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Special Needs Trusts

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Presentation by Clayton Davis

Presentation by Clayton Davis


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  • 1. CLE Alabama Elder Law The University of Alabama School of Law Tuscaloosa, Alabama Friday, February 24, 2012Special Needs Trusts and theNew Alabama Family Trust Clayton Keith Davis Davis & Neal Dothan
  • 2. SPECIAL NEEDS TRUSTS Prepared by Clayton Davis February 2012A. The Meaning of “Special Needs”The identity of the beneficiary as a person with disabilities is the basis for calling a trust a“special needs trust.” Such trusts are not “special needs trust” because the distributions from thetrust are limited to medical expenses related to the beneficiary’s condition.B. Why Use a Special Needs TrustThe purpose for using a special needs trust is to provide a means to improve the quality of life ofthe disabled beneficiary without jeopardizing current or future eligibility for means testedbenefits such as SSI and Medicaid. Only trusts that strictly comply with the requirements offederal law will be disregarded in determining whether the disabled beneficiary is eligible forSSI and Medicaid. Generally, a revocable trust funded with the assets of the disabled beneficiarywill result in disqualification. In addition, payments made directly to the disabled beneficiaryfrom any trust, whether funded by the individual or by some other person, will be consideredincome to that individual and will reduce or eliminate eligibility.In contrast, payments made for anything other than food or shelter costs on behalf of (but notdirectly to) the disabled beneficiary from a properly drafted special needs trust will not result inreduction or elimination of SSI and Medicaid benefits.C. Trusts Established in the Will of a Third PartyGenerally, a special needs trust established and funded in the will of a third person (even that ofthe spouse of the disabled individual) will not result in the income or assets of the testamentarytrust being counted against the disabled beneficiary with respect to SSI and Medicaid. State lawdetermines, however, to what extent the disabled beneficiary is legally entitled to obtain anydirect payments from such trusts. If payments are made directly to a disabled beneficiary (or Davis - 1
  • 3. indirectly for food or shelter for the disabled beneficiary) or if the disabled beneficiary has thelegal right to require such payments, then the income and assets may be countable income orresources, thus resulting in reduction or elimination of SSI and Medicaid benefits.D. Trusts Funded by the Disabled Individual or Spouse During the Spouse’s LifeSo-called “Medicaid Qualifying Trusts” are countable under federal law if they are funded withassets of the disabled beneficiary or those of such individual’s spouse during the spouse’slifetime. The maximum amount of the income and corpus of the trust that could be paid to thedisabled beneficiary under the terms of the trust (with the trustee exercising maximum discretionin favor of the disabled beneficiary) is countable. This is true under federal law even if thetrustee utterly refuses to make such discretionary payments and the disabled beneficiary has nolegitimate claim under state law to force such payments to be made. Thus the term “MedicaidQualifying Trust” is a misnomer in that the existence of such a trust often results indisqualification from Medicaid.Note that if the terms of the trust utterly prohibit invasion of corpus for payment to or on behalfof the life beneficiary, then the corpus will not count against the disabled beneficiary, but thetransfer of the corpus into the trust within five years of application for nursing home Medicaidbenefits or within three years of application for SSI benefits will result in a transfer penalty if thesource of the funding for the trust was the disabled individual or such person’s spouse during thespouse’s lifetime.Note also that “Medicaid Qualifying Trusts” must not be confused with “Medicaid QualifyingIncome Trusts,” which not only do not result in Medicaid disqualification, but are actuallyrequired for nursing Medicaid eligibility if the disabled beneficiary’s 2012 monthly incomeexceeds $2094 per month. See 42 U.S.C. § 1396p(d)(4)(B). These trusts are also known as“d4B trusts” or as MQIT’s or QIT’s. Davis - 2
