Special Needs Planning Cox Law Group, Inc Cynthia Cox, Esq. - - PowerPoint PPT Presentation

Cox Law Group, Inc Cynthia Cox, Esq. cynthia@coxlawgroupinc.com 310-798-6150 23326 Hawthorne Boulevard Suite 390 Torrance, California 90505

Special Needs Planning

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

ABLE Accounts Overview

• Achieving a Better Life Experience
• 26 USC 529A
• For those with a disability that began prior to age 26
• Disability must meet Social Security’s standards for adults
• Tax benefits
• Investments are not federally taxed and often not taxed in the state in which the

account is located

• Not all states have ABLE accounts, but beneficiaries (or their authorized

legal representative (parent, guardian, conservator)) can open an account in another state’s ABLE program

• Beneficiaries can switch their ABLE accounts from one state program to another, but

can only have one ABLE account at a time

• Beneficiaries (and/or their families) should carefully consider which state program to

choose

ABLE Account Funding

• Calendar year limit:
• Up to $15,000 from any source
• Including family, friends, beneficiary, beneficiary’s benefits, and other unearned income
• Another $12,140 from beneficiary’s own earned income (if he/she has a job)
• If beneficiary earns $12,140 or more, up to a total of $27,140 may be deposited yearly

into the ABLE account

• If beneficiary earns less than $12,140, then the amount the beneficiary may contribute would

be lower

• 529 college savings account rollover
• As of January 1, 2018, parents who saved money in a 529 college savings

account may be able to roll up to $15,000 (in 2018) of the funds into an ABLE account if the beneficiary is later diagnosed with a disability

ABLE Account Funding Continued

• Total limit before benefits may be lost
• Beneficiary may have up to $100,000 total in ABLE account and continue to

receive SSI benefits

• If beneficiary goes over that amount, SSI benefits stopped, but can be restarted (without

having to reapply) once amount drops back below $100,00

• Medi-Cal eligibility not affected by any amount in an ABLE account
• Many states have limits on the total amount allowed in an account
• California’s max is $529,000

Spending ABLE Account Funds

• Money in an ABLE account must be used for qualifying expenses,

including, but not limited to:

• Daily living expenses
• Education
• Housing
• Transportation
• Health care
• Assistive technology
• Legal fees
• Financial management fees

Intersection of ABLE Accounts and SNTs

• Beneficiaries can have an ABLE account as well as a SNT at the same

time

• Can even have an ABLE account, a first-party SNT, and a third party SNT
• Beneficiaries can enjoy benefit of personal control over ABLE account

money while having a more robust SNT managed by a different trustee

• ABLE accounts may be a better option to pay for housing as money

spent from ABLE accounts on housing do not decrease SSI benefits

• SNTs may allow for more freedom in spending options

Third Party SNTs

• -Third Party SNTs are typically established by a concerned donor on behalf of the

beneficiary.

• -Multiple donors may contribute to the same Third Party SNT.
• Differences between First and Third Party SNTs :
• -BIGGEST difference is the source of the funding. Third Party SNTs cannot be

funded with the beneficiary’s assets and must be funded with another’s. One dollar of a beneficiary’s own money could taint an entire Third Party SNT.

• - Third Party SNTs, unlike First Party SNTs do not have the same payback provision

requirement because the funds never belonged to the beneficiary.

• -Unlike First Party SNTs, Third Party SNTs do not have age limits.

Free Standing Third Party SNTs

• -It is preferable to draft a separate special needs trust, rather than to include

the special needs trust in the revocable living trust or will.

• Letters of Intent
• -A Letter of intent prepared by the parent, guardian, or other caregiver can

be invaluable as a tool for the trustee in later administration.

• Letters may include:
• -the caregiver’s hopes, dreams, and aspirations for the beneficiary
• -documents of the beneficiary’s likes, dislikes, and abilities
• -the beneficiary’s personality characteristics, programs, routine, social

integration, religion, likes and dislikes, the support group, personal information and contact information, essential persons in the (DAP’s ) life, medical information, abilities and limitations, favorite foods, routine, activities, aspirations, expectations.

• -Some practitioners incorporate the letter of intent into the SNT, and some

prefer to retain it as a separate document.

Common Drafting Errors

• -Over simplified approach to Drafting
• - There is no “one size fits all” SNT form
• -However, “canned” formats must be modified to fit the unique circumstances of

the person with disabilities and consider programs for which that person may be eligible, both now and in the future.

• Creating a SNT without Due Consideration of Other Alternatives
• - Sometimes the creation of a SNT is not appropriate

Factors to be considered include, but are not limited to:

• - The assets available to fund the SNT
• -The age of the beneficiary
• -The living arrangements and beneficiary’s needs, is there a significant

amount of unmet needs ?

