Special needs trusts were designed as an exception to the Medicaid rule disfavoring trusts.[1] Disability Trusts fall within two broad categories. Self-settled trusts, usually called Special Needs Trusts, are those funded with assets that belong to the public benefits applicant. Third party trusts, usually called Supplemental Needs Trusts, are funded with assets that belong to other people. The two types of trusts are treated differently under the Medicaid and tax rules.
Self-settled Trusts
Self-settled trusts are controlled by 42 U.S.C. § 1396p(d). Generally, a trust created by an applicant for means-tested public benefits is countable to the full extent the applicant could, under any circ*mstances, access income and/or principal or have income or principal used for his or her benefit. The exception to this rule is special needs trust established under subsection (d)(4)(A) or (d)(4)(C) for the sole benefit of the applicant. If the trust can be accessed by the applicant, then it is countable for eligibility purposes to the full extent that income, principal or both could be accessed by or for the applicant. If the trust cannot be accessed by or for the applicant, and if it is not a properly structured special needs trust, then it is subject to the transfer penalty rules. See 42 U.S.C. § 1396p(d)(3)(B)(ii).[2]
A trust is self-settled regardless of whether it is established by the applicant or by someone acting on his or her behalf if it is funded with the applicant’s funds.[3] If the goal is retaining or obtaining eligibility for public benefits, then the trust must comply with 42 U.S.C. § 1396p(d) and the trust will likely be referred to as a “self-settled” special needs trust. Funds belong to the applicant the moment he or she has a vested right to receive them. An applicant might, for example, have received an outright inheritance, or won a lottery. The most common source of funds used to fund a self-settled special needs trust is proceeds from a lawsuit. Receipt of a poorly planned inheritance might be another reason for funding these trusts.[4]
There are at least two differences when contrasting self-settled special needs trusts against third-party trusts. First, self-settled trusts must include what is known as a “pay-back” provision. This provision directs the trustee to use any remaining trust funds, following the applicant’s death, to reimburse the state for medical assistance the state Medicaid program provided for the applicant.[5] Second, in many states, the rules governing permissible distributions for self-settled special needs trusts are significantly more restrictive than those governing third-party special needs trusts.
Because Social Security law specifically describes self-settled special needs trusts, these instruments are sometimes referred to by the statutory section authorizing transfers to such trusts and directing that trust assets will not be treated as available or countable for SSI purposes. The statutory provision governing individual trusts is 42 U.S.C. § 1396p(d)(4)(A); thus individual self-settled special needs trusts are sometimes called, simply, “d4A” trusts. “Pooled” self-settled trusts are governed by Section 1396p(d)(4)(C), so those trusts are referred to as “d4C” trusts.
The essential elements of a d4A trust are:
- The trust beneficiary is under the age of 65;[6]
- The trust beneficiary is disabled as defined in the Social Security Act;
- The trust is for the sole benefit of the individual;
- The trust is established by a parent, grandparent, legal guardian of the individual, or a court;[7]
- The State will receive all amounts remaining in the trust upon the death of the beneficiary up to an amount equal to the total medical assistance paid on behalf of the beneficiary.
- The trust must be irrevocable.
A d4B trust does not protect countable or exempt resources. In fact, a d4B trust cannot hold resources of any kind.[8] It is a limited use trust and is given limited treatment in this document. Its sole purpose is to render excess income exempt when the State uses an income cap as part of its eligibility determination process. The essential elements of a d4B trust are:
- The trust is composed only of pension, Social Security, and other income to the individual (and accumulated income in the trust);
- The State will receive all amounts remaining in the trust upon the death of the beneficiary up to an amount equal to the total medical assistance paid by the State; and
- The State makes medical assistance available to individuals described in 42 U.S.C. § 1396a(a)(10)(A)(ii)(V), but does not make such assistance available to individuals for nursing facility services under 42 U.S.C. § 1396a(a)(10)(C).
The essential elements of a d4C trust are:
- It was established and is managed by a non-profit association.
- 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.
- Accounts in the trust are established solely for the benefit of individuals who are disabled by the parent, grandparent, or legal guardian of such individuals, by such individuals, or by a court.
- To the extent that amounts remaining in the beneficiary’s account upon the death of the beneficiary are not retained by the trust,[9] the trust pays to the State from such remaining amounts in the account an amount equal to the total amount of medical assistance paid on behalf of the beneficiary under the State plan under this subchapter.