  • 4. E. Individual First Party Special Needs TrustsAn individual special needs trust that is funded with assets of a disabled individual under theage of 65 years does not result in reduction or disqualification from SSI and Medicaid if therequirements of 42 U.S.C. § 1396p(d)(4)(A) are met. These trusts are commonly referred to a asd4A trusts. Like all first party special needs trusts, a Medicaid payback provision is required tobe included in the trust.POMS § SI 01120.203.D.1. lists the following requirements for d4A trusts:The trust must contain assets of an individual who was under age 65 when the trust wasestablished;The trust must contain assets of a disabled individual;The disabled individual must be the sole life beneficiary of the trust;The trust must have been established by a court or by a parent, grandparent, or legal guardian ofthe disabled individual; andThe trust must contain specific language to reimburse any state(s) for medical assistance paidupon the death of the disabled individual.If the trust meets all these requirements, then it meets the special needs trust exception to theextent that the assets of the individual were placed into the trust prior to the beneficiaryhaving attained to the age of 65.F. Pooled First Party Special Needs TrustsAny pooled special needs trust that is funded with assets of a disabled individual does not resultin reduction or disqualification from SSI and Medicaid if the requirements of 42 U.S.C. § Davis - 3
  • 5. 1396p(d)(4)(C) are met. These trusts are commonly referred to a as d4C trusts. Like all firstparty special needs trusts, a Medicaid payback provision is required to be included in the trust.POMS § SI 01120.203.D.2. lists the following requirements for d4C trusts:The trust must contain assets of a disabled individual;The pooled trust must have been established and must be maintained by a nonprofit association;The trust must pool the funds, yet maintain an individual account and be able to provide anindividual accounting for each beneficiary;The disabled individual must be the sole life beneficiary of the trust;The trust must have been established by the individual, by a court, or by a parent, grandparent,or legal guardian of the disabled individual; andThe trust must contain specific language to reimburse any state(s) for medical assistance paidupon the death of the disabled individual.If the trust meets all these requirements, then it meets the special needs trust exception. TheAlabama Family Trust is one such d4C pooled trust.G. Third Party Special Needs TrustsSpecial needs trust funded by anyone other than the disabled beneficiary or such individual’sspouse during the spouse’s lifetime are called “third party trusts.” These trusts are evaluatedunder POMS § SI 10020.200, et seq. “Third party trusts” do not require a Medicaid paybackprovision. These trusts may be individual private trusts or may be maintained by a pooled trustsuch as that Alabama Family Trust. Davis - 4
  • 6. The key issue with third party special needs trusts is whether the following requirement is met:“If an individual does not have the legal authority to revoke or terminate the trust or to direct theuse of the trust assets for his/her own support and maintenance, the trust principal is not theindividual’s resource for SSI purposes.” POMS § SI 01120.200D.2.In addition, “if the individual can sell his or her beneficial interest in the trust, that interest is aresource. For example, if the trust provides for payment of $100 per month to the beneficiary forspending money, absent a prohibition to the contrary (e.g., a valid spendthrift clause, see SI01120.200B.16.), the beneficiary may be able to sell the right to future payments for a lump-sumsettlement. POMS § SI 01120.200.D.1.a.H. Proper Administration of Special Needs TrustsThe key to proper administration of a special needs trust is how payments are made and for whatpurpose. In addition, whether the disabled individual is currently eligible for SSI or fullMedicaid determines whether the purpose and manner of payment is even currently relevant.If the beneficiary is currently eligible for SSI or full Medicaid (nursing home, DAC, SSI, ordisabled widow categories, but NOT QMB, SLMB, or QI), payments made either directly orindirectly for food or shelter costs and payments made for any purpose made directly to thebeneficiary will be countable income and may reduce or eliminate eligibility. Note that cableand telephone costs are not shelter costs, but utilities such as electricity, natural gas, and waterare considered shelter costs.On the other hand, if the disabled beneficiary is not currently eligible for SSI or full Medicaid,then indirect payments of any sort, even those for food and shelter, will not be relevant. Notethat persons eligible for QMB, SLMB, or QI, which in Alabama have no resources limitations,will not be effected by indirect payments from a special needs trust, but would be required tocount as income any direct payments made from the trust to the disabled individual. QMB,SLMB, and QI are not “full Medicaid,” but are administered by the Alabama Medicaid Agency. Davis - 5
