By Thomas D. Begley, Jr., CELA
The Concept
A sole benefit of trust is a creature of HCFA Transmittal 64.’ These trusts have traditionally been used in crisis planning. They can be established for the benefit of disabled persons—a Disability Annuity Trust (“DAT”).2 The idea is that assets would be transferred to an irrevocable trust for the sole benefit of the disabled individual. The assets in the trust were then paid out to the beneficiary on an actuarially sound basis using the actuarial tables contained in HCFA Transmittal 64.;i However, some states, including New Jersey, maintain that despite the clear language in HCFA Transmittal 64, the language in the statute “sole benefit of” means that a Medicaid payback provision is required. Because the assets were transferred to an irrevocable trust “for the sole benefit of” a disabled individual, the transfer is not subject to the Medicaid transfer penalty rules.
This is a particularly useful device where (1) there are highly appreciated assets and utilization of the trust makes it possible for a “step up” in basis to be obtained, and (2) advanced planning has not been done and the transfer of assets to children would result in significant periods of Medicaid ineligibility. There are two issues to be considered in utilizing “for the sole benefit of” trusts: transfer rules and availability.
Transfer of Asset Penalty
A sole benefit of trust is exempt from the Medicaid transfer of asset penalties.
Age limit
If the sole benefit of trust is established for a disabled child, there is no age limit.
Sole Benefit of child
The trust can be established for a disabled child age 65 or older.4
Sole benefit ofother disabled individual
If the sole benefit of trust is established for an individual other than a child, the other individual must be under age 65 years of age and disabled.5
Definition of sole benefit of
HCFA Transmittal 64 deals with transfers of assets and treatment of trusts.6 For the sole benefit of is defined as follows:
A transfer is considered to be for the sole benefit of a spouse, blind or disabled child, or a disabled individual if the transfer is arranged in such a way that no individual or entity except for the spouse, blind or disabled child, or disabled individual can benefit from the assets transferred in any way, whether at the time of the transfer or at any time in the future. For a transfer or trust to be considered for the sole benefit of one of these individuals, the instrument or document must provide for the spending of funds involved for the benefit of the individual on a basis that is actuarially sound based on the life expectancy of the individual involved.7
Despite the clear definition of sole benefit of in HCFA Transmittal 64, many states, including New Jersey, require that the sole benefit of trust have a provision requiring a payback on the death of the beneficiary to the state Medicaid agency.
The key issue concerning trusts “for the sole benefit of” is availability. In a private letter, HCFA, now CMS, has taken the position that a trust established for the sole benefit of a community spouse under HCFA Transmittal 64 is an available resource.8 HCFA maintained that there is a material difference between a standard annuity and an “annuitized” trust. HCFA states:
A standard annuity can protect the funds used to purchase the annuity from being counted as resources in determining eligibility for Medicaid. However, there is a fundamental difference between a standard annuity and the “annuitized” trust you established. A standard annuity requires the actual purchase of a commodity; i.e., the annuity itself. A specific amount of money is given to the entity selling the annuity, in return for which the entity contractually agrees to provide an income stream for a specified period of time. Upon completion of the transaction, the buyer no longer owns the funds used to purchase the annuity. Instead, the buyer owns the annuity itself. If the annuity is irrevocable, as most annuities are, the buyer cannot reclaim ownership of the funds used to purchase the annuity. The buyer is only entitled to the income stream purchased and only for as long as the annuity stipulates. This is essentially the same as the purchase of any item or product where funds are exchanged for ownership of something else.
Therefore, it is clear from this letter that assets in a sole benefit of trust are available to the beneficiary of the trust.
Therefore, if the beneficiary is receiving Social Security Disability Income (“SSDI”) and Medicare, a DAT is appropriate. Beneficiaries receiving Supplemental Security Income (“SSI”) and Medicaid must utilize a Disability Annuity Special Needs Trust.
An advantage of a DAT are there is no transfer of asset penalty. However, a Medicaid payback is required on the death of the beneficiary of the trust. Income from the trust is taxed to the beneficiary. There is a gift for gift tax purposes, but because of the $5,450,000 lifetime exemption, this is not a major consideration for most people. The assets of the trust would be included in the estate of the beneficiary of the trust, not the Grantor.
Begley Law Group, P.C. has served the Southern New Jersey and Philadelphia area as a life-planning firm for over 85 years. Our attorneys have expertise in the areas of Personal Injury Settlement Consulting, Special Needs Planning, Medicaid Planning, Estate Planning, Estate & Trust Administration, Guardianship, and Estate & Trust Litigation.
1 HCFA Transmittal 64 § 325 7.
2 HCFA Transmittal 64 § 3258.9B.
1 HCFA Transmittal 64 § 3258.9B.
* 42 U.S.C. § 1396p(c)(2)(B)(iii).
5 42 U.S.C. § 1396p(c)(2)(B)(iv).
6 HCFA Transmittal 64 § 3257.
7 HCFA Transmittal 64 § 3257(B)(6).
8 Letter dated April 16, 1998, from Robert A. Streimer, Disabled and Elderly Health Programs Group, Center for Medicaid and State Operations, Health Care Financing Administration, to Jean Galloway Ball.