The primary distinctions between d4A and d4C trusts are:
- Until recently, a d4A Trust could not be established by the Medicaid applicant, while an applicant could establish his or her own d4C sub-account; the SNT Fairness Act, signed on December 13, 2016 as part of the 21st Century Cures Act – Public Law 114-255, Section 5007, now allows the applicant to establish his or her own special needs trust.
- The statute does not include an age limitation for the establishment of d4C sub-accounts, while d4A trusts are limited to persons under the age of 65.
- The d4A Trustee may be anyone, while the d4C Trustee must be a non-profit association;
- A d4A trust is separately managed for the benefit of the individual beneficiary, while management of, and investments for, a d4C trust is a joint endeavor; the accounting and distributions remain individualized.
Third-Party Trusts
The second type of special needs trust is one established by someone other than the person with disabilities (usually, but not always, a parent).[10] These trusts are funded with assets that never belonged to the beneficiary. They are often used, when proper planning is done for a disabled person’s family, to hold an inheritance or gift. Without planning, a well-meaning family member might simply leave an inheritance to an individual with a disability. Even though it may be possible to set up a trust after the fact, the funds will have been legally available to the applicant. That means that any trust will created after rights have vested in the applicant is a “self-settled” special needs trust, rather than a third party trust.
Parents, grandparents and others with the foresight to leave funds in a third party special needs trust will provide significantly better benefits to the applicant. This type of trust will not need to include a “payback” provision for Medicaid benefits upon the applicant’s death. During the beneficiary’s life, the kinds of payments the trust can make will usually be more generous and flexible.
Third Party Trusts are not subject to 42 U.S.C. § 1396p(d) if they are properly drafted and funded. Instead, the issue with third party trusts is whether the beneficiary has control over income and/or principal. “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.” Social Security Administration’s Program Operation Manual System (“POMS”) SI 01120.200 D.1.a. Conversely, if “an individual does not have the legal authority to revoke or terminate the trust or to direct the use of the trust assets for his/her own support and maintenance, the trust principal is not the individual’s resource for SSI purposes.” POMS SI 01120.200 D.2. The same analysis should apply to Medicaid eligibility.
Even where a trust is exempt, distributions may create eligibility problems. For example, a trust distribution of cash to the beneficiary is unearned income and could cause a loss of benefits. Distributions paying for food or shelter are in-kind support and maintenance and are valued under the presumed maximum value rule.
Section 2336 of the Georgia ABD Manual, Medicaid Qualifying Trust Property
Section 2337 of the Georgia ABD Manual, Trust Property – OBRA 93
Section 2338 of the Georgia ABD Manual, Trust Property
Section 2346 of the Georgia ABD Manual, Special Needs Trusts
Notes:
1. Quinchett ex rel. Wells v. Massanari, 185 F. Supp. 2d 845 (S.D. Ohio 2001) (although SSA objected to use of a trust to obtain SSI eligibility, the law allowed settlor “to do precisely that”).
2. It is improper to both count the trust as a resource and impose a transfer penalty. “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.” POMS SI 01120.201.D.5.
3. POMS SI 01120.199.E.2.
4. Constructive receipt is also receipt. In Horowitz v. Barnhart, infra, funds paid into the court’s registry were countable.
5. Typically, this makes the State a creditor rather than a beneficiary. POMS SI 01120.200.H.1.b.
6. Even if a trust is created prior to attaining the age of 65, contributions to the trust after attaining 65 do not qualify for this exemption from the trust counting rules. In other words, there cannot be any additions to the trust after attaining the age of 65. There is, however, no rule prohibiting the trust from earning income on assets previously conveyed to the trust.
7. A related issue which arises from time to time is whether a surrogate had power to transfer assets into the trust.
8. Under the Medicaid rules, an asset is usually income during the month of receipt. Any portion retained on the first day of the month following receipt is a resource. An asset never treated as both income and a resource in the same month. See Ga. ABD Manual § 2300-1. Because a d4B trust cannot hold resources, it follows that administration occurs monthly, with income flowing in and expenses being paid during month of receipt.
9. At this time, a pooled trust’s ability to retain assets following early termination of a trust is murky at best. The POMS indicate that if the pooled trust could retain assets following early termination, then the trust is not exempt. See POMS SI 01120.199.F.1 and POMS SI 01120.199.H.1, Example 2.
10. If the person creating the trust fails to establish the trust correctly, a petition for reformation might be a remedy. Georgia law permits reformation of the trust if it is proved by clear and convincing evidence that the trust provisions were affected by a mistake of fact or law. O.C.G.A. § 53-12-60.
