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SPECIAL NEEDS TRUSTS
Thomas J. Murphy
Murphy Law Firm, Inc.
51 West Elliot Road, #106
Tempe, AZ 85284
(480) 838-4838
tom@murphylawaz.com
Presented on September 2, 2003
THE PROBLEM: Medicaid costs are exploding while state budgets are in the
red as never before. In 2002, there were 51 million people enrolled in
Medicaid spending $216 billion. Of the 51 million enrollees, 9 per cent were
elderly and 16 percent were disabled. Of the $216B spent, 27 percent was
spent on behalf of the elderly and 43 percent spent on the disabled. In
2003, the Kaiser Foundation estimates that Medicaid costs will increase by
$11B with 77 percent of that attributable to the elderly and disabled.
Finally, in 2004, state budget deficits are expected to exceed $70B.
What all this says to me is that there will be significant cutbacks in those
eligible for Medicaid (ie, AHCCCS in Arizona) and cutbacks in the services
provided to those who are eligible.
THE OBJECTIVE: To provide a disabled or elderly person with funds to pay for
their care without losing eligibility for AHCCCS and other governmental
benefits that the person is already receiving or about to receive.
THE SOLUTION: A “special needs trust”
But first, a bit of history…..
Up until about 10 years ago, I would occasionally encounter a situation that
did not have an easy solution. Typically, it involved parents of s disabled
child who wanted to make a will or trust. The disabled child was their
foremost concern and they wanted to make sure that the child was provided
for. Thus far, the child was doing well with the government programs that
he/she was enrolled in. But the parents were concerned that, if the disabled
child was left a large bequest, then the child would lose eligibility for
those programs.
About the best we could do was to disinherit the child and leave what would
have been that child’s share with another of the parents’ children. Yet I
was never entirely comfortable with this. First, there was probably no way
for us to require the child to provide for the disabled child. We simply had
to hope that the child would do the right thing. Second, it we could go to
court to enforce this understanding, the disabled child would become
ineligible for the benefits he/she had been receiving. This is what the
parents were trying to avoid in the first place. Third, the child might
encounter creditor problems whereby the creditors might be able to reach and
seize the assets that are now held in the non-disabled child’s name. Or the
child might just simply blow the money – drugs, big cars, riotous living,
etc. And fourth, there was always the possibility of a bad marriage. My
clients would tell me that they trust their daughter. I would ask “do you
trust your son-in-law?”
For all of these reasons, this arrangement definitely left something to be
desired.
#2. The person is disabled or blind, as defined under 42 USC 1382c(a) –
inability to engage in any substantial gainful activity for at Another
possible solution was to create a “support” trust with the disabled child as
the beneficiary. In such a trust, the trustee has unlimited discretion to
provide for the beneficiary’s support in whatever manner the trustee deemed
fit. It was thought that, since the beneficiary could not compel
distributions from the trust, then neither could anyone else, such as the
local Medicaid agency. However, in some states, the Medicaid agency was
successful in requiring the trustee to pay for the services that Medicaid
was providing and by rendering the disabled child ineligible for further
benefits until the trust was exhausted. See, for instance, the hotly divided
Ohio Supreme Court in Young v. State Dept of Human Services, 668 NE2d 908
(Ohio, 1996).
Then, in the early 1990’s, there were two big developments. First, Congress
passed the Omnibus Budget Reconciliation Act of 1993 (aka OBRA ’93). Then,
in November 1994, the Health Care Financing Administration (now known as the
Center for Medicare and Medicaid Services) issued Transmittal #64. These two
developments reshaped and clarified many of the issues confronting families
and their advisors in this area. Among these issues was the authority to
create special needs trust.
A PRIMER ON SPECIAL NEEDS TRUSTS
Special needs trusts (SNTs) come in two varieties – those created by the
disabled person and those created by a third party (typically a parent or
family member) for the benefit of the disabled person. They are governed by
federal statutes and regulations, primarily 42 USC 1396p, 20 CFR 1103 et seq
and Social Security POMS SI01120, as well as state statutes, such as ARS
36-2934.01 and the AHCCCS Policy and Procedures Manual.
The starting point for any SNT is 42 USC 1396p(d)(4)(A), which sets out the
criteria that, if met, will not disqualify the disabled person from public
benefits. These are commonly known as D4A trusts. The criteria are:
#1. The disabled person is under 65 years of age
#2. Disability as defined by statute, 42 USC 1382c(a) – unable to engage in
substantial gainful activity for at least twelve months or visual acuity of
less than 20/200.
#3. The trust is created by a parent, grandparent, legal guardian or a court
#4. The disabled person is the sole beneficiary while the person is alive
#5. The trust must be irrevocable and the disabled person cannot demand
access to the trust funds.