  • 7. The programs exempt Medicare beneficiaries whose monthly incomes (not counting interest anddividends) are no more than $1277 per month (2012) if single or married but not residing with aspouse or no more than a combined $1723 per month (2012) if married and residing with aspouse from payment of Medicare Parts B and D premiums, reduce such beneficiary’s 2012covered prescription drug co-payments to $2.60 for generics and $6.50 for brand name drugs,and eliminate the prescription drug “doughnut hole.” Such beneficiaries whose incomes are nomore than $951 monthly (2012) if single or separated or no more than $1281 per month (2012)combined if married and residing with a spouse are also provided with Medicaid payment ofalmost all deductibles and co-payments under Medicare Parts A and B. The QMB limits are setby law at $20 more than 100% of the federal poverty level, and the QI limits are set at $20 morethan 135% of the federal poverty level. Unfortunately, the poverty level increase for 2012 wasless than 2.5%, obviously not enough to encompass the 3.6% cost-of-living increase granted toSocial Security and many other public and private retirement beneficiaries for January 2012.This will result in thousands of people losing benefits that are worth much more than theCOLA’s they received.I. Distributions of Remaining Balances at Termination of Special Needs TrustsIn the vast majority of cases, a special needs trust will terminate at the death of the lifebeneficiary, unless a disabled sibling of the life beneficiary is designated as successor lifebeneficiary, in which case the trust terminates upon the death of the successor life beneficiary. Ina minority of cases, a court may order that a special needs trust terminate on the ground that thetrust can no longer serve the purpose for which it was created, such as that the life beneficiary’sdisability has ceased.In any event, upon termination of a third party special needs trust, the remaining balance in thetrust is distributed in accordance with the trust document to remainder beneficiaries. Because thesource of the corpus of the third-party trust is not the life beneficiary or his or her spouse, noMedicaid pay-back is required. If the AFT has been used to manage such a third party trust, theAFT Charitable Trust is due to receive 10% of the termination value before distribution to Davis - 6
  • 8. residual beneficiaries, but only if some payout has been received by the life beneficiary orsuccessor life beneficiary during his, her, or their lifetimes.At the termination of a first party special needs trust, Medicaid must be reimbursed up to theamount, if any, of lifetime benefits paid to the life beneficiary and any successor life beneficiarybefore distribution to residuary beneficiaries. As is the case with third party trusts, if AFT hasbeen used to manage the trust, the AFT Charitable Trust is due to receive 10% of the terminationvalue if some payout has been received. This Charitable Trust claim takes priority overMedicaid reimbursement.Federal law at POMS § SI 01120.201.B.3. is extremely strict about payment of any otherexpenses or claims at the termination of a first party special needs trust: “3. Allowable and Prohibited ExpensesThe following instructions about trust expenses and payments apply to Medicaid special needstrusts and to Medicaid pooled trusts. a. Allowable Administrative ExpensesThe following types of administrative expenses may be paid from the trust prior toreimbursement of medical expenses to State(s): Taxes due from the trust to the State(s) or Federal government because of the death of the beneficiary. Reasonable fees for administration of the trust estate such as an accounting of the trust to a court, completion and filing of documents, or other required actions associated with termination and wrapping up the trust. b. Prohibited Expenses and PaymentsThe following expenses and payments are examples of some of the types not permitted prior toreimbursement of the State(s) for medical assistance: Taxes due from the estate of the beneficiary other than those arising from the inclusion of the trust in the estate. Inheritance taxes due for the residual beneficiaries. Payment of debts owed to third parties. Davis - 7
  • 9. Funeral expenses. Payments to residual beneficiaries. c. ApplicabilityThis restriction on payments from the trust applies upon the death of the beneficiary. Paymentsof fees and administrative expenses during the life of the beneficiary are allowable as permittedby the trust document and are not affected by the State Medicaid reimbursement requirement.”Obviously, these provisions indicate that funeral and burial expenses should be prepaid prior tothe death of the life beneficiary. They also should encourage prompt requests to the trustee forpayment of the legitimate expenses of the life beneficiary because even expenses incurred priorto death cannot be paid after the death of the beneficiary. Davis - 8