C. Policy - Accounts That May Or May Not Be Trusts
1. Accounts That Are Not Trusts
The following accounts and instruments are similar to trusts and may be titled as trusts, but should
generally not be developed under these instructions for SSI purposes:
a. Conservatorship Accounts
These accounts, established by a court, are usually administered by a court-appointed conservator fbr the
benefit of an individual. They differ from a trust in that the "beneficiary" retains ownership of all of the
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assets, although in some cases they may not be available for support and maintenance. (See SI
0] ]40.2 ] 5 for instructions pertaining to conservatorship accounts.)
b. Patient Trust Accounts
Many nursing homes, institutions and government social services agencies maintain so called "patient
trust accounts" for individuals to provide them with toiletries, cigarettes, candy and sundries. Although
titled trust accounts, they are not; they are agency accounts. The individual owns the money in the
account, which the institution is merely holding for hind/herand making disbursements on his/her behalf
as necessary. (See SI 01120.020, SI 00810.120 and GN 00603.020/'or information on transactions
involving agents.)
2. "In Trust For" Financial Accounts
These accounts may or may not be trusts depending on the circumstances in the individual case.
Examples of the most common situations follow:
a. Representative Payee Accounts
One of the most common types of"in trust tbr" accounts are representative payee accounts. These
accounts are not trusts, but improperly titled accounts that are misleading as to the actual owner of the
funds. If a representative payee deposits current or conserved benefits in an account, the account must be
titled to reflect the beneficiary's ownership interest. (See SI 01 ]20.020 and SI 00810.120 for
instructions pertaining to agency accounts. See GN 00603.0 a0 for instructions pertaining to titling of
accounts established by representative payees.)
b. Torten Trusts
An "in trust for" financial institution account may be a Totten trust if an individual deposits his/her own
funds in an account and holds the account as owner for the benefit of another individual(s).
D. Policy - Trusts As Resources
1. Trusts Which Are Resources
a. Trust Principal is a Resource
[fan individual (claimant, recipient, or deemor) has legal authority to revoke or terminate the trust and
then use the funds to meet his food or shelter needs, or if the individual can direct the use of the trust
principal for his/her support and maintenance under the terms of the trust, the trust principal is a
resource for SSI purposes.
Additionally, if the individual can sell his or her beneficial interest in the trust, that interest is a resource.
For example, if the trust provides for payment of $100 per month to the beneficiary for spending money,
absent a prohibition to the contrary (e.g., a valid spendthrift clause, see SI 01120.200B.16.), the
beneficiary may be able to sell the right to future payments for a lump-sum settlement.
b. Authority to Revoke or Terminate Trust or Use Assets
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• Grantor
In some cases, the authorityto revokea trustis held by the grantor.Even if the power to revoke a trust is
not specifically retained,a trust maybe revocable in certain situations.(See SI 01120.200B.8. and 81
01120.20{)[3.3. for informationon grantor trusts.)Additionally,Statelaw may containpresumptionsas
to the revocabilityof trusts.If the trustprincipalreverts to the grantorupon revocationand can be used
for support and maintenance,then the principalis a resourceto the grantor.
• Beneficiary
A beneficiary generallydoes not have the power to terminatea trust. However, the trust may be a
resource to the beneficiary inthe rare instancewhere he/she has the authorityto terminatethe trustand
gain access to the trustassets.In addition,the beneficiarymay, in rareinstances, have the authority
under the trustto direct the use of the trustprincipal. (The authorityto control the trustprincipal may be
either specific trust provisionsallowing the beneficiary to act on his/her own or by pertaining the
beneficiary to order actionsby the trustee.)In such a case, the beneficiary'sequitableownership in the
trust principal and his/her ability to use it for support and maintenancemeans it is a resource.
The beneficiary'sright to mandatoryperiodic payments may be a resourceequalto the present value of
the anticipatedstringof payments unlessa valid spendthriftclause (see SI 0112{).20{)B.'16.) or other
languageprohibits anticipationof payments.
While a trustee mayhave discretionto use the trustprincipal _brthe benefit of the beneficiary, the
trustee should be considered a third partyand not an agent of the beneficiary, i.e., the actionsof the
trustee are not the actions of the beneficiary, unless the trust specifically states otherwise.
• Trustee
Occasionally,a trustee mayhave the legal authorityto terminatea trust.However, the trustis not a
resource to the trusteeunless he/she becomes the owner of the trustprincipalupon termination.The
trustee should be considered a third party. Although the trusteehas access to the principal for the benefit
of the beneficiary,this does not meanthatthe principalis the trustee'sresource, lfthe trustee has the
legal authorityto withdraw and use the trustprincipalfor his/herown support and maintenance,the
principalis the trustee'sresourcefor SSI purposes inthe amountthatcan be used.
• Torten trust
The creatorof a Tottentrusthas the authorityto revokethe financialaccounttrust atany time.
Therefore,the fundsin the accountare his/her resource.
2. Trusts Which Are Not Resources
If an individual does not have the legal authority to revoke or terminate the trust or to direct lhe use of
the trust assets for his/her own support and maintenance, the trust principal is not the individual's
resource for SSI purposes.
The revocability of a trust and the ability to direct the use of the trust principal depend on the terms of
the trust agreement and/or on State law. If a trust is irrevocable by its terms and under State law and
cannot be used by an individual for support and maintenance (e.g., it contains a valid spendthrift clause,
see SI {)1120.20{)B.16.), it is not a resource.
3. Revocability of Grantor Trusts
Some States follow the general principle of trust law that if a grantor is also the sole beneficiary of a
trust, the trust is revocable regardless of language in the trust to the contrary.
However, many of these States recognize that the grantor cannot unilaterally revoke the trust if there is a
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named "residual beneficiary" in the trust document who would, for example, receive the principal upon
the grantor's death or the occurrence of some other specific event.
Under the modern view, residual beneficiaries are assumed to be created, absent evidence of a contrary
intent, when a grantor names heirs, next of kin, or similar groups to receive the remaining assets in the
trust upon the grantor's death. In such case, the trust is considered to be irrevocable.
NOTE: The policies regarding grantor trusts may or may not apply in your particular State. Field offices
should consult regional POMS or your regional office program staff if in doubt.
E. Policy - Disbursements From Trusts
1. Trust Principal Is Not a Resource
If the trust principal is not a resource, disbursements from the trust may be income to the SSI recipient,
depending on the nature of the disbursements. Regular rules to determine when income is available
apply.
a. Disbursements Which Are Income
Cash paid directly from the trust to the individual is unearned income.
Disbursements from the trust to third parties that result in the beneficiary receiving non-cash items
(other than food or shelter), are in-kind income if the items would not be a partially or totally excluded
non-liquid resource if retained into the month after the month of receipt (see S I 00815.550 and S I
01110.210).
For example, if a trust buys a car for the beneficiary and the beneficiary's spouse already has a car which
is excluded for SSI, the second car is income in the month of receipt since it would not be an excluded
resource in the following month.
b. Disbursements Which Result in Receipt of In-kind Support and Maintenance
Food or shelter received as a result of disbursements from the trust by the trustee to a third party are
income in the form of in-kind support and maintenance and are valued under the presumed maximum
value (PMV) rule. (See Sl 00835.300 for instructions pertaining to the PMV rule. See SI 01120.200F.
for rules pertaining to a home.)
c. Disbursements Which Are Not Income
Disbursements from the trust other than those described in SI 01120.200E. 1.a. and 81
01120.200E. 1.b. are not income. Such disbursements may take the form of educational expenses,
therapy, medical services not covered by Medicaid, phone bills, recreation, entertainment, etc (see SI
00815.400).
Disbursements made from the trust to a third party that result in the beneficiary receiving non-cash items
(other than food or shelter) are not income if those items would become a totally or partially excluded
non-liquid resource if retained into the month after the month of receipt (see 81 00815.550 and 81
01110.210).
For example, a trust purchases a computer for the beneficiary. Since the computer would be excluded
from resources as household goods in the following month, the computer is not income (see SI
01130.430).
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2. Trust Principal Is a Resource
a. Disbursements
to or for the Benefit of the Beneficiary
If the trust principal is a resource to the individual, disbursements from the trust principal received by
the individual or that result in receipt of something by the individual are not income, but conversion of a
resource. (However, trust earnings are income. See SI 01110.100 for instructions pertaining to
conversion of resources from one form to another. See SI 01120.200G.2. for treatment of income
when the trust principal is a resource and SI 00830.500 for treatment of dividends and interest as
income).
b. Disbursements Not to or for the Benefit of the Beneficiary
If the trustis establishedwith the assets of an individualor his or her spouse and the trust (or portion of
the trust)is a resourceto the individual:
• any disbursement from the trust (or from that portion of the trust that is a resource) that is not
made to, or for the benefit of, the individual is considered a transfer of resources as of the date of
the payment and is not considered income to the individual (see SI 01150.110); and
• any foreclosure of payment (an instance in which no disbursement can be made to the individual
under any circumstances) is considered to be a transfer of resources as of the date of foreclosure.
Such foreclosure is not considered income to the individual.
F. Policy - Home Ownership/Purchase Of A Home By A Trust
1. Home as a Resource
If the trustee of a trust which is not a resource for SSI purposes purchases and holds title to a house as a
home for the beneficiary, the house would not be a resource to the beneficiary. It would also not be a
resource if the beneficiary moved from the house. The trust holds legal title to the house, therelbre, the
eligible individual would be considered to be living in his/her own home based on having an "equitable
ownership under a trust."
If the trust is a resource to the individual, the home is subject to exclusion under SI 01130. ] 00.
2. Rent-Free Shelter
An eligible individual does not receive in-kind support and maintenance (ISM) in the form of rent-free
shelter while living in a home in which he/she has an ownership interest. Accordingly, an individual
with "equitable home ownership under a trust" (see SI 01 ] 20.200F. 1.) does not receive rent-free
shelter. Also, because we consider such an individual to have an ownership interest, payment of rent by
the beneficiary to the trust has no effect on the SSI payment.
3. Receipt of Income from a Home Purchase
Since the purchase of a home by a trust for the beneficiary establishes an equitable ownership interest
for the beneficiary of the trust, the purchase results in the receipt of shelter in the month of purchase that
is income in the form oflSM (see SI 00835.400). This ISM is valued at no more than the presumed
maximum value (PMV).
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Even though the beneficiary has an ownership interest in the home and, if living in the home, does not
receive ISM in the form of rent-free shelter, purchase of the home or payment of the monthly mortgage
by the trust is a disbursement from the trust to a third party that results in the receipt of ISM in the form
of shelter. (See SI 01120.200E.1.b.)
a. Outright Purchase of a Home
If the trust,which is not a resource,purchases the home outrightand the individuallives in the home in
the month of purchase,the home would be income in the formof ISM and would reduce the individual's
paymentno more than the PMV in the month of purchase only, regardless of the value of the home.
(SeeSl 01120.200E.1.b.)
b. Purchase by Mortgage or Similar Agreement
If the trust, which is not a resource,purchasesthe home with a mortgageand the individual lives inthe
home in the month of purchase,the home would be ISM in the month of purchase. Each of the
subsequentmonthly mortgagepaymentswould result in the receipt of income inthe form of ISM to the
beneficiary living inthe house, each valuedat no more than the PMV (see SI 01 q20.200E. 1.b.).
c. Additional Household Expenses
If the trustpays forother shelteror household operatingexpenses, these paymentswould be income in
the form oflSM in the monththe individualhas use of the item (see SI 00835.350). Countableshelter
expenses are listed at Sl 00835.465D.
If the trust pays for improvements or renovations to the home, e.g., renovations to the bathroom to make
it handicapped accessible or installation of a wheelchair ramp or assistance devices, etc., the individual
does not receive income. Disbursements from the trust for improvements increase the value of the
resource and, unlike household operating expenses, do not provide ISM. (See SI 01120.200E.1 .c.).
G. Policy - Earnings/Additions To Trusts
1. Trust Principal Is Not a Resource
a. Trust Earnings
Trust earnings are not income to the trustee or grantor unless designated as belonging to the trustee or
grantor under the terms of the trust; e.g., as lees payable to the trustee or interest payable to the grantor.
Trust earnings are not income to the SSI claimant or recipient who is a trust beneficiary unless the trust
directs, or the trustee makes, payment to the beneficiary.
b. Additions to Principal
Additions to trustprincipalmade directlyto the trustare not income to the grantor,trustee or
beneficiary. Exceptions to this rule are listed in SI 01120.200G. 1.c. and Sl 01120.200G. 1.d.
c. Exceptions
Certainpaymentsare non-assignableby law and, therefore,are income to the individualentitled to
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receive the payment under regular income rules. They may not be paid directly into a trust, but
individuals may attempt to structure trusts so that it appears that they are so paid. Non-assignable
payments include:
• Temporary Assistance to Needy Families (TANF)/Aid to Families with Dependent Children
(AFDC);
• Railroad Retirement Board-administered pensions;
• Veterans pensions and assistance;
• Federal employee retirement payments (CSRS, FERS) administered by the Office of Personnel
Management;
• Social Security title II and SSI payments; and
• Private pensions under the Employee Retirement Income Security Act (ERISA) (29 U.S.C.A.
section 1056(d)).
d. Assignment of Income
A legally assignable payment (see $1 01120.200G.1 .c. for what is not assignable), that is assigned to a
trust, is income for SSI purposes unless the assignment is irrevocable. For example, child support or
alimony payments paid directly to a trust as a result of a court order, are not income. If the assignment is
revocable, the payment is income to the individual legally entitled to receive it.
2. Trust Principal Is a Resource
a. Trust Earnings
Trust earnings are income to the individual for whom trust principal is a resource, unless the terms of the
trust make the earnings the property of another. (See $1 00810.030 for when income is counted.)
b. Additions to Principal
Additions to principal may be income or conversion of a resource, depending on the source of the funds.
If funds from a third party are deposited into the trust, the funds are income to the individual. If funds
are transferred from an account owned by the individual to the trust, the funds are not income, but
conversion of a resource from one account to another.
H. Policy - Medicaid Trusts And Medicaid Qualifying Trusts
1. Medicaid Trusts
a. General
Medicaid trusts are trusts established by an individual on or after 8/11/93, that are made up, in whole or
in part, of assets (income and/or resources) of that individual. These trusts are created by a means other
than a will. A trust is considered established by an individual if it was established by:
• the individual;
• the individual's spouse; or
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• a person, including a court or administrative body with legal authority to act for the individual or
spouse or who acts at the direction or request of the individual or spouse.
Medicaid trusts may contain terms such as "OBRA 1993 pay-back trust," "trust established in
accordance with 42 USC 1396" or may be mislabeled as an "MQT." The Medicaid trust law affects the
individual's eligibility for Medicaid only, and has no effect on the SSI income and resource
determination.
See SI 01730.048 for additional information and procedures for coding and referring these trusts to the
State Medicaid agencies.
b. State Reimbursement
Provisions
Medicaid trusts generally have a payback provision stating that upon termination of the trust, or the
death of the beneficiary, the State Medicaid agency will be reimbursed for medical assistance paid on
behalf of the individual. According to the law in most States, the State is not considered a residual or
contingent beneficiary, but is a creditor and the reimbursement is payment of a debt, unless the trust
instrument reflects a clear intent that the State be considered a beneficiary, rather than a mere creditor.
This law may or may not apply in your State so consult your regional instructions or regional office.
2. Medicaid
Qualifying
Trusts (MQT)
An MQT is a trust or similar legal device established prior to 10/1/93, other than by a will, under which
the grantor (or spouse) may be the beneficiary of all or part of the payments from the trust. The amount
from the MQT considered available as a resource to the individual for Medicaid purposes is the
maximum amount of payments that may be distributed under the terms of the trust to the individual by
the trustee. This Medicaid-only provision has no effect on the income and resource determination for
SSI purposes.
NOTE: An MQT must have been established prior to 10/1/93, when section 1902(k) of the Social
Security Act was repealed.
I. Policy - Representative
Payees and Trusts
If a trust was established by a representative payee with an underpayment or conserved funds, see GN
00602.075 for additional rules that may apply.
Also, if a trust was established with a Zebley v. Sullivan underpayment, see SI 02008.013 E and SI
02008.01 ] H. concerning notices Zebley recipients received concerning establishing trusts with Zebley
underpayments.
J. Procedure - Development And Documentation of Trusts
1. Written Trust
a. Review the Trust Document
Obtain a copy of the trust document and related documents and, if possible, review it to determine
whether the:
• individual (claimant, recipient or deemor) is grantor, trustee, or beneficiary;
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• trust is revocable or can be terminated and, if so, whether the individual has authority to revoke or
terminate the trust and to use the principal for his/her own support and maintenance;
• individual has unrestricted access to the trust principal;
• trust provides for payments to the individual or on his/her behalf;
• trust principal generates income (earnings) and, if so, whether the individual has the right to any
of that income;
• trust contains a spendthrift clause that prohibits the voluntary and involuntary alienation of any
trust payments; and
• trust is receiving payments from another source.
b. Consult Regional Instructions
Consult any regional instructions which pertain to trusts to see if there are State laws governing
revocability or irrevocability, State laws governing grantor trusts or other State law issues to consider.
c. Referral to Regional Office
If there are any unresolvedissues that prevent you from determiningthe resource statusof the trust, or
thereare issues for which you believe you need a legal opinion, follow your regional instructionsor
consult with your RO program staff. Many issues canbe resolved overthe phone. If necessary,they will
tell you to referthe documentwith any relevantinformationor statementsto your AssistantRegional
Commissioner,Managementand OperationsSupport(ARC, MOS) for possible referralto the Regional
Chief Counsel.
NOTE: When referringa trust to the RO, make sure to include all documentationand identify the
applicant/recipient,source of funds/assetsand relevantrelationshipsof othersnamedin the trust.
2. Oral Trusts
a. State Recognizes as Binding
If the State in question recognizes oral trusts as binding (see regional instructions):
• record all relevant information;
• obtain from all parties signed statements describing the arrangement; and
• unless regional instructions specify otherwise, refer the case, through the ARC, MOS, to the
Regional Chief Counsel.
b. State Does Not Recognize as Binding
If the State does not recognize oral trusts as binding (see regional instructions), see SI 01120.020 if an
agency relationship (i.e., a person is acting as an agent of the individual) is involved.
3. Determining
the Nature and Value of Trust Property (Written or Oral Trust)
Apply the policies in SI 01120.200D. and in any regional instructionsto determinewhether the trustis
a resource.
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NOTE: When you are unsure about any relevant issue, do not make a determination, but discuss the
case with the RO programs staff. They will refer the case to the Regional Chief Counsel, if necessary.
When trust principal is a resource and its value is material to eligibility, determine the nature of the
principal and establish its value by:
• contacting the holder of the funds, if cash; or
• developing as required under the applicable POMS section for the specific type(s) of property, if
the trust principal is not cash.
4. Documentation - Trust Evidence
Record all information used in determining whether the trust is a resource or creates income. Record
your conclusions on the DROC (and subsequently lock the DROC), or the EVID screen. When a
certified electronic folder exists, fax the following into Section D. ,Non-Disability Development) of the
Electronic Disability Collect System (EDCS):
• a copy of the trust document;
• copies of any signed agreements between organizations making payments to the individual and
the individual legally entitled to such payments, if the payments have been assigned to the trust;
• records of payments from the trust, as necessary; and
• any other pertinent documents.
In the case of a paper folder, fax these materials into the NonDisability Repository for Evidentary
Documents (NDRed), or record any development electronically in EVID.
5. Medicaid Trust/Medicaid Qualifying Trust Determination
Consult Sl 03730.048
regarding Medicaid trusts and MQTS and the procedure to follow.
6. Systems Input -- Trusts
Make the appropriate entries to the MSSICS ROTH (other resources) screen. (See MSOM MSSICS
013.011 .) You may also make a CG field entry (RE06 or RE07) per SM 01301.820. On non-MSSICS
cases or where otherwise warranted, use Remarks (see MSSICS 023.003).
7. Posteligibility Change in Resource Status
If a trust was previously determined not to be a resource, but because of policy clarifications you now
determine that it is a resource (or vice versa), reopen the prior determination subject to the rules of
administrative finality. (See the overpayment waiver rules in Sl 02260.001)
K. Procedure - Discussing SSI Trust Policy With The Public
1. What to Discuss
When you discuss SSI trust policy with amember of the public, consider the following points in your
discussion, as applicable:
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a. Do not advise a claimant, recipient, representative payee, or legal guardian on how to invest funds
or hold property in trust. Remember that you cannot provide the kind of financial guidance that
attorneys, accountants, and financial advisors are usually able to provide. Do not attempt to
provide legal advice.
Never recommend to an individual that he/she set up a trust or suggest that you think a trust would be
beneficial to him/her. Be aware that by not knowing all of the legal implications of such an action,you
could endanger their eligibility for other programs or benefits (e.g., Medicaid).
Be aware that a trust allowing eligibility for SS1does not mean that the trust will allow eligibility for
Medicaid. Suggest that the individual check with the State Medicaid office.
b. Explain how trusts affect SSI eligibility and payment amount, in general terms or in terms specific
to a particular trust arrangement. In the latter case, examine the trust document or a draft of the
proposed trust provisions, as necessary. Do not, however, advocate specific changes to a trust.
c. Remember that an individual's ability to access and use the trust principal depends on the terms of
the trust document and on State law. Since State laws in this area may be complex, discuss the
individual's documents with your Regional Office if you are unable to make a determination.
2. Use "SSI Spotlight" on Trusts
Consider giving the individual a copy of the "SSI Spotlight" on trusts. A copy of the Spotlight is
available on the Internet at: http:llwww.socialsecurity.govlssilspotlightslspot-trusts.htm.
L. Examples of Trusts
The following examples are illustrative of situations that you may encounter. You should not rely solely
on the analysis given in the examples in making determinations in a specific case as laws vary from
State to State and the language of individual trust documents may provide different results from those
given in the example. You can refer to regional instructions, if any, and consult your Regional Office, as
necessary. Also you should be aware of the implications the trust may have for Medicaid eligibility. S I
01730.048 contains instructions on trusts and Medicaid.
1. Trust Principal Is a Resource
a. Situation
The claimant is the beneficiary of a trust established on her behalf by her mother, who is her legal
guardian. The money used to establish the trust was inherited by the claimant from her grandmother.
The mother is also the trustee. The trust document clearly indicates that the trust may be revoked at any
time by the grantor.
b. Analysis
Since the grantor may revoke the trust at any time, the trust is a resource to the grantor. In this situation,
the child is the grantor (see S[ 01120.200B.2.) and the trust is her resource. This is the case because the
actions of the mother, as her legal guardian, are as an agent for the child.
2. Trust Principal Is Not a Resource
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a. Example 1
• Situation
The SS1recipient is the beneficiary of an irrevocable trust created by her deceased parents. Her brother
is the trustee. The terms of the trust give the brother full discretionary power to withdraw funds for his
sister's educational expenses. The trustee uses these funds to pay the recipient's tuition and room and
board at a boarding school. The trust document also specifies that $25 of monthly interest income be
paid into a separate account that designates the recipient as owner. She has the right to use these funds in
any way she wishes. The trust also contains a valid spendthrift clause that prohibits the beneficiary from
transferring her interest in the trust payments prior to receipt.
• Analysis
Since the recipient,as beneficiary,has no authoritytoterminatethe trustestablished with her parents'
assets or access the principaldirectly, the trustprincipalis not her resource. While trust disbursements
on a beneficiary'sbehalf may be income, the disbursementsfortuitionare not income since they do not
provide food or shelter in any form. However, the trust disbursementsfor room and board are in-kind
supportand maintenancevalued underthe PMV rule. The $25 deposits of trust earnings intothe
recipient'spersonal accountare income when the deposit is made and are resources to the extent retained
intothe following month. The beneficiary'sright to the streamof $25 monthlypaymentsis not a
resource because she cannotsell or assignthem prior to receivingthem because of the valid spendthrift
clause. (See Sl 01120.200B.16. for a definitionof spendthrificlauses.)
b. Example 2
• Situation
The claimant is a minor and the beneficiary of an irrevocable trust established with the child's annuity
payment by his father, who is his representative payee. The father is also the trustee. The claimant's
brothers and sisters will become the trust beneficiaries in the event of the claimant's death. In the State
where the claimant lives, the grantor can revoke the trust if he is also the sole beneficiary. The brothers
and sisters are "residual beneficiaries" who become the beneficiaries upon the prior beneficiary's death
or occurrence of another event.
• Analysis
The trustprincipalis not a resourceto the claimant.Under the generalrule in Sl 01120.200D.2., the
trust documentprovides thatthe trustis irrevocable. Although the claimantcan be considered the
grantorof the trust(because the actionsof the fatheras payee are as an agentof the claimant),the trust is
not revocable under the rule for grantor trusts in Sl 01120.200D.3. because the claimant is not the sole
beneficiary.
3. Principal Held in a Grantor Trust Is a Resource
a. Situation
The trust beneficiary, a 17-year-old SSI recipient, received a $125,000judgment as the result of a car
accident that left him disabled. His mother, as his legal guardian, placed the money in an irrevocable
trust for the sole benefit of the recipient with the recipient's sister as trustee. The trustee has absolute
discretion as to how the trust funds are to be spent and the trust has a prohibition against the trustee
spending an amount of funds that would make the recipient ineligible for Federal or State assistance
payments. Applicable State law recognizes the principle that if an individual is both the grantor of a trust
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andthe solebeneficiary,the trust is revocable,regardlessof languagein the trusttothe contrary.
b. Analysis
Since the recipient's mother, as his legal guardian, established the trust with funds that belonged to the
recipient, it is treated as if the recipient established the trust himself. Therefore, he is considered the
grantor of the trust. Since he is also the sole beneficiary of the trust, the trust is revocable and is the
recipient's resource, regardless of the language in the trust document. The recipient is ineligible due to
excess resources.
4. Trust Requires Legal Review
a. Example 1
• Situation
The SSI claimant is the beneficiary of a revocable trust established with her father's assets for her future
care. Her father is her legal guardian. The claimant, as trust beneficiary, has no authority to terminate the
trust. The CR reviews the trust document to see if the claimant, through her legal guardian, has
unrestricted access to the trust principal, whether the trust provides for payments on her behalf or
whether the trust principal generates income.
The trust document is very complex and the situation is further complicated by the fact that the
claimant's father is grantor, trustee, and her legal guardian. The CR cannot determine whether the trust
principal is available to the trust beneficiary through the grantor/trustee.
• Analysis
Because it is nut clear from the trust document whether the father, as legal guardian, "stands in the
claimant's shoes" and controls the trust, the CR consults with the RO staff tbr possible referral through
the ARC, MOS, to the Regional Chief Counsel for an opinion.
b. Example 2
• Situation
The recipient is the beneficiary of an irrevocable trust. The trust document indicates that the recipient is
the sole named beneficiary and also the grantor of the trust. The document also indicates that there are
unnamed residual beneficiaries, the recipient's "heirs."
• Analysis
The adjudicator consults regional instructions on State law pertaining to grantor trusts. According to
those instructions, a grantor trust may be a resource to the recipient, but the State law is unclear about
the effect of the unnamed residual beneficiaries. The adjudicator consults with the RO staff for possible
referral through the ARC, MOS, to the Regional Chief Counsel.
M. References
• Trusts Established with the Assets of an Individual on or After 1/1/00, SI 01120.201-Sl
01120.204
• Conservatorship Accounts, Sl 01140.215
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• Agency Relationships, SI 01120.020, SI 00810.120
• CheckingandSavingsAccounts,Sl 01140.200
• Medicaid Qualifying Trusts, SI 01730.048
• When to Charge ISM from Third Party Vendor Payments, Sl 00835.360
• Transfer of Resources for Less Than Fair Market Value, SI 01150.100 ff
• Excluded Resources, Sl 01110.210
To Link to this section - Use this URL:
http:/policy.ssa.govlpoms.nsfllinksl0501120200
Sl 01120.200- Trusts- General, IncludingTrusts EstablishedPriorto 111/00,TrustsEstablishedwith the Assets of Third Partiesand TrustsNot
Subject to Section 1613(e) of the Social Security Act - 01/13/2009
q_r_\.g_,
Privacy Policy I Website Policies & Other Important Information
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POMSSection SI Ol120.201
www.socialsecurity.gov
Table of Contents I Search I Previous ] Next
TN 40 (01-09)
SI 01120.201 Trusts Established with the Assets
of an Individual on or after 1/1/00
Citations:
Social Security Act as amended in 1999, Section 1613(e); 42 U.S.C. 1382b; P.L. 106-169, Section 205
Topic
Background - Trusts
Definitions - Trusts
Reference
SI 01120.201A
SI 01120.201 B
Policy--General
Policy--Treatment Of Trusts
Policy--Relationship To Transfer Penalty (Irrevocable Trust)
Policy--For The Benefit Of/On Behalf Of/For The Sole Benefit Of
An Individual
SI 01120.201C
SI 01120.201D
SI 01120.201 E
SI 01120.201F
Policy--Legal Instrument Or Device Similar To A Trust
Policy--Burial Trusts
Policy--Disbursements From Trusts
Policy--Earnings/Additions To Trusts
References
St
SI
SI
SI
SI
01120.201G
01120.201 H
01120.2011
01120.201 J
01120.201K
A. Background
1. Legislative Enactment
On 12/14/99, the President signed into law the FosterCare IndependenceAct of 1999 (P.L. 106-169).
Section 205 of this law provides, generally, that trusts established with the assets of an individual (or
spouse) will be considered a resource for Supplemental Security Income (SSI) eligibility purposes. It
also addresses when earnings or additions to trusts will be considered income. The legislation also
provides exceptions to the statutory rules in Section 1613(e) of the Act for counting trusts as
resources and income (see Sl 01120.203). These provisions are effective for trusts established on or
after 1/1/00.
See SI 01120.200 for trusts established prior to 1/1/00, trusts established with the assets of third
parties, and trusts that meet an exception to the statutory provisions of Section 1613(e) but meet the
definition of a resource in S l 01110,100B, 1,
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2. Case Processing Alert
Trusts are often complex legal arrangements involving State law and legal principles that a claims
representative may not be able to apply without legal counsel. Therefore, the following instructions may
only be sufficient for you to recognize that an issue is present that should be referred to your regional
office (RO) for possible referral to the Regional Chief Counsel. When in doubt, discuss the issue with
the RO staff. Many issues can be resolved by phone.
B. Definitions -- Trusts
1. Corpus or Principal
The corpus or principal of the trust is all property and other interests held by the trust, including
accumulated earnings and any other additions, such as new deposits, to the trust after its establishment.
However, do not consider earnings or additions to be included in the corpus in the month they are
credited or otherwise transferred to the trust.
NOTE: Earnings or additions are not included in the corpus in the month that they are credited or
transferred into the trust because they are considered under income counting rules in that month (see SI
00810.000).
2. Asset
For purposes of this section, an asset is any income or resource of the individual or the individual's
spouse including:
• income excluded under section 1612(b)of the Social Security Act (the Act) (See SI 00830.099
and SI 00820.500 for income exclusions that are found in the Act);
• resources excluded under section 1613 of the Act (see S l 01130.050 for resource exclusions that
are found in the Act);
• any other payment or property to which the individual or individual's spouse is entitled, but does
not receive or have access to because of action by:
o the individual or individual's spouse;
o a person or entity (including a court) with legal authority to act in place of, or on behalf of,
the individual or spouse; or
o a person or entity (including a court) acting at the direction of, or on the request of, the
individual or spouse.
3. Trust Income
For purposes of this section, trust income includes any earnings of, and additions to, a trust established
by an individual:
• of which the individual is a beneficiary;
• to which the new trust provisions apply; and
• in the case of an irrevocable trust, if any circumstances exist under which payment from the
earnings or additions could be made to or for the benefit of the individual.
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4. Spouse
For the purposes of this section, the individual's spouse is the individual we consider to be the spouse
for normal SSI purposes (see SI 00501.150B.).
5. Legal Instrument or Device Similar to a Trust
This is a legal instrument, device, or arrangement, which may not be called a trust under State law, but is
similar to a trust. That is, it involves
• a grantor (see SI 01120.200B.2.) or individual who provides the assets to fund the legal
instrument, device, or arrangement (see SI 01 ] 20.201B.7.).
• who transfers property (or whose property is transferred by another).
• to an individual or entity with fiduciary obligations (considered a trustee for purposes of this
section).
The grantor makes the transfer with the intention that it be held, managed or administered by the
individual or entity for the benefit of the grantor or others. A legal instrument or device similar to a trust
can include (but is not limited to) escrow accounts, investment accounts, conservatorship accounts (SI
01 ]40.2 ] 5), pension funds, annuities, certain Uniform Transfers to Minors Act (UTMA) accounts and
other similar devices managed by an individual or entity with fiduciary obligations.
6. Trust Established by a Will
A trust established by a will or a testamentary trust (see Sl 01120.200B. 15.) is a trust established
under the terms of a will and which is only effective upon the individual's death. A trust to which
property is transferred during the life of the individual who created the will is not a trust established by a
will, even if the will transfers additional property to that trust. Field offices should obtain and review a
copy of the last will and testament.
7. Trust Established with the Assets of an Individual
A trust is considered to have been established with the assets of an individual if any assets of the
individual (or spouse), regardless of how little, were transferred to a trust other than by a will.
NOTE: The grantor (see SI 01120.200B.2.) named in the trust document who provided the assets
funding the trust and the individual whose actions established the trust may not be the same. The trust
may name the individual (e.g. a parent or legal guardian) who physically took action to establish the
trust rather than the individual who provided the trust assets. This distinction is important, especially in
developing Medicaid trust exceptions in SI 01120.203.
8. Foreclosure
For purposes of this section, foreclosure is an event that bars or prevents access to, or payment from, a
trust to an individual now or in the future.
9. Other Definitions
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Forotherdefinitionsapplicableto thissection,see Sl 01120.200B.
C. Policy - Certain Trusts Established on or After 1/1/2000
1. Effective Date
• The trust provisions of P.L. 106-169 apply to certain trusts established on or after 1/1/00.
• The trust provisionsof P.L. 106-169 do not apply to trusts established with the assets of an
individualprior to 1/1/00, regardlessof the individual'sfiling date. Trusts established prior to
1/1/00 are treatedunderinstructionsin Sl 01120.200.
• A trust established with the assets of an individual (see SI 01120.201B.7.) prior to 1/1/00 but
added to or augmented on or after 1/I/00 is still considered to be established prior to 1/1/00.
(However, additions to such a trust may be considered a transfer of resources, see SI 01150.100
ff.)
Example 1: Emily Lombardozi, age 67, has a settlement agreement as a result of an automobile accident
in 1994 in which she was paralyzed. Under the agreement, she receives a lump-sum payment in March
of each year. Since 1995, the payments have been paid into an irrevocable trust. The payments received
in 3/00 and following are not considered to be establishment of a trust for purposes of these provisions.
They are additions to a trust established prior to 1/1/00 and are evaluated under Sl 01120.200.
Example 2: Same situation as example 1 except that Ms. Lombardozi receives an inheritance of $3,000
that she deposits into the trust. The trust is evaluated under the rules in Sl 01120.200, but the deposit of
the inheritance is evaluated as a transfer of resources under SI 01150.100 ff.
• The transfer of an individual's property to an existing trust is considered to be the establishment of
a trust subject to the provisions of this section if:
o the transfer occurs on or after 1/1/00; and
o the corpus of the trust does not contain property transferred from the individual prior to
1/1/00.
Example: Robert Gates is a disabled child. His grandmother established an irrevocable $2,000 trust, of
which he is the beneficiary, in 12/97. Robert won a lawsuit in 2/00 and the money from the judgment
($50,000) was placed in the trust his grandmother established. Since Robert transferred all of the money
in the trust after 1/1/00, deposit of the judgment funds ($50,000) is considered establishment of a trust
on or after 1/1/00 for purposes of these provisions. However, the funds deposited by his grandmother are
not subject to these provisions since they are funds of a third party and are subject to evaluation under SI
01120.200.
• These provisions do not apply to trusts established solely with the assets of a third party, either
before or after 1/1/00. (See Sl 01120.200 for development.) However, if at any point in the
future the individual's assets are added to such a trust, the trust then becomes subject to
development under SI 01120.201-$1 01120.204.
2. Applicability
a. Trusts to Which This Provision Applies
Except as provided in Sl 01120.203A.,
this section applies to trusts "established with the assets of an
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individual." A trust is considered to have been established with the assets of an individual if any assets
of the individual (or spouse) (regardless of how little) were transferred to a trust other than by a will.
(See Sl 01120.20113.2. for a definition of an asset.)
b. Examples
• An individual who was the plaintiff in a medical malpractice lawsuit is the beneficiary of a trust.
The trust states that the defendant doctor's insurance company established it so the settlement
funds were never paid to the plaintiff directly. However, for SSI eligibility purposes, the trust was
established with the assets of the individual because the trust contains assets of the individual
(see Sl 01120.201 B.2.) which he/she did not receive because of action on behalf of, in the place
of, at the direction of, or on the request of, the individual.
• Likewise, the same result would occur ifa court had ordered the settlement to be placed in a trust,
even if the individual was a child and whether State law did or did not require the settlement to be
placed in a trust for the child.
• A disabled SSI recipient over age 18 receives child support which is assigned by court order
directly into the trust. Since the child support is the SSI recipient's income, the recipient is the
grantor of the trust and the trust is a resource unless it meets an exception in SSI 01120.203. If the
trust meets an exception and is not a resource, the child support is income unless it is irrevocably
assigned to the trust, per Sl 01120.201,1.1 .d In this example, the court ordered the child support
to be paid directly into the trust, so we consider it to be irrevocably assigned to the trust.
c. Individual's Assets Form Only a Part of the Trust
In the case of an irrevocable trust where the assets of the individual (or the individual's spouse) were
transferred along with the assets of another individual(s), these provisions apply to the portion of the
trust attributable to the assets of the individual (or spouse). Thus, in determining countable resources in
the trust, you must prorate any amounts of resources, based on the proportion of the individual's assets in
the trust.