#6. The trust should not distribute cash to the disabled person – only
“in-kind” distributions should be made. Otherwise, a disqualification period
will be imposed.
#7. The trust must contain a payback provision whereby, upon the death of
the disabled person or termination of the trust, the State gets paid for the
services rendered to the disabled person.
The other key factor is determining the public benefits to which the
disabled person is entitled. Supplemental Security Income (SSI) and
AHCCCS/ALTCS are means-tested programs. In other words, an eligible person
can only have minimal assets and income. Social Security Disability
Insurance (SSDI) is not means-tested and is based on a person’s wage
history. The person’s assets and income do not otherwise come into play in
determining eligibility for SSDI benefits.
THIRD PARTY SNTs
The two most common examples of third party SNTs are those created by a
parent for a disabled child and those created by an elderly spouse for a
spouse that is in a nursing home.
For third party SNTs, some of the D4A rules are relaxed or eliminated. Among
the more important of these are:
#1. A trust can be created for someone over age 65.
#2. There is no requirement of a payback provision to the State.
#3. If a trust is created via a will, none of the D4A requirements apply.
Yet, care must still be taken in drafting these trusts. First, the trust
must make it clear that there is no duty of support (ie, not a minor child)
owed by the person creating the trust to the disabled or elderly person.
Second, it must be made clear that the trust is only meant to supplement and
not replace the existing benefits that the person is receiving. Third, the
rules regarding in-kind distributions, discussed below, must be strictly
adhered to or disqualification could result.
SELF-SETTLED TRUSTS
The common scenario is where a person who has been grievously injured, such
as in a automobile accident, has been rendered disabled. That person then
collects a substantial amount in a lawsuit. The dilemma is that the proceeds
from the lawsuit will result in a long period of ineligibility. This dilemma
is enhanced by the fact that the lawsuit amount may not be sufficient to
take care of the person for the rest of the person’s life. For instance, the
proceeds may be low due to questionable negligence, limited amounts of
insurance or other assets owned by the defendant and medical and insurance
liens. And the disabled person has lost their job, meaning that health
insurance is either gone or not affordable.
In such a situation, a D4A trust can be established that will hold and
invest the lawsuit proceeds.
There is another form of trust that will also work – a D4C trust, also
called a “pooled” trust. This is a trust where a non-profit organization is
the trustee for trusts established for many disabled persons. Currently,
there is no such program in Arizona but several of my colleagues in Tucson
are working with charities to establish one.
DISTRIBUTION OF TRUST FUNDS – BE CAREFUL!!
Once you have established an SNT, the next question is how do you distribute
the trust assets in a manner that will not disqualify the disabled person.
One simple rule – don’t ever distribute cash to the disabled person. This
will result in a dollar-for-dollar decrease in monthly benefits and, if the
cash distribution is large, it could result in a period of ineligibility.
See 20 CFR 416.1121.
Instead, always have the trustee purchase good and services directly from
the provider. These are called “in-kind” distributions or “ISM”. The federal
regulations specifically allow a trust to purchase the following items that
will be used for the disabled person:
Medical care and services not otherwise provided
Social services, including vocational rehabilitation or education
Proceeds from an insurance policy or a loan
Home improvement
20 CFR 416.1103
A trustee (and even the disabled person themselves) can also purchase
certain items that are exempt from any adverse eligibility issues, such as:
Purchase a home if none owned
Pay down mortgage
Do repair work or modify and improve home
New roof, paint, carpeting or A/C
Add garage or enclose carport
Build a pool
Purchase burial insurance
Policy is irrevocably assigned to mortuary
Purchase the parcel of land next-door
Must be contiguous
Purchase automobile
Unlimited value if necessary for medical treatment
Travel to doctor’s office should be “necessary”
Otherwise, FMV cannot exceed $4,500.00
Only one car per couple
Purchase burial plan
Create burial fund up to $1,500.00
Use for payment of flowers, transportation for family, embalming, cost of
church service
Must be in separate account designated as such
Purchase new household goods
New furniture or appliances
Useful to buy items for “homier” nursing home
Travel or take a vacation
But watch out for money used to purchase food, shelter or clothing. Such
purchases will cause a decrease in monthly SSI benefits and could result in
disqualification. Shelter includes room, rent, mortgage payments, property
taxes, heating fuel, utilities and garbage collection services. 20 CFR
416.1130(b).
Other items that a disabled person cannot receive are: annuities, pensions,
alimony, inheritances, gifts and death benefits payable from life insurance
policies on the life of another person. 20 CFR 416.1121