• -The consideration of ‘spend down’ or purchase of exempt assets in lieu of

the SNT and the ultimate effect of holding assets in the name of the beneficiary rather than an SNT

• -The future needs of the beneficiary and whether there will be a

diminished or an increased need for public benefits

• -Whether a first party pay back trust is appropriate in light of the new

recovery rules

Downsides of establishing a SNT:

• - cost of drafting
• - possible and continuing court intervention,
• -the limitations of availing oneself of public benefits
• -limited access to the funds by the beneficiary and/or their family

members

• -possible payback to the state upon the death of the beneficiary, or

early termination of the Trust

Drafting Inappropriate Distribution Standards

• - One of the most important areas of the drafting of an SNT is careful

consideration of the distribution standards

• -A balance should be sought to ensure access to public benefits as

necessary or desired, but not in such a restrictive manner as to preclude the use of the trust funds in a creative way to meet unmet needs or to enhance the quality of life.

Drafting Inappropriate Distribution Standards

• The drafter should be constantly considering:
• -Is the distribution standard too restrictive?
• -Are there unmet needs that are likely to remain unmet because of this

restrictive standard?

• -Could the trustee buy clothes for the beneficiary (now allowed under SSI

regulations); or a home, or supplement medical care, hire a caregiver, and so on.

• -What if Medicaid (Medi-Cal in California) provides coverage for a root

canal, but the beneficiary must be on a 3-5 month waiting list to receive the treatment? Can the trust pay for dental work if Medi-Cal wouldn’t cover the work? Should the trust do so and how would that expenditure effect Medi-Cal, if at all ?

Drafting Considerations Continued:

• Payment for caregivers in addition to those caregivers provided in an

institution, is the trustee likely to also be the caregiver of the person with disabilities?

• -Have the potential conflicts of interest been properly addressed?

What about payment to the trustee for caregiving services, rent, or

• ther expenses, and the prohibition against self-dealing and other

fiduciary duties?

• -Is the trust drafted so that the trustee is prohibited from eliminating
• r reducing public benefits? Is there an instance in which the

temporary elimination of benefits would provide an overall benefit to the person with a disability?

Drafting Considerations (Cont.)

• - Is the distribution standard “discretionary?”
• -How will the trustee be chosen?
• -Who will contribute to distribution decisions?
• -Will there be a trust protector? What will be the trust protector’s

role? Will that trust protector act as a fiduciary?

• -What about an advisory committee? Who will be the members?

• Distribution standards should be drafted in a customized fashion, with

consideration given to the creator’s goals and aspirations for the beneficiary with a disability.

• -The ability to ascertain the intent of the settlor(s) is essential in the

administration of the trust and in the event of a contest of the trust by a public agency.

• Some distribution standards are drafted without regard to the Medi-Cal
• r Social Security, or without understanding of the rules, therefore they

are too open, possibly jeopardizing the public benefits.

• -Sometimes the disabled beneficiary is erroneously named as the

trustee.

• -Sometimes trusts are drafted with other present beneficiaries, when

the trust type required the trust be a ‘sole benefit’ type of trust, i.e. for the sole benefit of the disabled beneficiary.

• -Sometimes disabled beneficiaries are given powers which are

tantamount to being able to invade the trust, modify the trust, or access trust assets, risking the adjudication that the corpus of the trust is “available” and public benefits are inadvertently and catastrophically eliminated.

• -Some distribution standards are simply “behind

the times” and include provisions prohibiting the purchase of clothing, limit distributions to supplemental or emergency expenditures, or limiting the purchase of tangibles to a dollar limit, and do on. [Although in some cases, such standards may be appropriate]

• -Always strive for flexibility in drafting, and plan

for modification of the distributions called for in the trust if the trust is too restrictive, or becomes, by change of law or otherwise, not restrictive enough.

• -Think through creative alternatives:
• -Can the trust be modified by the trustee? A trust

protector? The Court? If court modification will be required, from whom will consent need to be sought? Is it feasible to seek and gain this consent?

• -In making a distribution, the trustee should consider whether

making the distribution is permissible under the trust instrument and state law, whether the proposed distribution is for the sole benefit of the disabled individual (if required), whether the item to be purchased is consumable, and, if so, does the method of it’s purchase violate SSI income rules?

• -If the item to be purchased will be considered a resource, how will

it be titled (trust or individual), and is it exempt?

Unnecessary Use of Payback Provisions

• -Frequently, trusts erroneously include payback provisions which are not required

by law, or omit a payback provision, when such a provision is required.

• What is a payback provision?
• - a provision which requires the balance of the trust, upon the death of the

beneficiary, or early termination of the Trust, to be paid back to the state for Medi- Cal usage.

• -To determine whether a payback provision is required, one must make a

distinction in the type of trust created ( Self-Settled (First Party) or Third Party) and analyze the source of funds for the creation of the trust.

• - A first party self-settled trust, created with the funds of a disabled beneficiary

must contain a payback provisions, while a Third Party Trust is not required to contain a payback provision.

• -Sometimes it is very difficult to determine whether the funds are first party or

third-party money

Confusing Benefits Programs

• -to those who do not deal with public benefits regularly, (and even

to those of us who do) public benefits can be a source of confusion

• -Medicaid (known as Medi-Cal in California ) is a needs-based public benefit providing

various medical care and custodial care.