Example: Jimmy Smith is an adult with cerebral palsy. His grandparents left $75,000 in trust for him in
their wills. Recently (after 1/1/00), Mr. Smith won an employment discrimination lawsuit and was
awarded a $1,500 judgment which was deposited into the trust his grandparents established. The $1,500
of Mr. Smith's funds are subject to these provisions and could be a resource if payment could be made to
or for Mr. Smith's benefit (see Sl 01120.201 D.2.). The $75,000 deposited by his grandparents is not
subject to these provisions (see Sl 01120.200).
d. Application of the Trust Provisions
These provisions apply to trusts without regard to:
• the purpose for which the trust was established;
• whether the trustees have or exercise any discretion under the trust;
• any restrictions on when or whether distributions may be made from the trust; or
• any restrictions on the use of distributions from the trust.
This means that any trust established with the assets of an individual on or after 1/1/00 will be subject to
these provisions and may he counted in determining SSI eligibility. No clause or requirement in the
trust, no matter how specifically it applies to SSI or other Federal or State program (i.e., exculpatory
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clause),precludesa trustfrombeingconsideredundertherulesinthissection.Anexculpatoryclauseis
one that attempts to exempt the trust from the applicability of these rules. For example, an exculpatory
clause would be one that states, "Section 1613(e) of the Social Security Act does not apply to this trust."
Such a statement has no effect as to whether these rules apply to the trust.
NOTE: While exculpatory clauses, use clauses, trustee discretion and restrictions on distributions, etc.
do not affect a trust's countability, they do have an impact on how the various components are treated.
For example, a prohibition in a discretionary irrevocable trust that limits the trustee to distributing no
more than $10,000 to an individual has no effect on whether or not the trust is countable, but does affect
the amount that is countable.
3. Income
For purposes of the SSI program, income includes any earnings or additions to a trust established with
the assets of an individual: of which the individual is a beneficiary; and
• which is a resource under these trust provisions; and
• in the case of an irrevocable trust, if any circumstances exist under which payment from the
earnings or additions could be made to or for the benefit of the individual.
(See SI 01120.201 d. for additional income instructions.)
D. Policy--Treatment Of Trusts
1. Revocable Trusts
a. General Rule Revocable Trusts
In the case of a revocable trust established with the assets of the individual, the entire corpus of the trust
is a resource to the individual. However, certain exceptions may apply. (See SI 01120.203,6,.)
NOTE: The exceptions in SI 01 ] 20.203A. only apply to counting a trust under the statutory provisions
of section 1613(e) of the Act. A trust that meets the definition of a resource is still countable and must
be developed under SI 01120.200.
b. Relationship to Transfer Penalty
Any disbursements froma trustthatis a resourcethatare not made to, or for the benefit of, the
individual (81 01120.201F. 1.) are considered a transfer of resources. (See SI 01150.100 fl: for
transfer of resource provisions.)
c. Example
Willie Jones is a young adult with mental retardation. Mr. Jones had a revocable trust established after
1/1/00. All but $5,000 of funds in the trust had been spent on Mr. Jones' behalf. His mother files for SSI
for him and is told that he is not eligible because of the money in the trust. His mother takes $4,500 of
the money and makes a down payment on a new car that she says she will use to transport Mr. Jones.
However, she registers the car in her own name. Even though his mother will use the car to transport Mr.
Jones, the purchase of the car is a transfer of resources since the car does not belong to him. (See 81
0 ] ] 20.201 F.1. for policy on purchases for the benefit of the individual and titling of property.)
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2. IrrevocableTrusts
a. General Rule - Irrevocable Trusts
In determining whether an irrevocable trust established with the assets of an individual is a resource, we
must consider how payments from the trust can be made. If payments from the trust could be made to or
for the benefit of the individual or individual's spouse (Sl 01120.201 F.1 .), the portion of the trust from
which payment could be made that is attributable to the individual is a resource. However, certain
exceptions may apply (see Sl 01120203).
b. Circumstance under Which Payment Can or Cannot be Made
In determiningwhether paymentscan or cannotbe made froma trust to or for the benefit of an
individual (Sl 01120.201 F.1.), take intoconsiderationany restrictionson payments.Restrictions may
include use restrictions, exculpatory clauses, or limits on the trustee's discretion included in the trust.
However, if a payment can be made to or for the benefit of the individual under any circumstance, no
matter how unlikely or distant in the future, the general rule in SI 01120.201 D.2.a. applies (i.e., the
portion of the trust that is attributable to the individual is a resource, provided no exception from S l
01120.203 applies).
c. Examples
• An irrevocable trust provides that the trustee can disburse $2,000 to, or for the benefit oL the
individual out of a $20,000 trust. Only $2,000 is considered to be a resource under Sl
01120.201D.2.a. The other $18,000 is considered to be an amount which cannot, under any
circumstances, be paid to the individual and may be subject to the transfer of resources rule in S I
01120.201E. andSl 01150.100 ff.
• Ifa trust contains $50,000 that the trustee can pay to the beneficiary only in the event that he/she
needs a heart transplant or on his/her 100thbirthday, the entire $50,000 is considered to be a
payment which could be made to the individual under some circumstance and is a resource.
• An individual establishes an irrevocable trust with $10,000 of his assets. His parents contribute
another $10,000 to the trust. The trust only permits distributions to, or for the benefit of, the
individual from the portion of the trust contributed by his parents. The trust is not subject to the
rules of this section. The portion of the trust contributed by the individual is subject to evaluation
under the transfer of resources rules in Sl 01150.100 ff. (see also Sl 01120.201E.). The portion
of the trust contributed by his parents is subject to evaluation under SI 01120.200.
3. Types of Payments from the Trust
a. Payments to an Individual
Paymentsare consideredto be made to the individual when any amountfromthe trust, including
amounts from the corpus or income produced by the trust, are paid directly to the individual or someone
acting on his/her behalf, e.g., guardian or legal representative.
b. Payments on Behalf of/for the Benefit of an Individual
See SI 01120.201F.1. Also see S[ 01120.201 I. for more instructions on disbursements from trusts.
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4. Placing Excluded Resourcesin a Trust
If an individual places an excluded resource in a trust and the trust is a countable resource, the resource
exclusion can still be applied to that resource. For example, if an individual transfers ownership of
his/her excluded home to a trust and the trust is a countable resource, the home is still subject to
exclusion under $1 01130.100. (See $1 01120.200F. for a discussion of ownership of a home by a
trust and the effect of payment of home expenses by the trust.)
5. Trust Rules Versus Transfer Rules for Assets in a Trust
When an individual transfers assets to a trust, he/she generally transfers ownership of the asset to the
trustee, in some cases, this could be considered a transfer of resources. In order to avoid both counting a
trust as a resource and imposing a transfer of resources penalty for the same transaction, the trust
provisions take precedence over the transfer provisions. If there are portions of the trust that cannot
be counted as a resource, then the transfer rules may apply to that portion of the trust.
E. Policy--Relationship
To Transfer Penalty (Irrevocable Trust)
1. Trust Established with Individual's Resources
a. Foreclosure of Payment
When all or a portion of the corpus of a trust, established with the assets of an individual (or spouse)
with the individual's (or spouse's) resources, cannot be paid to, or for the benefit of, the individual, the
portion which cannot be paid is considered a transfer of resources for less than fair market value.
The date of the transfer is considered to be:
• the date the trust was established; or
• if later, the date on which payment to the individual was foreclosed (i.e., an action was taken
which precludes future payments from the trust).
In determining the value of the transfer, do not subtract the value of any disbursements made after the
date determined above. Additions to the foreclosed portion of the trust after the above date may be new
transfers that must be developed separately.
(See $1 01150.100 ff. for instructions related to transfers of resources.)
b. Payment to or for the Benefit of Another
When all or a portion of a trust,established with the individual'sor spouse's resources, is a resource to
the individual, if paymentis made fromthe portion of the trustthatis a resourceto the individualto, or
for the benefit of, another,then such a paymentis a transferof resources.
c. Examples
• Example 1
Millie Russell is an adult SSIrecipient. Upon the death of her mother,Ms. Russell receives the proceeds
of a life insurancepolicy in the amountof $30,000. She uses the proceeds to establish an irrevocable
trust solely to pay for the college expenses of her younger sister, in accordance with her mother's wishes.
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Receipt of the insurance proceeds is income to Ms. Russell. Establishment of the trust is a transfer of
resources by Ms. Russell since payment to or for her own behalf is foreclosed by terms of the trust. Even
though establishing the trust was her mother's wish, she was not legally obligated to do so. Her mother
could have established a trust in her will or named the younger sister as beneficiary of the insurance
policy.
• Example 2
Same scenario as in Example 1 except that Ms. Russell establishes an irrevocable trust for the benefit of
her sister and herself. The trust is a resource to Ms. Russell and makes her ineligible. The trust makes a
$5,000 payment to State College on behalf of her sister tbr tuition. The $5,000 payment is a transfer of
resources for Ms. Russell. Although counting the trust as a resource would make her ineligible, if the
trust principal was spent down to the point where it would allow resource eligibility, we still have to
consider the tuition payments or other payments to or on behalf of her sister made within the 36-month
transfer look-back period. (See Sl 01150.100 f£ for more information on the transfer penalty.)
2. Trust Established
with Individual's
Non-Resource
Assets
a. What Is a Non-Resource Asset?
A non-resource asset is an asset that meets the definition in SI 01120.201 B.2., but that does not meet
the definition of a resource (SI 01110.100B1, and Sl 01110.115).
b. Transfer Penalty
When all or a portion of the corpus of a trust established by an individual or spouse with the individual's
or spouse's non-resource assets is considered to be a resource under the trust provisions of P.L. 106-169,
the transfer of resources penalty may apply in the following circumstances:
• If an event occurs which forecloses (see Sl 01120.201B.8.) payment from the portion of the trust
that is a resource, then such foreclosure is a transfer of resources as of the date that payment was
foreclosed.
• If payment is made from the portion of the trust that is a resource to or for the benefit of another
individual, then such payment is a transfer of resources.
In determining the value of the transfer, do not subtract the value of any disbursements made after the
date of foreclosure. Additions, by the individual, to the foreclosed portion of the trust after the
foreclosure date may be new transfers that must be developed separately.
(See S I 01150.100 ff. for instructions related to transfers of resources.)
NOTE: If a trust established with the individual's non-resource assets is not a resource to the individual,
payments to or for the benefit of another person or foreclosure of payment to the individual is not
subject to the transfer of resources penalty because the trust was not a resource. For example, an
individual has non-resource assets of $10,000 that she places into an irrevocable trust _brthe benefit of
her daughter. The trust is not a resource to the individual because nothing can be paid to or for her
benefit. It is also not a transfer of resources subject to the penalty provision since the trust is not a
resource and the trust was established with non-resource assets. Likewise, payments from the trust to or
for the benefit of the daughter are not transfers of resources.
F. Policy--For The Benefit Of/On Behalf Of/For The Sole Benefit
Of An Individual
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1. Trust Established for the Benefit of/on Behalf of an Individual
Consider a trust established for the benefit of an individual if payments of any sort from the corpus or
income of the trust are paid to another person or entity so that the individual derives some benefit from
the payment.
Likewise, consider payments to be made on behalf of, or to or for the benefit of an individual, if
payments of any sort from the corpus or income of the trust are paid to another person or entity so that
the individual derives some benefit from the payment.
For example, such payments could include purchase of food or shelter, or household goods and personal
items that count as income. The payments could also include services for medical or personal attendant
care that the individual may need which does not count as income.
NOTE: These payments are evaluated under regular income-counting rules. However, they do not have
to meet the definition of income for SSI purposes to be considered to be made on behalf of, or to or for
the benefit of the individual.
If funds from a trust that is a resource are used to purchase durable items, e.g., a car or a house, the
individual (or the trust) must be shown as the owner of the item in the percentage that the funds
represent the value of the item. When there is a deed or titling document, the individual (or trust) must
be listed as an owner. Failure to do so may constitute evidence of a transfer of resources.
2. Trust Established for the Sole Benefit of an Individual
Consider a trust established for the sole benefit of an individual if the trust benefits no one but that
individual, whether at the time the trust is established or at any time for the remainder of the individual's
life. However, the trust may provide for reasonable compensation for a trustee(s) to manage the trust, as
well as reasonable costs associated with investment, legal or other services rendered on behalf of the
individual with regard to the trust. In defining what is reasonable compensation, consider the time and
effort involved in providing the services involved, as well as the prevailing rate of compensation for
similar services considering the size and complexity of the trust.
NOTE: This should not routinely be questioned unless compensation is being provided to a family
member or the adjudicator has some other reason to question reasonableness of the compensation.
Do not consider a trust that provides for the trust corpus or income to be paid to or for a beneficiary
other than the SS1 applicant/recipient to be established for the sole benefit of the individual. However,
payments to a third party that result in the receipt of goods or services by the individual are considered
for the sole benefit of the individual. The following disbursements or distributions are also permitted:
• reimbursement to the State, after the individual's death, for medical expenses paid on the
individual's behalf(see SI 01120,203B.1.f. and SI 01120,203B.2.g.);
• upon death of the beneficiary, retention of a certain percentage of the funds in a "pooled trust"
established through the actions of a nonprofit association in accordance with the trust agreement
(see Sl 01120.203B.2.); and
• transfer of the remaining trust corpus to a residual trust beneficiary after the individual's death.
G. Policy--Legal Instrument Or Device Similar To A Trust
1. What Is a Legal Instrument or Device?
Consider under trust rules a legal instrument, device, or arrangement, which may not be called a trust
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under State law, but which is similar to a trust. We will consider such an instrument, device or
arrangement as a trust if:
• it involves a grantor (see Sl 01120.200B.2.) who transfers property (or whose property is
transferred by another);
• the property is transferred to an individual or entity with fiduciary obligations (considered a
trustee for purposes of this section); and
• the grantor transfers the assets to be held, managed or administered by the individual or entity for
the benefit of the grantor or others.
However, we will not consider these arrangements under trust rules if they would be counted as
resources under regular SSI resource-counting rules.
2. Examples of a Legal Instrument or Device
A legal instrument or device similar to a trust can include (but is not limited to):
• escrow accounts;
• investment accounts;
• conservatorship accounts (SI 01140.215);
• pension funds (SI 01120.210);
• annuities;
• certain Uniform Transfers to Minors Act (UTMA) accounts; and
• other similar devices managed by an individual or entity with fiduciary obligations.
H. Policy--Burial Trusts
It is important to determine whether a burial trust was established with the individual's funds or funds
that have been irrevocably paid to the funeral director. Since the trust provisions of P.L. 106-169 apply
without regard to the purpose for which the trust was established, burial trusts that may be irrevocable
under State law may be countable resources for SSI resource-counting purposes if established with the
individual's assets.
1. Burial Trusts to Which These Provisions Do Not Apply
a. Irrevocable Burial Contract
These provisions do not apply to a burial trust where:
• an individual irrevocably contracts with a provider of funeral goods and services for a funeral; and
• the individual funds the contract by prepaying for the goods and services; and
• the funeral provider subsequently places the funds in a trust; or
• the individual establishes an irrevocable trust, naming the funeral provider as the beneficiary.
b. Revocable Burial Contract
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These provisions do not apply to a burial trust where:
• an individual revocably contracts with a provider of funeral goods and services; and
• the individual subsequently funds the contract by irrevocably assigning ownership of a life
insurance policy to the provider; and
• State law does not prohibit the individual from irrevocably assigning ownership of a life insurance
policy to the funeral provider; and
• the funeral provider subsequently places the funds in an irrevocable trust.
These transactions constitute a purchase of goods and services by the individual and establishment of a
trust with the funeral provider's funds, not the funds of the individual.
These arrangements should be evaluated under regular resource rules. Specifically, see the burial
contract instructions in S[ 01130.420 Sl 01130.425. However, if the individual who purchased the
funeral was named as the beneficiary of the burial trust that a funeral director established, and thus
retains an equitable interest, see the rules applicable to third party trusts in Sl 01 ] 20.200.
2. Burial Trusts to Which These Provisions Apply
The provisions of this section apply to a trust if:
• an individual does not enter into a pre-need funeral contract with a funeral provider, but
establishes a burial trust with his/her own assets; or
• an individual enters into an irrevocable funeral contract with a funeral provider, but establishes a
revocable trust to fund the contract; or
• an individual enters into a revocable funeral contract with a funeral provider, even if the funeral
provider places the money in a trust (except as provided in Sl 01120.201 H 1.b).
3. Applicable Exclusions
If application of this provision results in the counting of a burial trust as a resource, the burial space and
burial funds exclusions may apply.
• Burial spaces may be excluded without limit for an individual, spouse and members of the
individual's immediate family. (See SI 01 ] 30.400 for a definition of burial spaces and applicable
policy.)
• Burial funds may be excluded up to $1,500 each for an individual and spouse. (See Sl
01130.409-Sl 01130.425 for applicable instructions.)
The undue hardship waiver may also apply (see Sl 01120.203C.).
I. Policy--Disbursements From Trusts
1. Trust Principal Is Not a Resource
If the trust principal (or a portion of the trust principal) is not a resource, disbursements from the trust
(or that portion) may be income to the SSI recipient, depending on the nature of the disbursements.
Regular rules apply to determine when income is available.
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a. Disbursements Which Are Income
Cash paid directly from the trust to the individual is unearned income.
Disbursements from the trust to third parties that result in the beneficiary receiving non-cash items
(other than food or shelter), are in-kind income if the items would not be a partially or totally excluded
non-liquid resource if retained into the month after the month of receipt (see S l 008 ] 5.550).
For example, if a trust buys a car for the beneficiary and the beneficiary's spouse already has a car which
is excluded for SSI, the second car is income in the month of receipt since it would not be an excluded
resource in the following month
b. Disbursements Which Result in Receipt of In-kind Support and Maintenance
Food or shelter received as a result of disbursements from a trust by the trustee to a third party is income
in the form of in-kind support (ISM) and maintenance and is valued under the presumed maximum value
(PMV) rule. (See Sl 00835.300 for instructions pertaining to the PMV rule. See Sl O] 120.200F. for
rules pertaining to a home.)
c. Disbursements Which Are Not Income
Disbursements from the trust that are not cash to the individual or are third party payments that do not
result in the receipt of support and maintenance are not income. Such disbursements may take the form
of educational expenses, therapy, medical services not covered by Medicaid, phone bills, recreation,
entertainment, etc (see S I 008 ] 5.400).
Disbursements made from the trust to a third party that result in the beneficiary receiving non-cash items
(other than food or shelter) are not income if it would become a totally or partially excluded non-liquid
resource if retained into the month after the month of receipt (see S I 008 ] 5.550).
For example, a trust purchases a computer for the beneficiary. Since the computer would be excluded
from resources as household goods in the following month, the computer is not income (see SI
01130.430).
d. Disbursements for Credit Card Bills
If a trust pays a credit card bill for the trust beneficiary, whether the individual receives income depends
on what was on the bill. If the trust pays for food or shelter items on the bill, the individual will
generally be charged with in-kind support and maintenance up to the PMV. If the bill includes non-food,
non-shelter items, the individual usually does not receive income as the result of the payment unless the
item received would not be a totally or partially excluded non-liquid resource the following month
For example, if the credit card bill includes restaurant charges, payment of those charges results in 1SM.
If the bill also includes purchase of clothing, payment for the clothing is not income.
e. Disbursements for Gift Cards and Gift Certificates
Gift cards and gift certificates are considered cash equivalents. If a gift card/certificate can be used to
buy food or shelter (e.g. restaurant, grocery store or VISA gift card), it is unearned income in the month
of receipt. Any unspent balance on the gift card/certificate is a resource beginning the month after the
month of receipt. If the store does not sell food or shelter items (e.g. bookstore or electronics store), but
the card does not have a legally enforceable prohibition on the individual selling the card for cash, then
it is still unearned income (see 81 00830.522).
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2. Trust Principal Is a Resource
a. Disbursements to or for the Benefit of the Individual
If the trust principal (or a portion of the trust principal) is a resource to the individual, disbursements
from the trust principal (or that portion of the principal) to or for the benefit of the individual are not
income, but conversion of a resource. However, trust earnings, e.g., interest, are income. (See SI
01110.100 for instructions pertaining to conversion of resources from one form to another and S I
01120.201J.2. and Sl 01120.2013.3. for treatment of earnings/additions when the trust principal is a
resource.)
b. Disbursements Not to or for the Benefit of the Individual
In the case of a trust established with the assets of an individual (or his/her spouse), if from the trust, or
portion of the trust, that is considered to be a resource:
• a disbursement is made other than to or for the benefit of the individual, such a disbursement is
considered to be a transfer of resources (see SI 01150.100 ff.) as of the date of the payment; or
• no disbursement could be made to the individual under any circumstances, foreclosure of payment
is considered to be a transfer of resources as of the date of the foreclosure.
(See SI 01120.201 g. 1. for a definition of "to or for the benefit of.")
3. Mixed Trust--Part
of Trust Is a Resource and Part Is Not a Resource
In a situation where part of the trust was established with assets of the individual (or spouse) and part
was established with the assets of other individuals, consult the trust document to determine from which
portion of the trust disbursements were made. If the trust document does not specify, a statement from
the trustee regarding the source of the disbursements will be determinative. If the trustee is unable to
provide a statement, presume that disbursements were made first from the portion of the trust established
with the funds of other individuals. When that portion is depleted, then presume that disbursements were
made from the portion of the trust established with funds of the individual.
J. Policy--Earnings/Additions To Trusts
1. Trust Principal Is Not a Resource
a. Trust Earnings
Trust earnings are not income to the SSI claimant or recipient who is a trust beneficiary unless the trust
directs, or the trustee makes, payment to the beneficiary.
Trust earnings are not income to the trustee or grantor unless designated as belonging to the trustee or
grantor under the terms of the trust, e.g., as fees payable to the trustee or interest payable to the grantor.
b. Additions to Principal
Additions to the trustprincipalmadedirectly to the trustare not income to the grantor,trusteeor
beneficiary. Exceptions to this rule are listed in Sl 01120.201J.1 .c. and SI 01120.201J.1 .d.
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c. Exceptions
Certain payments are not assignable by law and, therefore, are income to the individual entitled to
receive the payment under regular income rules. They may not be paid directly into a trust, but
individuals may attempt to structure trusts so that it appears that they are so paid. Important examples of
non-assignable payments include:
• Temporary Assistance for Needy Families (TANF);
• Railroad Retirement Board-administered pensions;
• Veterans pensions and assistance;
• Federal employee retirement payments (CSRS, FERS) administered by the Office of Personnel
Management;
• Social Security title II and SSI payments;
• Private pensions under the Employee Retirement Income Security Act (ERISA)(29 U.S.C.A.
section 1056(d)).
d. Assignment of Income
A legally assignable payment (see $1 01120.201JA .c. for what is not assignable), that is assigned to a
trust, is income for SSI purposes unless the assignment is irrevocable, lfthe assignment is revocable, the
payment is income to the individual legally entitled to receive it.
2. Trust Principal Is a Resource--Revocable
Trust
a. Trust Earnings
Any earnings on a revocable trust are unearned income to the individual if:
• the trust was established with the assets of an individual;
• the individual is a beneficiary of the trust; and
• the trust is a resource under this section (see $1 00830.500 for exclusion of interest income).
b. Additions to Principal--Revocable Trust
Any additions to a revocable trust are unearned income to the individual if:
• the trust was establishedwith the assets of an individual,
• the individualis a beneficiaryof the trust; and
• the trust is a resource underthis section.
EXCEPTION: If the source of the additionsis the individual'sresources, theadditionsare not income
but conversion of a resource.
3. Trust Principal Is a Resource--Irrevocable Trust
a. Trust Earnings
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Any earnings on an irrevocable trust are unearned income to the individual in the percentage that he/she
provided the assets that constitute the corpus of the trust. This is the case if:
• the trust was established with the assets of an individual;
• the individual is a beneficiary of the trust;
• the trust is a resource under this section; and
• circumstances exist under which payment from the trust earnings could be made to or for the
benefit of the individual.
For example, if the individual's assets constitute 75% of the trust corpus and the trust earns $100 interest
in April, $75 of interest is income to the individual if the interest could be paid to or for the benefit of
the individual (see SI 00830.500 for exclusion of interest income).
b. Additions to Principal--Irrevocable Trust
Any additionsto an irrevocabletrustare unearnedincome to the individualif:
• the trust was established with the assets of an individual;
• the individual is a beneficiary of the trust;
• the trust is a resource under this section; and
• circumstances exist under which payment from the trust additions could be made to or for the
benefit of the individual.
EXCEPTION: If the source of the additions to the trust is the individual's other resources, then the
additions are not income, but a conversion of a resource.
4. Individual's Assets Form Only a Part of the Trust
In the case of an irrevocable trust where the assets of the individual (or the individual's spouse) were
transferred along with the assets of another individual(s), these provisions apply to the portion of the
trust attributable to the assets of the individual (or spouse). Thus, in determining income to the trust, you
must prorate any amounts of income, based on the proportion of the individual's assets in the trust.
Example: Jimmy Smith is an adult with cerebral palsy. His grandparents left $75,000 in trust for him in
their wills. Recently (after 1/1/00), Mr. Smith won an employment discrimination lawsuit and was
awarded a $1,500 judgment, which was deposited into the trust that his grandparents established. The
$1,500 of Mr. Smith's funds are subject to these provisions and could be a resource if payment could be
made to or for Mr. Smith's benefit (see Sl 01120.201 D.2.). The $75,000 deposited by his grandparents
is not subject to these provisions (see SI 01120.200) and is not a resource.
In determining income to the trust (see Sl 01120.201(3.3.), we must prorate the income in proportion
to the percentage of funds placed in the trust by Mr. Smith. Since this is an irrevocable trust, we will
count 1.96% ($1,500/$76,500) of the trust earnings as income and not count 98.04% ($75,000/$76,500)
of the earnings. Disbursements from, or additions to, the trust may require recalculation of the
percentages.
K. References
• Trusts - General, Including Trusts Established Prior to 1/1/00, Trusts Established with the Assets
of Third Parties and Trusts Not Subject to Section 1613(e) of the Social Security Act, SI
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01 ] 20.200
• Transfer of Resources for Less Than Fair Market Value, S] 01150. ] 00 ff
• Development and Documentation of Trusts Established on or after 1/1/00, Sl 01120.202
• Exceptions to Counting Trusts Established on or after 1/1/00, SI 01 ] 20.203
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POMSSectionSI
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SI ATL01120.201 Trust Property
See SI 01120.201
A. Background
Trusts involving SSI recipients/deemors must be reviewed to determine if they are a countable resource.
Several factors must be evaluated, including irrevocability of the trust, and the identity of the grantor
and the beneficiary.
Even though the trust document has a provision stating that it is irrevocable, the trust might still be
revocable under state law depending on the beneficiary designations.
The beneficiary and the grantor may be the same person in some instances. The actions of a
representative payee, legal guardian, a parent, or any other individual legally empowered to act on
behalf of the recipient with respect to his/her funds, in establishing a trust with these funds, are the
actions of an agent for the recipient. The actions of the agent are equivalent to the actions of the SSI
recipient. Thus, in such cases, it may be said that the SSI recipient has established the trust and therefore
is both the trust grantor and beneficiary.
B. Sole Beneficiary Trust
Laws for each state in the Atlanta Region follow the general principle of trust law that if a grantor is also
the sole beneficiary of a trust, the trust is revocable regardless of language in the trust document to the
contrary.
However, if there is a residual beneficiary properly designated in the trust document, then the trust is
irrevocable by its terms and is not a resource for SSI purposes.
C. Residual Beneficiary
A residual beneficiary, while not a current beneficiary of a trust, is named to receive the benefit of the
trust after a specific event occurs, e.g., the death of the primary beneficiary. The trust would no longer
be a grantor trust if there is a properly named residual beneficiary and may or may not be revocable
according to the language used to name the residual beneficiary.
1. State Laws
Statelawsdifferwithrespectto the languagethat mustbe usedto namea residualbeneficiary.
2. General
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For Alabama, Georgia, South Carolina and Kentucky, the trust must specify a particular person or entity
as the residual beneficiary. In these states, if the trust states that after death the trust will go to a
specifically named person or entity, or if it states that the trust is to go "to my children, or issue, or
descendants", this is specific enough to identify a person and the trust is irrevocable.
If, on the other hand, the trust language says that after death, the trust will go "to my estate" or "to the
heirs" of the primary beneficiary (or some other non-specific general term), this is not sufficient. This
trust would be revocable by the grantor because this wording is not specific enough to identify persons
who, upon his death, may become his heirs.
For Florida, Mississippi, North Carolina and Tennessee, the above general principle is not _bllowed.
3. Tennessee
For Tennessee, as long as the trust names any residual beneficiary, even an unborn child, it is not a sole
beneficiary trust and, therefore, may not be revoked by the grantor.
4. Mississippi
For Mississippi, as long as the trust names a residual beneficiary, other than an unborn child, it is not a
sole beneficiary trust and, therefore, can not be revoked by the grantor. Where the residual beneficiary is
an unborn child or children, and the grantor has no children, examine the file for evidence that the
grantor is unable to have children. If such evidence exists in the file, then the trust would be revocable
by the grantor and is a resource. Do not question the grantor or seek additional evidence outside of the
file concerning their ability to procreate. If no evidence exists in file, the trust is irrevocable.
5. North Carolina
In North Carolina, a specific person or entity may be designated. In addition, wording such as "to my
estate" or "to the heirs" (or some other general non-specific term) is sufficient to name a residual
beneficiary.
Refer any questionable trust document to the Office of General Counsel through the Assistance
Programs Section in the Regional Office.
6. Florida
In Florida, a specific person or entity may be designated. In addition, wording such as "to my heirs," "to
my heirs at law," "to my next of kin," "to my distributees," "to my relatives" or "to my family" (or
language of similar intent) is sufficient to name a residual beneficiary.
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POMS Section SI 01120.203
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TN 40 (01-09)
SI 01120.203 Exceptions to Counting Trusts
Established on or after 1/1/00
Topic
Introduction to Medicaid Trust Exceptions
Policy--Exception To Counting Medicaid
Trusts
Reference
SI 01120.203A
SI 01120.203B
Policy--Waiver For Undue Hardship
Procedure-- Developing Exceptions To
Resource Counting
Procedure--Development Of Undue
Hardship Waiver
Procedure--Nonprofit Associations
Procedure--Follow-Up To A Finding Of
Undue Hardship
Procedure--Reevaluating Revocable Trusts
Processed Under The Policy In Effect From
1/1/2000 Through 1/31/2001
SI 01120.203C
SI 01120.203D
SI 01120.203E
SI 01120.203F
SI 01120.203G
SI 01120.203H
A. Introduction to Medicaid Trust Exceptions
We refer to the exceptions discussed in this section as Medicaid trust exceptions because sections 1917
(d)(4)(A) and (C) of the Social Security Act (the Act) (42 U.S.C. § 1396p(d)(4)(A) and (C)) set forth
exceptions to the general rule of counting trusts as income and resources for the purposes of Medicaid
eligibility and can be found in the Medicaid provisions of the Act. While these exceptions are also
Supplemental Security Income (SSI) exceptions, we refer to them as Medicaid trust exceptions to
distinguish them from other exceptions to counting trusts provided in the SS1law (e.g., undue hardship)
and because the term has become a term of common usage.
Development and evaluation of Medicaid trust exceptions are based on the type of trust under review.
There are two types of Medicaid trusts to consider:
• Special Needs Trusts
• Pooled Trusts
B. Policy--Exception
To Counting Medicaid Trusts
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1. Special Needs Trusts Established under Section 1917(d)(4)(A) of the Act
a. General -- Special Needs Trusts
NOTE: Although this exception is commonlyreferredto as the special needs trust exception,the
exception applies to any trust meeting the following requirements and does not have to be a strict
special needs trust.
The resource countingprovisions of Section 1613(e) do not apply to a trust:
• Which containsthe assets of an individual under age 65 and who is disabled; and
• Which is established for the benefit of such individual through the actions of a parent,
grandparent, legal guardian or a court; and
• Which provides thatthe State(s) will receive all amounts remaining in the trust upon the death
of the individual up to an amount equal to the total medical assistance paid on behalf of the
individual under a State Medicaid plan.
CAUTION: A trust which meets the exception to counting the trust under the SSI statutory trust
provisions of Section 1613(e) must still be evaluated under the instructions in S I 01120.200 to
determine if it is a countable resource. If the trust meets the definition of a resource (SI
01110.100B. 1.), it would will be subject to regular resource-counting rules.
b. Under Age 65
To qualifyfor the special needs trustexception,the trustmustbe established for the benefit of a disabled
individualunderage 65. This exception does not apply to a trust established for the benefit of an
individualage 65 or older. If the trust was established for the benefit of a disabled individualprior to the
date the individualattainedage 65, the exception continuesto apply after the individualreaches age 65.
c. Additions to Trust After Age 65
Additions to or augmentationof a trustafterage 65 (except as outlinedbelow) arenot subjectto this
exception. Such additions may be income inthe month addedto the trust,depending on the source of the
funds (see SI 01120.201J.) and may be countedas resourcesinthe following monthsunder regular SSI
trust rules.
Additions or augmentation do not include interest, dividends or other earnings of the trust or portion of
the trust meeting the special needs trust exception. If the trust contains the irrevocable assignment of the
right to receive payments from an annuity or support payments made when the trust beneficiary was less
than 65 years of age, annuity or support payments paid to a special needs trust are treated the same as
payments made before the individual attained age 65 and do not disqualify the trust from the special
needs trust exception.
d. Disabled
To qualify for the special needs trust exception, the individual whose assets were used to establish the
trust must be disabled for SSI purposes under section 1614(a)(3) of the Act.
e. Established for the Benefit of the Individual
Under the special needs trust exception, the trust must be established for and used for the benefit of the
disabled individual. SSA has interpreted this provision to require that the trust be for the sole benefit of
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the individual, as described in SI 01120.201.F.2. Any provisions that:
• provide benefits to other individuals or entities, or
• allow for termination of the trust prior to the individual's death and payment of the corpus to
another individual or entity (other than the State(s) or another creditor for payment for goods or
services provided to the individual), will result in disqualification for the special needs trust
exception.
Payments to third parties for goods and services provided to the trust beneficiary are allowed. However,
such payments should be evaluated under POMS SI 01120.200E. - SI 01120.200F. and 01120.201.I.
to determine whether the payments may be income to the individual.
f. Who Established the Trust
The special needs trust exception does not apply to a trust established through the actions of the disabled
individual himself/herself. To qualify for the special needs trust exception, the assets of the disabled
individual must be put into a trust established through the actions of the disabled individual's:
• parent(s);
• grandparent(s);
• legal guardian(s); or
• a court.
In the case of a legally competent, disabled adult, a parent or grandparent may establish a "seed" trust
using a nominal amount of his or her own money, or if State law allows, an empty or dry trust. After the
seed trust is established, the legally competent disabled adult may transfer his or her own assets to the
trust or another individual with legal authority (e.g. power of attorney) may transfer the individual's
assets into the trust.
In the case of a trust established through the actions of a court, the creation of the trust must be required
by a court order. Approval of a trust by a court is not sufficient.
NOTE: Under 1613(e) of the Act, a trust is considered to have been "established by" an individual if
any of the individual's (or the individual's spouse) assets are transferred to the trust other by will.
Alternatively, under the Medicaid trust exceptions in 1917(d)(4)(A) and (C) of the Act, a trust can be
"established by" an individual who does not provide the corpus of the trust, or transfer any of his/her
assets to the trust, but rather someone who took action to establish the trust. To avoid confusion, we use
the phrase "established through the actions oP' rather than "established by" when referring to the
individual who physically took action to establish a special needs or pooled trust.
g. Legal Authority and Trusts
The person establishing the trust with the assets of the individual or transferring the assets of the
individual to the trust must have legal authority to act with respect to the assets of that individual.
Attempting to establ{sha trust with the assets of another individual without proper legal authority to act
with respect to the assets of the individual will generally result in an invalid trust.
For example, a parent establishing a seed trust for his adult child with his own assets has legal authority
over his own assets to establish a trust. He only needs legal authority over his child's assets if he actually
takes action with the child's assets, e.g., transfers them to a previously established trust.
A power of attorney (POA) is legal authority to act with respect to the assets of a disabled individual.
However, a trust established under a POA will result in a trust we consider to be established through the
actions of the disabled individual himself/herself because the POA merely establishes an agency
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relationship.
h. State Medicaid Reimbursement Requirement
To qualify for the special needs trust exception, the trust must contain specific language that provides
that upon the death of the individual, the State(s) will receive all amounts remaining in the trust, up to an
amount equal to the total amount of medical assistance paid on behalf of the individual under the State
Medicaid plan(s). The State(s) must be listed as the first payee and have priority over payment of other
debts and administrative expenses except as listed in SI 01120.203B3.a.
The trust must provide payback for any State(s) that may have provided medical assistance under the
State Medicaid plan(s) and not be limited to any particular State(s). Medicaid payback may also not be
limited to any particular period of time, i.e. payback cannot be limited to the period after establishment
of the trust.
NOTE: Labeling the trust as a Medicaid pay-back trust, OBRA 1993 pay-back trust, trust
established in accordance with 42 U.S.C. § 1396p, or as an MQT, etc. is not sufficient to meet the
requirements for this exception. The trust must contain language substantially similar to the language
above. An oral trust cannot meet this requirement.
