Special Needs Planning Cox Law Group, Inc Cynthia Cox, Esq. cynthia@coxlawgroupinc.com 310-798-6150 23326 Hawthorne Boulevard Suite 390 Torrance, California 90505
Course Goals: - Identify and understand the differences between first party, third party, and pooled special needs trusts - Understand the mechanics of ABLE accounts - Identify and avoid common drafting errors when drafting special needs trusts - Understand recent changes to special needs trust law, specifically recent changes to the Social Security Administration’s Programs Operations Manual System (POMS).
What is a Special Needs Trust (SNT) ? • - A SNT allows a person with disabilities to maintain eligibility for public assistance benefits despite having assets that would make the person ineligible for those benefits. • -There are three types of SNTs: First Party SNTs, Third Party SNTs and Pooled Trusts. • -How do I determine which type of SNT is appropriate? • - to determine which type of SNT is appropriate, ask yourself, “ Whose assets are funding the SNT? ”
First Party SNTs (aka Self-Settled SNTs or Statutory Special Needs Trusts) • -funded with assets belonging to the SNT beneficiary or by assets to which the beneficiary is/ was legally entitled. • - First Party SNTs occur most frequently when there is a lawsuit recovery or settlement, or a situation where an inheritance from a donor to a public benefits recipient has been poorly planned.
Considerations when creating a SNT: • -tax ramifications of the SNT on the beneficiary while alive and upon death including: • -estate taxes on assets places in the trust when the beneficiary dies • -gift taxes on transfers to third parties upon the cremation of a trust or from the funding of personal injury settlements into a special needs and income taxation
Considerations when creating a SNT (Cont.): • - the trust’s impact on government benefits • -the impact on existing liens from public benefits or private insurance. • -a trustee of a trust of which an SSI recipient is a beneficiary must understand these rules in order to administer the trust most effectively for the SSI recipient beneficiary. • - Copious accounting of each transaction is a must!
Special Payback Provision • -To be effective, First Party SNTs must include federal and state provisions, which require notice and payback to the State(s) upon the death of the trust beneficiaries or earlier termination of the SNT. • The Department of Health Care services (DHCS) (in California) or applicable Medicaid providing department, recovers up to an amount equal to the total medical assistance paid by Medi-Cal on behalf of the SNT beneficiary.
Different Kinds of First Party SNTs • -First Party SNTs are classified as either: • 1.(d)(4)(A) SNTs - or Pooled SNTs [42 USC 1396p (d)(4)(A)] • 1. Must be established for an individual with disabilities under age 65 • 2.Must be formed and funded prior to age 65
• 3. Must be properly established: • - The SNT is established by the individual (Special Needs Fairness Act), so long as such individual has capacity, or a parent, grandparent, or legal guardian of the person with a disability, or a court. • 4. Must have a payback provision
Policy Behind the “(d)(4)” SNTs • These are trusts names for the provisions exempting certain types of trusts from application of the OBRA ‘93 rules for treatment of trusts • As Congress worked on the legislation that became OBRA ‘93, members were aware that SNTs could be a valuable planning tool for persons with a disability. Working from that premise, Congress exempted three kinds of trusts from application of the new rules, known respectively as the “(d)(4)(A)”, “(d)(4)(B)”, and “(d)(4)(C),” named for each section of the new provisions that provides the exemption of each. • These safe harbors trusts are typically used to preserve Medicaid eligibility when a litigation recovery is paid to a properly drafted SNT, or when an inheritance inadvertently passes to a public benefits recipient, but can be formed anytime a beneficiary has money in his or her own name and needs to avail himself or herself of means-tested public benefits (or to preserve existing benefits). • Although these safe harbors also apply to trusts that aren’t SNTs, trusts for a disabled beneficiary, as a general rule, should be drafted as SNTs so the trust instrument does not obligate the safe harbor trust to pay for health care and the trust will preserve eligibility for programs other than Medicaid.
Source of funding for First Party SNT • General Rule : If the funds are the funds of the beneficiary with a disability, then a First Party or Self-Settled SNT will need to be created. • “funds of the beneficiary with a disability” can mean different things : • 1. Funds received by beneficiary from an inheritance (that was not already designated to be held in a Third Party SNT created by someone else). • 2.Proceeds of a settlement or judgement from litigation (Probate Code 3600 et seq.) • 3.Any other source of funds to which the beneficiary is legally entitled.
Disability Requirements for First Party SNTs • - The trust must be established for an individual who is “disabled” as that term is defined in section 1614(a)(3) of the Social Security Act, 42 U.S.C. Section 1382c(a)(3). • - California’s special needs trusts rules utilize a definition of disability that is far broader than the federal definition. • -If the individual is already receiving SSI or Medicaid based upon disability, the “disability” determination has already been made. Otherwise, there will have to be independent determination of disability.
Irrevocability Requirement for First Party SNTs • -The social security administration requires the trust be irrevocable. If the trust is revocable, the assets would be considered available to the beneficiary, and the state is not a residual beneficiary by virtue of the payback provision, but rather, is in the position of a creditor.
Sole Benefit Rule • The sole benefit rule is found at SI 01 120.201 • OBRA ‘93 also provides at 42 U.S.C. section 1396p(d)(4)(A): “ A trust containing the assets of an individual under age 65 who is disabled (as defined in section 1614(a)(3)) and which is established for the benefit of such individual by [the individual], a parent, grandparent, legal guardian of the individual, or a court if the State will receive all amounts remaining in the trust upon the death of such individual up to the amount equal to the total medical assistance paid on behalf of the individual under a State plan under this title.” • Transfer to such a trust is not a transfer: 42 U.S.C. Section 1382b(c)(1)(C)(ii)(IV): An individual shall not be ineligible for benefits under this subchapter by reason of the application of this paragraph to a disposal of resources by the individual or the spouse of the individual, to the extent that… the resources… were transferred to a trust (including a trust described in section 1396p(d)(4) of this title) established solely for the benefit of an individual who is disabled. • In a self-settled SNT it is necessary to be careful of provisions which may benefit another. Provisions which would allow others to receive any benefit should be scrutinized.
Considerations when drafting a First Party SNT: • 1. A d(4)(A) trust is useful when the person would lost eligibility but for the trust and no alternatives appear feasible. • - Alternatives include : • - joining a pooled trust • - contributing to an ABLE account • - doing nothing and losing benefits • - spending money on exempt assets or other qualified expenditures • -gifting the property to another or disclaiming the property • 2. Amount funded to SNT justifies the cost of creation and administration
Pooled SNTs • Established under 42 USC 1396p(d)(4)(C) • Pooled Trust can be established for a disabled individual of any age, and must be established and managed by a non-profit association. • A separate account is maintained for each beneficiary, but funds are “pooled” together for investment purposes.
Benefits of Pooled SNT • Pooled SNTs may be used for first or third party special needs trusts • Unlike d(4)(A) trusts, there is no age limit for a Pooled SNT • Thus if your client is over 65 and needs to fund his/her own money into a SNT, a pooled SNT is a good option for maintaining benefits • Pooled SNTs may be the more appropriate option for someone who has less money to fund the SNT • Typically Pooled SNTs have a lower administrative cost than a d(4)(A) trust
Pooled SNT Considerations • If funded with beneficiary’s own money, payback provisions still apply • Client may be uncomfortable with a “stranger” managing the funds • Not tailored to beneficiary’s individual situation • Typically requires less attorney involvement • Attorney can advise on the Pooled SNT option • Attorney reviewed proposed joinder agreement and may have to send the same to the Department of Health Care Services
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