• -Medicare is an entitlement program based on payment into the social security system,

for which retirees may be eligible after age 65 and persons with a disability may be eligible for two years after being found eligible for SSDI.

• -Social Security Disability Income (SSDI) is a disability program which pays a monthly

income based on entitlement after paying into the social security system for a certain period of time.

• -SSI is also a social security program which pays a monthly income upon disability, but is a

needs-based program, requiring an eligibility determination based on assets and income.

• -it is possible for a person to be receiving SSDI, SSI, Medicare, and Medi-Cal

simultaneously, as well as other programs. It is essential to determine what programs the beneficiary is receiving, and this is not always easy to determine. Many times a call to the social security office is required, with the participation of the beneficiary.

The following list may be useful:

• Needs-Based Public Benefits
• a.SSI
• b.Medicaid(Medi-Cal)
• c.Section 8
• d.Food Stamps
• e.Regional Center Benefits
• f.Group Homes
• g.Traumatic Brain Injury Programs
• h.State Waiver Programs
• Entitlement Benefits
• a. SSDI
• b. Medicare
• c. Special Education

Naming the Wrong Trustee

• -This is another area where it may be advisable to recommend in

earnest a professional trustee. A person can lose benefits from poor administration of the trust just as easily as poor drafting. Because a SNT must be drafted as a discretionary trust, the trustee has a lot of latitude to make both good and bad decisions.

• -The SNT trustee must:
• -be well versed in the specifics of the beneficiary’s type of disability, the

benefits available and the rules and regulations related to those benefits.

• -understand investments
• -be able to keep detailed records
• -be able to plan the discretionary distributions in light of the size of the

trust corpus, the needs of the beneficiary, and the intent of the settlor(s)

• A family member can act as a trustee, but will require advice, and

monitoring.

• -should be a person who is willing to seek assistance from a variety of

sources in order to properly discharge his or her duties.

Overview of Updates:

• a. Sources of Law SSI Program
• i. Statutory: Title XVI [42 U.S.C. 1381 et seq.] of Social Security Ace

Trusts- Sec.1613 (e) [42 U.S.C. 1382b(e)]

• ii. Regulatory: SSI, in general, 20 CFR Part 416, Income Rules are at

20 CFR Part 416, Subpart K, Resource Rules are at 20 CFR Part 416 Subpart L

• iii Sub-Regulatory: The Program Operations Manual System

(POMS)

Updates to POMS-What Changed?

• 1. SI 01120.200 51-Third Party Trusts pre 1-1-2000
• 2. SI 01120.201 52- First Party Trusts post 1-1-2000
• 3. S1 01120.203 53 –D(4)(A) and D(4)(C) exceptions
• -Exceptions to counting trusts established on or after January 1, 2000
• 4. S1 01120.202 54
• -Development and Documentation of trusts established after January

1, 2000

Generally 3rd Party Trusts, or with Assets of 3rd Parties

• i. Does the Trust meet the definition of resource?
• 1. Can the Beneficiary revoke the trust and use the assets; or
• 2. Can the Beneficiary direct the use of the trust assets to pay for food or

shelter (is the trust a support type trust?)

Trust Review Process

• 1. Three-Tiered System
• a. Field Office Technician makes initial determination
• b. Field Office Technician goes to the Regional Trust Reviewer
• c. The Regional Trust Reviewer can go to the Regional Trust Lead for review

Post-Eligibility Changes

• 90 day amendment period to cure previously accepted trust
• Use upon change of policy, policy clarification, or reopening of

erroneous trust determination.

• Can get good cause extension

Miscellaneous Changes

• 1. ABLE accounts are not trusts
• 2. U.S. Military Service Benefit Plan payments are assignable to a SNT

POMS Sole Benefit Rule

• -Statutory Basis: Section 1917 (d)(4)(A) of Social Security Ace, A trust

containing the assets of an individual… which is established for the benefit of the individual

• Third-Party payments are allowed
• Must be of primary benefit to the beneficiary

• Travel Expenses
• Allowed if accompanying trust beneficiary and necessary
• Third-party travel to visit a trust beneficiary
• Allowed to ensure safety and medical wellbeing of the beneficiary

• Titling/ Registration
• -Best practice - in the name of the SNT
• Service Providers
• -can be a family member
• -need not have medical training or certification
• -compensation must be reasonable

• Distributions to able accounts
• -transfers from SNT to able accounts = not income
• -transfers from SNT to able accounts does not = a resource
• Pre-Paid Cards
• -True Link Cards
• Trustee must be account owner and administrator
• -beneficiary is card holder
• -debit cards in the name of the beneficiary are the same as a cash

distribution

• Development and Documentation of Trusts
• -can request re-opening of trust determination
• -written notice by SSA must be issued for trust
• 1. Must site section of trust that is problematic
• 2. Must give the POMs citation that contains the policy requirement
• 3. Must tell where the POMS can be found online
• Post-Eligibility Event
• -If the trust was already approved, SSA is discouraged from re-opening

the case