2. Pooled Trusts
Established
under Section
1917(d)(4)(C)
of the Act
a. General - Pooled Trusts
A pooled trust is a trust established and administered by an organization. It is sometimes called a
"master trust" because it contains the assets of many different individuals, each in separate accounts
established through the actions of individuals, and each with a beneficiary. By analogy, the pooled trust
is like a bank that holds the assets of individual account holders.
Whenever you are evaluating the trust, it is important to distinguish between the master trust, which is
established through the actions of the nonprofit association, and the individual trust accounts within the
master trust, which are established through the actions of the individual or another person for the
individual.
The provisions of the SSI trust statute do not apply to a trust containing the assets of a disabled
individual which meets the following conditions:
• The pooled trust is established and maintained by a nonprofit association;
• Separate accounts are maintained for each beneficiary, but assets are pooled for investing and
management purposes;
• Accounts are established solely for the benefit of the disabled individuals;;
• The account in the trust is established through the actions of the individual, a parent,
grandparent, legal guardian, or a court; and
• The trust provides that to the extent any amounts remaining in the beneficiary's account upon the
death of the beneficiary are not retained by the trust, the trust will pay to the State(s) the amount
remaining up to an amount equal to the total amount of medical assistance paid on behalf of the
beneficiary under State Medicaid plan(s).
NOTE: There is no age restriction under this exception. However, a transfer of resources to a trust for
an individual age 65 or over may result in a transfer penalty (see SI 01150.121 .).
CAUTION: A trust which meets the exception to counting the trust under the SSI statutory trust
provisions of 1613(e) must still be evaluated under the instructions in SI 01120.200 to determine if it is
a countable resource.
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b. Disabled
Under the pooled trust exception, the individual whose assets were used to establish the trust account
must meet the definition of disabled for purposes of the SSI program.
e. Nonprofit Association
The pooled trust must be established through the actions of a nonprofit association. For purposes of the
pooled trust exception, a nonprofit association is an organization established and certified under a State
nonprofit statute or defined in section 501 (c) of the Internal Revenue Code (IRC) and that also has taxexempt status under section 501(a) of the IRC. (See SI 01120.203F. for development.)
d. Separate Account
A separate account within the trust must be maintained for each beneficiary of the pooled trust, but
for purposes of investment and management of funds, the trust may pool the funds in the individual
accounts. The trust must be able to provide an individual accounting for the individual.
e. Established for the Sole Benefit of the Individual
Under the pooled trust exception, the individual trust account must be established for the sole benefit of
the disabled individual. (See Sl 01120.201F.2. for a definition of sole benefit.) This exception does not
apply if the account
• provides a benefit to any other individual or entity, or
• allows for termination of the trust account prior to the individual's death and payment of the
corpus to another individual or entity
f. Who Established the Trust Account
In order to qualify for the pooled trust exception, the trust account must have been established through
the actions of the disabled individual himself/herself or through the actions of the disabled individual's:
• parent(s);
• grandparent(s);
• legal guardian(s); or
• a court.
A legally competent, disabled adult who is establishing or adding to a trust account with his or her own
funds has the legal authority to act on his or her own behal£ A third party establishing a trust account on
behalf of another individual with that individual's assets must have legal authority to act with regard to
the assets of the individual. An attempt to establish a trust account by a third party with the assets of an
individual without the legal right or authority to act with respect to the assets of that individual will
generally result in an invalid trust.
In the case of a trust established through the actions of a court, the creation of the trust must be required
by a court order. Approval of a trust by a court is not sufficient.
g. State Medicaid Reimbursement
Provision
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To qualify for the pooled trust exception, the trust must contain specific language that provides that, to
the extent that amounts remaining in the individual's account upon the death of the individual are not
retained by the trust, the trust pays to the State(s) from such remaining amounts in the account an
amount equal to the total amount of medical assistance paid on behalf of the individual under the State
Medicaid plan(s). To the extent that the trust does not retain the funds in the account, the State(s) must
be listed as the first payee(s) and have priority over payment of other debts and administrative expenses
except as listed in SI 01120.203B.3.a.
The trust must provide payback for any State(s) that may have provided medical assistance under the
State Medicaid plan(s) and not be limited to any particular State(s). Medicaid payback may also not be
limited to any particular period of time, i.e. payback cannot be limited to the period after establishment
of the trust.
NOTE: Labeling the trust as a Medicaid pay-back trust, OBRA 1993 pay-back trust, trust
established in accordance with 42 U.S.C. § 1396p, or as an MQT, etc. is not sufficientto meet the
requirementsforthis exception. The trustmust containlanguagesubstantiallysimilar to the language
above. An oral trust cannotmeet this requirement.
3. Allowable and Prohibited Expenses
The following instructions about trust expenses and payments apply to Medicaid special needs trusts and
to Medicaid pooled trusts.
a. Allowable Administrative Expenses
The following types of administrativeexpenses may be paid fromthe trust priorto reimbursementof
medical assistanceto the State(s):
• Taxes due fromthe trust to the State(s)or Federalgovernmentbecause of the death of the
beneficiary;
• Reasonable fees for administrationof the trustestate such as an accountingof the trustto a court,
completion and filing of documents,or otherrequiredactionsassociatedwith terminationand
wrappingup of the trust.
b. Prohibited Expenses and Payments
The following expenses and payments are examples of some of the types not permitted prior to
reimbursement of the State(s) for medical assistance:
• Taxes due from the estate of the beneficiary other than those arising from inclusion of the trust in
the estate;
• Inheritance taxes due for residual beneficiaries;
• Payment of debts owed to third parties;
• Funeral expenses; and
• Payments to residual beneficiaries.
c. Applicability
This restriction on payments from the trust applies upon the death of the beneficiary. Payments of fees
and administrative expenses during the life of the beneficiary are allowable as permitted by the trust
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documentandare not affectedby the StateMedicaidreimbursementrequirement.
4. Reevaluate Trusts Processed under the Policy in Effect From 1/1/2000 through
1/31/01
a. Applicability
Trusts evaluated under the policy in effect from 1/1/2000 through
1/31/2001 that were found to meet the requirements of a Medicaid special needs trust or a Medicaid
pooled trust must be reevaluated under these instructions.
b. Policy Change
These instructionscontaina policy change thatis effective prospectively from
2/1/2001. Underthe prior policy, we did not count as a resourceany trustmeetingthe requirementsof a
Medicaid special needs trust or a Medicaid pooled trust. Effective 2/1/2001, a trust determined to meet
the requirements of a Medicaid special needs trust in $1 01120.203B. 1. or Medicaid pooled trust in or
$1 01120.203B.2. must also be evaluated using the instructions in SI 01120.200. This is the case
because even though a trust may meet the requirements for an exception to counting under Section 1613
(e)(5) of the Act, a trust may still meet the definition of a resource and be countable. The special needs
and pooled trust exceptions are not resource exclusions.
c. Trusts That Become Countable
lfa trust previously not counted under the policy in effect 1/1/2000 1/31/2001 is now found to be a
countable resource under $1 01120.200, we will not reopen the case retroactively, but will count the
trust as a resource prospectively beginning with 2/1/2001. Any payments made to the individual
between the month the case was initially adjudicated using the prior policy and the readjudication under
these instructions are not overpayments. See SI 01 t 20.203H.
NOTE: The undue hardship waiver in SI 01120.203G. does not apply to trusts counted as resources
under $1 01120.200. The waiver only applies to trusts counted under section 1613(e) ($1 01120.201
through $1 01120.203).
5. Income Trusts Established under Section 1917(d)(4)(B) of the Act
Income trusts, sometimes called Miller trusts (after a court case), established under section 1917(d)(4)
(B) of the Act are not considered exceptions to trust rules for SSI eligibility purposes. However, some
States may exclude these trusts from counting as a resource for Medicaid eligibility purposes.
C. Policy--Waiver
For Undue Hardship
1. Definition
a. Undue Hardship
For purposes of the trust provisions of section 1613(e) of the Act, undue hardship exists in a month if:
• failure to receive SSI payments would deprive the individual of food or shelter; and
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• the individual's available funds do not equal or exceed the Federal benefit rate (FBR) plus
federally administered State supplement, if any.
NOTE: Inability to obtain medical care does not constitute undue hardship for SSI purposes although it
may under a State Medicaid plan. Also, the undue hardship waiver does not apply to a trust counted as a
resource under SI 01120.200. It only applies to trusts counted under section 1613(e)of the Act (SI
01120.201 through SI 01120.203).
b. Loss of Shelter
For purposes of this provision, an individual would be deprived of shelter if:
• he/she would be subject to eviction from their current residence ifSSl payments were not
received; and
• there is no other affordable housing available, or there is no other housing available with
necessary modifications for a disabled individual.
2. Application of the Undue Hardship Waiver
a. Applicability
We will consider the possibility of undue hardship under this provision only when:
• counting an irrevocable
excess resources;
trust as a resource results in the individual's ineligibility for SSI due to
• the individual alleges (or information in the file indicates) that not receiving SSI would deprive
him/her of food or shelter; and
• the trust specifically prohibits disbursements or prohibits the trustee from exercising his/her
discretion to disburse funds from the trust for the individual's support and maintenance.
NOTE: Since an individual may revoke a revocable trust and access the funds for his/her support and
maintenance, the requirements for undue hardship cannot be met if the individual established a
revocable trust.
b. Suspension of Resource Counting
The countingof an irrevocable trustas a resource is not applicable in any month for which countingthe
trust would cause unduehardship.
c. Resource Counting Resumes
Resource countingof a trust resumesfor any month(s) for which it would not resultin undue hardship.
3. Available Funds
In determining the individual's available funds we include:
a. Income
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• All countable income received in the month(s) for which undue hardship is an issue.
• All income excluded under the Act received in the month(s) for which undue hardship is an issue.
(See SI 00830.099 and SI 00820.500, respectively, for a list of unearned and earned income
exclusions provided under the Act.)
• The value of in-kind support and maintenance (ISM) being charged, i.e., the presumed maximum
value (PMV), the value of the one-third reduction (VTR), or the actual lesser amount.
(Do not include SSI payments received or items that are not income per SI 00815.000 ff.)
NOTE: The receipt of ISM, in and of itself, does not preclude a finding of undue hardship.
b. Resources
• All countable liquid resources as of the first moment of the month(s) for which undue hardship is
at issue. (See SI 01 ] 10.300 for a definition of liquid resources.)
• All liquid resources excluded under the Act as of the first moment of the month(s) for which
undue hardship is at issue. (See SI 01130.050 for a list of resource exclusions under the Act.)
SSI benefits retained into the month following the month of receipt are counted as a resource for
purposes of determining available funds.
(Do not include nonliquid resources or assets determined not to be a resource per Sl 01120.000 if)
4. Example
Frank Williams filed for SSI in 3/2008 as an aged individual. In 2/2008, he received an insurance
settlement from an accident that was placed in an irrevocable trust. After determining that he met the
other requirements for undue hardship (including a prohibition on the trustee from disbursing any funds
for Mr. Williams' support and maintenance), the claims representative (CR) determined Mr. Williams'
available funds. He receives $450 in title II benefits per month. His only liquid resource is a bank
account that has $500 in it. The total of $950 in available funds ($450 title I1and $500 bank account
balance) means that undue hardship does not apply in 3/2008 because that amount exceeds the FBR.
(His State has no federally-administered State supplement.)
Mr. Williams comes back into the office in 6/2008. He presents evidence that he has spent down the
$500 in his bank account on living expenses in the past 3 months. As of 6/2008, he has no liquid
resources and his income total of $450 is below the $637 FBR. Mr. Williams meets the undue hardship
test for 6/2008 (which is his E02 month). The trust does not count as his resource in that month, lfhis
situation does not change, he will qualify for an SSI payment in 7/2008.
D. Procedure--- Developing Medicaid Trust Exceptions To
Resource Counting
1. Special Needs Trusts under Section 1917(d)(4)(A) of the Act
The following is a summary of special needs trust development presented in a step-action format. Refer
to the policy cross-references for complete requirements.
STEP
ACTION
1
Does the trust contain the assets of an individual who was under age 65 when the trust
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was established? (SI 01120.203B.1 .b.)
• If yes, go to Step 2.
• If no, go to Step 8.
2
Does the trust contain the assets of a disabled individual? (SI 011203B.1.d.)
• If yes, go to Step 3.
• If no, go to Step 8.
3
Is the disabled individual the sole beneficiary of the trust? (SI 01120.203B.1 .e.)
• If yes, go to Step 4.
• If no, go to Step 8.
4
Did a parent, grandparent, legal guardian or a court establish the trust? (SI
01120.203B.1.f.)
• lfyes, go to Step 5.
• If no, go to Step 8.
5
Does the trust provide specific language to reimburse any State(s) for medical
assistance paid upon the individual's death as required in Sl 01120.203B. 1.h.?
• If yes, go to Step 6.
• Ifno, goto Step 8.
6
7
8
The trust meets the special needs trust exception to the extent that the assets of the
individual were put in trust prior to the individual attaining age 65. Any assets placed
in the trust after the individual attained age 65 are not subject to this exception, except
as provided in SI 01120.203B.1 .c.
Go to Step 7 for treatment of assets placed in trust prior to age 65.
Go to Step 8 for treatment of assets placed in trust after attaining age 65.
Evaluate the trust under SI 01120.200D.1 .a. to determine if it is a countable
resource.
The trust (or portion thereof) does not meet the requirements for the special needs
trust exception.
Determine whether the pooled trust exception in SI 01120.203B.2. applies.
2. Pooled Trusts Established under Section 1917(d)(4)(C) of the Act
The following is a summary of pooled trust development presented in a step-action format. Refer to the
policy cross-references for complete requirements.
STEP
ACTION
l
Does the trust account contain the assets of a disabled individual? (See $1
01120.203B.2.b.)
• If yes, go to Step 2.
• If no, go to Step 8.
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Was the pooled trust established and maintained by a nonprofit association? (See SI
01120.203B.2.a., SI 01120.203B.2.c. and development instructions in SI
01120.203F.)
• If yes, go to Step 3.
• If no, go to Step 8.
3
Does the trust pool the funds, yet maintain an individual account tbr each beneficiary,
and can it provide an individual accounting? (SI 01 ]20.203B.2.d.)
• If yes, go to Step 4.
• If no, go to Step 8.
4
Is the disabled individual the sole beneficiary of the trust account? (SI
01120.203B2.e.)
• If yes, go to Step 5.
• If no, go to Step 8.
5
Did the individual, parent(s), grandparent(s), legal guardian(s) or a court establish the
trust account? (SI 01120203B2.a. and SI 01120.203B2.f.)
• If yes, go to Step 6.
• If no, go to Step 8.
6
Does the trust provide specific language to reimburse any State(s) for medical
assistance paid upon the individual's death from funds not retained by the trust as
required in SI 01120.203B.2.g.?
• If yes, go to Step 7.
• If no, go to Step 8.
7
The trust meets the Medicaid pooled trust exception, however, the trust still should be
evaluated under SI 01120.200D. 1.a. to determine if it is a countable resource.
8
The trust does not meet the requirements for the Medicaid pooled trust exception.
Determine if the undue hardship waiver applies under S I 01120.203 E.
E. Procedure--Development
Of Undue Hardship Waiver
The following is a summaryof developmentinstructionsfor unduehardship presentedin a step-action
format.Refer to cross-referencesfor complete instructions
STEP
1
ACTION
Is the trust irrevocable?
• If yes, go to Step 2.
• If no, go to Step 8.
2
Does counting the trust result in excess resources?
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• If yes, go to Step 3.
• If no, go to Step 8.
3
Does the individualallege (or informationin the file indicate)that not receiving SSI
would deprive him/her of food or shelteraccording to SI 01120.203C.1 .?
• If yes, go to Step 4.
• If no, go to Step 8.
4
Obtainthe individual'ssigned statement(on the DPST screen in MSSICS, or in nonMSSICScases, on a SSA-795 faxed intoNDRed) as to whether:
• Failure to receive SSIpaymentswould deprive the individualof food or shelter;
• The individual'stotal availablefundsare less thanthe FBR plus federally
administeredStatesupplement;
• The individualagrees to report promptlyany changes in income and resources;
and
• The individual understandsthathe/she may be overpaid if availablefunds
exceed the FBR plus Statesupplementfor any month, or other situations
change.
• Go to Step 5.
5
Does the trust contain language that specifically prohibits the trustee from making
disbursements for support and maintenance or that prohibits the trustee from
exercising discretion to disburse funds for support and maintenance?
• If yes, go to Step 6.
• If no, go to Step 8.
6
Add up all of the individual's income, both countable and excludable (see SI
01120.203C.3.a.). Do not include any SSI payments received or items that are not
income per Sl 00815.000 ff. If the individual is receiving 1SM, include as income
the ISM being charged (PMV, VTR, or actual amount, if less).
Add up all of the individual's liquid resources, both countable and excludable (See S l
01120.203C.3b.).
Does the total of the income and the liquid resources equal or exceed the FBR plus
federally administered State supplement, if any?
• If yes, go to Step 8.
• If no, go to Step7.
7
Suspendcountingof the trust as a resource for any month in which all requirements
above are met (Sl 01120.20gc.2.).
• In MSSICS, documentthe findings of unduehardship andapplicable months in
the DROC screen.
• On paper forms, documentthe informationin the REMARKS section. See SI
01120.202C. and Sl 01120.202D. for further documentation and SI
01120.203G. for follow-up instructions. STOP.
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8
Undue hardship does not apply. However, in some instances where income and
resource are currently too high, unless the trust is revocable, undue hardship may
apply in future months.
F. Procedure---Nonprofit
Associations
When a trust is alleged to be established through the actions of a nonprofit, tax-exempt organization,
check regional instructions to determine if a precedent on the organization's certification under a State
nonprofit statute or Internal Revenue Service (IRS) section 501(c) tax-exempt status is listed.
• If so, document the evidence on the DROC screen in MSSlCS or on EVID for non-MSSICS
cases.
• If a precedent has not been established, contact the organization and request a copy of its State
nonprofit certification or its IRS section 501(c) tax-exempt certification. Annotate the evidence
screen and forward a copy to the regional office for inclusion as a regional precedent. Do not
recontact an organization if there is already a regional precedent.
G. Procedure--Follow-Up
To A Finding Of Undue Hardship
1. When to Use This Procedure
Use this procedure when it is necessary to determine whether an individual who established a trust
continues to be eligible for SSI based on undue hardship. Since undue hardship is a month-by-month
determination, recontact the individual to redevelop undue hardship periodically.
2. Recontact Period
The recontact period may vary depending on the individual's situation. If the individual alleges, and
information in the file indicates, that the individual's income and resources are not expected to change
significantly and the individual is continuously eligible for SSI because of undue hardship, recontact the
individual no less than every 6 months. If the individual's income and resources are expected to
fluctuate or the file indicates a history of such fluctuation, the recontact period should be shorter, even
monthly in some cases.
3. Documentation
At each recontact:
• Obtain the individual's signed allegation that failure to receive SSI would have deprived the
individual of food or shelter for any month not covered by a prior allegation;
• Determine whether total income and liquid resources exceeded the FBR plus State supplement for
each prior month;
• If undue hardship continued for the prior period and is expected to continue in the future period,
continue payment and tickle the case for the next recontact per SI 01120.203G.4.
• If undue hardship did not continue through each month, clear the excluded amount and exclusion
reason entries on the ROTH screen for each month that undue hardship did not apply. Process the
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excess resources overpayment for those months. If undue hardship stops due to a continuing
change in the individual's situation, e.g., income or resources, do not tickle the file to follow up.
The individual must recontact SSA and make a new allegation of undue hardship.
4. Recontact Controls
Use the Modernized Development Worksheet (MDW) to control the case for recontact when the
individual is eligible for SSI based on undue hardship. Set up an MDW screen using instructions in
MSOM MDW 001.001 and the following MDW inputs:
• In the ISSUE field: input TRUST
• In the CATEGORY
field: input T16M1SC
• In the TICKLE field: input the date the individual should be recontacted to redevelop undue
hardship
• In the MISC field: input information (up to 140 characters) about the trust undue hardship issue
including issues to be aware of and anything else the CR deems appropriate in the case. If
additional space is needed, use REMARKS.
H. Procedure---Reevaluating Revocable Trusts Processed Under
the Policy In Effect From 1/1/2000 Through 1/31/2001
1. Policy Change
These instructions represent a prospective policy change related to revocable Medicaid special needs
trusts and Medicaid pooled trusts. The policy in effect from 1/1/2000 through 1/31/2001 provided for an
exception to counting these trusts without regard to whether the trusts were resources under the general
resource rules. Effective 2/1/2001, revocable Medicaid special needs trusts and Medicaid pooled trusts
initially evaluated under the policy in effect 1/1/2000 through 1/31/2001 must be reevaluated under
these instructions.
2. Identify Trust Cases
Identify any cases processed under the 1/1/2000 through 1/31/2001 policy.
a. Irrevocable
Trusts
You do not need to do anything additional with these cases.
b. Revocable Trusts
You must reevaluate these cases prospectively from 2/1/2001 following the instructions in S[
01120.200 to determine if they meet the definition of a resource. If the trust meets the definition of a
resource, it is subject to regular resource counting rules as of 2/1/2001.
c. Prior Period
You do not need to reopen any period prior to 2/1/2001 and no overpayments will result for the prior
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period as a result of the policy change.
To Link to this section - Use this URL:
http:/policy.ssa.gov/poms,nsf/links/0501120203
SI 01120.203 - Exceptions to Counting Trusts Established on or after 1/1/00 - 01/13/2009
_'S,_._g_
Privacy Policy I Website Policies & Other Important Information
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2/2/2009
What Estate Planners Need to Know
About Special Needs Trusts
&
Public Benefits
March 31, 2009
By
Richard E. Davis1
Krugliak, Wilkins, Griffiths & Dougherty Co., LPA
4775 Munson St., N.W.
Canton, OH 44718
(330) 244-2877
[email protected]
1
Portions of this outline, as indicated by footnote, are from outlines prepared by Andrew H. Hook
and Bernard A. Krooks. Oast & Hook, P. C. retains the original copyright on those portions.
©2009 Richard E. Davis
TABLE OF CONTENTS
I
General Principles
3
II
Who May Create an SNT?
4
III
Common Law Third-Party-Settled SNT
5
IV
Third-Party-Settled SNT – “Sole Benefit” Trust for
Coordination with Medicaid Planning for Parents
16
V
Self-Settled SNT – (d)(4)(A) Trusts
20
VI
Self-Settled SNT – Pooled Trust Account(d)(4)(C) Trusts
27
VII
When to Use Third-Party Special Needs Trusts
28
VIII
When to Use Self-Settled Special Needs Trusts
32
IX
Malpractice for Failure to Preserve Public Benefits
Eligibility
36
X
Notification Requirements
37
XI
Alternatives to SNTs
41
XII
Current Developments
42
Appendix A Government Benefit Programs
44
Appendix B Issues to Consider in Administering SNTs
68
2
I.
General Principles.
A.
Purposes for Special Needs Trusts. A special or supplemental needs trust (both
referred to in this outline as “SNT”) is a type of trust created for an individual (1) who is or who
may become disabled and (2) who is or may become the recipient of means tested public
benefits.
1.
Special Needs Trusts. The terms “special” or “supplemental” are often used
interchangeably, and local custom often determines the appropriate nomenclature
in certain jurisdictions. This outline, for simplicity purposes, uses the term “SNT”
generically to refer to both. Because the Social Security Administration (“SSA”)
refers to self-settled d(4)(A) and d(4)(C) trusts2 as special needs trusts, that terms
is often used to refer to self-settled SNTs. Some practitioners use the term special
needs trusts to mean one that limits the discretion of the trustee to making in-kind
distributions of items other than food or shelter.
2.
Supplemental Needs Trusts. The term supplemental needs often refers to a trust
that gives the trustee unlimited discretionary authority to make distributions;
however, the term is sometimes used to refer to all third-party-settled SNTs.
The special or supplemental needs that such trusts are designed to provide are those that are not
covered by the public benefits received by the SNT beneficiary. These include items such as:
•
•
•
•
•
•
•
•
•
•
•
Clothing
Eyeglasses
Transportation (including vehicle purchase)
Insurance premiums
Hobbies
Recreational activities
Computers/electronic equipment
Vacations/trips/entertainment
Purchase of goods and services that add pleasure and quality to life: videos,
furniture, or a television
Athletic training or competitions
Personal care attendant or escort
The goal of the SNT is to provide for these types of supplemental benefits without jeopardizing the
beneficiary’s eligibility for public benefits. Unless extreme care is exercised in the drafting and
administration of the SNT, it can be treated as a countable resource of the beneficiary, thereby
defeating the trust’s primary purpose.
B.
follows:
Definition of Disability. “Disabled” is defined in 42 U.S.C. § 1382c(a)(3) as
2
These are trusts described in 42 U.S.C. § 1396p(d)(4)(A) and (C) and which are described in parts VI and VII of
this outline.
3
an individual shall be considered to be disabled for purposes of this subchapter if he is unable to
engage in any substantial gainful activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or which has lasted or can be expected
to last for a continuous period of not less than twelve months.
C.
Types of Means Tested Public Benefits. The trustee who administers an SNT
needs to have a good understanding of the eligibility requirements of the public benefits for
which the beneficiary is or may become eligible. A brief summary of the public benefits that
disabled individuals often receive is attached as Appendix A.
II.
Who May Create an SNT?
Anyone may create an SNT; however, the identity of the trust settlor has a
dramatic impact on how the trust is treated for public benefit eligibility purposes. There are two
main types of SNTs. Knowing which type of trust one is dealing with is critical.
A.
Third-Party SNTs.
1.
SNTs For a Recipient of SSI or Medicaid. An SNT may be created by a donor
who would like to set aside, during life or upon death, assets for the benefit of the
intended beneficiary (e.g., a child or a grandchild of the donor) without
jeopardizing the beneficiary’s eligibility for public benefits. In most states these
are based upon common law principles; however some states have statutory
authorization. These are discussed in Article III.
2.
Third-Party SNTs Created for Another Where Donor Seeks Medicaid
Eligibility for Him/Herself. An SNT may also be established by a donor who is
seeking Medicaid qualification for her/himself (or for his or her spouse) and who
also wishes to create a trust to benefit the donor’s child with a disability,
regardless of age, or any other beneficiary with a disability who is under the age
of 65. This is referred to as a (c)(2)(B)(iv) “sole benefit” trust (see Article IV).
3.
Discretionary Support Trusts Created by Wealthy Elders for the Benefit of
the Settlors' Children Who Are Disabled. In some cases, family wealth is
sufficient to assure that means tested public benefits should never become an
issue, barring unforeseen future events. In these cases, the beneficiary may totally
lack the ability to handle financial matters, but may need a trust to provide for
most or all of the beneficiary’s needs, including support.
B.
Self-Settled SNTs. A self-settled trust is funded with assets of the recipient of an
individual with a disability who is or will likely need means-tested public benefits. In some
cases a court acting on behalf of such person establishes the trust. Generally speaking, selfsettled trusts will render the settlor ineligible for most means tested public benefits, unless the
trust is one of the two following types created by the Omnibus Budget Reconciliation Act of
1993 (“OBRA ’93:
1.
Medicaid payback trust governed by 42 U.S.C. 1396p(d)(4)(A), referred to in this
outline as a "(d)(4)(A) trust” (discussed in Article VI); and
4
2.
III.
Pooled trust account governed by 42 U.S.C. 1396p(d)(4)(C), referred to in this
outline as a “pooled account” (discussed in Article VII).
Common Law Third-Party-Settled SNT.
A.
How Created. A third-party SNT may be created by revocable inter vivos trust,
irrevocable trust, or by will. While first party-settled SNTs must be irrevocable, the POMS
imposes no similar for third party settled trusts, however. While virtually all stand alone third
party SNTs are, and should be, irrevocable, use of a revocable trust becomes an issue when the
parent of a child with a disability himself or herself becomes disabled, and the parent’s revocable
trust includes a provision allowing the trustee to make distributions for the supplemental needs of
the child.
B.
Advantage of Third-Party-Settled SNTs. A common law SNT established by a
third party is not required to reimburse the State for the cost of Medicaid benefits expended on
behalf of the SNT beneficiary upon the beneficiary’s death.
C.
Make Sure Trust Will Not be Treated as a Resource. A determination must be
made regarding which public benefits the beneficiary is receiving. The key is to make sure that
the assets of the trust will not be treated as countable resources of the beneficiary. Many states
have begun to aggressively assert that SNTs are countable resources of their beneficiaries.
Nevertheless, federal Medicaid and SSI law, which is binding on the states, basically assures that
persons not responsible for the support of a Medicaid or SSI recipient may provide a source of
funds to be used to enhance the quality of life of the beneficiary, and federal law restrains states
from treating as resources trusts from which the beneficiary cannot compel distributions for
support.
1.
Medicaid. If the SNT beneficiary is receiving Medicaid, strict compliance with
the requirements of any state Medicaid rules or regulations is essential.
2.
Supplemental Security Income (“SSI”). If the SNT beneficiary is receiving
SSI, a thorough understanding of the Social Security Administration (“SSA”)
rules governing SSI is essential. SSI financial eligibility rules can be found at 20
C.F.R. 416.1200 et seq. (for resources) and at 20 C.F.R. 416.100 et seq. (for
income.). While the C.F.R. contains the official regulations, the SSA relies
primarily upon the sub-regulatory Program Operations Manual System (POMS)3,
published by the SSA. POMS can be found on the internet at
https://s044a90.ssa.gov/apps10/poms.nsf/aboutpoms
D.
When is a Third-Party-Settled SNT a Resource? The answer depends upon the
terms of the trust (e.g., whether the trust contains a support standard and the extent of discretion
given to the trustee) and upon whether or not the beneficiary has the right to compel a
distribution for food and shelter (for SSI) or for support (for Medicaid).
3
Although these instructions are not the product of formal rule making, the Supreme Court has held that the POMS
“warrant respect”.
5
1.
Federal “Availability” Requirements. A state may consider only the income
and resources that are “available” to the applicant or recipient. Whether an
interest in a trust is a “resource” is a matter of federal law, and while the meaning
of “availability” in the context of a third-party-settled trust is not specifically
addressed in the United States Code or the Code of Federal Regulations, that issue
is addressed squarely in the POMS, and was discussed in the legislative history of
the Medicaid Act.
a)
United States Code. 42 U.S.C. 1396a requires:
A State plan for medical assistance must . . . (17) . . . include reasonable
standards . . . for determining eligibility . . . which. . . (B) provide for
taking into account only such income and resources as are, as determined
in accordance with standards prescribed by the Secretary, available to the
beneficiary [and] . . . (C) provide for reasonable evaluation of any such
income or resources. . . .
b)
Code of Federal Regulations. 20 CFR § 416.1201(a)(1) clarifies this by
providing:
(a) Resources; defined. For purposes of this subpart L, resources means
cash or other liquid assets or any real or personal property that an
individual (or spouse, if any) owns and could convert to cash to be used
for his or her support and maintenance. (1) If the individual has the right,
authority or power to liquidate the property or his or her share of the
property, it is considered a resource. If a property right cannot be
liquidated, the property will not be considered a resource of the
individual (or spouse).
Similarly, 20 CFR § 416.120(c)(3) states, “Resources means cash or other
liquid assets or any real or personal property that an individual owns and
could convert to cash to be used for support and maintenance. . . .”
c)
POMS. The POMS, at SI 01120.200, discusses “availability” in the
context of trusts established by third parties. (D)( 1 )(a) of that section
states:
If an individual (claimant, recipient, or deemor) has legal authority to
revoke or terminate the trust and then use the funds to meet his food or
shelter needs, or if the individual can direct the use of the trust principal
for his/her support and maintenance under the terms of the trust, the trust
principal is a resource for SSI purposes.
Subparagraph (b) of that section expands upon the ability of a beneficiary
to terminate the trust:
A beneficiary generally does not have the power to terminate a trust.
However, the trust may be a resource to the beneficiary in the rare
instance where he/she has the authority to terminate the trust and gain
access to the trust assets. In addition, the beneficiary may, in rare
6
instances, have the authority under the trust to direct the use of the trust
principal. (The authority to control the trust principal may be either
specific trust provisions allowing the beneficiary to act on his/her own or
by permitting the beneficiary to order actions by the trustee.) In such a
case, the beneficiary's equitable ownership in the trust principal and
his/her ability to use it for support and maintenance means it is a
resource.
d)
Legislative History. The issue of “availability” is also discussed in
Medicaid’s legislative history. A 1965 Senate Report summarizing the
Medicaid Act which had recently been enacted, stated:
Another provision is included that requires States to take into account
only such income and resources as . . . are actually available to the
applicant or recipient and as would not be disregarded . . . . Income and
resources taken into account, furthermore, must be reasonably evaluated
by the States. These provisions are designed so that the States will not
assume the availability of income which may not, in fact, be available or
over evaluated income and resources which are available.4
e)
Court Decisions. State and federal courts have addressed the application
of these federal “availability” requirements. The United States Supreme
Court5 has stated that the “availability principle” is aimed primarily at
preventing states from imputing or assuming financial assistance from
sources that have no obligation to furnish it. The Connecticut Supreme
Court stated:
[U]nder applicable federal law, only assets actually available to a medical
assistance recipient may be considered by the state in determining
eligibility for public assistance programs such as title XIX [Medicaid]. . . .
A state may not, in administering the eligibility requirements of its public
assistance program pursuant to title XIX . . . presume the availability of
assets not actually available. . . . Zeoli v. Commissioner of Social Services,
179 Conn. At 94, 425 A.2d 553.
2.
Importance of Settlor Intent. It is a fundamental principle of trust law that a
grantor may dispose of his or her property in any manner desired, other than
dispositions prohibited by law or contrary to public policy. Following long
standing and well established common law principles, the Comment to § 103 of
the Uniform Trust Code (UTC) underscores the point that it is the settlor’s intent
that is paramount. That comment states, “Except as limited by public policy, the
extent of a beneficiary’s interest is determined solely by the settlor’s intent”. Intent
is evidenced primarily by the trust’s distributive language, but it can also be
determined by precatory statements, and the circumstances of the beneficiary at
the time of the trust’s creation. This is illustrated in In Re Leona Carlisle Trust,6
where the court stated:
4
S.Rep. No. 404, 89th Cong., 1st Sess. 78 (1965).
Shweiker v. Gray Panthers, 453 U.S. 34, p. 44 (1981).
6
498 N.W. 2d 260 (Minn. Ct. App. 1993).
5
7
The intention of the settlor of the trust will be carried out if it is not contrary to
law and public policy. . . . When the trust instrument states an intent to
supplement rather than supplant any government financial assistance that is or
may be available to the Medicaid recipient, most courts give effect to the settlor’s
intent and find the trust is not an available asset. . . . The cases that involve both a
discretionary trust and clear settlor intent to supplement rather than supplant
government assistance conclude the trust is not an available asset. See id. [Trust
Co. of Okla., 825 P.2d 1295], see also Zeoli v. Commissioner of Social Servs.,
179 Conn. 83 (1979); Lineback by Hutchens v. Stout, 79 N.C.App 292 (1986).
Accordingly, if the settlor intends that the trust supplement rather than supplant
the beneficiary’s government benefits, such intent should be controlling. Such a
trust should not be deemed an available resource. In an attempt to treat SNTs as
available resources for Medicaid purposes, states occasionally have challenged
SNTs (especially SNTs that do not clearly state their purpose of supplementing,
rather than supplanting, public benefits) on the basis that the trustee owes an
obligation of minimum support to the beneficiary.
Many cases, however, are notable for the fact that no examination is made
regarding the settlor’s intention in creating the trust.
3.
Do Not Include a Support Standard. For the reasons explained herein, a trust
established for the benefit of a beneficiary with disabilities who needs, or may in
the future need, means tested public benefits, should not include an express
support standard or a standard which references the beneficiary’s health.
The common law and Restatement of Trusts (Second) treat discretionary trusts
and support trusts differently.7 The rights of beneficiaries of pure discretionary
trusts are sufficiently nebulous to fall short of being judicially recognized as
constituting property interests for creditors’ rights purposes.8 A beneficiary's
entitlement to distributions under a support trust, on the other hand, is
determinable enough to give the beneficiary the right to compel distributions
pursuant to the applicable standard. Section 155 of the Restatement of Trusts
(Second), which describes the discretionary trust, has two express components:
(1) the trustee has uncontrolled discretion to pay or apply such amounts of
income and/or principal (2) as the trustee “shall see fit to pay or apply.” Section
155 makes no reference to whether a discretionary trust may have an express
distribution standard. Most commentators and courts refer to a discretionary trust
7
Sections 154 and 155 of the Restatement (Second) distinguish between discretionary trusts, which provide no
standards for the exercise of the trustee’s discretion, and support trusts, which require the trustee to use the income
and principal of the trust only for the beneficiary’s support.
8
The classic definition of a trust includes the bifurcation of title of trust property between the trustee, who holds
legal title, and the beneficiary, who holds equitable title, to the trust assets. Further, trust beneficiaries clearly have
interests that they may protect from, for example, breach of duty by the trustee. Still, for creditors’ rights purposes,
courts have held that beneficiaries of discretionary trusts have a “mere expectancy” in undistributed trust assets until
the trustee exercises its discretion to make a distribution. See, e.g., United States v. O’Shaughnessy, 517 N.W.2d 574
(Minn. 1994).
8
that has no stated distribution standard against which the trustee’s discretion is to
be applied as a “pure” discretionary trust.9
Most trusts are neither purely support trusts nor purely discretionary trusts. When
discretionary language is added to a trust that has an express distribution standard,
particularly a support standard, the classification of the trust becomes
problematic, and courts have reached various results. A support trust does not
expressly give discretion to the trustee (however it is implicit that the trustee must
have discretion in determining the amount that is “necessary” for support.) If a
settlor grants to the trustee simple discretion to distribute to the beneficiary such
amounts, or all, or none, of the income and/or principal as the trustee determines
for the beneficiary’s education and support, important components of the
definition of each type of trust have been combined. If a trust grants the trustee
uncontrolled discretion and contains a support standard, many courts have found
the trust to be a discretionary trust; however, other courts, citing Restatement
(Second) of Trusts § 187, have found that it was an abuse of discretion for a
trustee with uncontrolled discretion not to make a distribution pursuant to the
distribution standard.
When a settlor creates a discretionary trust that imposes standards for the
beneficiary's support or for support, maintenance, and education, these trusts
are now often called discretionary support trusts.10 The courts have had
difficulty determining how to enforce the beneficiary's interest in these
trusts. Because of the support standard, the trustee's discretion is more
restricted than it would be under a pure discretionary trust, but the trustee
has more discretion than in a pure support trust.11
Although many courts have attempted to stick to a rigid classification of all trusts
as being either support or discretionary, many others have not. While attaching a
label of either “support” or “discretionary” to trusts that combine elements of both
types, courts have reached contradictory results. It is not uncommon for the
9
For example, George G. Bogert and George T. Bogert, The Law of Trusts and Trustees states, “If the settlor does
not impose any standards or guides that the trustee is to consider, these trusts are sometimes called pure
discretionary trusts.” Sec. 228.
10
Evelyn Ginsberg Abravanel, Discretionary Support Trusts, 68 Iowa L. Rev. 273 (1983). In Strojek ex rel. Mills v.
Hardin County Bd. of Supervisors, 602 N.W.2d 566 (Iowa Ct. App. 1999), the court said that if a trust is a true
discretionary trust, “a creditor of the beneficiary cannot compel the trustee to pay any part of the income or
principal.” But the court upheld the trial court determination that the beneficiary's trust interest could be considered
in determining whether the beneficiary was eligible for county-sponsored residence benefits (with her resultant
ineligibility). The court held that the trust was a “discretionary support trust” (the first recognition of that hybrid
trust in Iowa), because the instrument instructed the trustee to provide “such sums from the income and principal as
… [the] trustee in the exercise of her sole discretion deems necessary or advisable, to provide for … [beneficiary's]
proper care, support, maintenance and education.” Miller v. Department of Mental Health, 432 Mich. 426, 442
N.W.2d 617 (1989). Matter of Leona Carlisle Trust Created Under Trust Agreement Dated Feb. 9, 1985, 498
N.W.2d 260, 40 Soc. Sec. Rep. Serv. 610 (Minn. Ct. App. 1993). A trust agreement that states that the primary
purpose of the trust is to provide for the “health, support, care, comfort and education” of the primary beneficiary
but also grants the trustee “full, absolute and uncontrolled discretionary power and authority to exercise or fail to
exercise any and all of the powers, rights, and authorities provided …” creates neither a support trust or a
discretionary trust but rather a “discretionary support trust.” Smith v. Smith, 246 Neb. 193, 517 N.W.2d 394 (1994).
11
Supra, n. 9 at § 228.
9
classification assigned by the trial court to be reversed upon appeal.
difficulty in classification has been frequently discussed.12
The
On the other hand, there are cases in which trusts that contain an express support
standard, but that also grant to the trustee uncontrolled discretion, have been held
not to be available resources. As a general rule, purely support trusts are treated as
available resources; but, purely discretionary trusts are rarely available resources.
The difference typically hinges upon whether or not under state law the
beneficiary has the right to compel a distribution for support.
If a trust is a support trust, a beneficiary generally has the right to compel the
trustee to make distributions pursuant to the distribution standard. Accordingly,
the trust is an available resource. There has been much litigation on the issue of
whether or not a trust is a support trust. If the trust is discretionary with a support
standard, some cases have held that the beneficiary cannot compel a distribution.
In these cases, the trust property is not an available resource and the beneficiary is
not disqualified from eligibility of means tested government benefits. Other cases
have held that the beneficiary can compel a distribution and that the trust property
is therefore an available resource.13
4.
When Can a Beneficiary Compel a Distribution? The answer to this question
is important, because in most states a trust will be treated as a resource if the
beneficiary can compel a distribution, especially a distribution for support.
5.
Treatment of Pure Discretionary Trusts. If a trust is a pure discretionary trust
with no distribution standard, the beneficiary generally has no ability to compel a
distribution, especially if the trustee was given “sole,” “absolute,” or
“uncontrolled” discretion; therefore, the trust is not an available resource.14
E.
Proper Trust Administration is Essential. A perfectly drafted trust can still
result in disqualification if the trust is not administered properly.
F.
The Trust Must Have a Residuary Beneficiary. Having the remaining assets
payable to the beneficiary’s estate or heirs is not sufficient in many states. There must be a
named beneficiary in order for the trust to be treated as being irrevocable in certain states that
have not abrogated the Doctrine of Worthier Title and the Rule in Shelly’s Case.
G.
Distribution Standards. Cynthia L. Barrett, a Certified Elder Law Attorney
from Portland, Oregon, has developed a list of the following six types of distribution standards.
The examples of each standard are those of Ms. Barrett.15
12
See “Trust Provisions for Payment, In the Trustee's Discretion or for a Designated Purpose, of Part or All of the
Principal to a Beneficiary” 2 A.L.R.2d 1383; Brenda R. Foyt, “Trusts--Payment or Distribution of Proceeds of Trust
Property: Categorizing a Trust for the Purpose of Determining Eligibility for Medical Assistance,” 72 N. Dakota L.
Rev. 1069 (1969); Abravanel, supra, n. 10.
13
Clifton B. Kruse, Jr., Third-Party and Self Created Trusts – Planning for the Elderly and Disabled Client (3d ed.
ABA 2002), at 54-70.
14
See Restatement (Second) of Trusts, sec. 155 (1) cmt. b.
15
Barrett, Cynthia L., “Distribution Standard for the Special and Supplemental Needs Trust”, NAELA Quarterly,
10
1.
Mandatory: “My trustee shall distribute to or for the benefit of the beneficiary
those amounts of income or principal necessary for his health, education, support,
and maintenance.” This standard will cause the trust to be treated as a resource of
the beneficiary in nearly every state.
2.
Support Standard--Fully Discretionary: “My trustee may distribute to or for
the benefit of the beneficiary those amounts of income or principal which my
trustee may determine, in my trustee’s sole, absolute and unfettered discretion, for
his health, education, support, and maintenance.” This type of standard has been
the subject of much litigation in a number of states. While this standard works in
many states, the list of these states where this standard works is constantly
dwindling, and this standard currently does not work in many others. This
standard is unreliable, and its use has resulted in trust assets being treated as an
available resource of their beneficiaries in numerous cases in many states.16
Vol. 14, No. 3 (Summer 2001).
16
California: In re Johnson's Estate, 17 Cal. Rptr. 909 (1962) Discretion does not authorize the trustee to avoid the
settlor's intent evidenced in the trust instrument as construed by the court; In re Lackmann's Estate, 320 P.2d 186
(Cal. 1958) Trust instrument provided, “I vest in my said trustee complete and absolute discretion as to how much
he should expend from the trust funds for the proper care, support and maintenance of my said son....” Court held,
“It would be unreasonable to hold that any discretion given a trustee in the administration of a trust for another's care
could enable the trustee to cast his care and maintenance on the state.”; Colorado: Matter of Estate of McCart, 847
P.2d 184 (Colo. App. 1992). The term “comfortable support” of the beneficiary, among others, mandated support
payments. The trustee was to maintain, not ascertain, the beneficiary's support needs; Connecticut: Corcoran v.
Department of Social Services, 859 A.2d 533, Trust stated, “the trust established for her shall be retained by my
trustees..., paying to or expending for the benefit of [the plaintiff] so much of the net income and principal of said
Trust as the Trustees, in their sole discretion, shall deem proper for her health, support in reasonable comfort, best
interests and welfare ....” The court treated this language as constituting a general support trust, despite the grant of
sole discretion; Kolodny v. Kolodny, 503 A.2d 625 (Conn. 1986). The trustee could not elect to make no
distributions at all where discretionary support standards are included as expressions of the settlor's intent; Iowa:
Strojek ex rel. Mills v. Hardin County Bd. of Supervisors, 602 N.W.2d 566 (Iowa, 1999). Trust stated, “My trustee
shall, from time to time, pay to or apply for the benefit of my daughter ... such sums from the income and principal
as my trustee in the exercise of her sole discretion deems necessary or advisable, to provide for her proper care,
support, maintenance and education.” Court held, “The recognition of discretionary support trusts in Iowa is the next
logical step in the maturation of this state's trust law. It resolves ambiguity and provides settlors a hybrid tool to
effectuate their intent. Furthermore, the trust in the present case falls squarely within the definition of a discretionary
support trust. It combines discretionary language with language indicative of a support trust;” (see, however, Iowa
statute 633A.4702, which provides that discretionary language prevails over standard); Minnesota: In re Decision
of Com'r of Human Services in Appeal of Flygare for Medical Assistance, 725 N.W.2d 114 (MN 2006). Trust stated,
“...my trustee... may in his sole and exclusive discretion ... withdraw installments of principal ... and pay the same to
or for the benefit of my spouse as my trustee ... deems necessary and advisable in order to provide for the proper
support and maintenance of my spouse; provided, nevertheless, that no such sums of principal or income shall be
paid ... in the event my spouse would be eligible for assistance under any government funded program.... ” Court
held, “Minnesota courts have long recognized that placing assets in a trust for the support of another person but
withholding consideration of those resources for that person's medical assistance eligibility is generally disfavored
as against public policy... The broad policy is clear: persons who have the means should pay for their health care and
not shelter available resources in order to enrich their heirs;” Missouri: Wallace's Estate v. Director, Missouri State
Division of Family Services, 628 S.W.2d 388 (MO 1982). Court held, “In this case, the trust provides that the trustee
may in his sole discretion use any part of principal and income for the support of claimant. Such language has been
held to require the trustee to pay the minimum amount which in the opinion of a reasonable man would be necessary
for claimant's support, with the trustee's discretion limited to the determination of the amount necessary for that
purpose, above that minimum... ”; Nebraska: Re Sullivan's 12 N.W.2d 148 (Neb. 1943). Restatement of Trusts
(Second) § 187(j) controlling. Terms “sole and absolute” do not allow the trustee to be arbitrary or capricious, but
the terms do waive the requirement that the trustee be reasonable; New York: Matter of Estate of McNab, 558
11
3.
Fully Discretionary, No Mention of Supplemental Needs: “My trustee may
distribute to or for the benefit of the beneficiary those amounts of income or
principal which my trustee may determine, in my trustee’s sole, absolute and
unfettered discretion, to be appropriate, and my trustee may choose to make no
distributions whatsoever.”
a)
Because of the beneficiary’s inability to compel a distribution from this
type of trust, it cannot properly be treated as an available resource under
applicable federal law.
N.Y.S.2d 751 (1990). The trustee was to pay sufficient sums so that a disabled beneficiary could live in his
accustomed manner. Empowerment in the trustee to make distributions to satisfy this standard is treated as a
direction to do so; Rueff's Will, 151 N.Y.S.2d 464 (1956). Trustee discretion is not absolute. Restatement of Trusts
(Second) § 1870) followed; In Re Estate of Cooper, 349 N.Y.S.2d 613 (N.Y. Surr. Ct. 1973). Trust stated, “I direct
my trustee to pay to my sister at least semi-annually during her lifetime or apply to her use and benefit so much of
the net income therefrom, and in addition, thereto, so much of the principal thereof as my trustee, in his absolute
discretion, shall deem necessary or advisable, after considering all other resources which my sister shall have, for
her support, maintenance, comfort and welfare.” Court held, “The trustee cannot shut his eyes to petitioner's needs,
and neglect to act, or refuse to approve proper and necessary payments which come clearly within the contemplation
of the trust;” Ferrugia v. NY State Dept. of Health, 192 Misc.2d 709, 747 N.Y.S.2d 314 (N.Y.Sup. 2002). Trust
stated that the trustees are to “distribute to or for the benefit of the Insured's wife, so much of the principal as the
Trustees, in their sole discretion deem advisable for her health, maintenance and support.” Court held, that where the
trust document gives the trustee discretion to use principal for the welfare of a sole beneficiary, it is presumed that
the Settlor intended that the principal be an available resource; North Dakota: Bohac v. Graham, 424 N.W.2d 144
(ND 1988). Where a trustee is “authorized” to disburse “any portion of the principal of the Trust Property as [the]
trustee deems necessary for [the beneficiary's] support, maintenance, medical expenses, care, comfort and general
welfare, the trust principal is available for these described purposes and may not he discretionarily withheld;
Kryzsko v. Ramsey Cty. Social Services, 607 N.W.2d 237 (N.D. 2000). Trust stated, “The Trustee shall pay to or
apply to the benefit of the beneficiary, for his lifetime, such amounts from the principal or income, up to the whole
thereof, as the Trustee in the Trustee's sole discretion may from time to time deem necessary or advisable for the
satisfaction of the beneficiary's special needs... As used in this instrument, ‘special needs’ refers to the requisites for
maintaining the beneficiary's good health, safety, and welfare when, in the sole discretion of the Trustee, . . .
‘Special needs’ include, but are not limited to, medical and dental expenses, clothing and equipment, programs of
training, education, treatment, and essential dietary needs to the extent that such needs are not provided by any
government entity.’” Court held, that because the trust provided standards—care, maintenance, support, and
education--but contained no reference to a trust intention to limit distributions to supplemental benefits, the trust was
a support trust, despite the grant of “sole” discretion; Ohio: Metz v. Ohio Dept. of Human Services, Ohio Common
Pleas Ct., Ottawa County, Case No. 00CVE-011 (Nov. 9, 2000). Generally, where a trustee has absolute or sole
discretion in distributing trust assets, a court will not review a fiduciary's conduct: however, where this discretion is
to be exercised with reference to care, comfort, maintenance, and general well-being of a beneficiary, a trustee
abuses his discretion where he fails to provide at least minimal support For a destitute person; Wagner, Guardian of
Burkhart. v. Ohio Dept. of Human Services, 2000 W.L. 1459599 (Ohio App. 5 Dist.); LEX1S 4545 (Ct. App. Ohio,
5'h App. Dist. (9-25-2000). Trustee was authorized to invade a trust's corpus for the beneficiary's care, support, and
maintenance in the trustee's discretion. The court held that the standards described constituted a legal right to access
by the beneficiary. Support needs could be forced; Pennsylvania: DeBone v. Department of Public Welfare, 929
A.2d 1219 (PA 2007). Trust gave trustees sole discretion to distribute principal for beneficiary’s “health,
maintenance and support.” Court held, “we presumed that the Settlor intended that the principal be an available
resource; ”Estate of Rosenberg v. Department of Public Welfare, 679 A.2d 767 (PA 1996). “The trustee was ...
authorized, in his “sole discretion” to use principal for the comfort, welfare, and maintenance and support, for
educational requirements, medical and surgical expenses, and other unusual needs of' the beneficiary. ” Held to be
an available resource; Wisconsin: Matter of Ralph Holmquist Trust, 357 N.W.2d 7 (Wis. App. 1984). The trust
instrument did not prohibit use of principal for the beneficiary's support; the beneficiary is therefore treated as
entitled to principal payments in order to achieve the intended “comfortable support.” For additional cases, see
Kruse, supra, n. 6, Table 3-1, beginning at page 17.
12
b)
While this standard should work in every state, consider supplementing
this language with an express declaration of the supplemental nature of the
permissible expenditures and the non-support nature of the trust purpose,
essentially converting this standard to the one described in paragraph 4,
immediately following.
c)
Consider including a “poison pill” provision that would cause the trust to
terminate if it is determined that it is a resource of its beneficiary.
d)
Neither the author nor Clifton B. Kruse, Jr.17 was able to find any
Medicaid eligibility case in which a pure discretionary trust (i.e. one that
contained no support standard) was treated as an available resource of its
beneficiary. Nevertheless, state Medicaid rules and statutes must be
consulted in order to avoid any hidden traps.
For example, in Ohio Revised Code Sec. 5111.151(G) provides that any
third party trust “… shall be an available resource only if the trust permits
the trustee to expend principal, corpus, or assets of the trust for the
applicant's or recipient's medical care, care, comfort, maintenance, health,
welfare, general well being, or any combination of these purposes….”
(emphasis added). While the trustee of a pure discretionary trust
containing no distribution standard would clearly be permitted to
make a distribution for any or all of the proscribed purposes, the Ohio
Supreme Court recently ruled that neither a common law pure
discretionary trust nor Ohio’s statutory safe harbor “wholly
discretionary trust”18 can be treated as an available resource for
Medicaid purposes because of the beneficiary’s inability to compel a
distribution.19
4.
Fully Discretionary, Precatory Language Mentioning Special Needs: “My
trustee may distribute to or for the benefit of the beneficiary those amounts of
income or principal which my trustee may determine, in my trustee’s sole,
absolute and unfettered discretion, to be appropriate, and my trustee may choose
to make no distributions whatsoever. My child is disabled, and will rely on public
programs for much of his life I will not always be there to help him and oversee
his care. I know that he will have supplemental and special requirements,
including a need for advocacy, which will not be provided by the publicly funded
programs. I urge my trustee to, in the exercise of his unfettered discretion, make
distributions which permit my son dignity and grace, enhance my son ’s day to day
existence, and allow him the highest possible development of his abilities.”
17
Supra, n. 6. Table 3-1, beginning at pg. 117, summarizes over 70 third party-settled trusts, of which 5 were pure
discretionary trusts with no support standard. In none of the 5 cases was the trust treated as an available resource of
its beneficiary. The author compiled a similar summary of third party-settled trusts for his presentation The UTC
and SNTs: Should it be Embraced, Feared, or Ignored at the Stetson University Special Needs Trusts X (2008), and
as was the case with the Kruse study, no case could be found in which a discretionary trust without a support
standard was treated as an available resource of its beneficiary.
18
Ohio’s version of the Uniform Trust Code created a statutory pure discretionary trust against which no creditor
remedies are available. See O. R. C. Sec. 5801.01(Y).
19
Pack v. Osborn, 117 Ohio St. 3d 14 (2008).
13
a)
Perhaps the most common standard used in third-party SNTs.
b)
Should work in every state, and is the safest distribution standard, but
check for state statutes.
•
For example, in Minnesota, a supplemental needs trust must
contain provisions that prohibit disbursements that would have the
effect of replacing, reducing, or substituting for publicly funded
benefits:
A supplemental needs trust must contain provisions that prohibit
disbursements that would have the effect of replacing, reducing, or
substituting for publicly funded benefits otherwise available to the
beneficiary or rendering the beneficiary ineligible for publicly
funded benefits.20
•
5.
6.
20
21
Ohio’s statutory “wholly discretionary trust” specifically
authorizes the inclusion of precatory supplemental needs language
in trusts created for disabled beneficiaries.21
Strict (Known as the SSI Standard), Prohibiting Food and Shelter: “No part
of the principal or income of this trust may be distributed for food or shelter, or to
replace any public assistance benefits for which the beneficiary may be eligible
through any county, State, Federal or other governmental agency.”
a)
This is a very commonly used standard, however it is unduly restrictive.
Many practitioners mistakenly believe that such a provision is necessary in
order to maintain eligibility for means test public benefits.
b)
Too strict in situations in which the beneficiary is not receiving SSI but is
receiving other benefits with more liberal eligibility standards.
c)
Families and trustees often desire to provide items (such as superior living
quarters) in enhancement of the SSI limits but are concerned with breach of
duty if the limitations are excluded. More importantly, such limitations
may in fact never be needed.
Fully Discretionary, Authority to Reduce Benefits (“On/Off,” or “Spigot”):
“It is the intention of the Grantor to create a supplemental fund for the benefit of
the Beneficiary. The Trustee may make distributions of income and principal as
the trustee may determine, in his or her sole, absolute and unfettered discretion,
to supplement any governmental or private programs for which the beneficiary
may be eligible. I ask the Trustee to make reasonable efforts to avoid making
distributions that supplant services, benefits or medical cure otherwise available
to the Beneficiary from governmental or private sources, or both, unless the
Minn. Statute § 501B.89(2)(d).
Supra, n. 10.
14
trustee has determined in his or her sole, absolute and unfettered discretion that
the benefit to the Beneficiary from the particular trust distribution outweighs the
reduction in a particular public benefit program that may be a consequence of the
trust distribution.”
a)
While confirming that the principal intent is to create a supplemental
needs only trust, this standard authorizes the trustee, if it deems
appropriate, to make distributions above program benefit levels in order to
provide the beneficiary a higher standard of living. For example, a trustee
may decide that paying for certain services or providers, or purchasing
food or providing shelter outweighs the cost to the beneficiary of a
reduced SSI monthly stipend.
b)
This is a particularly useful standard in situations where the beneficiary
will need costly medical treatment for just a limited time period. This
standard allows the trustee to protect Medicaid benefits during that time
without forcing the beneficiary to live the remainder of his/her life after that
time period at minimal SSI/Medicaid income levels.
c)
Some Trustees use this standard to intentionally cause the loss of SSI
benefits for one month each year, during which month substantial food,
home expenditures, etc., can be made.
CAUTION: An additional provision drafters often include is one requiring the Trustee to
seek support and resources for the beneficiary from all public benefits programs. While
well-meaning, this provision places liability on the Trustee for a role he or she cannot
fulfill unless he or she also serves as a guardian or conservator for the beneficiary.22
22
H.
Manner of Making Distributions, Regardless of Which Standard is Used.
1.
Distributions must not be made directly to the beneficiary. They must be made to
third parties. Distributions made directly to the beneficiary will reduce SSI dollar
for dollar.
2.
Distributions to third parties that result in “in-kind support and maintenance
(ISM)”—that is, food or shelter received because of the distribution—result in a
reduction of benefits. ISM reduces SSI by the lesser of the presumed maximum
value of the items provided or an amount calculated by dividing the maximum
SSI benefit by three and adding the $20 disregard amount.
3.
If the beneficiary has no right to revoke the trust or to compel distributions for his
or her support and maintenance, the trust is not an available resource.
Supra, n. 1
15
I.
Power of Amendment. ALWAYS provide that the trustee can amend the trust to
conform to later changes in public benefit law.23 If existing third-party SNTs do not have
provisions allowing amendment, judicial authority to make this amendment should be sought.
The Uniform Trust Code codifies a number of common law methods which can be used to seek
judicial modification, as well as expanding pre-existing common law modification methods.
J.
Termination Prior to Death. In some instances, it is not clear whether or not the
disabled beneficiary will remain disabled or will receive government entitlements based upon
need. A third party-settled SNT can provide for the termination of the trust prior to death, as it
contains no Medicaid payback requirement.
K.
Coordination With Self-Settled “Payback” Trusts. If a parent establishes a
third-party trust with no payback to the state upon death, but the child with a disability has a selfsettled (d)(4)(A) Trust, language may be included in the parent’s trust directing that the trustee of
the third-party trust use trust assets only to the extent that the payback trust is not available to
provide the same goods and services.
L.
Income Taxation. Most third-party-settled special needs trusts are non-grantor
trusts. Accordingly, the trustee must file a fiduciary income tax return under the trust’s EIN.
Because the trustee typically is not required to distribute all income, the trust should be classified
on Form 1041 as a complex trust. I.R.C. Sec. 642(b)(2)(C) permits “qualified disability trusts”
to claim a special personal exemption which, for 2009, is $3,650 for trusts with a modified AGI
of $66,500 or less. That exemption, when combined with the beneficiary’s own personal
exemption, permits up to $7,150 of income to be sheltered from the federal income tax.
M.
Reporting to Social Security. There is no requirement to report the existence of
a third-party-settled SNT to the Social Security Administration, if the beneficiary is receiving
SSDI only. See Section X of this outline for a detailed discussion of reporting requirements.
IV.
Third-Party-Settled SNT—(c)(2)(B)(iii) “Sole Benefit” Trust for
Coordination with Medicaid Planning for Parents.
Under OBRA ’93, a parent seeking his or her own Medicaid eligibility may avoid the
transfer of asset penalty by transferring assets to (1) his or her disabled child, (2) to a trust
“solely for the benefit of” the [parent’s] disabled child, regardless of the child’s age, or to (3) a
trust for the sole benefit of any other disabled beneficiary under 65, regardless of the relationship
to the settlor.24 The ability to create this type of trust has arguably become more important in
light of the draconian asset transfer penalties set forth in the Deficit Reduction Act of 2005.
Besides all of the requirements set forth above in Article III regarding third-party SNTs, a parent
seeking his or her own Medicaid eligibility or the eligibility of his or her spouse must meet one
additional requirement. Unlike most third party-settled SNTs, which are created to benefit SSI
recipients, virtually all (c)(2)(B)(iii) sole benefit trusts will be evaluated by the state’s Medicaid
agency, as institutionalized individuals are not eligible for SSI. This is true not only in 209(b)
states but also in SSI criteria and section 1634 states.
23
See attached out line of Stuart D. Zimring, Modifying Trusts; Fixing Problems, American College of Trust
and Estate Counsel annual meeting (2009).
24
42 U. S. C. § 1396p(c)(2)(B)(iii) and (iv).
16
A.
Statutory Authorization. The actual text of the statute, which is found in
Subchapter XIX of the Social Security Act (which governs Medicaid), states:
(2) An individual shall not be ineligible for medical assistance by reason
of paragraph (1) to the extent that-(B) the assets-(iii) were transferred to, or to a trust (including a trust described in
subsection (d)(4) of this section) established solely for the benefit of, the
individual's child described in subparagraph (A)(ii)(II), or
(iv) were transferred to a trust (including a trust described in
subsection (d)(4) of this section) established solely for the benefit of an
individual under 65 years of age who is disabled (as defined in section
1382c(a)(3) of this title)….25 [emphasis added]
B.
Sole Benefit Requirement. It should be noted that 42 U.S.C. § 1396p(d)(4)(A),
which authorizes the self-settled SNT, contains no sole benefit requirement. Rather, the statute
merely requires that the trust be “established for the benefit of such individual….”
1.
There is much inconsistency and, as a result much confusion, regarding the “sole
benefit” requirement. Neither the statute (i. e. 42 U.S.C. § 1396p(d)(4)(A)) nor the
POMS provision interpreting the statute imposes a “sole benefit” requirement for
(d)(4)(A) trusts. The POMS, in interpreting “for the benefit” states:
SI 01120.201.F.1. Consider a trust established “for the benefit” of an
individual if payments of any sort from the corpus or income of the trust
are paid to another person or entity so that the individual derives some
benefit from the payment.
This provision clearly requires that the d(4)(A) beneficiary derive some benefit,
but does not dictate that the expenditure be for the exclusive benefit of the
beneficiary.
Nevertheless, the SSA and state courts have increasingly been requiring that
(d)(4)(A) trusts be administered solely for the benefit of their beneficiary.26 David
Lillesand, in his “Hot Topics” presentation at the Stetson University Special
Needs Trust X (2009) pointed out the inconsistency between the statutory
authorization for self-settled SNTs in 42 U.S.C. § 1396p(d)(4)(A), a Medicaid
statute, and the SSI statute which imposes no period of ineligibility for transfers to
certain trusts, 42 U.S.C. § 1382b(c)(1)(C)(ii)(IV).
a)
The wording of the SSI statute is virtually identical to the Medicaid
statute, 42 U.S.C. § 1396p(c)(2)(B)(iii) and (iv) quoted above, and also
contains the requirement that the trust be “established solely for the benefit
25
Id.
See Hobbs v. Zendeman, 542 F,Syoo 2d, 1220 (Dist. N.Mex., 2008), currently on appeal to the 10th Circuit. The
Disct Court upheld New Mexico’s termination of Medicaid benefits to a severely disabled beneficiary of a (d)(4)(A)
trust because caretaker payments to the beneficiary’s mother violated the “sole benefit” rule. Because of the
potential importance of the case, amicae briefs have been filed on behalf of New Mexico by a number of states, and
on behalf of the appellant by The Special Needs Alliance and the New Mexico NAELA chapter.
26
17
of an individual who has not attained 65 years of age and who is
disabled.” [emphasis added.]
b)
2.
While the SSA in it POMS and numerous courts have applied this statute
to self-settled (d)(4)(A) trusts, a couple of observations are in order.
1)
First, both the SSI and the Medicaid statute which contain the
“solely for the benefit of” language refer to trusts established by a
person seeking to establish SSI or Medicaid eligibility for himself
or herself by transferring assets to a trust for the benefit of his or
her disabled child regardless of age, or for any other individual,
regardless of relationship, who is under age 65. Using either of
these statutes to justify the imposition of a trust created under a
totally different statute, 42 U. S. C. 1396p(d)(4)(A), appears to be
misplaced.
2)
Second, it is curious that the third person seeking his or her own
eligibility can supposedly use fund a (d)(4)(A) trust, as that type of
trust is required to be funded with the assets of the trust’s
beneficiary. It is possible that the reference in these two statutes to
(d)(4)(A) trusts refers to pre-existing trusts into which the parent is
placing his or her own, separate property. to impose a “sole
benefit” requirement on all (d)(4)(A) trusts.
The “Sole Benefit” Requirement for the Trusts Described in this Article IV is
Different. The Health Care Financing Administration (HCFA) [the predecessor of
the Centers for Medicare and Medicaid Services] in its State Medicaid Manual
Transmittal Letter No. 64 (Nov. 1994) (hereinafter “HCFA 64) interpreted this
requirement, and this interpretation is followed by many, if not most, states. (A
copy of HCFA 64 can be found at http://www.elderlawanswers.com/resources/documents/Transmittal64Sec3258.pdf )
In order for a transfer or trust to be considered to be for the sole benefit of one of
these individuals, the instrument or document must provide for the spending of
the funds involved for the benefit of the individual on a basis that is actuarially
sound based on the life expectancy of the individual involved.
It is unclear what “on a basis that is actuarially sound based on the life expectancy
of the individual involved” means. The author is aware of no authoritative
guidance regarding the meaning of this requirement at the federal level.
a)
Some practitioners feel that this requires an annual distribution similar to
an IRA, perhaps even using the Uniform Table with annually recalculated
life expectancies. Adding such a requirement would create a mandatory
annual distribution that, in most situations and in most states, could be
reached by creditors despite the presence of a spendthrift provision.
b)
Other practitioners merely recite the requirement in the distribution
provision of the trust agreement, without further elaboration.
18
3.
c)
In order to avoid the mandatory payment creditor issue, consider stating
that while the trustee is required to distribute the funds over the life
expectancy of the beneficiary, the trustee is not required to make a
distribution in any given year, and that distributions can be unequal in
amount as long as the distributions overall are made on an actuarially
sound basis. The ability to provide for this degree of flexibility will be
dependent upon state Medicaid rules. Most states, however, have not
addressed this issue, and the HCFA 64 State Medicaid Manual is of no
help.
d)
CAUTION: Overfunding a “sole benefit” trust may make it virtually
impossible to expend the required amount for the benefit of the
beneficiary, a problem that does not exist for any other type of SNT.
e)
Lastly, it is worth noting that the statute seemingly, if not expressly,
provides the settlor with two distinct options: (i) transfer the funds into a
(d)(4)(A) trust, or (ii) create and fund a third party-settled trust. Only the
latter of the two has the statutory “sole benefit” requirement, however as
stated above, the SSA has imposed also imposed that requirement on
(d)(4)(A) trusts, but without the “actuarially sound” addition.
Does the Sole Benefit Trust have a payback requirement?
42 U.S.C.
§ 1396p(d)(4)(A) explicitly spells out the mandatory payback requirement, while
§ 1396p(c)(2)(B)(iii), which authorizes the sole benefit trust, imposes no such
requirement, HCFA 64, however, implies that a payback requirement is
mandatory:
[A] trust is considered to be established for the sole benefit of a ... disabled child,
or disabled individual if the trust benefits no one but that individual, whether at
the time the trust is established or at any time in the future. However, the trust
may provide for reasonable compensation, as defined by the State, for a trustee or
trustees to manage the trust, as well as for reasonable costs associated with
investment or otherwise managing the funds or property in the trust [without
violating the concept of ‘sole benefit’]...Allowing the trustee to pay for the
beneficiary’s funeral before the Medicaid payback27.
4.
May a Sole Benefit Trust Have Residuary Beneficiaries? Unanswered in the
statute is whether such a trust violates the language or intent of the act if a
remainder beneficiary is named.
a)
HCFA 64, at § 3257(B)(6) defines “sole benefit: “…a trust is considered
to be established for the sole benefit of a spouse, blind or disabled child, or
disabled individual if the trust benefits no one but that individual, whether
at the time the trust is established or at any time in the future….”
[emphasis added].
27
The “sole benefit” trust discussed in this Article IV does not have a Medicaid payback requirement. CMS
(“Centers for Medicare and Medicaid Services,” the successor to HCFA) has administratively taken the position that
(d)(4)(C) trusts, discussed at VI, below, also contain a “sole benefit” requirement, even though no such requirement
is found in the statute at 42 U.S.C. 1396p(d)(4)(a).
19
b)
It should be noted that the above language is sub-regulatory and merely sets
forth CMS’ interpretation of the requirement, however many states which
use HCFA 64 as their state Medicaid rules will require a payback
requirement, despite the lack of statutory authority for such a requirement.
c)
The statute does not specify whether the remainder beneficiary must be
the beneficiary’s estate. Such a requirement would expose the remaining
trust assets to Medicaid estate recovery in states which have expanded
estate recovery. While such a requirement would appear to be consistent
with the “sole benefit” requirement, it has been the author’s experience that
naming other remainder beneficiaries has not caused the denial of
Medicaid eligibility for the trust settlor or termination of SSI for the trust
beneficiary and many states specifically permit this type of trust to name a
residuary beneficiary.
d)
Clifton Kruse suggested that one possible meaning to the HCFA 64
requirement may be as follows:
This language, defining what is meant by "sole benefit,"
precludes a subsequent beneficiary, following the passing of
the immediate interest of the disabled beneficiary except
where the document provides for distributions to be made
that are actuarially sound based upon the sole
beneficiary's life expectancy, or where the indenture
provides for repayment to the state for Medicaid
disbursements paid on the beneficiary's behalf. 28
[emphasis added]
5.
V.
Limited Power of Attorney for Parent(s). Whenever preparing an estate plan for
a parent of a child who has a disability, consider having the parent execute a limited
power of attorney expressly authorizing the agent to create and fund a (c)(2)(B)(iv)
trust. See the attached form.
Self-Settled SNT--(d)(4)(A) Trusts.
A.
OBRA ‘93 provides that a disabled individual may create a trust for her/his
benefit, and fund it with his or her assets, without losing eligibility for Medicaid and SSI if
certain requirements are met. So-called “(d)(4)(A)” trusts are governed by 42 U.S.C.
1396p(d)(4)(A), which describes the requirements for the trust as follows: “A trust containing the
assets of a disabled individual under the age of 65 which trust was established for the benefit of
such individual by the parent, grandparent, legal guardian of the individual or a court if the State
receives all amounts remaining in the trust on the death of the individual up to an amount equal
to the total medical assistance paid on behalf of the individual under a State plan is exempted.”
1.
Generally referred to as “(d)(4)(A)” or “Medicaid payback” trusts.
28
Clifton B. Kruse, Jr., “Caring for an Aging Population – Strategic Trusts Reasonably Considered by Counsel in
Satisfying Elder Client Values,” American College of Trust and Estate Counsel 2002 Annual Meeting,
20
2.
SSI and Medicaid benefits will be lost if the requirements of this section are not
met.
3.
The Foster Care Independence Act of 1999, 42 U.S.C. 1982b(e)(5), incorporated
the (d)(4)(A) requirements into the SSI benefit rules.
4.
Can only be established for and funded by a beneficiary under age 65.
5.
There is no penalty for Medicaid or SSI for transfers into these trusts
B.
Funding Sources--Must be Funds of the Beneficiary.
C.
Who May Establish (d)(4)(A) Trusts? (d)(4)(A) trusts must be “established” by
a court, a parent, a grandparent, or a guardian. They may NOT be established by the beneficiary.
D.
Who May Fund a (d)(4)(A) Trust?
1.
“Establishing” the trust is a completely different issue from “funding” the trust.
2.
The beneficiary, if competent, may simply transfer the funds into the (d)(4)(A)
trust.
3.
Usually funded by a guardian using the ward’s assets.
4.
Generally, neither the parents nor grandparents will have the authority to transfer
an adult child’s assets to a (d)(4)(A) SNT.
E.
Under Age 65 Requirement.
1.
Can only be established for the benefit of a beneficiary under age 65.
2.
The trust, if created and funded before age 65, can continue for the benefit of the
beneficiary after age 65.
3.
No additional contributions can be made to an existing trust after the beneficiary
attains age 65.
F.
Disability Requirement. If the individual is already receiving SSI or Medicaid
based upon disability, the “disability” determination has already been made and the state
Medicaid agency or SSA will accept the disability determination made for those programs;
otherwise, there will have to be an independent determination of disability.
21
G.
The (d)(4)(A) Trust Must be Irrevocable. In states that have not abolished the
Doctrine of Worthier Title and the Rule in Shelly’s Case, SSA clings to the antiquated
proposition that a trust, even if irrevocable by its terms, is nevertheless revocable if the
remainder is payable to the heirs or to the estate of the income beneficiary. In these states, it is
therefore important that a (d)(4)(A) trust have a residual beneficiary who is a person or entity
that is specifically identifiable.
1.
The fact that the state will be repaid upon the beneficiary’s death does not make
the state a residual beneficiary--it is a creditor.
2.
If the trust states that at the death of the beneficiary the trust property will go the
beneficiary’s heirs at law, as the beneficiary may provide by will, or to the estate of
the beneficiary, the trust will not have a residual beneficiary, will not be
considered as being irrevocable, and will result in SSA treating the trust as a
resource of the SSI beneficiary.
3.
SSA has issued regional POMS for the Boston, Chicago, Dallas and New York
regions dealing with this issue and stating the factors that it will examine in
determining whether it will treat a trust as being irrevocable.29 Practitioners in
Connecticut, Maine, Rhode Island, Vermont, Massachusetts, New Hampshire,
Indiana, Illinois, Ohio, Michigan, Minnesota, Wisconsin, Arkansas, Louisiana,
Texas, New Mexico, Oklahoma, New York, and New Jersey should consult the
applicable regional POMS to determine the specific factor(s) in those states.
H.
Payback Requirement. Upon Death, the trust must provide the state with the
right to receive “all amounts remaining in the trust upon the death of such individual up to an
amount equal to the total medical assistance paid on behalf of the individual under a State plan
under this title.” The trustee should request from the state Medicaid agency a written statement
of the amount due, including a description used of the methodology used in its calculation.
29
1.
There is some authority for the proposition that only those assets used to fund the
trust that came from the program recipient who benefited from the transfer
exemption need to be paid back. For example, assume that the beneficiary’s
grandfather, by Will, added some of his own assets to a pre-established (d)(4)(A).
In that case, arguably only the assets of the trust beneficiary that were used to
establish the trust would need to be paid back. Other authorities in this area feel
that all funds contained in a (d)(4)(A) trust (including contributions from third
parties) must be applied to repay Medicaid when the beneficiary dies. If the latter
is correct, drafting for the former could result in disqualification of SSI and
Medicaid benefits.
2.
For a (d)(4)(A) trust beneficiary who resides in a nursing home, a big issue is
whether the state can only require reimbursement for Medicaid “medical
assistance,” as opposed to the total cost of the nursing home care, most of which is
for expended for housing and food. Most states generally seek reimbursement for
all Medicaid expenditures. There is conflicting authority among the states
regarding the amount of the payback requirement in this situation.
See POMS SI BOS01120.200, SI CHI01120.20, SI NY01120.200, and SI DAL01120.200
22
3.
If the beneficiary has collected Medicaid in more than one jurisdiction and the
trust is insufficient to pay back all jurisdictions, the trust must provide that the
jurisdictions will be reimbursed proportionally.
4.
Existing Medicaid liens, and any payments due under the Medicare secondary
payor statute, must be paid “off the top” from the personal injury settlement at the
time of creation of the trust, prior to the commencement of distributions to the
beneficiary. This is a process that often takes several months, and failure to
address the lien issue at the time of funding can result in liability against the
drafting attorney.
5.
The following expenses may be paid at the individual’s death before
reimbursement of medical assistance to the state:
6.
a)
Estate taxes, but not inheritance taxes, due from the trust to the state or
federal government because of the death of the beneficiary.
b)
Reasonable administrative expenses such as an accounting of the trust to
the court, completion and filing of documents, or other required actions
associated with termination of the trust.
c)
Funeral expenses may be prepaid during the beneficiary’s lifetime, but
they may not be paid following death until the Medicaid payback
requirement has been fully satisfied.
The following expenses and payments may not be permitted after the
beneficiary’s death prior to the reimbursement of the state for medical assistance:
a)
payment of debts due third parties;
b)
funeral expenses;
c)
payments to residual beneficiaries.
I.
State Requirements and Decoupling.30 There has been an increasing trend
among the states to limit the uses, flexibility and availability of SNTs. States will frequently
impose additional requirements for d(4)(A) SNTs to qualify as an exempt resource for Medicaid
eligibility.
1.
30
SSI POMS 01730.048 states “Existence of a Medicaid trust will result in a
referral of the case to the Medicaid State agency for a Medicaid eligibility
decision. Explain to the individual that the Medicaid State agency will
determine Medicaid eligibility.”
Supra, n. 1
23
2.
North Carolina requires the payback provision to include payback upon death
or dissolution of the trust.31 North Carolina also requires that proceeds from a
settlement on behalf of a Medicaid recipient be used to purchase structured
settlement payments, annuities, or other forms of an income stream payable to
the Trust over time, and the Trust must remain the designated payee. There
must be no alternate designated payee named in the contract for the payments
until the Trust has been properly wound up and the State has been
reimbursed.32
3.
Arizona has adopted a specific statute imposing reporting requirements on
trustees and limiting the types of expenditures from d(4)(A) SNTs. 33
4.
New Mexico has ruled that a d(4)(A) SNT may not hold real estate or
disburse funds to provide shelter. New Mexico also prohibits any payments to
a person with an obligation to support the trust’s beneficiary, thereby
eliminating the ability of an SNT to pay the parents of a beneficiary for
caretaking.34
5.
Mississippi has established limitations similar to New Mexico’s.
6.
New Jersey requires that a d(4)(A) SNT contain the following sixteen provisions:
(1) identify the trust as a special needs trust established pursuant to 42 USC
§ 1396p(d)(4)(A); (2) shall not contain any provisions intended to give anyone or
court the power to alter the form of the trust to a pooled trust; (3) specifically state
that the trust is for the sole benefit of the trust beneficiary; (4) specifically state
that its purpose is to permit the use of trust assets to supplement and not to
supplant any benefits to which the beneficiary may otherwise be eligible; (5)
specifically identify, in an attached schedule, the source of the initial trust
property; (6) contain a spendthrift provision; (7) specifically state that the trust is
established by a parent, grandparent, legal guardian, or court; (8) state that the
trust is irrevocable; (9) specifically identify the trustee by name and address; (10)
require the state be given notice of changes in trustee; (11) specifically require
that the trustee comply with all state laws, including the Prudent Investor Act;
(12) state that the trustee will be compensated only as provided by law; (13)
specifically require the trustee to notify the state of the death of the beneficiary;
(14) state that a formal or informal accounting shall be submitted to the state on
an annual basis; (15) require the trustee give advance notice of any expenditure in
excess of $5,000; and (16) require the residuary trust estate pass by intestacy.35
7.
Minnesota requires that “...A supplemental needs trust may allow or require
distributions only in ways and for purposes that supplement or complement the
benefits available under medical assistance, Minnesota supplemental aid, and
31
North Carolina MA-2230 XI.C.3.e.
North Carolina MA-2230 XI.C.3.f.
33
Ariz. Rev. Stat. § 36-2934-01 (2008).
34
See Hobbs v. Zenderman et al, 06-DIV-0985 BB/WDS, filed 3/31/2008, U.S. District Court for District of New
Mexico. The decision is currently on appeal to the Tenth Circuit.
35
J. J. Admin. Code 10:71 – 4.11.
32
24
other publicly funded benefit programs for persons with disabilities. A
supplemental needs trust must contain provisions that prohibit disbursements that
would have the effect of replacing, reducing, or substituting for publicly funded
benefits otherwise available to the beneficiary or rendering the beneficiary
ineligible for publicly funded benefits.”36
Illinois37 and Colorado38 have also passed statutes that are specifically intended to
provide protection for funds for persons with disabilities through the use of a trust
and impose requirements on such trusts.
8.
J.
Income Tax Considerations. (d)(4)(A) trusts usually are drafted to have one or
more of the I.R.C. sections 671-678 grantor trust provisions to clarify their status as grantor
trusts for income tax purposes. A discussion of intentionally making an SNT attract grantor trust
status is beyond the scope of this outline, but this issue is more complex than a reading of those
code sections might indicate.39
K.
Treatment of Distributions. The trustee of a (d)(4)(A) trust should retain public
benefits counsel and hold regular meetings with the counsel to receive input and make decisions
concerning distributions.
L.
The following table, from POMS SI 01120.203 sets forth guidelines used by SSA
to evaluate (d)(4)(A):
STEP
1
2
3
4
ACTION
Was the trust established with the assets of an individual under age 65? (SI 01 120.203B.1 .b.)
•
If yes, go to Step 2.
•
If no, go to Step 8.
Was the trust established with the assets of a disabled individual? (SI 01 1203B.1 .c.)
•
If yes, go to Step 3.
•
If no, go to Step 8.
Is the disabled individual beneficiary of the trust? (SI 01120.203B.1.d.)
•
If yes, go to Step 4.
•
If no, go to Step 8.
Did a parent, grandparent, legal guardian or a court establish the trust? (SI 01120.203B.1.e.)
36
Minn. Stat. § 501B.89 Sub. 2(d).
760 Ill. Comp. Stat. 5/15.1
38
Colo. Rev. Stat. Ann. § 15-14-409.8
39
See Lawrence Eric Davidow, Special Needs Trusts: The Grantor Trust Rules and Beyond, Stetson College of
Law, Special Needs Trusts VII (2005).
37
25
5
•
If yes, go to Step 5.
•
If no, go to Step 8.
Does the trust provide specific language to reimburse the State for medical assistance paid upon the
individual's death as required in SI 01120.203B.1.f.?
•
If yes, go to Step 6.
•
6
If no, go to Step 8.
The trust meets the special needs trust exception to the extent that the assets of the individual were put in
trust prior to the individual attaining age 65. Any assets placed in the trust after the individual attained age
65 are not subject to this exception.
Go to Step 7 for treatment of assets placed in trust prior to age 65.
Go to Step 8 for treatment of assets placed in trust after attaining age 65.
7
8
Is the trust irrevocable?
•
If yes, assets placed in the trust prior to age 65 are not a countable resource. STOP.
•
If no, evaluate the trust under SI 01120.200 to determine if it is a countable resource.
The trust (or portion thereof) does not meet the requirements for the special-needs trust exception.
Determine whether the pooled trust exception in SI 01120.203B.2. applies.
M.
Reporting to the Court.
1.
Where a (d)(4)(A) trust is created by a Court, it is likely that the Court will impose
the same accounting requirements that are used for testamentary trusts, however
this practice can vary from county to county within states. Courts may also impose
bonding requirements and may required advance approval of expenditures.
2.
An advantage to court accounting is that it insulates the trustee from later liability.
N.
Transfer Penalties. SSI and Medicaid both impose ineligibility periods for
the transfer of assets, but each in a different manner.
1.
Transfer of assets out of the beneficiary’s name will ordinarily disqualify the
beneficiary from receiving public benefits.
2.
This penalty occurs even though the public benefits recipient does not personally
make the transfer (e.g. as when the transfer is ordered by a court action on behalf
of the recipient).
3.
A transfer of assets to a (d)(4)(A) trust avoids the ineligibility period.
26
VI.
Self-Settled SNT--Pooled Trust Account-(d)(4)(C) Trusts.
The pooled asset trust is a master trust established and maintained by a charitable
organization with sub-trusts for individual beneficiaries. In exchange for consolidating
management and administration, the charity is entitled to receive the balance of the individual
accounts when the beneficiary dies. To the extent the charity does not receive the remaining
assets, they are paid back to the state in repayment of its prior Medicaid expenditures.
A.
Statutory Requirements Are Set Forth in 42 U.S.C. § 1396p(d)(4)(C):
1.
The trust is established by a non-profit association.
2.
A separate account is maintained for each beneficiary of the trust but for purposes
of investment and management of funds, the trust pools these accounts.
3.
Accounts in the trust are established solely for the benefit of individuals who are
disabled by the parent, grandparent, legal guardian of the individual, a court, or
the individual herself/himself.
4.
It contains the assets of a disabled individual, perhaps regardless of age, however
that may be changing! Unlike a (d)(4)(A) trust, which can only be funded by its
beneficiary before attaining age 65, the statute creating the (d)(4)(C) pooled
account has no age limit. Despite that fact, approximately one-half of the states
impose a period of ineligibility upon the beneficiary of a (d)(4)(C) account who
funds the account after attaining the age of 65. In the 2009 revision to POMS
Sec. IS 01120.121, SSA states that the transfer of assets to a (d)(4)(C) account
“may result in a transfer penalty.”
5.
To the extent that amounts remaining in the beneficiary’s account on the death of
the beneficiary that are not retained by the trust, the trust pays to the state from
such remaining amounts up to an amount equal to the total medical assistance
paid on behalf of the individual.
B.
An important difference between a (d)(4)(A) trust and a (d)(4)(C) trust is the
ability of the disabled individual to fund his or her own pooled account trust.
C.
Permitted distributions are of the same type permitted under (d)(4)(A) trusts.
D.
Payback Requirement. Upon the death of the disabled beneficiary, the funds
remaining in the beneficiary’s account may either become the property of the master trust or be
paid back to the state to the extent of Medicaid benefits paid to the beneficiary.
E.
POMS Table. The following table from POMS SI 01120.203 sets forth a table
used by SSA to evaluate (d)(4)(C) pooled trust accounts:
27
STEP
1
2
3
4
5
6
7
8
VII.
ACTION
Was the trust account established with assets of a disabled individual? (See SI 01 120.203B.2.b.)
•
If yes, go to Step 2.
•
If no, go to Step 8.
Was the pooled trust established and maintained by a nonprofit association? (See SI
01120.203B.2.a, SI 01120.203B.2.c. and development instructions in SI 01120.203F.)
•
If yes, go to Step 3.
•
If no, go to Step 8.
Does the trust pool the funds, yet maintain an individual account for each beneficiary, and can it
provide an individual accounting? (SI 01 120.203B.2.d.)
•
If yes, go to Step 4.
•
If no, go to Step 8.
Is the disabled individual the sole beneficiary of the trust account? (SI 01 120.203B.2.e.)
•
If yes, go to Step 5.
•
If no, go to Step 8.
Did the individual, parent(s), grandparent(s), legal guardian(s) or a court establish the trust
account? (SI 01120.203B.2.a. and SI 01120.203B.2.f.)
•
If yes, go to Step 6.
•
If no, go to Step 8.
Does the trust provide specific language to reimburse the State for medical assistance paid upon
the individual's death from funds not retained by the trust as required in SI 01 120.203B.2.g.?
•
If yes, go to Step 7.
•
If no, go to Step 8.
The trust meets the Medicaid pooled trust exception, however, the trust still should be evaluated
under SI 01120.200D.1.a. to determine if it is a countable resource.
The trust does not meet the requirements for the Medicaid pooled trust exception. Determine if the
undue hardship waiver applies under SI 01 120.203E.
When to Use Third-Party Special Needs Trusts.
A.
Contingent third-party SNT if beneficiary becomes disabled as part of parents’ or
grandparents’ estate plan. Common situations include:
28
1.
Parents have a young developmentally disabled or mentally ill child, the extent of
whose disabilities may not be known for years.
2.
Child suffers from a chronic disease or mental condition which is not currently
severe enough for the child to be considered disabled, but which could result in
total disability in the future.
B.
Gift Receptacle or Standalone SNT. These are often established by relatives
during lifetime to serve as a vehicle into which they or other family members can contribute
funds for the benefit of the disabled beneficiary.
C.
SNT for Benefit of Surviving Spouse on Medicaid. While the primary focus of
this outline is planning by parents of children with disabilities, it should be noted that similar
planning may be allowed between spouses, where the surviving spouse is disabled. A
comprehensive discussion of this issue is beyond the scope of this outline, however a summary
will be provided.
1.
OBRA ’93 essentially treats most types of self-settled trusts that were established
for the primary purpose of securing Medicaid eligibility for the trust settlor and/or
the settlor’s spouse as available resources. (The (d)(4)(A), (d)(4)(C) and the socalled Miller trusts were exceptions to this rule.) The applicable statutory
provision, however, states that it applies to all trusts established “other than by
will.”40
2.
When this rule applies (i.e. a trust was established with an individual’s assets for
the benefit of the individual or the individual’s spouse), essentially the entire
corpus would be treated as an available resource.41
40
42 U.S.C. Sec. 1396p. Liens, adjustments and recoveries, and transfers of assets.
(d) Treatment of trust amounts
(1) For purposes of determining an individual's eligibility for, or amount of, benefits under a State plan under this
subchapter, subject to paragraph (4), the rules specified in paragraph (3) shall apply to a trust established by such
individual.
(2)(A) For purposes of this subsection, an individual shall be considered to have established a trust if assets of the
individual were used to form all or part of the corpus of the trust and if any of the following individuals established
such trust other than by will:
(i) The individual.
(ii) The individual's spouse. . . . [emphasis added].
41
42 U.S.C. Sec 1396 p(d)(3)(B). In the case of an irrevocable trust-(i) if there are any circumstances under which payment from the trust could be made to or for the benefit of the
individual, the portion of the corpus from which, or the income on the corpus from which, payment to the individual
could be made shall be considered resources available to the individual, and payments from that portion of the
corpus or income-(I) to or for the benefit of the individual, shall be considered income of the individual, and
(II) for any other purpose, shall be considered a transfer of assets by the individual subject to subsection (c)
of this section; and
(ii) any portion of the trust from which, or any income on the corpus from which, no payment could under any
circumstances be made to the individual shall be considered, as of the date of establishment of the trust (or, if later,
the date on which payment to the individual was foreclosed) to be assets disposed by the individual for purposes of
subsection (c) of this section, and the value of the trust shall be determined for purposes of such subsection by
including the amount of any payments made from such portion of the trust after such date.
29
3.
Some practitioners believe that because OBRA ’93 does not govern testamentary
trusts, that type of trust can be used to create Medicaid eligibility for an
institutionalized surviving spouse.
a)
Nothing in federal regulations or in the legislative history gives any
support to the notion that the inclusion of “other than by will” in 1396p(d)
gives rise to any type of preemption argument that would prohibit the
states from implementing rules treating testamentary trusts created by a
deceased souse for the benefit of the surviving spouse as an available
resources, however several states do permit this type of planning.
b)
Even if the inclusion rule of 1396 p(d)(3)(B) is held not to apply to a
testamentary trust, the trust would nevertheless be subject to being
evaluated as any other third party-settled SNT. This point was illustrated
in the recent ruling by the Nebraska Supreme Court in Pohlmann v.
Nebraska Dept. of Health and Human Services.42 In Pohlmann, a
testamentary credit shelter trust which granted the trustee extended
discretion and which had a support standard for the benefit of the
surviving spouse was held not to be an available resource. The case is
especially noteworthy, as it is the first Medicaid eligibility case to be
decided under the Uniform Trust Code, with the court noting that, despite
the support standard, such trusts are to be treated under the UTC as
discretionary trusts rather than as support trusts.
4.
Most states have spousal statutory share provisions, and the failure to elect against
a will to receive the statutory share will generally be treated as an improper
transfer. While this argument was mentioned in Pohlmann, the Court held that
since the state did not raise the issue at the trial level, it would not raise the issue
on appeal. Some states, such as Florida, permit the statutory share of the
surviving spouse to be satisfied by means of a trust.
5.
This issue is very state specific. Even in states where this technique cannot be
used, it may be possible for the deceased spouse to leave an institutionalized
surviving spouse who is or could be eligible for Medicaid the smallest permissible
statutory share, with the balance going to other beneficiaries, such as the children,
or simply to disinherit the institutionalized spouse. (In the latter case, it is
essential that the institutionalized spouse exercise his or her statutory elective
rights.) In states where the use of a testamentary trust for the surviving spouse is
a viable planning option, it is important that the trustee be granted extended
discretion and that the trust not contain a distribution standard which references
the health, support or maintenance of the spouse.
D.
Assets Used to Fund SNT.43 The trustee of a third-party SNT can be designated
as the beneficiary of life insurance policies, annuities, or as a payable-on-death (POD) or
transfer-on-death (TOD) recipient of bank and brokerage accounts. The third-party SNT can also
be named as the beneficiary of qualified plans; in that instance the drafting attorney will want to
42
43
271 Neb. 272, 710 N.W.2d 639 (2006).
Id.
30
ensure that the SNT qualifies as a designated beneficiary by naming identifiable individuals as
remainder beneficiaries. This allows taxes to be deferred by having the qualified plan assets
distributed (i.e. “stretched out”) over a longer period of time. Although third-party SNTs
normally permit trustees to retain income (with undistributed income being added annually to
principal), trustees should be cautious about retaining qualified plan benefits (which are typically
taxable as “Income In Respect of a Decedent” under IRC section 691), since any qualified plan
distributions retained in the third-party SNT could be subject to higher (i.e., compressed) income
taxation. Another solution for qualified plans is to name a charitable remainder trust as the
designated beneficiary of the qualified plan, and then have the charitable remainder trust make
its annual payment to the third-party SNT. This plan could work well when a large qualified plan
is the primary source of funding for the third-party SNT.
E.
Estate Planning for Wealthier Clients.
1.
In some situations, the parents of the child with the disability may have sufficient
financial means to make means tested public benefits unnecessary, especially
where the disability does not involve unusually high medical expenses. Other
parents with significant means, however, may have a child with medical needs
that approach $1 million per year. In yet other situations, a child receiving SSDI,
which is not means tested, may have a mental illness that renders the child
incapable of ever handling his or her finances in a responsible manner. Even
where means tested public benefits appear never to be necessary, an SNT may
still be advisable for other reasons, such as fiscal and case management.
a)
2.
In all of these cases, the trust would typically be fully discretionary;
however, it is of utmost importance that the intentions of the parents be set
forth in the trust instrument. Specifically, is the trust to be used for basic
needs? Are the beneficiary’s income and/or other resources to be
considered by the trustee? Are public benefits to be considered?
Funding options. In some situations, the parents may have exhausted their
lifetime gift tax exclusions, or they may otherwise seek to fund a third partysettled SNT on a tax favored basis. A number of options are available.
a)
A QPRT can be used to fund an SNT. The parents would establish their
own qualified personal residence trust, the remainder beneficiary of which
would be an SNT for their child with the disability.
EXAMPLE: Mother, age 50, owns a home valued at $350,000
which is expected to appreciate at an annual rate of 4%. If, in April
2009, she establishes a 15 QPRT the remainder beneficiary of
which is an SNT for the benefit of her son with a disability, the
creation of the QPRT will result in a taxable gift of $205,019,
however at the end of the trust term, the property is expected to
have a value in excess of $630,000. By using just over $200,000 of
her lifetime gift tax exclusion, an asset that will likely have a value
in excess of $600,000 is removed from her gross estate. Moreover,
at the end of the trust term, the mother can rent the home from the
31
SNT, and the rent payments will not be treated as an additional gift.
3.
VIII.
b)
A GRAT can be used in a similar manner. With the depressed stock
market value, this is the perfect time to establish a zeroed out GRAT,
which would consume no gift tax exemption but which would transfer all
future appreciation in excess of today’s low Sec. 7520 rate to the SNTremainder beneficiary. Choices include a series of rolling 2 year Grates,
or one GRAT with a longer term.
c)
An SNT can be funded with payments from a charitable remainder trust.
Rev. Rul. 2002-20 described the manner in which annual payments from a
CRUT could be paid to an SNT for the benefit of a “financially disabled”
child.
These, along with other funding options are explained in greater detail by Dennis
M. Sandoval in his paper entitled “Tax Efficient Funding of a Lifetime Special
Needs Trust” which was presented at the NAELA 2005 Advanced Practitioner
Program.
When to Use Self-Settled Special Needs Trusts.
A.
Unprotected Inheritances or Gifts. Before distribution is made to the disabled
beneficiary, a parent, grandparent, guardian, or court can authorize the creation of a self-settled
SNT into which the following types of items can be distributed. (This assumes that the donor had
provided for outright distribution to the disabled beneficiary.)
1.
outright distributions from estate;
2.
outright distributions from trusts;
3.
POD or TOD accounts;
4.
life insurance death benefits;
5.
custodial accounts.
a)
Under the Uniform Transfers to Minors Act, a custodian has no authority
to distribute custodial assets to a (d)(4)(A) trust.
b)
If the distribution of the account would cause a loss of SSI benefits, the
custodian should seek court authority to terminate the account and
establish a (d)(4)(A) trust. The consent of the beneficiary, if competent
and between 18 and 21, otherwise of a guardian ad litem, will be required.
B.
Personal Injury or Medical Malpractice Judgment or Settlement. A plaintiff
who was severely disabled as the result of an injury or medical malpractice will often have
unusually high medical expenses for life, and maintaining or achieving Medicaid eligibility may
be essential. The judgment or settlement can be placed in a self-settled SNT without negatively
impacting Medicaid eligibility.
32
C.
Is the Fund Large Enough For A Self-Settled Trust? Self-settled SNTs are
often perfect receptacles to receive personal injury settlements, including structured settlement
payments. The following four guidelines are suggested by attorney Andrew Hook.44
1.
For settlements of less than $100,000, it is frequently advisable that the entire
amount be taken in a lump sum, because the cost of creating and administering a
small (d)(4)(A) trust is large in relation to the trust assets. In these cases, the lump
sum can often be spent down in such a way that will protect public benefits, such
as by purchasing a home or motor vehicle.
2.
For settlements between $100,000 and $500,000, the needs of the disabled person
must be analyzed to determine whether a portion of the recovery might best be
taken in the form of a lump sum and invested in exempt resources and another
portion paid to a (d)(4)(A) trust.
3.
For settlements of $500,000 or more, it is almost always beneficial to establish a
(d)(4)(A) trust to manage the funds. The needs of the disabled person must be
analyzed to determine what portion of the recovery should be structured and what
portion should be in a lump sum. The structured portions should contain a
commutation provision or payment on death provision, to permit the payment of
estate taxes and the Medicaid claim.
4.
For very large settlements, a (d)(4)(A) trust is not necessary when the amount is
sufficient to provide for all of the beneficiary’s reasonably foreseeable future
needs (including medical care and prescription drugs) during his or her lifetime.
D.
Establishment Process for Inheritances and Excess Funds.45
1.
A person with disabilities may receive an inheritance from a family member. A
person may also become disabled later in life and need Medicaid and/or SSI, but
have more than $2,000 in resources. In these situations, a self-settled SNT can
help protect the inherited or excess funds during the beneficiary’s lifetime. If the
beneficiary does not have a living parent, grandparent, or legal guardian, a court
will have to establish a (d)(4)(A) or (d)(4)(C) SNT and direct the payment of the
beneficiary’s funds into the SNT.
2.
The attorney must file a petition with the circuit or probate court in the
jurisdiction where the beneficiary resides, to have the court establish and fund
the SNT. The court will normally want to appoint a guardian ad litem to
evaluate the beneficiary’s interests in the establishment and funding process.
The court will normally hold a hearing on the petition, and the court order can
permit the Trustee to execute the (d)(4)(A) trust document. The court may
also sign the (d)(4)(A) trust document or the (d)(4)(C) joinder agreement as
the grantor.
E.
Establishment and Administration Process for Matrimonial Actions.46
44
“What the Trust & Estates Lawyer Needs to Know About (d)(4)(A) Special Needs Trusts, ACTEC Journal, Fall,
2003.
45
Supra, n. 1.
33
1.
Approximately 50% of marriages end in a divorce. The divorce rate is
actually higher in families with special needs children.
2.
Self-settled SNTs are frequently established to protect property divisions,
spousal support and child support received by persons with disabilities in
divorce actions.
a)
If a spouse with a disability is in a divorce action, any funds awarded by
equitable distribution should be paid directly to a self-settled SNT, rather
than directly to the spouse with disabilities.47
b)
Alimony and spousal support are unearned income. 74 The Alimony or
spousal support may be irrevocably assigned to an SNT.
c)
Child support payments made on behalf of a child with disabilities
are unearned income for the child. The court may assign the support
payments to a self-settled SNT.
d)
To be effective, the assignment of the property settlement, spousal
support or child support to the self-settled special needs trust must be
irrevocable.
3.
The assets in an SNT may be considered in determining the obligation of
a parent to provide support for the child. Certain states impose a continuing
support obligation on the parents for an adult child with a disability. A
Pennsylvania case has held that as a matter of law and public policy the court would
not allow a support obligation to be underwritten by an SNT rather than the
parents.48
4.
The assets in a self-settled SNT may not be shielded from claims of child support
even in states with asset protection trust laws. If the trustee makes distributions for
child support on behalf of the person with disabilities, be wary of a violation of
the “sole benefit” rule. The refusal to make the distribution may result in contempt
charges against the disabled parent beneficiary; thus, it could be argued that the
distribution was for his benefit and the benefit to the child was incidental.
F.
Establishment Process for Personal Injury Claims.49
1.
Self-settled special needs trusts are often established for proceeds from
personal injury or medical malpractice claims. Attorneys who are familiar with
special needs law should be involved in the claim process as early as possible,
particularly if a structured settlement may be considered, to ensure that the
settlement will not result in making the beneficiary ineligible for needs-based
benefits.
46
Supra, n. 1.
POMS SI 00830.418
48
POMS SI 01120.201
49
Supra, n. 1.
47
34
2.
Interface with personal injury attorneys. Personal injury attorneys should
consult with special needs attorneys early in the process to determine whether
a special needs trust is appropriate. The special needs attorney should set up a
consultation with the personal injury attorney, and the beneficiary and his or
her family to discuss the available options for the claim proceeds. If the claim
results in a judgment or settlement order by a court, the special needs attorney
should work with the personal injury attorney to include the establishment and
funding of the (d)(4)(A) or (d)(4)(C) SNT in the court order. This procedure
should be followed even if the parent, grandparent, legal guardian, or
beneficiary (for (d)(4)(C) SNTs) actually signs the trust document or joinder
agreement as the grantor. The court order can authorize the parent,
grandparent, legal guardian, or beneficiary (for (d)(4)(C) pooled trusts), to
sign the trust document or joinder agreement as the grantor. Having the court
direct the payment of the funds into the SNT avoids potential problems with
the SSA regarding the legal authority to transfer the beneficiary’s funds into
the SNT. If the settlement will not require a court order, the settlement
agreement should require the defendant to pay the claim proceeds directly to
the trustee of the SNT.
3.
Medicaid Liens, Medicare Claims and ERISA Plan Reimbursement Claims.
a)
50
51
Medicaid liens.
i.
In many tort cases, the beneficiary has received medical
care for the injury under the Medicaid program prior to the
settlement or disposition of the case. By receiving this care,
the Medicaid beneficiary has agreed to repay the state if a
recovery is made. Federal law requires the states to take all
reasonable measures to ascertain the legal liability of third parties
(including health insurers) to pay for care and services paid
for by the Medicaid program.50
ii.
Virtually all states impose a lien for Medicaid services
rendered as a direct result of the injury and require notice to be
given to the state Medicaid agency by attorneys involved in
personal injury, w o r k e r s c o m p e n s a t i o n a n d o t h e r
c a s e s . Additionally, some states have attempted to recover from
personal injury settlements the projected future medical expenses
that will be paid by the state Medicaid program. The Idaho
Supreme Court has held that federal and state laws were not
intended to permit the state to recover money meant to
compensate the plaintiff for future medical expense.51
42 U.S.C. § 1396a.
State of Idaho Dept. of Health and Welfare v. Jonathon L. Hudelson, Docket No. 34495, 2008 Opinion No. 116.
35
IX.
iii.
The North Carolina Supreme Court allowed a lien against
damages other than medical expenses.52
iv.
Although the states may compromise their lien,53 the state budget
deficits have put additional pressure on them to not compromise
their claim.
Malpractice for Failure to Preserve Public Benefits
Eligibility. 54
A.
Personal Injury Case.
1.
Christina Grillo settled a personal injury case for a lump sum on the advice of
her personal injury attorney. She later sued the attorney and guardian ad litem
for malpractice. She alleged that the defendants: (1) failed to consult
competent experts concerning a structured settlement and (2) failed to plan to
preserve her SSI and Medicaid eligibility. Ms. Grillo alleged that a structured
settlement with a d(4)(A) SNT would have protected her personal injury
settlement from dissipation, provided tax benefits and protected her SSI and
Medicaid benefits. The case was settled by all defendants for a combined sum
of $4.1 million.55
2.
Edith Saunders, the conservator for James A. Saunders III (Jamie) settled a
personal injury action on Jamie’s behalf. As a part of the application to
compromise and settle the claim, the conservator requested that the net
settlement amount be placed in a d(4)(A) SNT for Jamie to preserve his
Medicaid eligibility. The State of Connecticut objected. The Supreme Court
of Connecticut rejected the attorney general’s argument that the conservator
should spend down all of Jamie’s assets and then re-apply for Medicaid
assistance. The court ruled: “By contrast, with the creation of the trust, Jamie
will retain his Medicaid eligibility and Saunders (the conservatrix) can
provide for his supplemental needs from the trust assets, while Medicaid
provides for his basic medical care. Therefore, not only is the latter course of
action clearly better for Jamie, it may be fairly stated by failing to follow it,
the probate court, and Saunders could be deemed to be in dereliction of their
52
See Ezell v. Grace Hospital, Inc. 360 N.C. 529, 631 S.E.2d 131. This seems to contradict the U.S. Supreme Court’s
decision in Arkansas DHHS v. Ahlborn which prohibits states from asserting a Medicaid third-party liability claim
against a Medicaid recipient’s recovery for personal injury damages other than medical expenses. 126 S. Ct. 1752. The
issue is again under review by the North Carolina Supreme Court.
53
For example see Garcia v. County of Sacramento, 103 Cal. App. 4th 6 (2002), and Commonwealth v. Huynh, 262
VA. 165, 546 S.E.2d 677 (2001).
54
Supra, n. 1.
55
Grillo v. Petiete et al., 96-145090-92, 96th Dist. Ct., Tarrant Cty., Texas, and Grillo v. Henry Cause, 96167943-96, 96th Dist. Ct., Tarrant Cty., Texas. See also French v. Glorioso, 94 S.W.3d 739 (Tex. Ct. App. 2002)
which demonstrates the potential for malpractice liability for failure to advise clients about the impact of a
settlement on public benefits eligibility. Dept. of Social Services v. Saunders, 724 A.2d 1093, 247 Conn. 686
(1999).
36
duties to Jamie (italics added).”56 This duty requires the fiduciary of an estate
and indirectly, the lawyer, to protect the client’s settlement.
3.
An attorney practicing in this area has the duty to ensure his client is informed
about the options of structured settlements, trusts and the effect of the
judgment or settlement on the client’s public benefits eligibility.
B.
Estate Planning.
1.
In 2000, an attorney was retained to draft the will that left a significant sum
to the testatrix’s sister who resided in a nursing home. The Medicaid program
was paying for the sister’s care.
2.
After the testatrix’s death, the sister was disqualified for Medicaid assistance,
had to spend down the inheritance and reapply for Medicaid.
3.
The Supreme Judicial Court of Maine held that the attorney “... could and
should have drafted a ‘Supplemental Needs Trust’ for ... [the testatrix's sister],
thereby avoiding the Medicaid spend down....”
4.
On October 25, 2002, the court suspended the drafting attorney’s license to
practice law because of his failure to create the special needs trust and for other
reasons.57
Notification Requirements. 58
X.
A.
Duty to Report Creation and Funding (d)(4)(A) Trust to SSA.
1.
Notification is required in two circumstances:
a)
SSI and Medicaid recipients, and their representative payees, are under a
continuing obligation to report any change in their income, resources, living
arrangements or other conditions.
b)
The client must report the (d)(4)(A) trust when he or she is applying for
SSI or Medicaid.59 The beneficiary must also report the creation and
funding of a third-party SNT when the trust is funded.
56
Dept. of Social Services v. Saunders, 724 A.2d 1093, 247 Conn. 686 (1999).
Board of Overseers of the Bar v. Ralph W. Brown, Esq., Me. Sup. Jud. Ct. Docket No. BAR-01-6 (October 25, 2002).
58
Supra, n. 1.
59
When you prepare a d(4)(A) or joinder agreement for a d(4)(C) SNT for a child who will not apply for SSI until
he or he reaches the age of 18 because of parental “deeming” of income, consider drafting a letter to the SSA
notifying the SSA of the trust. The parents should be instructed in writing to attach the letter to the SSI application
when it is filed after the child reaches age 18.
57
37
2.
The failure to notify or report to the SSA can result in huge overpayment claims
against the trust if the SSA becomes aware of the trust after the beneficiary has
received significant SSI benefits and the SSA rules that it is a countable resource.
The SSA will frequently become aware of the trust by an IRS computer check
against the SSI rolls, which the SSA does constantly. If the trust is immediately
reported to the SSA, corrective action can frequently be taken before the SSA has a
large over payment claim.
3.
The notification can be in the form of a letter to the local SSA office which should
include i) the beneficiary’s name, ii) the beneficiary’s Social Security number, iii)
a copy of the trust agreement, and iv) trust records showing the receipt of funds.
The letter should expressly answer all of the questions in an SSI step action chart
reproduced in this outline at ¶(L) of Article V of this outline with references to the
applicable sections of the trust agreement.
4.
The beneficiary, or his/her representative payee, has the duty to report60; however,
it is a matter of good practice for the attorney to prepare and file the report. The
report should be made by letter mailed to the local Social Security Administration
office responsible for providing services to the beneficiary by certified mail.61 If
filed by the attorney, it is good practice to attach SSA Form 1696, “Appointment
of Representative,” and include with the cover letter a request that the SSA direct
all correspondence and questions to the attorney.
5.
The report is due as soon as the event occurs, but is late if not made by the tenth
day of the following month.62
6.
Upon receipt of the notice, the Claims Representative (“CR”) reviews it in
accordance with the action chart and approves it if appropriate. If the CR has
questions, he or she will submit it to the Regional Office for an analysis and
report. There may be no response for months, and if the trust is approved there
may never be a response.
7.
Upon receipt of an unfavorable initial determination, the following steps should
be taken:
a)
Determine who will represent the client on appeal.
i.
The attorney who has prepared the trust and submitted it to
the SSA but has not represented the client before the SSA.
ii.
Once an appeal is filed, however, a new fee arrangement
must be secured.63
60
20 CFR 416.704.
The local office should be the SSA office for where the client lives, unless the client has a representative payee,
and then it should be for the local office where the representative payee lives.
62
20 CFRR 413.714.
63
42 U.S.C. § 406(a)(5).
61
38
1)
In the absence of prior approval from the SSA, no fees
may be charged to the beneficiary or the trustee
for legal representation before the SSA.64
2)
Failure to obtain advance SSA approval of fees may result
in the attorney committing a crime and being barred
from practicing before the SSA.
iii.
The attorney representing the beneficiary should file with the SSA
a Form 1696, together with a copy of his fee agreement. This form
may be obtained from the SSA’s Office of Hearings and Appeals.
iv.
When the representation is complete, the attorney must submit a
Petition for Approval of Fee.
1)
b)
The SSA’s criteria for evaluating fee petitions
include the following:
a.
the extent and type of services performed
b.
the amount of time spent on the case
c.
the complexity of the case
d.
the level of skill and competence required
e.
the results obtained
f.
the level of review to which the case was taken
2)
The fee determination process can take months and
the trustee may not pay your fee without fee approval by the
SSA.
3)
Keeping time records and having a written fee agreement
are essential.
4)
The SSA assumes no responsibility for payment of the
fee for SSI appeals.
Request for Reconsideration.
i.
Request that the CR send you the analysis of the trust by the
Regional Office.
ii.
The request for reconsideration is made by filing Form SSA561-U2.
64
Practice Note: Because the attorney will not have obtained advance approval for a fee to submit the trust to the
SSA for review, you may wish to consider not charging a fee for that specific service.
39
c)
iii.
There are three types of review: (i) case review, (ii) informal
conference, and (iii) formal conference. Case reviews seldom
result in a favorable decision. Always request an informal or
formal conference, both of which permit an in person presentation
and the calling of witnesses. However, witnesses may be
subpoenaed in a formal conference. Conferences may be held in
person or by phone. However, it is preferable to hold the
conference in person.
iv.
After the conference, the SSA will issue a written notice of
Reconsideration. An unfavorable decision triggers another
deadline (10 days to continue benefits and 60 days to continue
the appeal).
Administrative Law Judge Hearing
i.
The request for a hearing by an Administrative Law Judge is
made on form SSA HA-501-U5.
ii.
Hearings are usually scheduled for one hour and are followed
by a formal written decision.
iii.
The ALJ’s decision is final unless a review of the decision is
requested within 60 days.
d)
Appeals Council Review. The request for the Review of the Hearing
Decision is made on form HA-520-U5.
e)
Judicial
Review.
After
exhausting
the
beneficiary’s
administrative appeals, the beneficiary may petition for judicial
review by filing a complaint against the Commissioner of the
SSA in the United States District Court.
B.
Duty to Report Creation & Funding of (d)(4)(A) Trust to the State or County
Medicaid Agency.
1.
Medicaid recipients, or their guardians, are under a continuing obligation to report
any change in their income, resources, living arrangements or other conditions to
the state.
2.
The beneficiary, whether in a 209(b), SSI or 1634 state, must report the creation
and funding of the trust to the local Medicaid eligibility office. Again, it is
advisable for the attorney to prepare this correspondence to Medicaid and send it
by certified mail to the beneficiary’s caseworker.
3.
If the beneficiary receives Section 8 vouchers, the beneficiary should report the
creation and funding of the (d)(4)(A) trust to the local public housing authority.
40
4.
While the trustee does not have this duty to report the funding of the trust, many
trustees choose to do so, as most beneficiaries would fail to comply with this
requirement, thereby risking later disqualification.
C.
Notification to the State
1.
Medicaid recipients are under a continuing obligation to report any change in their
income, resources, living arrangements or other conditions.
2.
The beneficiary, whether in a 209(b), SSI or 1634 state, must report the creation
and funding of a (d)(4)(A) or (d)(4)(C) SNT or third-party SNT (when funded) to
the local Medicaid eligibility office. It is a matter of good practice, however, for
the attorney to prepare and file the report.
3.
If the beneficiary receives Section 8 housing vouchers, the beneficiary should
report the creation and funding of the SNT to the local PHA. Once again, it is
good practice for the attorney to prepare and file the report.
D.
Trust Administration Duties. The Trustee of a third-party, d(4)(A) or
d(4)(C) SNT must fulfill the normal fiduciary duties of a trustee, including:
1.
Take custody of and title the trust assets in the name of the trust.
2.
Comply with the terms of the trust agreement and state law.
3.
Keep detailed records and provide the beneficiary and/or representative with
regular accountings.
4.
Invest the trust assets in compliance with the Prudent Investor Act.
E.
Written Advice. When drafting a d(4)(A) SNT, the draftsperson should
provide detailed, written advice concerning the creation, funding, management and
distribution (including SSI distribution rules) of the trust to the Trustee and to the plaintiff’s
counsel where the trust is being funded with litigation proceeds.
XI.
Alternatives to SNTs.
Because the administration of SNTs can be expensive and burdensome, and
because of the generally antagonistic approach to SNT regulation on the part of some
governmental agencies, other alternatives should be considered to the use of SNTs in certain
circumstances. The alternatives include:
A.
Disinheritance. Rely on the other children to take care of their disabled sibling.
This can be, but is often not, a good alternative, and was one that was commonly used before the
advent of SNTs.
41
B.
Purchase of Exempt Resources. If the inheritance will be relatively modest, the
purchase of exempt assets that a public benefits recipient can own without losing eligibility can
be a good choice. These include the purchase of a home and/or vehicle. Plans must be in place
for the payment of real estate taxes, insurance, and maintenance expenses.
C.
Pay Down Debt. Paying down debt, including credit card bills, or pre-paying
bills can prevent the funds so used from being treated as resources.
D.
Foregoing Public Benefits. This is a good option for larger amounts, particularly
where the public benefits recipient is medically stable.
E.
Planning for Future Eligibility.
1.
Sometimes the best course of action is to have the beneficiary receive the
disqualifying amount, embark on a concentrated effort of self-improvement, and
then develop a spend down plan to regain eligibility later.
2.
Alternatively, the disabled individual can transfer assets to a third party, who
would then establish a third party trust for the beneficiary after any applicable
period of ineligibility that may result from the transfer.
3.
Gifts to third parties under a moral obligation to assist the person with a
disability. This strategy is not recommended since it leaves the person with
disabilities totally at risk. The third party could pass away, get divorced, or
become disabled himself.
XII.
Current Developments. 65
A.
Congress:
During 2008, the following bills were referred to a committee in the US
1.
2.
65
H.R. 2370 - Financial Security Act.
a)
Amends the IRC to establish tax-exempt financial security accounts
for individuals with disabilities to pay for certain expenses of such
individuals.
b)
The account is not to be deemed a resource or income for SSI or
Medicaid eligibility.
S. 2741 - Disability Savings Act.
a)
Amends the IRC to allow a tax exemption for disability savings
that have a value of $250,000 or less and are established for beneficiaries
under the age of 65 who are blind or disabled.
b)
Allows tax-free distributions from such accounts for certain services.
Supra, n. 1.
42
c)
3.
Allows tax credits for contributions of up to $2,000 made to such an
account. Permits such accounts to be disregarded in determining
eligibility for Medicaid and certain other means-tested federal
programs.
S. 2743 - Financial Security Accounts.
a)
Amends the IRC to establish tax-exempt financial security accounts for
individuals with disabilities to pay for certain expenses of such
individuals.
b)
Allows individual taxpayers a tax deduction, up to $2,000 per year, for
cash contributions to such accounts.
c)
Disregards these accounts in determining eligibility for Medicaid
benefits.
B.
It is not clear that contributions to these accounts will be exempt from the SSI
and Medicaid asset transfer rules.
C.
It is possible that similar bill(s) will be introduced in Congress during 2009.
These accounts may serve as alternatives to SNTs and structured settlements in certain cases.
43
APPENDIX A
GOVERNMENT BENEFIT PROGRAMS
This appendix is a brief summary of governmental benefits that may be available
to beneficiaries of SNTs, and is not intended to detail the very complex and
comprehensive provisions of the various programs.
Whenever engaging in SNT planning, the attorney must consider and incorporate
the public benefits that are available to the person with disabilities into an
appropriate special needs plan. Each of these public benefits has different
eligibility rules and different sets of covered services. Some of these benefits are
not based on financial need and some of them have financial eligibility
requirements. Although SNTs are not necessary to protect those benefits that do
not have financial eligibility rules, SNTs will protect the eligibility for some, but
not all, of the programs with benefits that are based on financial need.66
Supplemental Security Income (SSI)
The Social Security Administration is responsible for two major programs that
provide benefits based on disability: Social Security Disability Insurance (SSDI ),
which is based on prior work under Social Security, and Supplemental Security
Income (SSI). Under SSI, payments are made on the basis of financial need.
For both programs, Social Security pays only for total disability. The disability
benefits of a recipient who is still receiving disability benefits when reaching full
retirement age are automatically converted to retirement benefits. See SSA Pub.
No. 05-10029.
Source of Law. SSI is authorized by Title XVI of the Social Security Act. The
SSI statute can be found at 42 U.S.C §§ 1381 et seq., and the regulations at 20
C.F.R. §§ 416. General information about SSI can be found at
http://www.ssa.gov/pgm/links_ssi.htm. The internal SSA guidelines used by it in
administering SSI are found in its Program Operations Manual System (POMS), which
can be found on the internet at https://s044a90.ssa.gov/apps10/poms.nsf/aboutpoms.
Supplemental Security Income (SSI) is a program financed through
general revenues. SSI disability benefits are payable to adults or children who are
disabled or blind, have limited income and resources, meet the living arrangement
requirements, and are otherwise eligible. The monthly payment varies up to the
maximum federal benefit rate, which may be supplemented by the State or
decreased by countable income and resources.
Residents of public institutions are not eligible for SSI. Public institutions are
those operated or controlled by a government entity that provide treatment or
66
Supra, n. 1
44
services in addition to food and shelter to four or more persons. Exceptions are
persons who live in such institutions to receive vocational or educational training,
persons who live in group homes or community residences with no more than 16
residents.
To be eligible for SSI benefits, the monthly income limit for an unmarried person
in 2009 is $674. Married persons are entitled to benefits if combined monthly
income is less than $1,011. Income includes anything received in cash or in kind
that can be used to meet the person's needs for food, clothing or shelter.
Deemed income is income of another attributed to the claimant. Generally, it is
an issue when the claimant lives with an ineligible spouse or parent. “Deeming''
stops applying in the month following a claimant's 18th birthday.
Description Of Benefits. SSI is a federal welfare program designed to pay for
food and shelter for categorically needy individuals living below the poverty
level. For 2009, the maximum monthly SSI benefits are as follows:
Living Arrangement
2008 SSI:
Federal
Payment
Independent Living
Eligible Individual
Eligible Couple
Couple/One Spouse Eligible
$674.00
$1,011.00
$637.00
Living in the Household of Another
Eligible Individual
$449.34
Eligible Couple
$674.00
Couple/One Spouse Eligible
$449.34
Most SSI recipients also receive Medicaid. All states other than the nine § 209(b)
states are required to use federal SSI eligibility requirements for purposes of
determining Medicaid eligibility for SSI recipients. Because of the inherent
redundancy (e.g., Medicaid and SSI both use the same definition of “disabled”),
many states automatically grant Medicaid coverage to SSI recipients; however,
other states require SSI recipients to file a separate application for Medicaid.
§ 209(b) states are permitted to have program requirements that are more
restrictive than the federal requirements under SSI provided that those rules may
not be more restrictive than their rules that were in effect on January 1, 1972.
45
(Generally, the eligibility requirements in § 209[b] are not significantly different
than current SSI requirements.) See SSA Pub. No. 05-11011, “What You Need to
Know When You Get Supplemental Security Income.”
Because many disabled individuals have unusually high medical expenses, the
ability to receive free medical care through Medicaid is often of far more
importance than the monthly SSI check; however it is SSI eligibility that makes
Medicaid coverage available.
State Supplements. Some states supplement the federal SSI benefit with
additional payments. This makes the total SSI benefit levels higher in those
states. SSI benefit amounts and state supplemental payment amounts vary based
upon the recipient’s income, living arrangements, and other factors. For
additional information regarding state supplements in specific states, see
www.workworld.org/wwwebhelp/ssi_state_supplements_overview.htm .
•
NO STATE SUPPLEMENT: The following do not pay a supplement to
people who receive SSI benefits: Arkansas, Georgia, Kansas, Mississippi,
Tennessee, and West Virginia.
•
SOCIAL SECURITY ADMINISTERED SUPPLEMENT:
SSA
administers the State supplement for the following States. California,
Delaware, Washington, D.C., Hawaii, Iowa, Massachusetts, Michigan,
Montana, Nevada, New Jersey, New York, Pennsylvania, Rhode Island,
Utah, and Vermont. Of these states, Delaware, Iowa, Michigan, New
York, Pennsylvania, and Vermont, and Washington are “dual
administration states,” in which both Social Security and these states
administer some state supplements.
•
STATE ADMINISTERED SUPPLEMENT: The following States pay and
administer supplemental payments: Alabama, Alaska, Arizona, Colorado,
Conn., Florida, Idaho, Illinois, Indiana, Kentucky, Louisiana, Maine, Md.,
Minnesota, Missouri, Nebraska, New Hampshire, New Mexico, North
Carolina, North Dakota, Ohio, Oklahoma, Oregon, South Carolina, South
Dakota, Texas, Virginia, Washington, Wisconsin., and Wyoming.
•
DUAL ADMINISTRATION STATES: In the following states, the State
administers supplements for people in certain types of living
arrangements, while the SSA administers supplements for other types:
Delaware, Iowa, Michigan, New York, Vermont, and Washington.
SSI Eligibility Requirements. Eligibility is not based on a person’s employment
record, a person’s relationship to an injured worker, or employment taxes paid.
As with Medicaid, an SSI recipient must be aged, blind, or disabled. The person
must be a U.S. citizen or qualified immigrant.
46
Definition of Disability. Social Security defines a disabled person as:
A.
An adult (18 years or older) who is unable to do any substantial
gainful activity by reason of any medically determinable physical
or mental impairment which can be expected to result in death, or
which has lasted or can be expected to last for a continuous period
of not less than 12 months. Substantial gainful activity is an
amount that changes each year. For 2009, it is $980 per month
($1,640 if blind).
B.
A child under 18 is considered disabled if suffering from a
medically determinable physical or mental impairment(s), which
compare in severity to an impairment that would make an adult
disabled. See SSA Pub. No. 05-10026, “Benefits for Children
With Disabilities”.
C.
Persons diagnosed as addicted to alcohol or drugs will be found to
be disabled only if the disability is based on symptoms, signs, and
laboratory findings independent of the addiction itself. If the drug
addiction or alcoholism is found to be a contributing factor to the
disability the person is required to participate in free treatment, if
available, to maintain their eligibility.
Income Limits. For SSI purposes, "income" is defined as anything a person
receives in cash or in-kind that can be used to meet a person’s needs for food or
shelter. If the SSI recipient is living with an ineligible spouse or parent, a portion
of the parent's or spouse's income is “deemed” to the recipient. That portion of
the parent’s or ineligible spouse’s income that is considered as necessary for their
own living expenses, however, is not deemed. The 2009 maximum SSI benefit of
$674 is reduced by the recipient's actual unearned monthly income and by onehalf of the recipient's earned income that is in excess of $65. For purposes of this
benefit reduction, food or shelter provided by a third party is treated as income,
for the reason that SSI is paid for the purpose of providing food and shelter. This
is referred to as "in-kind support and maintenance" (ISM). The receipt of ISM
will reduce the SSI benefit by either one-third of the maximum SSI benefit or by
the "presumed maximum value." If the recipient is living in the home of another,
such as a relative or friend, the SSI benefit is reduced by one-third of the
maximum benefit. If, however, an SNT is making a mortgage payment on behalf
of an SSI recipient who is living either in his or her own home or in one owned by
the SNT, then the presumed maximum value rule applies. The only difference
between the one-third reduction rule and the presumed maximum value rule is an
additional reduction of $20 beyond the one-third reduction under the PMV rule.
Example: If an SSI recipient receives items of food or shelter in-kind
(commonly referred to as “in-kind support and maintenance” (“ISM”)),
the Social Security Administration (“SSA”) will treat those items as
income dollar for dollar subject to the lesser of: (i) the amount ISM
provided, or (ii) 1/3 of the federal (SSI) benefit rate plus the
47
unearned income disregard of $20, for a total of $245 in 2009. [$674 x
1/3= $225+ 20 = $245].67
Non-Countable Income. The following income is not counted in determining
eligibility for SSI:
67
•
The first $20 a month of most income;
•
The first $65 a month of earnings;
•
Half of earnings over $65;
•
Food stamps;
•
Shelter or other in-kind assistance the recipient gets from private nonprofit
organizations;
•
Most home energy assistance;
•
One-third of support payments made to or for a child by an absent parent;
•
The value of plane, train, bus tickets received as a gift;
•
Wages used to pay for items or services that help the SSI recipient work
(for example, if the recipient needs a wheelchair, the wages used to pay
for it do not count as income);
•
Wages earned by a blind person used for work expenses (for example, if a
blind person uses wages to pay for transportation to and from work, the
wages used to pay the transportation cost are not counted as income); and
•
Earnings during a “trial work period”68
Supra, n. 1, for the example.
68
SSA has special rules called "work incentives" designed to help SSI recipients keep their SSI
benefit while they test their ability to work. For example, there is a trial work period during which
a recipient can receive full benefits regardless of how much is earned, as long as the work activity
is reported to SSA and the recipient continues to have a disabling impairment.
The trial work period continues until the recipient accumulates 9 months (not necessarily
consecutive) in which the recipient performs "services" within a rolling 60-month period. Work is
considered to be "services" if more than $670 (2008 amount) is earned in a month. After the trial
work period ends, the SSI benefit stops for months in which the recipient’s earnings are
“substantial," currently $940 in 2008. Different amounts apply to people who are disabled because
of blindness. For an additional 36 months after completing the trial work period, SSI benefits can
resume if earnings fall below the "substantial" level and the recipient continues to be disabled. For
more information, see “Working While Disabled-How We Can Help” (SSA Publication Number
05-10095).” http://www.ssa.gov/pubs/10095.pdf
48
Relationship with SSDI. Individuals who qualify for Social Security Disability
Income (SSDI, discussed below), but whose SSDI payment is less than $674 per
month, will receive both SSDI and SSI, with the SSI benefit being the difference
between the amount of the SSI benefit and their SSDI benefit. Therefore, in order
to receive both SSDI and SSI, the SSDI must be less than $674. Note, however,
that it is only SSI, not SSDI, that carries with it Medicaid eligibility.
Resource Limits. SSI and Medicaid have the same resource limits or $2,000 for
an individual or $3,000 for a couple. (The Medicaid amounts are lower that these
SSI amounts in some Section 209(b) states, such as Ohio, where the individual
limit is $1500.) The Medicaid concept of the Community Spouse Resource
Allowance does not apply to SSI. As with income, SSI applies deeming rules for
resources, under which assets of ineligible parents of minor children with a
disability and of ineligible spouses living with the SSI recipient are considered for
eligibility purposes. The parents’ income and assets are no longer deemed as
soon as the child/SSI recipient reaches age 18, even though the child may
continue to live with his or her parents. In that situation, however, any support
actually provided by the parent will be treated as income under the ISM rules.
An SSI recipient who accumulates more than $2,000 in cash resources will
generally lose SSI and, possibly, Medicaid, until resources again drop below the
maximum permitted level. Proceeds of sale of a resource are not income, but
continue to be a resource. Countable resources are anything that the individual
owns, has an independent legal right to negotiate, can be converted to cash, and is
usable for food or shelter.
Exempt Resources.
Some excluded resources are:
•
The home and the land it is on;
•
Life insurance policies owned by the SSI recipient with a face value of
$1,500 or less per person;
•
One car if it is used for transportation for the SSI recipient or a member of
his or her household;
•
Burial plots for the SSI recipient and members of his or her immediate
family; and
•
Up to $1,500 in burial funds for the SSI recipient and up to $1,500 in
burial funds for the recipient’s spouse.
•
Household goods and personal effects;
•
Property used in a trade or business, or for use in connection with the SSI
recipient’s job;
49
•
Money or property set aside under a Plan to Achieve Self–Support
(PASS).69
SSI And Transfers. Gifts (or, as the statutes phrase it, “transfers of resources for
less than fair consideration”) create a period of time (known as the “penalty
period” or “period of ineligibility”) during which the person making the gift will
be ineligible to receive SSI. For SSI, the penalty period is calculated by dividing
the amount of the gift by the then current federal benefit rate (currently $674) plus
the state supplement, if any.
Unlike Medicaid, there were no transfer penalties for SSI prior to passage of the
Foster Care Independence Act of 1999. While the SSI and Medicaid transfer
penalty rules are similar, they are not the same. For SSI purposes, the period of
ineligibility that results from an uncompensated transfer made during the 36month lookback period is computed by dividing the amount of the uncompensated
value transferred assets by the amount of the then current maximum monthly
benefit (currently $674), rounding the quotient up or down to the nearest whole
number (when this calculation is made for Medicaid purposes, the result is always
rounded down), with a cap of 36 months. In 2009, the period of ineligibility
resulting from a transfer would be computed as follows: Amount of
uncompensated value ÷ ($674+ 20) = months of SSI ineligibility. Medicaid
uses a 60-month lookback period and maximum period of ineligibility and with
Medicaid, the period of ineligibility does not begin to run when the gift is made,
but when the person would otherwise be eligible for Medicaid. Significantly,
however, the transfer penalty rules do not apply when the assets transferred are
those of the person called the “deemor” and not the actual SSI applicant. For
instance, if a parent’s resources are deemed to an SSI applicant child, there will be
no penalty if that parent transfers those resources to a non-spouse as to that child’s
application. In addition, transfers to (d)(4)A) and (C) trusts are exempt; however,
transfers to (d)(4)(A) trusts must be made before the applicant is age 65. Many
states impose transfer penalties for transfers to (d)(4)(C) accounts if the
beneficiary is age 65 or older.
SSI Benefits for Children. A child from birth to age 18 may receive SSI based
on disability or blindness if:
•
He or she has an impairment or combination of impairments that meets
the definition of disability for children70 and
•
The income and resources of the parents and the child are within the
allowed limits.
69
See “Understanding Supplemental Security Income Spotlight on Plans to Achieve Self–
Support” at http://www.socialsecurity.gov/ssi/spotlights/spot-plans-self-support.htm
70
The child must have a physical or mental condition(s) that very seriously limits his or her
activities; and the condition(s) must have lasted, or be expected to last, at least 1 year or result in
death. A state agency makes the disability decision.
50
Social Security Disability Income (SSDI )
Source of Law. Social Security Disability Income (SSDI) is authorized by Title
II of the Social Security Act. The law governing SSDI is found at 42 U.S.C. § 420
– 425 and 20 C.F.R. Part 404. ], General (public) information about SSDI can be
found at: (General information about SSDI can be found at
http://www.ssa.gov/pgm/links_disability.htm There is much confusion between
Social Security Disability (SSDI) and SSI. Many disabled individuals who
receive disability benefits are not aware of which they are receiving, as both are
processed by the Social Security Administration. SSDI is part of a larger program
more fully known as Old Age Survivors and Disability Insurance (OASDI). SSDI
is not means tested, so the existence of an SNT for the benefit of a recipient of
SSDI would have no impact upon the SSDI benefit. SSDI is a cash benefit paid
monthly to a disabled individual (SSI and SSDI use the same "disability"
definition) due to one of the following factual circumstances:
•
The disabled wage earner is himself or herself entitled to benefits due to
disability;
•
The spouse and/or children of a disabled wage earner are entitled to
dependent benefits; or
•
A disabled surviving spouse and surviving disabled or healthy children
can obtain survivor’s benefits.
SSI and SSDI are similar, in that benefits are paid to individuals to meet a
common definition of “disabled”. They differ in that SSI is a “welfare” program,
while SSDI is an “insurance” program.71 As a federal “insurance” program, SSDI
is not “needs based.”
How Coverage is Earned.
Social Security Disability Insurance (SSDI) is financed with Social Security taxes
paid by workers, employers, and self-employed persons. To be eligible for a
Social Security benefit, the worker must earn sufficient credits based on taxable
work to be "insured" for Social Security purposes. Disability benefits are payable
to blind or disabled workers, widow(er)s, or adults disabled since childhood, who
are otherwise eligible. The amount of the monthly disability benefit is based on
the Social Security earnings record of the insured worker.
To qualify for SSDI, the disabled recipient generally must have worked five out
of the last ten years. For individuals under 31 years old, the requirements are a
little different since they have not been in the work force as long.
There is no minimum age required to receive disability benefits as long as the
disabled individual meets the very strict Social Security definition of disability.
71
See 20 CFR §§ 416.1100 et seq.
51
But to qualify for SSDI, the disabled individual must have worked long and
recently enough under Social Security to earn the required number of work
credits.
Credits are the "building blocks" used to determine whether the applicant has the
minimum amount of covered work to qualify for each type of Social Security
benefits, including SSDI. A maximum of four work credits can be earned each
year. The amount of earnings required for a credit increases each year as general
wage levels rise.
Before 1978, credits were called "quarters of coverage", or QCs. Back then, a
worker received one QC or credit if he or she earned at least $50 in a three-month
calendar quarter. Since 1978, credits have been based upon total wages and selfemployment income during the year, no matter when the actual work is performed
during the year. Some workers might work all year to earn four credits, while
more highly compensated workers might earn enough for all four in a much
shorter length of time.
The amount of earnings it now takes to earn a credit changes each year. In 2009,
one credit is earned for each $1,090 of earnings. In 2009, a worker who earns at
least $4,360 during the year will receive the maximum four credits, even if that
$4,360 is earned in just one month.
Most individuals earn more credits than the minimum number you need to be
eligible for benefits. These extra credits don't increase the benefit amount,
however; benefits are based upon the worker’s average earnings.
The number of work credits you need for disability benefits depends on the age at
which the disability began. The rules for how much work is needed to qualify for
disability benefits are as follows:
•
Before age 24 -- An individual may qualify if six credits were earned in
the three-year period ending when the disability started.
•
Age 24 to 31 -- An individual may qualify if he or she has credit for
working half the time between age 21 and the onset of the disability.
•
Age 31 or older -- In general, an individual needs to have the number of
work credits shown in the chart below. Unless the individual is blind, the
disabled individual must have earned at least 20 of the credits in the 10
years immediately before becoming disabled.
52
Born after 1929,
Become Disabled At Age
Number of Credits You Need
31 through 42
20
44
22
46
24
48
26
50
28
52
30
54
32
56
34
58
36
60
38
62 or older
40
Income and Resource Rules. There are no resource or income limits for SSDI
eligibility. However, if the individual’s earned income in 2009 exceeds
$980 a month (after deducting the cost of impairment-related work
expenses), the person will likely not be considered disabled and therefore
may not be eligible for SSDI benefits.72
Benefits of Children with Disabilities.
A disabled adult child (a person age 18 or older) may receive SSDI based upon
the work record of his or her living parent (Social Security Dependent’s Benefits)
or a deceased parent (Social Security Survivors’ Benefits) if:
72
•
The adult child is blind or disabled;
•
The disability began before age 22 and the child has remained
continuously disabled;
•
The child is not doing any substantial work; and
•
The adult child's parent worked long enough to be insured under Social
Security and is receiving retirement or disability benefits or is deceased.
Supra, n. 1.
53
These benefits are often called Childhood Disability Benefits (“CDB’s”).73
SSDI monthly benefits are based on the worker’s primary insurance amount
("PIA") which is based on the worker’s indexed monthly earnings. The worker’s
benefit is based on a 100% of the PIA. A CDB of a worker is entitled to 50% of
PIA and, if the worker is deceased, this increases to 75%. A spouse’s benefit is
also available.
Medicaid
Source of Law. Federal Medicaid law is found in Title XIX of the Social
Security Act, 42 U.S.C. § 1396, and its regulations are in 42 C.F.R. Parts 430,
431, and 435. General information about Medicaid can be found at
http://www.cms.hhs.gov/home/medicaid.asp . Medicaid is a joint federal-state
program of medical assistance to eligible needy persons. SSI recipients are
usually eligible for Medicaid, but states have the option to apply more or less
restrictive guidelines and are known as Section 209(b) states.
State Options. States have three options for the determination of Medicaid
eligibility:
1) 209(b) states use at least one eligibility criterion more restrictive than the
SSI program. States have elected this option may not use more restrictive
standards than those in effect on January 1, 1972, and must provide for
Medicaid income spend down so that individuals may reduce their income
to the income eligibility level.74
2) SSI states use the SSI eligibility criteria for Medicaid but make their own
independent Medicaid determinations.75 The individual is eligible for
Medicaid if he or she is entitled to at least $1 per month of SSI benefits.
3) 1634 States use SSI eligibility criteria and have entered into an agreement
with the SSA for SSA to make Medicaid eligibility determinations.76 The
individual is automatically (i.e. "categorically") eligible for Medicaid if he
or she receives at least $1 per month of SSI benefits.
Medicaid Description Of Benefits.77 Medicaid is a financial means-tested
program designed to provide payment for medical care for aged, blind and
disabled individuals. There are over 50 different types of Medicaid programs.
Unlike Social Security, which is based on an insurance model (i.e., benefits are
based in part upon amounts contributed by the recipient), Medicaid is based on a
welfare model (i.e., benefits are based upon need).
73
Formerly called Disabled Adult Child (“DAC”) benefits.
The 209(b) states are: Connecticut, Hawaii, Illinois, Indiana, Minnesota, Missouri, Nebraska,
New Hampshire, North Dakota, Ohio, Oklahoma, Oregon, Utah and Virginia
75
The SSI states are Alaska, Idaho, Kansas, Nebraska, Nevada, Oregon, and Utah.
76
The 1634 States are the remaining states. The agreement between the state and SSA is authorized
by Section 1634 of the Social Security Act (42 USC § 1383c).
77
Supra, n. 1.
74
54
1) The federal Medicaid statute requires the states to pay for certain listed
medical services. Although these services are required, there is a huge
disparity in the availability and quality of these services at the state and
local level. Examples of these types of services include:
(a)
Inpatient hospital services
(b)
Outpatient hospital services
(c)
Physician services
(d)
Physical therapy
(e)
Prescribed drugs
(f)
Skilled and intermediate nursing services
(g)
Home and community care for individuals with disabilities
(h)
Community support living arrangement services
(i)
Personal care services
(j)
Case Management services
(k)
Emergency and non-emergency medical transport.
2) Some states have sought and have been granted special waivers to
provide Medicaid services to individuals who live at home rather
than in an institution. Waiver services can provide the following
home and community based services:
(a)
Case Management
(b)
Homemaker services
(c)
Home health aids
(d)
Personal care services
3) State Medicaid Plans must provide for home health care for all persons
entitled to nursing facility services.
4) Medicaid additionally provides Medicare cost-sharing coverage for
poor Medicare Beneficiaries (QMBs), and premium payments for near
poor Medicare beneficiaries (SLMBs), Qualified Disabled and
Working Individuals (QDWIs) and Qualified Individuals (QIs).
Collectively, these programs are called the Medicare Savings Programs
(MSPs).
5) Medicare Part D Low-Income Subsidy (LIS). Some form of LIS is
available to help pay the cost of Medicare Part D drug coverage for
Medicare beneficiaries with incomes up to 150 percent of the
federal poverty limit (FPL). Subsidies vary according to income,
Medicaid status and institutional status.
55
6) Group Health Insurance. The health insurance laws of some states provide
that the coverage of a dependent child shall not terminate upon the
attainment of a specified age when the child is and continues to be
both:
a)
incapable of self support by reason of a disability, and
b)
dependent upon the policy owner for support.
Medicaid Eligibility Requirements. In order to receive Medicaid benefits, the
applicant must be "categorically needy" by being aged (age 65 or older), blind, or
disabled. "Disabled" is defined as "the inability to do any substantial gainful
activity by reason of any medically-determinable physical or mental impairment
which can be expected to result in death or which has lasted or can be expected to
last for a continuous period of not less than 12 months." In addition, the person
must be a citizen or resident alien, and a resident of the state providing the
benefit.
Income Limits. Only low income individuals qualify for Medicaid. Some states,
called "income cap states", only provide benefits to individuals with income of
300% or less of the federal SSI benefit rate. (Excess income, however, is
disregarded if paid to a so-called Miller trust.) Other states provide nursing home
Medicaid to the extent that the recipient's actual income is less than the state
reimbursement rate paid to the facility. Income is viewed in monthly periods.
For institutionalized individuals, the recipient is generally only permitted to keep
a small monthly personal needs allowance ($40 per month in many states) and an
amount necessary to keep in force any supplemental health insurance policy, with
the balance of the recipient’s income being used to help pay for her or his care.
For a married recipient who is institutionalized, the community spouse is
permitted to keep all of his or her income, but if the community spouse's income
is less than a certain amount (referred to as the Minimum Monthly Maintenance
Needs Allowance [MMMNA], which is between $1,750 and $2,739, with the
amount in any given case being dependent upon a number of factors), the
community spouse is permitted to receive that portion of the institutionalized
spouse's income necessary to bring the community spouse's income up to the
MMMNA, which portion is referred to as the Monthly Income Allowance (MIA).
Resource Limits. Medicaid treats assets as either countable or exempt. Exempt
assets generally include the home, personal effects, one automobile, preneed
funeral contracts, permanent life insurance with a stated death benefit of $1,500 or
less, property essential for self-support, and a limited amount of rental property.
For single Medicaid recipients, countable assets must be $2,000 or less (or $1,500
or less if residing in some § 209[b] states.) For married couples, if both spouses
are Medicaid recipients, their combined countable resources are limited to $3,000
(or $2,250 if residing in Ohio, a § 209[b] state.) For married couples where one
spouse is institutionalized and one is living in the community, the institutionalized
spouse is permitted to keep either $2,000 or $1,500, and the community spouse is
permitted to keep a maximum of the "Community Spouse Resource Allowance"
56
(CSRA), which for 2009 is $109,560. Many states, however, limit the CSRA to
the lesser of $109,560 or one-half of the couple's countable assets determined as
of the beginning of the first continuous period of institutionalization (usually the
date the institutionalized spouse entered the hospital or nursing home). In no
event may the CSRA be less than a certain minimum amount, which is $21,912
for 2009.
Asset Transfers. In determining whether or not an applicant meets the resource
limits set forth above, the state will look for any uncompensated transfers made
within 60 months prior to the filing of the Medicaid application. This is referred
to as the "lookback period." Any uncompensated transfer creates a "period of
ineligibility", the length of which, in months, is determined by dividing the value
of the assets that were transferred by a "state divisor," which represents the
average monthly cost of a nursing home care throughout the state. The period of
ineligibility cannot exceed 60 months, unless a Medicaid application is filed
during a period of ineligibility, in which case there is no limit on the actual period
of ineligibility. The period of ineligibility does not begin until the applicant is
institutionalized and would otherwise be eligible for Medicaid coverage but for
the uncompensated transfer.
Medicaid Card. All Medicaid applicants who meet the categorical and financial
eligibility requirements receive a Medicaid Card each month that entitles them to
free medical care and prescriptions. A Medicaid Card may be issued to an
institutionalized individual who does not qualify for nursing home benefits (e.g.,
because of an unexpired period of ineligibility), thereby enabling the recipient to
be able to receive free physician care and prescription coverage but no assistance
with payment of nursing home costs.
Medicare
Source of Law. Medicare is authorized by Title XVIII of the Social Security Act.
The Medicare statute begins at 42 U.S.C. § 1395, and the regulations are in 42
C.F.R. parts 405-424. General information about Medicare can be found at
http://www.socialsecurity.gov/pgm/links_medicare.htm . Except for the amount
of the Part B co-pay (singles with income over $85,000 and joint filers with
income over $170,000 pay significantly higher premiums), Medicare is not means
tested, so the existence of an SNT for the benefit of the Medicare recipient would
have no effect upon benefits.
Individuals most often qualify for Medicare by turning age 65 and receiving
Social Security retirement benefits; however, persons under age 65 who have
received, or been entitled to receive, SSDI for 24 months are eligible for Part A
Medicare benefits as well. There is a shorter waiting period for persons with ALS
or renal failure. There are no resource or income limits for Medicare eligibility.
Medicare consists of four parts:
57
-
Part A – Hospital and skilled nursing care
Part B – Physician and outpatient hospital care
Part C – HMOs/Medicare Advantage
Part D – Outpatient prescription drug
Medicare Part A. Part A covers inpatient hospital services, post-hospital
extended care services, home health and hospice services. Psychiatric hospital
stays are limited to 190 days in the beneficiary's lifetime. Skilled nursing facility
stays are limited to 100 days and are 100% covered for only the first 20 days.
There may also be substantial deductibles and co-pays under Medicare.
A worker generally must have worked ten years and earned 40 credits (see “How
Coverage is Earned” under the discussion of SSDI, above) If the ten-year
requirement not met, a senior can buy in by paying a monthly premium ($443 for
2009). A covered individual can enroll at any time after 65; there is no
enrollment period. Part A coverage is free, as it is financed by 1.45% payroll tax
paid by employers and employees. An application for Social Security triggers
enrollment in Medicare Parts A & B, but the recipient can opt out of Part B.
Hospital coverage for 2009 is as follows:
Services
Semi-private
room and board,
general nursing,
and other
hospital services
and supplies.
Benefit
First 60 days
61st – 90th day
91 to 150th day*
Beyond 150th day
Medicare Pays
All but $1,068
All but $267 a day
All but $534 a day
Nothing
Co-Pay
$1,068
$267 per day
$534 per day
All costs
Part A also covers up to 100 days in a skilled nursing facility:
SERVICES
BENEFIT
Semi-private room and First 20 days
board, general nursing,
skilled nursing, and
rehabilitative services Additional 80 days
and other services and
supplies**
Beyond 100 days
MEDICARE PAYS YOU PAY
100% of approved Nothing
amount
All but $133.50 a
day
Up to $133.50 a day
Nothing
All Costs
Part A covers some home health care costs:
58
SERVICES
BENEFIT
MEDICARE PAYS
Part-time or intermittent Unlimited as long
skilled care, home
as you meet
health aide services,
Medicare
durable medical
conditions
equipment and supplies,
and other services.
YOU PAY
100% of approved Nothing for services;
amount; 80% of
20% of approved
approved amount for amount for durable
durable medical
medical equipment
equipment
"Custodial care" is not covered. This is care that could be given safely and
reasonably by a person who is not medically skilled and that is given mainly to
help the patient with daily living such as walking, bathing and dressing. There is
no coverage for custodial care even if performed in a skilled nursing facility or
home health care environment.
Medicare Part B. Medicare Part B covers physicians, diagnostic tests, medical
equipment, ambulances, outpatient physical and speech therapy. Any person
eligible for Part A may enroll and pay the premium for Part B coverage. The
2009.base premium is $96.40 per month for those with annual income of up to
$85,000 (single) or $170,000 (married couple), and increases as shown on the
following table:
You Pay
If Your Yearly Income is
Single
Married Couple
$96.40
$85,000 or less
$170,000 or less
$134.90
$85,001-$107,000
$192.70
$107,001-$160,000 $214,001-$320,000
$250.50
$160,001-$213,000 $320,001-$426,000
$308.30
Above $213,000
$170,001-$214,000
Above $426,000
A 10% surcharge per year is assessed for each year that an individual fails to
enroll in Part B. Unlike Part A, which has no enrollment period, after the initial
enrollment period, an individual can only enroll during first three months of each
year, with coverage starting the following July 1.
Part B coverage for 2009 is as follows:
59
BENEFIT
SERVICES
Doctors services,
inpatient and outpatient Unlimited if
medical and surgical
medically
services and supplies, necessary
physical and speech
therapy, diagnostic
tests, durable medical
equipment
MEDICARE PAYS
YOU PAY
80% of approved amount
(after $135 deductible) $135 deductible plus 20%
of approved amount and
50% of approved
limited charges above
charges for most
approved amount
outpatient mental health
services
Part B also pays for 100% of many lab tests, if medically necessary.
Medicare Part C. Medicare Part C is called “Medicare Advantage” (prior to
2006, Part C was known as Medicare+Choice). It consists of:
•
•
•
•
Medicare Health Maintenance Organization (HMOs)
Preferred Provider Organizations (PPO)
Private Fee-for-Service Plans
Medicare Special Needs Plans
SSA’s web site states:
To join a Medicare Advantage Plan, you must have Medicare Part A and
Part B. You will have to pay your monthly Medicare Part B premium to
Medicare. In addition, you might have to pay a monthly premium to your
Medicare Advantage Plan for the extra benefits that they offer.
If you join a Medicare Advantage Plan, your Medigap policy won’t work.
This means it won’t pay any deductibles, copayments, or other costsharing under your Medicare Health Plan. Therefore, you may want to
drop your Medigap policy if you join a Medicare Advantage Plan.
However, you have a legal right to keep the Medigap policy.
Medicare Part D. Part D is the prescription drug benefit, which began January 1,
2006. Part D is not part of the traditional Medicare program; however, it is
available for all individuals who are entitled to Part A or enrolled in Part B.
Unlike Parts A and B, however, a Medicare recipient must affirmatively enroll in
Part D. Part D is offered through private insurance plans:
•
•
•
Prescription drug plans (PDPs)
Medicare Advantage Plans (MA-PDs)
Some employers and unions to retirees
One must enroll in a Part D plan that serves his or her geographic region.
60
25.5% of program cost will be financed by beneficiary premiums and 74.5% out
of the government general revenue. Benefit amounts are indexed. Part D has a
standard benefit:
Medicare
Benefit
(95%)
$6,154
5% Co-ins
min. $2.40/$6
100%
Coinsurance
(“donut hole”)
$4,350 outof-pocket
reached
$2,700
Medicare
Benefit
(75%)
$295
25% Co-ins
($500)
$295 deductible
In general, the enrollment periods for PDPs and MA-PDs are similar. There are
three enrollment periods:
•
Initial Enrollment Period (IEP);
•
Annual Coordinated Election Period (AEP) is from November
15 - December 31 of each year;
•
Special Enrollment Period (SEP). This is available to those
who move out of the plan service area, individuals who enter or
leave long-term care facility, and those who face an
involuntary loss, reduction, or non-notification of creditable
coverage.
MA-PDs also have an open enrollment period which is January through March.
61
There is a 1% penalty per month for every month that individual waits to enroll
after becoming initially eligible.
For those turning 65, there is a seven-month enrollment period that begins three
months before eligibility for Medicare prescription drug coverage, that includes
the month of eligibility and that ends three months after eligibility for Medicare
prescription drug coverage.
Once a Part D plan has been selected, there are limitations on the ability to switch
plans. Most individuals can only change PDPs during the enrollment period.
Those who choose a MA-PD plan can change to traditional Medicare with or
without a PDP or another MA plan with or without Rx coverage during the first
three months of the year. Dual-eligibles (those eligible for both Medicare and
Medicaid), however, can change once per month.
There is a low income subsidy for individuals who fall within one of three groups:
„ Group 1
– Full-benefit dual eligibles with incomes at or below 100% Federal
poverty level (FPL). The 2009 FPL amounts are as follows:
Persons in family
Poverty guideline
1
$10,830
2
14,570
3
18,310
4
22,050
5
25,790
6
29,530
7
33,270
8
37,010
For families with more than 8 persons, add $3,740 for each additional per
„ Group 2
– Full-benefit dual eligibles above 100% of FPL; Qualified Medicare
Beneficiary (QMB), Specified Low Income Medicare Beneficiary
(SLMB), Qualified Individual (QI), SSI-only, or non-dual eligible
beneficiaries with incomes below 135% FPL and limited resources
as shown below.
„ Group 3
– Beneficiaries with incomes below 150% FPL and limited
resources.
62
The low income subsidy is as follows:
Group 1
Premium
(varies)
Deductible $295/year
Coinsurance up to
$4,350 out of pocket
Catastrophic 5% or
$2.40/$6.00 copay
Group 2
$0
$0
$0
$0
$1.10/$3.20
copay
$0
$2.40/$6.00
copay
$0
Group 3
Sliding scale based on
income
$60
15% coinsurance
$2.40/$6.00 co-pay
In addition to the income limit, there is a resource limit. The resource limit
required for beneficiaries to qualify for the full low-income subsidy for 2009 is
$6,600 ($9,910 if married). The resource limit required to qualify for partial lowincome subsidies is $11,010 ($22,010 if married) for 2009.
LIS Level
Full Subsidy
LIS
All Other LIS
Marital
Status
Single
Married
Single
Married
2008 LIS Resource
Limit*
$7,790
$12,440
$11,990
$23,970
2009 LIS Resource
Limit*
$8,100
$12,910
$12,510
$25,010
PDPs and MA-PDs may have a formulary. CMS will ensure formularies do not
discourage enrollment among certain groups of people. Plans can change their
formularies upon 60 days notice. CMS has developed model guidelines for plans
to use in deciding which drugs to include. The guidelines set 146 types of
medications in 41 therapeutic categories, and a formulary must include two drugs
in each class, and in each category if the category does not have classes. Plans
that use the categories & classes in Guidelines deemed not to discriminate. Plans
can choose which drugs to include in the classes and categories, however all plans
must use the same formulary for participants who reside in long-term care
facilities and for those who do not.
Medicare and SSDI Recipients. SSDI beneficiaries are entitled to Part A
Medicare benefits after 24 months of qualified disability, one month waiting
period for a person disabled with ALS (a.k.a. “Lou Gehrig’s Disease”) and no
waiting period for people on kidney dialysis. SSDI beneficiaries who are eligible
for Medicare Part A benefits may enroll for Medicare Part B benefits but must
pay a premium of $96.40 per month in 2009. Part B benefits cover physicians’
charges.78
78
Supra n. 1.
63
Veteran’s Benefits
The U.S. Department of Veterans Affairs (“VA”) administers benefits for
veterans, their children and other dependents, their parents, and their surviving
spouses.
Links
to
various
VA
benefits
can
be
found
at
http://www.vba.va.gov/VBA/benefits/factsheets/#BM1
Full survivor benefits can be paid to surviving spouses at full retirement age
(currently 65), reduced benefits at age 60, and benefits as early as age 50 to
disabled widows or widowers. There is no age limit if the surviving spouse is
caring for the decedent’s child who is under age 16 or disabled and receiving
Social Security benefits. Unmarried children under age 18 (or up to age 19 if they
are attending high school full time), as well as dependent parents age 62 or older,
are also eligible for survivor benefits. The benefits available to dependents and
survivors of the veteran include Dependency and Indemnity Compensation
(“DIC”) and, in certain circumstances, home loans.
It is the position of the VA that assets held in a (d)(4)(A) or (d)(4)(C) trust or
account are treated as resources in computing the claimant’s net worth for pension
purposes.
Subsidized Housing
Federal Subsidized Housing. The U.S. Department of Housing and Urban
Development (“HUD”) offers programs to provide subsidized rent to low income
families, the elderly, and persons with disabilities. These programs are
particularly important to SSI recipients, because of the low level of SSI benefits.
Section 8 is a subsidy to assist with monthly housing costs.
For federal housing programs, the household pays a portion of monthly housing
costs based on the income of the household. This portion is usually equal to 30
percent of the household’s monthly adjusted income. Income limits to qualify
vary by area of the country and are based upon the median income for each area.
Unlike other means tested public benefits, federal housing programs determine
eligibility only with reference to income, which includes SSDI and SSI payments.
In addition to regular income, Section 8 also counts income derived from “net
family assets”, which generally is the greater of the actual income derived from
those assets, or a percentage of their value based upon current passbook savings
rates.
Eligibility is based upon the family’s annual income, both earned and unearned,
which includes SSI and SSDI. In addition to income, if the assets of the family
exceed $5000, a percentage of the value of such assets based on the current
passbook savings rate, as determined by HUD, can added to income. For Housing
Choice Vouchers, public housing, and project-based Section 8, total income may
not exceed 80% of the “area median income” or AMI, for the area in which the
applicant resides. Income may not exceed 60% of the AMI for the Low Income
Housing Tax Credit, or 50% for supportive housing for the elderly and disabled.
64
Because the number of applicants eligible for these benefits exceeds the available
resources, HUD also uses “income targeting,” which directs a certain percentage
of new admission to families with income below 30% of the AMI.
Federal subsidized housing programs have no asset limits, but, as described
above, imputed interest on the value of assets in excess of $5000 is added to
income. For this purpose, there is a two year lookback period, and assets
transferred without adequate consideration will still be considered as being
owned. This rule applies to assets transferred to self-settled SNTs.
The rental rate for subsidized housing generally is 30% of the recipient’s income.
Section 8. The Section 8 Rental Voucher Program increases affordable housing
choices for very low-income households by allowing families to choose privately
owned rental housing. This HUD program is administered at the local level by
local public housing authorities (“PHA”) or metropolitan housing authorities
(“MHA”), which generally pay the landlord the difference between 30 percent of
household income and the PHA-determined payment standard, which typically is
about 80% - 100% of the fair market rent (FMR). That difference is called the
“voucher.” The household may choose a unit with a higher rent than the FMR
and pay the landlord the difference or choose a lower cost unit and keep the
difference.
Through the Section 8 Rental Voucher Program, the administering housing
authority issues a voucher to an income-qualified household, which then finds a
unit to rent. If the unit meets the Section 8 quality standards, the PHA then pays
the landlord the amount equal to the difference between 30 percent of the tenant's
adjusted income (or 10 percent of the gross income or the portion of welfare
assistance designated for housing) and the PHA-determined payment standard for
the area. The rent must be reasonable compared with similar unassisted units.
Disabled individuals typically will qualify for rent vouchers. These program
benefits are described in two HUD handbooks. Handbook No. 4350.3 entitled
“Occupancy Requirements of Subsidized Multifamily Housing Programs,” can be
found at: http://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4350.3/index.cfm
and the “Section 8 Housing Choice Voucher Program Guidebook” can be found
at: http://www.hud.gov/offices/adm/hudclips/guidebooks/7420.10G/7420g05GUID.pdf .
While Section 8 has no asset transfer penalties per se, “net family assets” does
include assets disposed of without adequate consideration during the two years
prior to applying for benefits.
Special Needs Trusts and Section 8. Section 8 has its own independent rules
regarding the treatment of trusts, in general, and special needs trusts, in particular,
which are found in Section 5-7(G) of Handbook 4350.3 referred to above.
65
“b.
How to Treat Trusts.
1. The basis for determining how to treat trusts relies on information
about who has access to either the principal in the account or the
income from the account.”
*
*
*
3. Nonrevocable trusts. If no family member has access to either the
principal or income of the trust at the current time, the trust is not
included in the calculation of income from assets or in income. The
basis for determining how to treat trusts relies on information
about who has access to either the principal in the account or the
income from the account.”
If a close family member serves as trustee of the SNT, especially one who resides
with the beneficiary, the trust will likely be treated as a net family asset from
which income will be attributed to the beneficiary.
In a classic example of the lack of coordination between federal benefit programs,
the treatment of self-settled (d)(4)(A) trusts can be even worse, as the funding of
such a trust by a beneficiary who is disabled is not exempt, as demonstrated by
the following two examples from Handbook 4350.3:
Example – Nonrevocable Trust Distributing Income to the
Creator/Tenant
Reggie Bouchard has established a nonrevocable trust in the amount of
$35,000 that no one in the family controls. Income from the trust is paid to
Reggie. Last year, he received $3,500.
The [apartment] owner will count Reggie’s actual anticipated income from
the trust in next year’s annual income.
Because the asset was disposed of for less than fair market value (see
paragraph 5.7 G.6), the value of the asset given away, $35,000, is
counted as an asset disposed of for less than fair market value for two
years.
66
Example – Special Needs Trust
Daryl Rockland is a 55-year old person with disabilities, living with his
elderly parents. The parents have established a special-needs trust to
provide income to their son after they are gone. The trust is not
revocable; neither the parents nor the son currently have access to the
principal or interest. In calculating the income of the Rocklands, the owner
will disregard the trust. [emphasis added]
Temporary Assistance for Needy Families (“TANF”)
The Office of Family Assistance, which is a part of the federal Department of
Health and Human Services, administers the Temporary Assistance for Needy
Families (TANF) program. TANF provides assistance and work opportunities to
needy families by granting States the federal funds and wide flexibility to develop
and implement their own welfare programs.
TANF is a block grant program to help move recipients into work and turn
welfare into a program of temporary assistance. Under the welfare reform
legislation of 1996, TANF replaced the old welfare programs known as Aid to
Families with Dependent Children (AFDC), the Job Opportunities and Basic
Skills Training (JOBS) program and the Emergency Assistance (EA) program.
The law ended federal entitlement to assistance and instead created TANF as a
block grant that provides States and tribes federal funds each year. These funds
cover benefits, administrative expenses, and services targeted to needy families.
As with many block grant programs that are administered at the state level, rules
can vary greatly. Generally, SNT distributions that are made directly to the
beneficiary will be treated as income for TANF purposes.
TANF recipients are usually eligible for Medicaid.
67
APPENDIX B
Issues to consider in administering Special Needs trusts
Prepared by Joanne Hindel79
1.
Liability for benefits
Most trust agreements provide that the assets of the trust are to supplement
the benefits the beneficiary receives under applicable federal and state
programs.
The trust terms do not usually specify who is responsible for applying for
the benefits or ensuring their continued availability to the beneficiary.
The terms also do not specify who is to coordinate the interplay of the
benefits with the funds available from the trust.
A trustee should seek to have these duties clarified - either that the trustee
or someone else is responsible for these functions.
2.
Education and expertise of trust professionals
If the trustee is to be responsible for the interplay of governmental benefits
with funds available from the trust, then the trustee must obtain the
requisite education and expertise to handle this properly.
This represents training beyond that normally needed for acting as a
trustee and should be undertaken only when the account load warrants
such additional training. In other words, trustees should not take on SNTs
casually, but should dedicate the training and cost to handling them
properly.
3.
Outside professionals
Because of the unique needs of the beneficiaries of SNTs, often, numerous
other professionals will continue to be involved in handling their affairs.
These may include social workers, life care planners, therapists, home
health aides, special educators etc.
It is likely to fall upon the trustee to manage the activities of these other
professionals as well as pay all or a part of their services.
This requires additional time and sufficient familiarity both with the needs
of the beneficiary as well as the nature and adequacy of the services these
other professionals can provide.
79
Joanne Hindel is a vice president and Senior Personal Trust Officer with Fifth Third Bank,
Cleveland Ohio.
68
4.
Hiring employees
In conjunction with the management of outside professionals, SNT
trustees often will have to hire ongoing aides for the trust beneficiaries to
assist them in activities of daily living. This assistance may be from family
members, who may or may not get paid, and from others. The trustee has
to address licensing and bonding issues and often has to address employee
turnover due to the nature of the work involved.
The trustee has to consider who will be responsible for the hiring, staffing,
tax reporting etc of these employees.
5.
Oversight by courts
Often, court authority establishes SNTs and many courts continue to
exercise some degree of oversight; either by virtue of requiring periodic
court accountings or by requiring that all expenditures from the trust are
approved first by the court.
It is essential that the trustee understand each court's practices which may
not be reduced formally to local rules and which may vary considerably
from county to county. If the trustee acts without obtaining the requisite
court approval, sanctions against the trustee are possible.
It is therefore also essential that the trustee has the authority and continues
to employ the assistance of counsel that drafted the SNT so that court
interaction can be handled through the law firm.
6.
Duration of trust
Unlike most other trusts, SNTs generally are of shorter duration, in large
part because the beneficiaries often have shortened life expectancies. In
addition, these trusts do not continue for successive lives, as do other
trusts.
In addition to shorter duration, the expenditures from these trusts, especially
at the outset, are often significant. This is often a function of pent-up
needs of the beneficiaries that have been placed on hold while litigation
continues.
The nature of these trusts is also unique in that they are not necessarily
expected to last for a beneficiary's lifetime and often are designed to be
depleted during that lifetime.
The administration and, particularly, the investment management of these
trusts are therefore rather different than the typical trust.
69
7.
Expectations of beneficiaries
Most of the beneficiaries of SNTs are individuals who are not accustomed
to having sums of money available to them. The establishment of the trust
and the receipt of funds are often perceived as a tremendous source of
wealth with little or no understanding of the cost of care and services for
them for their lives.
Many times, the beneficiaries themselves are incompetent or of limited
competence and the family members view the funds as unlimited.
The opportunity for the trustee to "educate" either the beneficiary or the
caregivers regarding the limited nature of the funds given the anticipated
costs is not usually available. This leads to continuing frustration by all
parties involved.
8.
Trustee compensation
Given the unique nature of these trusts and the aforementioned additional
areas of responsibility for the trustee, fees charged for the administration
of these trusts should be carefully reviewed. They may warrant additional
charges for the additional trustee exposure and involvement; however, fees
may be curtailed by court rule or lack of familiarity on the part of those
establishing the trust.
70
REFORMING TRUSTS; FIXING PROBLEMS
a presentation for
The American College of Trust and Estate Counsel
by
Stuart D. Zimring
March 3-9, 2009
REFORMING TRUSTS; FIXING PROBLEMS
1.
Introduction
It appears to be axiomatic that, at the very least, first-party or self-settled Special
Needs Trusts (“SNTs”) are drafted as “irrevocable” trusts.1 Presumably this is to satisfy
the requirement of 42 U.S.C. §1396p(d)(4)(A) which requires such self-settled trusts to
be “...established for the benefit of such individual...”, the argument being that if the trust
were revocable, the settlor could revoke the trust or utilize its assets for the benefit of
someone other than the beneficiary.
Unfortunately, an uncritical analysis of this strategy leads many drafters (and even
more unfortunately, some interpreters), to the conclusion that because the trust is
irrevocable, it is un-modifiable and therefore the beneficiary and the trustee are locked
in to the trust’s seemingly immutable provisions, regardless of whether those provisions
are appropriate to the then-existing circumstances.
Fortunately, this is not true. First, as will be seen below, proper drafting can
obviate the draconian consequences of “irrevocability” equaling “unmodifiable” and,
even better, current trust law in most jurisdictions establishes statutory bases upon which
interested parties can obtain judicial relief.
A.
Definitions
1.
“Irrevocable” means: “not to be revoked or recalled; unable to be repealed
or annulled.”2
2.
“Modification” means “the state of being modified; partial alteration”3
1
See generally Clifton B. Kruse, Jr. Third-Party and Self-Created Trusts, Third Edition (ABA 2002).
2
Random House Dictionary of the English Language, unabridged edition, Random House, 1966.
3
Id.
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and “Amendment” means “a change made by correction, addition or deletion.”4
3.
Thus, logically, there is nothing in the definition of “irrevocable” that
prevents an “irrevocable” document from being “amended” or “modified” (and
for the balance of this paper, the terms “modification” and “amendment” will be
used interchangeably). The analogy the author uses with clients in discussing the
concept is that of a wine bottle (a natural metaphor as those who know the author
will attest). If the bottle is the trust, the contents of the bottle (or a portion
thereof) can be poured out and new wine added without changing the nature of
the bottle; it is still a bottle of wine, albeit with different contents. This paper will
discuss the various methods of changing the contents of the bottle and ultimately,
disposing of the bottle.
2.
Modification
A.
Revocable Trust v. Irrevocable Trust
1.
A SNT established by a third party settlor for the benefit of a disabled
beneficiary and funded with the settlor’s assets (not the disabled beneficiary’s),
(a “third party” SNT), could certainly be created as a garden variety, revocable
inter vivos trust. Since the assets of the trust are not the disabled beneficiary’s,
the trust is not subject to any of the rules covering self-settled, or “first party”
SNTs, discussed below. If the trust is revocable, it is, by definition, modifiable
and terminable at the whim of the settlor.5 Since modifying or terminating such
trusts is inherent in their structure, they will not be discussed further here.
However, it should be kept in mind that such trusts frequently become
irrevocable upon the death of the settlor and at that point, may well be subject to
the considerations discussed below.
4
Id.
5
See Restatem ent of Trusts 3d, §63. See also, for exam ple, California Probate Code §§15400 et
seq. And Florida Statutes §733.707(3).
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2.
Most commonly however, SNTs are created as irrevocable trusts and
therefore, this discussion will focus on the reasons and methods for modifying
and ultimately terminating irrevocable SNTs.
B.
When & Why
1.
As will be discussed below, a properly drafted SNT will contain
provisions permitting its modification any time and for any reason that is
appropriate under the circumstances. What those circumstances are will depend
on the nature of the individual trust, the primary beneficiary’s condition, the
trust’s assets and any other factors the drafter deems appropriate.
On the other hand, many older SNTs and those drafted by inexperienced
draftspersons do not contain provisions permitting modification. Unfortunately,
it is these trusts, more than others, that frequently are in need of modification in
order to “fix” problems that have arisen because of unanticipated situations.
These situations can involve the status of the trust’s beneficiary, changes in the
law, changes in the situs of the trust or changes in the trust’s corpus. In all of
these cases, “fixing” the “problem” will probably involve modifying or
sometimes revoking the trust.
2.
The Restatement of Trusts sets forth a number of bases upon which a trust
can be modified or revoked:
“The Settlor of an inter vivos trust has the power
to revoke or modify the trust to the extent the
terms of the trust so provide6
If the Settlor fails to expressly make provision for
revocation or amendment, the question is one of
interpretation.”7
6
Restatem ent of Trust 3d, §63(1).
7
Restatem ent of Trusts 3d, §63(2).
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3.
The Restatement further provides that the trust itself may grant the
trustee, beneficiaries or third parties powers regarding modification or
revocation.8
4.
Under the Restatement, irrevocable trusts can be modified or terminated
by the consent of all the beneficiaries unless such termination or modification
would be inconsistent with a material purpose of the trust, in which case the
consent of the settlor is required or, if the settlor is deceased, a court determines
that the reason(s) for the modification or termination outweigh the material
purpose.9
5.
Finally, the Restatement holds that a court may modify administrative or
distributive provisions of the trust if circumstances not anticipated by the settlor
require such modification to further the purposes of the trust.10 In fact, the
Restatement goes so far as to state that it is the duty of a trustee to seek such
relief in circumstances where to fail to do so could cause substantial harm to the
trust or its beneficiaries.11
C.
By The Trustee
1.
By far one of the most common provisions authorizing modification vests
that power in the trustee. For example:
“The Trustee may, in the Trustee’s sole and
absolute discretion, amend this Trust to conform
with subsequent changes in federal or state law or
regulations established thereunder in order to
8
Restatem ent of Trusts 3d, §64.
9
Restatem ent of Trusts 3d, §65.
10
Restatem ent of Trusts, 3d. §66(1).
11
Restatem ent of Trusts, 3d. §66(2).
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better effect the purposes of the Trust. The
Trustee shall disclose any Trust amendment with
the next annual accounting. Further, the Trustee
may petition to a court with jurisdiction over the
Trust, or to a court where the Beneficiary lives, or
where the Trust has property, for authority to
amend the trust to better effect the purposes of the
Trust.”12
A more comprehensive clause:
“This trust is irrevocable and unamendable;
provided however, that in the event that any
provision of this trust fails to meet the financial
eligibility requirements of any program of meanstested public benefits for which the beneficiary is
or may be eligible, the then-acting trustee or
trustees may, in his, her or their discretion, amend
the trust to ensure eligibility for such benefits.
Any such amendment shall be in a writing dated
and signed by the trustee or trustees and dulyacknowledged. In no event shall said trustee have
any power or authority under this Article which
shall constitute a general power of appointment
under Internal Revenue Code section 2041 and
applicable regulations. In addition, nothing herein
shall be construed as depriving any person of the
right to seek modification or reformation of this
under California Probate Code sections 1540015414, or other California Probate Code sections
then in effect that govern such trusts. In no event
shall the beneficiary have any right or power to
alter, amend, revoke or terminate the Trust, or any
of the terms of the Trust instrument, in whole or
in part. Furthermore, the beneficiary shall have no
right, power or legal authority to direct the use of
the trust corpus for the beneficiary’s own support
and maintenance.”13
12
Mary T. Schm itt Sm ith, “A Trust Dissected: Article By Article”, Stetson University College of Law,
Special Needs Trusts, 1999.
13
Sterling L. Ross, Jr. ,Special Needs Trusts, in Drafting California Irrevocable Trusts, 3d Edition,
619, 660 (John R. Cohan, editor, Continuing Education of the Bar - California 2004).
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2.
There is nothing wrong in granting this power to the trustee so long as the
trust’s author is confident in the identity and ability of the trustee or successor
trustee to act in an appropriate manner. If the various named trustees are all
either professionals or persons or entities independent and neutral to the
beneficiary, this is probably not a problem. On the other hand, if the trustee (or
any of them) is a person who may, potentially, be adverse to the beneficiary,
problems can arise.
3.
For example, if the trustee (or a successor trustee) is a sibling of the
beneficiary and therefore, presumably a remainder beneficiary, such a person
could easily be put in an adversarial posture to the beneficiary. (This problem
would as easily occur in connection with discretionary distributions, but this
paper will not deal with that issue or the more critical issue of whether or not it
is appropriate to appoint a potentially adverse party as trustee in these
circumstances.) If the trustee has the authority to modify the trust when
appropriate (or necessary), but chooses not to do so, has the trustee breached his
or her fiduciary duty? If the decision is within the discretion of the trustee (and
most carefully drafted SNTs will go overboard to make sure everything is within
the discretion of the trustee), can the non-exercise of that discretion be
questioned, and if so, by whom?
4.
It is inherent in trust law that the trustee must act in a fiduciary capacity.
The Restatement, in defining what a trust is, states:
“A trust, as the term is used in this Restatement
when not qualified by the word ‘resulting’ or
‘constructive,’ is a fiduciary relationship with
respect to property, arising from a manifestation
of intention to create that relationship and
subjecting the person who holds title to the
property to duties to deal with it for the benefit of
charity or for one or more persons, at least one of
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whom is not the sole trustee.” [emphasis added] 14
5.
Comment “b” to Restatement §2 goes on to state:
“Despite the differences in the legal circumstances
and responsibilities of various fiduciaries, one
characteristic is common to all: a person in a
fiduciary relationship to another is under a duty to
act for the benefit of the other as to matters within
the scope of the relationship.”15
6.
Thus, whether or not the trust document specifically sets forth language
regarding the trustee’s duty vis a vis the beneficiary, it can (and should) be argued
that the trustee, simply by virtue of his or her office, has a duty to the beneficiary
to act in an appropriate manner. However, in the context of this discussion, if the
trustee is the holder of the authority to modify the trust and elects not to do so for
personal gain, who will act to protect the beneficiary’s interest if the beneficiary
is unable to do so?
D.
By Third Party
1.
It is with that question in mind, i.e. “Who will protect the beneficiary if
the trustee does not, or turns out to be adverse to the beneficiary?”, that some
drafters utilize the office of a “trust protector” or “special trustee,” either
individually or as a member of a committee.
2.
Commonly, a trust advisory committee, a trust protector or a special
trustee (hereafter simply referred to as a “trust protector”) fulfills a number of
roles. The trust protector may advise the trustee on specific needs of the
beneficiary. The trust protector may have authority to direct the trustee to make
specific types of distributions for the benefit of the trustee. In appropriate
14
Restatem ent 3d, §2.
15
Restatem ent 3d, §2, Com m ent b.
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circumstances (especially when there is only one trust protector rather than a
committee), it may be appropriate to vest the modification power in the trust
protector rather than the trustee.
3.
As noted above, vesting the power in the trust protector rather than in the
trustee is particularly appropriate where the trustee (or a successor trustee) may,
in certain circumstances, have a potentially adverse relationship to the
beneficiary. In such cases, the trust can provide that where such a conflict arises,
any powers held by the trustee automatically default to the trust protector.
Alternatively, to avoid any question as to when such powers are granted to the
trust protector, the document can specifically set forth the powers that vest in the
trust protector.
4.
A sample of the first kind of clause is:
~___, ~___ and ~___ are appointed the initial
members of the Trust Advisory Committee.
There shall always be an odd number of members
of the Trust Advisory Committee, with a
minimum number of ~___. All actions of the
Trust Advisory Committee shall be by unanimous
vote of the members of the Trust Advisory
Committee acting from time to time. Any
member of the Trust Advisory Committee shall
have the right to resign at any time. The members
of the Trust Advisory Committee, from time to
time, may appoint new members of the Trust
Advisory Committee to act along with the
members then acting, or to act as successors to
them. Also, the members of the Trust Advisory
Committee, from time to time, may remove a
member of the Trust Advisory Committee with
the approval of the court having jurisdiction over
the Trust. Any such appointment or removal shall
be in writing and shall be filed with the records of
the Trust. No bond shall be required of any
person acting as a member of the Trust Advisory
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Committee.
The Trust Advisory Committee shall have the
power and authority, in its discretion, to determine
and direct the Trustee concerning payments to be
made to or for the benefit of the Beneficiary
during his/her lifetime. Notwithstanding any
provisions of this instrument to the contrary,
payments by the Trustee to or for the benefit of
the Beneficiary shall be made only upon direction
of the Trust Advisory Committee. In all respects
other than the discretion granted to the Trust
Advisory Committee to direct payments to or for
the benefit of the Beneficiary, the Trustee shall
have all the rights, titles, interests, powers, duties,
and discretions in connection with the
administration and management of the Trust.
5.
The second kind of clause would simply substitute the trust protector for
the trustee in the clause set forth in paragraph C.1, above.
6.
Scope of Authority
(a)
If the drafter of the trust elects to give a party the authority to
modify the instrument, consideration must be given to (a) what can be
modified and (b) the impact of the authority given on both the beneficiary
and the trust.
(b)
The clause set forth in paragraph C.1 above, gives the trustee the
authority to modify the trust under certain, specified circumstances. The
underlying rationale of the grant of authority is set forth to both guide the
trustee and any judicial interpreter of the instrument.
(c)
On the other hand, there may well be situations where a broader
grant of authority would be appropriate. For example, if an SNT is being
established for a young child whose ultimate prognosis is unknown, but
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at the time the trust is being established is greatly in need of various
services public benefit agencies can supply, the drafter may want to
authorize the trustee to liberalize the distribution provisions to take into
account improvements in the beneficiary’s condition or advances in
medical or other therapies. In such cases, the drafter should exercise
caution so as not to create too much flexibility which might lead to an
attack on the trust as being “available” to the beneficiary by virtue of the
trustee’s authority.
(d)
Further, where the trustee is a remainder beneficiary, care should
be exercised in not granting so much authority to the trustee to modify the
trust that it can be argued that there has been a merger16 or the creation of
a general power of appointment which would subject the trust corpus to
taxation in the trustee/remainder beneficiary’s estate.17 In reality, this
particular problem is more likely to occur in termination situations
discussed below, than in modification situations.
(e)
Finally, another alternative is to give a party the right to remove
and replace the Trustee. While this does not give that party or the Trustee
the power to modify the terms of the trust per sé, it does give the party a
strong element of control over the conduct of the Trustee.
E.
By Court
1.
Where the trust is silent on the subject of modification, statutes frequently
offer relief, following the Restatement position.
16
See Restatem ent of Trusts, 3d., §69: “If the legal title to the trust property and the entire
beneficial interest becom e united in one person, the trust term inates.”
17
IRC §§2041(a)(2) and 2514(b). A general power of appointm ent is any power possessed by the
donee to appoint assets in favor of the donee, the donee’s creditors, the donee’s estate or the creditor’s of
the donee’s estate.
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2.
For example, Florida law authorizes judicial modification of a trust under
certain circumstances:
737.4031 Judicial modification of trusts.-(1) If the purposes of a trust have been fulfilled or
have become illegal or impossible to fulfill or, if
because of circumstances not known to or
anticipated by the settlor, compliance with the
terms of the trust would defeat or substantially
impair the accomplishment of a material purpose
of the trust or, if a material purpose of the trust no
longer exists, upon the application of a trustee of
the trust or any beneficiary a court at any time
may modify the terms of a trust which is not then
revocable to:
(a) Amend or change the terms of the trust,
including terms governing distribution of the trust
income or principal, or terms governing
administration of the trust;
(b) Terminate the trust in whole or in part;
(c) Direct or permit the trustee to do acts that are
not authorized or that are prohibited by the terms
of the trust; or
(d) Prohibit the trustee from performing acts that
are permitted or required by the terms of the trust.
(2) Upon the application of a trustee of the trust
or any beneficiary, a trust which is not then
revocable may be modified at any time by a court
as provided in subsection (1), and without regard
to the reasons for modification provided in
subsection (1), if compliance with the terms of the
trust is not in the best interest of the persons
having a beneficial interest in the trust.
(a) The court shall exercise its discretion to order
a modification of the trust under this subsection in
a manner that conforms to the extent possible with
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the intention of the settlor, taking into account the
current circumstances and best interests of the
beneficiaries.
(b) This subsection shall not apply to a trust
created prior to January 1, 2001.
(c) This subsection shall not apply to a trust
created after December 31, 2000, if:
1. Under the terms of the trust, all beneficial
interests in the trust must vest or terminate within
the period prescribed by the rule against
perpetuities in s. 689.225(2), notwithstanding s.
689.225(2)(f).
2. The terms of the trust expressly prohibit
judicial modification.
(d) Modification of a trust, as authorized in this
subsection, is not prohibited by a provision in the
trust instrument that prohibits amendment or
revocation of the trust if the provision does not
expressly prohibit judicial modification.
(3) In exercising its discretion to order a
modification of a trust under this section, the court
shall consider the terms and purposes of the trust,
the facts and circumstances surrounding the
creation of the trust, and extrinsic evidence
relevant to the proposed modification.
(4) To the extent the interests of any person with
a beneficial interest in the trust who is unborn or
unascertained, whose identity is not then known
for any reason, or who is a minor or under a legal
disability are not represented by another
beneficiary, such person shall be represented by
the person's legal guardian, if any, or, if none, by
a guardian ad litem appointed by the court upon
the court's own motion or upon application by the
trustee or any beneficiary.
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(5)
The court shall consider spendthrift
provisions as a factor in making a decision
whether to modify a trust under this section, but
the court is not precluded from exercising
authority to modify the trust because the trust
contains spendthrift provisions.
(6) For purposes of this section:
(a) "Beneficiary" means:
1. All current income or principal beneficiaries,
whether the beneficiaries' beneficial interests are
discretionary or mandatory.
2. All reasonably ascertainable beneficiaries if all
current income interests immediately terminated,
determined as if any power of appointment over
the trust assets were not exercised.
(b) "Trust" means trust as defined in s. 731.201.
(c) A trust is revocable if revocable by the settlor
alone or in conjunction with any other person. A
trust is not revocable for purposes of this section
if revocable by the settlor only with the consent of
all persons having a beneficial interest in the
property.
(d) A trust which is revocable shall be treated as
created when the right of revocation terminates.
(7) The provisions of this section are in addition
to, and not in derogation of, rights under the
common
law to modify, amend, or revoke trusts.
18
3.
Similarly, California law provides:
“a) Except as provided in subdivision (b), if all
beneficiaries of an irrevocable trust consent, they
18
Florida Statutes §737.4031.
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may compel modification or termination of the
trust upon petition to the court.
(b) If the continuance of the trust is necessary to
carry out a material purpose of the trust, the trust
cannot be modified or terminated unless the court,
in its discretion, determines that the reason for
doing so under the circumstances outweighs the
interest in accomplishing a material purpose of the
trust. Under this section the court does not have
discretion to permit termination of a trust that is
subject to a valid restraint on transfer of the
beneficiary's interest as provided in Chapter 2
(commencing with Section 15300).”19
Sample petitions are attached as Appendices 1 and 2.
F.
By Statute
1.
On the other hand, where the beneficiaries and/or the settlor of the trust
are still alive, some state statutes provide a non-judicial method of modification
where all parties concur.
2.
For example, California law provides:
“(a) If the settlor and all beneficiaries of a trust
consent, they may compel the modification or
termination of the trust.
(b) If any beneficiary does not consent to the
modification or termination of the trust, upon
petition to the court, the other beneficiaries, with
the consent of the settlor, may compel a
modification or a partial termination of the trust if
the interests of the beneficiaries who do not
consent are not substantially impaired.
(c) If the trust provides for the disposition of
principal to a class of persons described only as
19
California Probate Code §15403.
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``heirs'' or ``next of kin'' of the settlor, or using
other words that describe the class of all persons
who would take under the rules of intestacy, the
court may limit the class of beneficiaries whose
consent is needed to compel the modification or
termination of the trust to the beneficiaries who
are reasonably likely to take under the
circumstances.20
3.
Likewise, Florida law provides:
“1) A trust which is not revocable may be
modified at any time after the settlor's death, upon
the unanimous agreement of the trustee and all
beneficiaries of the trust, to:
(a) Amend or change the terms of the trust,
including terms governing distribution of the trust
income or principal or terms governing
administration of the trust;
(b) Terminate the trust in whole or in part;
(c) Direct or permit the trustee to do acts that are
not authorized or that are prohibited by the terms
of the trust; or
(d) Prohibit the trustee from performing acts that
are permitted or required by the terms of the trust.
(2) This section shall not apply to any trust for
which a charitable deduction is allowed or
allowable under the Internal Revenue Code until
the termination of all charitable interests in the
trust.
(3) An agreement to modify a trust under this
section shall be binding upon a person with a
beneficial interest in the trust who is unborn or
unascertained, whose identity is not then known
for any reason, or who is a minor or under a legal
20
California Probate Code§15404.
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disability, to the extent that his or her interest is
represented by another beneficiary having the
same or greater quality of beneficial interest in the
trust, but only to the extent there is no conflict of
interest between such person and such beneficiary
or among the persons represented.
(4) To the extent the interests of any person
having a beneficial interest in a trust who is
unborn or unascertained, whose identity is not
then known for any reason, or who is a minor or
under a legal disability are not represented by a
beneficiary under subsection (3), such person shall
be represented by the person's legal guardian if
there is one or, if the person does not have a legal
guardian, such person shall be represented by a
guardian ad litem appointed by the court upon
application by the trustee or any beneficiary.
Unless the court requires otherwise, the guardian
ad litem's decision whether to consent to modify
the trust shall be binding upon any person
represented by the guardian ad litem without
seeking court approval.
(5) This section shall not apply to a trust created
prior to January 1, 2001.
(6) This section shall not apply to a trust created
after December 31, 2000, if, under the terms of
the trust, all beneficial interests in the trust must
vest or terminate within the period prescribed by
the rule against perpetuities in s. 689.225(2),
notwithstanding s. 689.225(2)(f), unless the terms
of the trust expressly permit modification under
this section.
(7) Modification of a trust as authorized in this
section is not prohibited by a spendthrift clause, or
by a provision in the trust instrument that
prohibits amendment or revocation of the trust.
(8) For purposes of this section:
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(a) "Beneficiary" means:
1. All current income or principal beneficiaries,
whether the beneficiaries' beneficial interests are
discretionary or mandatory.
2. All reasonably ascertainable beneficiaries if all
current income interests immediately terminated,
determined as if any power of appointment over
the trust assets were not exercised.
(b) "Trust" means trust as defined in s. 731.201.
(c) A trust is revocable if revocable by the settlor
alone or in conjunction with any other person. A
trust is not revocable for purposes of this section
if revocable by the settlor only with the consent of
all persons having a beneficial interest in the
property.
(d) A trust which is revocable shall be treated as
created when the right of revocation terminates.
(9) The provisions of this section are in addition
to, and not in derogation of, rights under the
common law to modify, amend, or revoke
trusts.”21
Note that under the Florida statute, modification under this section is not
permitted for instruments created after December 31, 2000 where the instrument
contains a “perpetuities savings clause” unless there is a specific reference in the
instrument permitting modification under the Code section.
4.
In the author’s opinion, statutes that permit modification (or even
termination) of irrevocable trusts, regardless of whether the document authorizes
such modification or termination, are double-edged swords. On the one hand, the
21
Florida Statutes §737.4032.
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statute creates a safety-valve or escape hatch enabling the parties to continually
customize the document to cope with changing circumstances - a laudable goal.
On the other hand, however, it could be argued that statutes that permit such all
encompassing modification, such as California’s, in fact create documents that
are not truly “irrevocable” or “unmodifiable” and therefore a state agency could,
theoretically, seek to compel a trustee or settlor to modify the document to
require distribution to the beneficiary or take the position that since the trustee
or settlor could undertake such action, that the trust in fact is an “available
resource.” Obviously, the argument against this position is that such actions by
the trustee would constitute a breach of the trustee’s fiduciary duty to the
beneficiary. However, when faced with statutory language such as Florida’s,
which permits the trustee and all beneficiaries to “...Direct or permit the trustee
to do acts that are not authorized or that are prohibited by the terms of the
trust....,”22 it gives one pause.23
3.
The View From the Bench
A.
Judicial Reformation of SNT
1.
It is one thing for a statute to permit reformation and another for a court
to actually do it. As noted above, when judicial modification is authorized, the
court is required to determine the intent of the settlor and then decide whether or
not there have been changed circumstances, frustration of purpose, impossibility
of performance or some other, extrinsic, event that justifies modification or
reformation.24
22
Florida Stats §737.4032(c).
23
For an excellent discussion of Florida-specific issues regarding trust m odification, see Mary
Alice Jackson, CELA “Fixing Problems: Florida Specific Issues” in Stetson University College of Law
“Special Needs Trust V,” October, 2003.
24
See, for exam ple, Florida Statutes §737.4031 and California Probate Code §15403(b).
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2.
If the settlor had no knowledge of the beneficiary’s disability, the issue
of proof is rather simple: can it be established that if the settlor had know of the
condition, she would have created a SNT rather than the type of trust that was
created? If the answer is “yes,” then the petition to modify will probably be
granted. It is “simply” a question of establishing the settlor’s intent. As an
example, many California planners used language similar to this as part of their
“standard” language:
“If any person entitled to outright distribution of a portion of the
Trust is under age twenty-one (21), or if the Trustee shall
determine that there is a compelling reason (such as a serious
disability, a pending divorce, potential financial difficulty, a
serious tax disadvantage in making the distribution, or a similar
substantial cause) to postpone a distribution, in complete or
partial termination of the Trust, the Trustee shall continue to hold
and administer that beneficiary's share for his or her benefit.”
Using this language, the author has successfully argued on a number of
occasions that the settlor had a clear, manifest intent to protect beneficiaries who
suffered from any disability.
3.
A more difficult fact situation is presented when the Settlor knew of the
individual’s disability and failed to provide for it in the trust. In these cases, one
can argue that the Settlor did not understand that the trust, as drafted, would
render the beneficiary ineligible for public benefits. While it is difficult to
generalize, and there are few reported cases, it seems that the position taken in
a 2007 New York case, embodies the most rational, commonsense approach.
In that case, the settlor died leaving a share of his estate in a support trust
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for the benefit of one of his sons who had a disability. The Guardian ad Litem
for the son petitioned the court to reform the trust from a support trust to a SNT.
The drafting attorney submitted an affidavit stating that the trust was drafted
when the settlor was terminally ill, and that there was insufficient time to
consider a SNT. The affidavit further stated that had the settlor properly
considered his son’s condition and the impact the trust would have on his public
benefits, he would have instructed the draftsperson to create a SNT.
Based on this, the court held that there was a presumptive intent on the
part of the Settlor to take advantage of all available public benefits, similar to the
presumption that a settlor/testator will want to reduce her tax exposure to the
greatest extent possible. Citing the Restatement of the Law of Property Third, the
court held: “...a donative document, though unambiguous, may be reformed to
conform the text to the donor’s intention, if it is established by clear and
convincing evidence that a mistake of fact or law affected the terms of the
document and what the donor’s intention was.”25
4.
Obviously, these cases are very fact specific. Further, because they rely
so heavily on judicial discretion, it is extremely difficult to predict the outcome
from jurisdiction to jurisdiction.
B.
Judicial Interpretation of Trustee Discretion
1.
A related issue is that of judicial “second guessing” of the discretionary
decisions made by trustees. The issue is coming up more frequently in the area
of SNTs because some state Medicaid agencies are becoming more aggressive.
They are demanding that Trustee’s exercise their discretion to make distributions
and taking the Trustee to court when she does not.
25
Matter of Longhine, 2007 N.Y. Slip Op. 50517 (U) (Feb. 27, 2007), unpublished. Cited in
Thom as D. Begley Jr., Angela E. Canellos Special Needs Trust Handbook 2008 (Aspen Publishers).
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2.
Here, the issue is becoming as much political as it is legal. State
Medicaid agencies are taking the position that it is against public policy to permit
a trustee not to make a distribution if the exercise of that discretion results in the
trust’s beneficiary becoming eligible for public benefits. The cases are literally
all over the map.
This argument was advanced by the Ohio State Medicaid Agency in
attacking a third party SNT. The Trust was upheld on a four-to-three decision
over a strong dissent arguing that the SNT violated public policy by shifting “the
beneficiary’s financial responsibility to the taxpayers despite the fact [that] the
beneficiary has the financial means to pay for his or her own medical expenses.”26
On the other hand, a California case held that where the trust gave the
trustee full discretion to use income and principal for the benefit of the
beneficiary (the settlor’s sister) and specifically directed the trustee to take into
account that the settlor had, prior to his death, paid $25 per month for the
beneficiary’s support, the trustee did not abuse his discretion in continuing to pay
only $25 per month in order to preserve the beneficiary’s public benefits.27
4.
Termination
A.
Generally
1.
Generally speaking, a trust terminates upon the expiration of a period of
time, the happening of a specific event as provided in the trust, or the exhaustion
of the trust’s assets. In the absence of specific provisions governing termination,
26
Young v. State Dept. of Hum an Svcs., 76 Ohio State 3d 547, 668 N.E. 2d. 908 (Ohio 1996).
27
Estate of Johnson, 198 Cal. App. 2d 503, 17 Cal. Rptr. 909 (1961). See also, Dept. of Public
W elfare v. Meek, 264 Ky. 771, 95 S.W .2d 599 (1936) for a sim ilar result.
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termination will occur when the trust’s purpose is accomplished.28
B.
On Death of Primary Beneficiary Or On Full Distribution of Assets
1.
The most common reason that a trust (whether a SNT or other kind)
terminates is the death of the primary beneficiary or the exhaustion of the trust’s
assets. In that regard, the most commonly seen provision usually reads as
follows:
“This trust shall terminate upon the death of the
Beneficiary.
In accordance with 42
U.S.C.§1396p(d) (4) (A), upon termination, and
after payment or provision has been made for
expenses of administration and other obligations
payable by the Trust, the remaining Trust Estate
shall be payable to any state, or agency of a state,
which has provided medical assistance to the
Beneficiary under a state plan under Title XIX of
the Social Security Act, up to an amount equal to
the total medical assistance paid on behalf of the
Beneficiary under such state plan.
After such payment or payments have been made,
the remaining Trust Estate shall be distributed to
the person or persons, excluding the Beneficiary,
creditors of the Beneficiary, the Estate of the
Beneficiary, or creditors of the Estate of the
Beneficiary, in such manner and proportions as
shall be designated by the Beneficiary by written
instrument delivered to the Trustee or by specific
reference to this power by the Beneficiary’s last
Will. Any prospective appointment may be
revoked by a subsequent written instrument
delivered to the Trustee or by specific reference to
the revocation by the Beneficiary’s last Will. If
the exercise of any of said powers of appointment
is inconsistent with any other exercise of said
powers, the provisions of the instrument bearing
the later date shall prevail. To the extent any or
28
Restatem ent of Trusts 3d, §61.
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all of the remaining Trust Estate is not appointed
because of the nonexercise or invalid exercise of
such power, said remaining Trust Estate shall be
distributed to JOHN DOE, if he survives the
Beneficiary by a period of thirty (30) days. If
JOHN DOE fails to survive the Beneficiary by a
period of thirty (30) days, the gift to him shall
lapse and shall pass to the legal heirs of the
Beneficiary. The identity of said heirs shall be
determined according to the laws of succession of
the State of California then in force relating to the
succession of separate property not received from
the separate property of a predeceased spouse.
The determination of the identity and respective
shares of such legal heirs shall be made by the
Trustee, in the Trustee’s sole judgment and
discretion, and shall be conclusive upon all such
heirs and other persons interested in this Trust,
and the Trustee shall not be liable for any errors or
omissions in making such determination.”
2.
In a self-settled SNT, this will trigger the “payback provisions” required
by law,29 with the remaining balance of corpus, if any, being distributed in
accordance with the trust’s terms. Because the governing statutes and regulations
set out the hierarchy of entitlement to reimbursement, the drafter should carefully
craft these provisions to avoid conflicts between the statute, the trust and
potential claims by either the state agency or the remainder beneficiaries.
3.
In a third-party SNT, the corpus remaining on the death of the primary
beneficiary can be distributed in any manner the settlor desires. In such cases, the
drafting considerations dealing with distributions to remainder persons are no
different than any other trust.
C.
On Failure of Purpose
29
42 U.S.C.§1396p(d) (4) (A)
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1.
Usually, but not always, the purpose of the SNT, i.e. to render the corpus
as an “unavailable resource” for public benefits purposes, is not going to change
over time. However, there are at least two situations where the purpose may
cease to be relevant:
(a)
If the need for public benefits ceases to exist because the
beneficiary no longer requires public benefits; or
(b)
2.
The public benefits themselves no longer exist.
As families become more and more familiar with the concept of SNTs,
we are seeing an increase in advance planning for younger beneficiaries whose
long-term prognoses are often unknown. The easiest example is a young autistic
child. Today, his or her condition may be severe, but as more is understood about
the condition, more and better treatment options will become available, setting
the stage for the child to function in a normal manner. Similarly, the child may
well “outgrow” the condition, fully or partially, eliminating the need for public
benefits. If the need for public benefits no longer exists, what should happen to
the trust corpus?
3.
In the author’s opinion, if the discretionary distribution language has been
properly drafted, the trustee will already have the requisite authority to deal with
this situation. For example, if the distribution clause states:
“The Trustee shall, in the Trustee's sole and
absolute discretion, distribute so much income
and principal to or for the benefit of the
Beneficiary as the Trustee shall, in the Trustee's
sole discretion, determine in order to provide
supplemental benefits, as hereinafter defined, to
the benefits receivable by the Beneficiary through
or from various governmental assistance
programs. The Trustee is prohibited from making
any distribution to any governmental entity to
replace or reimburse or supplant any public
assistance benefit of any county, state, federal or
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other governmental agency which has a legal
responsibility to serve persons similar to the
Beneficiary herein, and shall not distribute Trust
assets to or for the benefit of the Beneficiary for
such needs as would be provided for in the
absence of this Trust by governmental financial
assistance and/or benefits and/or by any provider
of services. In no event shall Trust property be
distributed in such manner that any governmental
financial assistance which would be available to
the Beneficiary if this Trust did not exist, is in any
way denied. All terms of this Trust, wherever
they may appear, shall be interpreted to conform
to this primary goal, namely that the governmental
financial assistance which would otherwise be
available to the Beneficiary if this Trust did not
exist will in no way be denied. However, a
distribution may be made by the Trustee, in the
Trustee's sole discretion, in order to meet a need
of the Beneficiary for supplemental benefits not
otherwise met by governmental financial
assistance.”
the trustee has inherent authority to make distribution to or for the benefit of the
Beneficiary without regard to public benefit restrictions since there are no longer
any public benefits to restrict the distributions.
4.
Similarly, the trustee could be authorized to terminate the trust under
these circumstances and distribute the corpus out to the beneficiary. The author
advises against including such language in a self-settled SNT since it would
probably stand out as a glaring “red flag” to the various governmental agencies
of the trustee’s ability to terminate the Trust and make distribution directly to the
beneficiary. In the case of the third-party trust this, of course, would not be a
problem since the “pay back” rules do not apply.
5.
Alternatively, especially in third-party trust situations, the trustee or other,
independent party could be given authority to terminate all or a portion of the
trust and have it pour over to another, more “liberal” trust such as a
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“health/education/maintenance/support type support trust, or a trust with
mandatory distribution provisions. The author has drafted a number of such
trusts where, if the clause is triggered, the corpus of the third-party SNT flows
back to a “conventional” trust already created within the Settlor’s primary estate
planning trust.
6.
The second situation is more unfortunate, but easier to deal with. If the
frustration of the Trust’s purpose occurs because the public benefits programs
themselves disappear, the trustee’s options would appear to be simple. There are
no longer any programs for which the beneficiary qualifies and therefore, there
are no longer any restrictions affecting the trustee’s discretion to make
distributions.
7.
Other drafters are not as skittish as the author in authorizing termination
under these circumstances. Richard Courtney of Jackson, Mississippi has used
the following language in self-settled trusts:
“It is specifically acknowledged that the primary
purpose of this trust is to preserve Medicaid
and/or SSI benefit eligibility for the Beneficiary
who is ‘disabled’ as defined in 42 U.S.C.
§1382(a)(3) and who is otherwise eligible for such
benefits.
If the Trustee determines that
Beneficiary no longer requires or is no longer
eligible for public benefits, or such benefits are
not in the best interests of the Beneficiary, the
Trustee may seek court approval to terminate the
Trust and distribute the Trust Estate in accordance
with the direction of the court. The Mississippi
Division of Medicaid shall be given advance
written notice of any such action. Upon court
approval of such termination, the Trustee shall
give written notice to Beneficiary that Beneficiary
has the right to terminate this Trust and withdraw
assets by providing written notice of termination
(in whole or as to specific assets) to the Trustee.
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In the event termination is sought only as to
specific assets, and not the Trust in total, all assets
to be included in the Beneficiary’s written notice
of termination shall remain in this Trust subject to
its terms and conditions. The right to terminate
and withdraw is personal to the Beneficiary and
may be exercised only by Beneficiary,
individually or through Beneficiary’s guardian or
conservator.”
Katherine N. Barr of Birmingham, Alabama takes what the author considers a
less conservative but not necessarily more cautious approach since she vests the power
of termination in the beneficiary rather than in the Trustee or a third party:
“If at any time after Beneficiary reaches her
thirtieth (30th) birthday, she is not considered
‘disabled’ as defined within the meaning of 42
U.S.C. §1382(c)(1)(3) of the Social Security Act,
she shall have the continuing right, as long as she
is not so disabled, to give written notice to the
Trustee of her desire, if any, to terminate this
Trust and withdraw its assets, subject to the
provisions of Paragraph X, above [the payback
provisions] if an applicable State agency requires
such a payback as set forth in such paragraph.
This right to terminate and withdraw is personal to
the Beneficiary and may be exercised only by her,
and not by any agent or other person or legal
representative of Beneficiary acting on her
behalf.”
D.
On Threat of Inclusion of Trust Corpus As Resource
1.
Drafters of SNTs frequently include clauses such as this:
“Termination Because of Ineligibility:
Notwithstanding anything to the contrary
contained in the other provisions of this Trust, in
the event that the Trustee's discretionary right to
invade Trust principal for the Beneficiary herein
has the effect of rendering the Beneficiary
ineligible for Supplementary Security Income
(SSI), Medi-Cal or subsidized housing, the
Trustee is authorized to terminate this Trust, and
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the undistributed balance of the Trust Estate shall
be distributed to the Beneficiaries in the same
manner and upon the same terms set forth above
in Paragraph 3.7 as if the Beneficiary were
deceased.
In determining whether the existence of the Trust
has the effect of rendering said Beneficiary
ineligible for SSI or Medi-Cal, the Trustee is
hereby granted full and complete discretion to
initiate either administrative or judicial
proceedings, or both, for the purpose of
determining eligibility, and all costs relating
thereto, including reasonable attorney fees, shall
be a proper charge to the Trust Estate.”
2.
The theory behind the use of such clauses is essentially to act as an in
terrorem or “poison pill.” If a state agency attempts to pierce through the trust
and either obtain the assets or have them declared as an “available resource,” the
trustee can simply point to this clause and say “fine - take your best shot, but if
you do, I’m going to terminate the trust and distribute the assets to the remainder
beneficiaries.”
3.
The problem with this theory is that it may (probably does) not work in
connection with self-settled trusts. Drafters of self-settled SNTs must keep in
mind that the trusts they draft are not creditor protection devices; they are grantor
trusts and therefore, except in those states that permit self-settled asset protection
trusts, the assets of the trust will be exposed to the debts of the
settlor/beneficiary.30
4.
Likewise, if it is determined that the trust corpus is an “available
resource,” transferring that resource is not necessarily going to help the
30
See Robert F. Collins, Esq. L.L.M. “The Greater Asset Protection Self Settled Special Needs
Trust (GAPSNT), 2004 NAELA Sym posium .
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beneficiary. It may even harm the beneficiary by creating up to a sixty (60)
month period of disqualification because of the transfer.31 Further, an argument
could be made that the remainder beneficiary holds the distributed assets as a
constructive trustee for the benefit of the primary beneficiary or (worse) for the
state agency.32
E.
The Ultimate Modification Solution
1.
ACTEC Fellow Alan S. Acker, in an article entitled “Fixing Broken
Irrevocable Trusts,” posits a fascinating suggestion: “Do what you want to do
anyway.” Mr. Acker cites Section 1009 of the Uniform Trust Code which
provides, inter alia, that a trustee is not liable to a beneficiary for breach of trust
if in fact the beneficiary consented to the trustee’s conduct that constituted the
breach, ratified the transaction which constitutes the breach or released the trustee
from liability, unless the consent, release or ratification by the beneficiary was
induced by improper conduct of the trustee or if at the time of the consent, release
or ratification, the beneficiary did not know of the beneficiary’s rights or of the
material facts relating to the breach.
Mr. Acker takes the position that if all material purposes of the trust have
been satisfied, the beneficiary can compel distribution. Under this scenario, the
trustee is merely acceding to the direction of the beneficiary. The beneficiary
cannot hold the trustee liable for a breach of trust if the beneficiary consented to
it.
While the author commends Mr. Acker on his creativity and his gutsy
approach, one has to ask oneself the question of whether or not he or she would
be willing to put his or client, as Trustee, in the position of making a distribution
under these circumstances, regardless of how “ironclad” one felt the release was
31
42 U.S.C. §1396p(d)
32
31 ACTEC Journal 230 (2005)
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framed. That said, it is certainly something worth thinking about when all else
fails.
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APPENDIX 1
LAW OFFICES OF
STUART D. ZIMRING
12650 Riverside Drive
North Hollywood, California 91607-3492
(818) 755-4848
TELECOPIER (818) 755-4853
STUART D. ZIMRING, SBN 52911
LEW IS SCHLESINGER, SBN 52775
Attorneys for Trust Beneficiary, Wilma
Flintstone
SUPERIOR COURT OF THE STATE OF CALIFORNIA
FOR THE COUNTY OF LOS ANGELES
CASE NO. __________
In re the Matter of
THE WILMA FLINTSTONE
SPECIAL NEEDS TRUST DATED
_________
STIPULATED JOINT PETITION FOR
MODIFICATION OF TRUST (Probate code
Sections 15403; 15409; and 4541)
Date:
Time:
Place:
Wilma Flintstone, current Beneficiary of the Wilma Flintstone SPECIAL NEEDS TRUST
dated _______________ (“WILMA”), PEBBLES FLINTSTONE, individually and as Trustee
of the Wilma Flintstone Special Needs Trust (“PEBBLES”), daughter of Wilma Flintstone, and
BAMBAM FLINTSTONE (“BAMBAM”), daughter of Wilma Flintstone (WILMA, PEBBLES, and
BAMBAM are hereinafter jointly referred to as “PETITIONERS”) stipulate and allege as
follows:
THE WILMA FLINTSTONE SPECIAL NEEDS TRUST
1.
On or about __________, DOROTHY FLINTSTONE (“DOROTHY”) as Settlor
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and PEBBLES as Trustee established the WILMA FLINTSTONE SPECIAL NEEDS TRUST
(“TRUST”). A copy of that Trust is attached as Exhibit “A” and is incorporated herein by
reference.
2.
DOROTHY died on January 19, 2003. A copy of her Death Certificate is
attached hereto as Exhibit “B” and incorporated herein by this reference.
3.
So far as is pertinent to the within Petition, the Trust provides that the Trustee
is to hold, administer and distribute the Trust’s assets for the benefit of WILMA as the lifetime
beneficiary pursuant to the instructions contained in Article II. The Trust is what is known as
a third party special needs trust in that its assets are not now nor have they ever been the
property of the Trust’s beneficiary. Further, pursuant to the terms of Article II, distributions
from the Trust for the benefit of WILMA can only be made in a manner that does not adversely
impact her rights to various public benefits including SSI and Medi-Cal.
PROPOSED MODIFICATION OF TRUST
4.
WILMA, PEBBLES and BAMBAM are all the beneficiaries of the Trust.
PEBBLES is also the Trustee of the Trust. They all stipulate, consent and join in this Petition
to modify the Trust by the adoption of the FIRST AMENDMENT TO TRUST, a copy of which
is attached hereto as Exhibit “C” and is incorporated herein by reference. The proposed
FIRST AMENDMENT accomplishes the following:
A.
It appoints PEBBLES and BAMBAM, WILMA’s two daughters, as Co-Trustees
rather than PEBBLES alone as sole Trustee;
B.
It grants the Trustees somewhat broader discretion in making distributions to or
for the benefit of the beneficiary during her lifetime, liberalizing the somewhat draconian
language presently contained in the instrument;
C.
It incorporates more conservative provisions regarding the application of the
Uniform Prudent Investor Act and Uniform Principal and Income Act imposing on the
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Co-Trustees a more conservative investment strategy than is currently contained.
5.
The above amendments are appropriate and necessary for the efficient
administration of the Trust and for the benefit of WILMA, the primary beneficiary for the
following reasons:
A.
The extent of WILMA’s post-polio disabilities do not in any way affect her
mentally. She is capable of handling many of her own affairs and of living a relatively
full life, albeit physically impaired and disabled. It is essential to protect her spirits,
psychological needs for social interaction, and intellectual curiosity within a framework
suited for her needs. Thus, the existing provisions of the Trust impose much too strict
a straight-jacket upon the Trustee, creating the possibility for tension and conflicts
between the Trustee and the Beneficiary, who are also mother and daughter;
B.
It eliminates a potential area of conflict between the beneficiary’s daughters by
appointing them both as Co-Trustees, thus giving them an equal voice in the handling
of Trust affairs. Since they are the remainder beneficiaries, appointing them as CoTrustees avoids future problems and conflicts of interest between them.
NOTICE
6.
Since the Petitioners are the Trustees and the sole beneficiaries of the Trust,
there are no other parties to whom notice must be given. While there may be unborn or
unascertained beneficiaries of the Trust, their interests are aligned with the existing
beneficiaries and thus no guardian ad litem is needed. There are no Requests for Special
Notice on file herein. However, notice will be given to BARNEY RUBBLE, Co-Executor of the
Estate of Dorothy Flintstone inasmuch as the Trust is a beneficiary of the decedent’s estate.
PLACE OF TRUST ADMINISTRATION
7.
At all times herein mentioned the day-to-day administration of the Trust was and
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now is conducted in the City and County of Los Angeles, State of California.
WHEREFORE, Petitioners stipulate, consent and pray that:
1.
The Trust be amended and modified on the terms and conditions set forth
herein, effective as of the date of the court’s order;
2.
For such other and further relief as the court may deem proper.
DATED: August _____, 2006.
LAW OFFICES OF STUART D. ZIMRING
By
Stuart D. Zimring
Attorneys for Wilma Flintstone
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(SPACE BELOW FOR FILING STAMP ONLY)
APPENDIX 2
LAW OFFICES OF
STUART D. ZIMRING
12650 Riverside Drive
North Hollywood, California 91607-3492
(818) 755-4848
STUART
D. ZIMRING, SBN 52911
LEW IS SCHLESINGER, SBN 52775
KATHERINE O. GLICK, SBN 239391
Attorneys for Petitioner, PEPPERMINT
PATTY
SUPERIOR COURT OF THE STATE OF CALIFORNIA
FOR THE COUNTY OF LOS ANGELES
CASE NO. BP ____________
In re the Matter of
CHARLIE BROWN TRUST,
dated August 22, 1988
STIPULATED JOINT PETITION FOR
ORDER TERMINATING TRUST
[Probate Code §§15403, 15408,
15409]; ORDER APPROVING TRUST;
DISCHARGE OF TRUSTEES, AND
RESTRAINING ORDERS
Date:
Time:
Place:
_______, 2006
8:30 a.m.
Dept.:
Petitioners, PEPPERMINT PATTY (“PATTY”), individually and as Successor
Trustee of the CHARLIE BROWN TRUST, SCHROEDER SMITH (“SCHROEDER”), ART
MODERNE, Conservator of the Estate of SCHROEDER SMITH (“ART”), LINUS A. VAN
PELT (“LINUS”), and SALLY E. BROWN (“SALLY”), (PATTY, SCHROEDER, ART, LINUS,
and SALLY, are hereinafter jointly referred to as “Petitioners”), allege:
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RELIEF REQUESTED
1.
Petitioners hereby stipulate to, and seek, the following relief:
A.
An Order that the CHARLIE BROWN TRUST, dated August 22,
1988, be terminated;
B.
An Order approving the SCHROEDER SMITH Trust;
C.
An Order that the assets of the CHARLIE BROWN TRUST be
transferred to the Trustee of the SCHROEDER SMITH Trust;
D.
An Order Discharging Trustees; and
E.
Restraining Orders restraining certain of the parties from contacting
one another.
PARTIES
2.
The parties and their interests in this matter are as follows:
A.
PATTY is the Sole Successor Trustee of the CHARLIE BROWN
TRUST, dated August 22, 1988 (“Trust”) and is the remainder
beneficiary of the Trust. PATTY is the daughter of the Trustor,
CHARLIE BROWN (“CHARLIE”) and is SCHROEDER’S sister.
B.
SCHROEDER
is
CHARLIE’S
son
and
PATTY’S
brother.
SCHROEDER is the current beneficiary of the Trust.
C.
ART MODERNE is Conservator of SCHROEDER’S Estate.
D.
LINUS and SALLY are PATTY’S children.
THE TRUST
3.
On or about August 22, 1988, CHARLIE, as Trustor, established the Trust
and appointed himself as Trustee thereof. A copy of the Trust is attached hereto as
Exhibit “A” and is made a part hereof by reference.
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4.
CHARLIE died on May 15, 1989. A copy of his Death Certificate is attached
hereto as Exhibit “B” and is made a part hereof by reference.
5.
Upon CHARLIE’ death, his daughter, PATTY became Successor Trustee of
the Trust.
BALANCE ON HAND OF THE TRUST
8.
The balance on hand of the Trust is as follows:
ITEMS
APPROXIMATE VALUE
1.
$__________
2.
3.
TOTAL:
$__________
PLACE OF ADMINISTRATION
9.
At all times herein mentioned the day-to-day operation of the Trust was, and
now is, conducted in the City and County of Los Angeles, State of California.
PERTINENT PROVISIONS OF THE TRUST
10.
Article VI. A. of the Trust provides that income and principal are to be used
for CHARLIE’S maintenance and support and SCHROEDER’s “supplemental needs.”
(See: Trust, Page 6). The Trust further provides that if the Trust has been terminated as
to SCHROEDER, and CHARLIE is deceased, principal and income of the Trust, as well
as any future benefits or payments as to which CHARLIE or the Trustee are entitled shall
be distributed to PATTY. (See: Trust, Page 9). Since CHARLIE is deceased the Trust has
been administered as a Special Needs Trust for SCHROEDER’S benefit.
TERMINATION OF THE TRUST
11.
SCHROEDER on the one hand, and PATTY, LINUS and SALLY on the other
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hand, are unable to get along and the demands made by SCHROEDER upon PATTY are
creating family tensions and are having a detrimental impact upon PATTY’S health and
well-being and family harmony. It addition, they are causing PATTY to incur costs and
expenses, including attorneys’ fees and the assistance of others, to aid and counsel her
regarding the administration of the Trust. The harmful effect upon the interested parties
resulting from the situation was not known to CHARLIE when he created the Trust and was
not anticipated by him. The fees and costs incurred by PATTY as a result of the situation
are high in relation to the value of the Trust and under the circumstances, continuation of
the Trust in its present form will defeat or substantially impair the purposes of the Trust.
12.
The parties have stipulated and agreed that subject to approval by the Court,
the Trust shall be terminated and the assets thereof transferred to a new Trust known as
THE SCHROEDER TRUST, a copy of which is attached hereto as Exhibit “D” and made
a part hereof by reference. PATTY will have no interest in the new Trust. All parties
stipulate and agree that the termination of the Trust and the transfer of the assets to the
new Trust is in the best interest of all parties, including SCHROEDER, who is represented
by counsel and has been advised of and is aware of the consequences of the anticipated
action.
13.
The parties further stipulate and agree that upon transfer of the assets to
ART MODERNE, as Trustee of THE SCHROEDER TRUST, PATTY shall be relieved and
discharged of any and all responsibility and liabilities in connection with her administration
of the Trust.
14.
The parties further stipulate and agree that PATTY, LINUS and SALLY on
the one hand, and SCHROEDER on the other hand, shall not harass, attack, strike,
threaten, assault, hit, follow, stalk, keep under surveillance, or block movements of one
another and that PATTY, LINUS, and SALLY on one hand, and SCHROEDER on the other
hand, shall not contact (directly or indirectly), telephone, send messages, mail, or e-mail
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each other except through the peaceful written contact of a lawyer or other intermediary.
15.
Concurrently herewith, the parties are filing two (2) other separate Petitions
similar to this one seeking to terminate the Brown Trust dated January 10, 1991 and the
Marie Brown Family Trust dated July 18, 1979, as part of a “global settlement” of the
differences between the parties. All parties stipulate and agree that unless all three (3)
Petitions are granted, none of them should be granted. The essence of the global
settlement is that the assets of the Charlie Brown Trust and the Brown Trust will be
distributed to a new Trust for SCHROEDER’s benefit and the assets of the Marie Brown
Trust will be distributed outright to PATTY.
NOTICE
16.
There are no unborn or unascertained beneficiaries of the Trust and no
guardian ad litems are needed. Since Petitioners are all the interested parties and
beneficiaries of the Trust, there are no other parties to whom notice must be given.
WHEREFORE, Petitioners stipulate, consent, and pray that:
1.
The CHARLIE BROWN TRUST be terminated;
2.
That the SCHROEDER TRUST be approved;
3.
That PEPPERMINT PATTY, as Trustee of the CHARLIE BROWN TRUST
be authorized and directed to deliver to ART MODERNE, as Trustee of the SCHROEDER
TRUST, all assets held by her as Trustee of the CHARLIE BROWN FAMILY TRUST, and
that upon delivery of such assets she be discharged as Trustee;
4.
That PEPPERMINT PATTY, LINUS A. BOYLE, and SALLY E. BOYLE, on
the one hand, and SCHROEDER SMITH on the other hand, be restrained and enjoined
from harassing, attacking, striking, threatening, assaulting, battering, following, stalking,
keeping under surveillance, and blocking the movements of one another, and that
PEPPERMINT PATTY, LINUS A. BOYLE, and SALLY E. BOYLE, on the one hand, and
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SCHROEDER SMITH on the other hand, be further restrained and enjoined from
contacting (directly or indirectly), telephoning, sending messages, mailing or e-mailing each
other, except through the peaceful written contact of a lawyer or such other intermediary;
and
5.
For such other and further relief as the Court deems just and proper.
IT IS SO STIPULATED:
Law Offices of Stuart D. Zimring
By:_____________________________
STUART D. ZIMRING, Attorneys for
PEPPERMINT PATTY, Petitioner
Dated: ___________________, 2006
_______________________________
PEPPERMINT PATTY, Petitioner
Dated: ___________________, 2006
Law Offices of Dewey Cheatham & Howe
By:_____________________________
WEESHURE DONTWE, Attorneys for
SCHROEDER SMITH,
Beneficiary
Dated: ___________________, 2006
_______________________________
SCHROEDER SMITH,
Beneficiary
Dated: ___________________, 2006
Law Offices of Bilk Robb Pilpher & Steele
By:_____________________________
Robb Steele, Attorney for
ARTHUR MODERNE, Conservator
Dated: ___________________, 2006
_______________________________
ARTHUR MODERNE, Conservator
///
Dated: ___________________, 2006
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///
_______________________________
LINUS A. VAN PELT
Dated: ___________________, 2006
_______________________________
SALLY BROWN
Dated: ___________________, 2006
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