By Thomas D. Begley, Jr., CELA
Trusts for disabled individuals who have not reached age 65 and are funded with assets of the disabled person are authorized under OBRA-93.(1) The trust is for the benefit of disabled persons. The person much be under 65 at the inception of the trust. While the trust must be established and funded prior to the beneficiary attaining the age of 65, it may continue after 65. If the trust is funded with a structured settlement prior to the beneficiary attaining the age of 65, the trust remains viable even though payments from the annuity are received after age 65.
The trusts must be established by a parent, grandparent, legal guardian, or court. Curiously, they cannot be established by the disabled individual. However, there is legislation in Congress that would permit the individual beneficiary to establish his or her own trust.
By statute, transfers to the trust are not subject to the transfer of assets rules. The trust should be drafted so that the resources are unavailable. The trust should be administered in such a way that the income is not counted as income to the beneficiary.
The trust must provide that on death the funds remaining in the trust go first to reimburse Medicaid and then for the benefit of other beneficiaries.
The assets used to fund the trust must be the assets of the beneficiary, not the assets of a third party, except that a token amount is permitted to be contributed by a third party to seed the trust, i.e., S10 or S20. If a trust is funded with assets of a third party, it is considered a Third-Party Special Needs Trust and the rules are very different. Generally a Self-Settled Special Needs Trust, or First-Party Special Needs Trust is used in connection with:
When drafting a Self-Settled Special Needs Trust, it is always good practice to use a professional trustee. Family members are always well intentioned, but do not have the necessary expertise with respect to public benefits law, tax law and investments and do not know how to navigate the disability system. Family members frequently have a conflict of interest with the beneficiary. Family members are often uncomfortable in naming a professional trustee. A way to make everyone happy is to appoint family member as trust protector. The trust protector is given the authority to monitor the trustee and to remove and replace the trustee, if the trust protector is dissatisfied with the trustee’s performance. The trust protector’s power to remove and replace could be limited to cause, which would be spelled out in the trust document, or the power could be exercised without cause. If a family member serves as trust protector, it is inappropriate to provide for compensation for the family member. The document should provide that if the trust protector removes and replaces the professional trustee, the new trustee must also be a professional trustee. The professional trustee could be a corporate trustee or a disability organization. It is good practice to set a limit on the dollar amount under management by the new trustee. Fifty million dollars might be appropriate, so that disability organizations can qualify.
Established by
A Self-Settled Special Needs Trust must be established by a parent, grandparent, guardian or court. The Social Security Administration (SSA) is now taking the position that if a parent establishes a trust, they must fund the trust with 510 of the parent’s money. This position is based on a court case, Draper v. Colvi11.(2) The rationale seems to be that the person who “first funds” the trust is the establishor. If the parent signs the trust, but funds it with the personal injury settlement, inheritance, child support or alimony, then that money belongs to the beneficiary of the trust, so the court
and Social Security are taking the position that the first funding comes from the beneficiary and the beneficiary is not permitted to establish a Self- Settled Special Needs Trust.
The same rationale would apply to a trust established by a grandparent. Self-Settled Special Needs Trusts are seldom established by a guardian, because court action is required to authorize the guardian to establish the trust. As a practical matter, it is easier to simply have the court establish the trust. The judge will not want to sign the trust, so the trust document must state that the trust is approved, required and established and the judge directs another individual to sign the trust. Typically, the individual signing the trust is the parent, but the first funding doctrine does not apply, because the trust is actually being established by the court. It is not good practice to simply incorporate the trust in the court order by reference. It is important that the judge direct someone to sign the trust. If a parent or grandparent is not available, it could be any other family member or even an attorney.
In establishing any trust to be used in a Medicaid context, there are seven planning considerations:
While the above-referenced statutes do not mention irrevocability, the POMS do require that a Self-Settled Special Needs Trust be irrevocable.
The Social Security Administration requires that a Self Settled Special Needs Trust have a spendthrift clause. The purpose of this clause is to prevent the beneficiary of the trust from assigning trust assets. If the beneficiary had the right to assign the corpus of the trust the assets would be available and the trust would not qualify as a Special Needs Trust. Even though the trust contains a spendthrift provision, it is not immune from claims of the beneficiary’s creditors, unless it is established in a state that has a Domestic Asset Protection Trust statute. A First-Party Special Needs Trust is a Self-Settled Trust and, therefore, subject to claims of creditors. New Jersey does not have a Domestic Asset Protection Trust statute.
1 42 u.s.c. § 13 96p( d ) (4)( A).
2 Draper v. Colvin, DSD Civ. 12-4091-KES Ouly 10, 2013); U.S. Cou rt or Appeals 5th Cir. No. 13-2757 (Mar. 3, 2015).
By Thomas D. Begley, Jr., CELA
One of the trusts used in Medicaid Planning is a Disability Annuity Special Needs Trust (“DASNT”). A previous Straight Word article discussed a Disability Annuity Trust (“DAT”). These trusts are designed so that an individual can establish a trust and transfer assets to the trust for the benefit of a disabled child of any age or a disabled individual under age 65 without incurring a Medicaid transfer of asset penalty. The problem with that trust is that the assets in the trust are considered available for public benefit purposes. Therefore, if a DAT were established for the benefit of an individual receiving Supplemental Security Income (“SSI”) and/or Medicaid, they would become ineligible for those public benefits because the assets in the trust would be countable. The solution would be to wrap a DAT inside a Special Needs Trust (“SNT”). In a Medicaid Planning context, the monies to be used to fund the trust would belong to the third party, usually a parent or a grandparent, so the SNT would be a Third-Party Special Needs Trust (“TPSNT”). In a typical situation, the parent would require long-term care and be applying for Medicaid. In order to become immediately eligible, from an asset standpoint, the parent would transfer the assets to a DASNT. The trust is exempt from the SSI and Medicaid transfer of asset penalties, and the assets in the trust would not be considered available because of the special needs provisions.
Generally, a family member, other than the trust beneficiary, would be the trustee of the DASNT, although a professional trustee could be utilized.
There are seven main issues to be considered in drafting any trust involving a potential Medicaid recipient.
These include:
Let’s examine each of these issues in the context of a DASNT.
The assets in the DASNT would not be available, because the trust would be designed to give the trustee complete discretion with respect to distributions. Standard Third Party Special Needs Trust language would be used in designing the trust. The standard DAT language would also be included. Because of the special needs provisions, the assets in the trust are not counted as assets of the beneficiary.
There would be no transfer of asset penalty imposed upon the grantor, usually a parent or grandparent, by SSI and Medicaid, because there is a statutory exemption(1) from the penalties for transfers of assets to or for the sole benefit of individuals with disabilities. For a child with a disability, there is no age limit. If the beneficiary of the DASNT is an individual other than a child, there is an age limit of 65.
Whether a “sole benefit of” trust is subject to a Medicaid payback is open to question. New Jersey takes the position that such a trust must include a Medicaid payback and this issue has not been litigated. Under the provisions of HCFA Transmittal 64, a payback does not appear to be required so long as distributions are made to the beneficiary on an actuarially sound basis. This means that the distributions must be made over the actuarial life expectancy of the beneficiary as determined by the tables contained in HCFA Transmittal 64. Many states follow this interpretation with respect to “sole benefit of” trusts including DATs and DASTs.
Because a DASNT is a crisis Medicaid planning strategy, generally all assets are placed in the trust. A careful analysis must be made as to whether to include retirement accounts. If the life expectancy of the grantor is short, a better strategy may be to take the risk and use the retirement accounts to pay for care. If the life expectancy is longer, the best strategy may be to simply pay the tax and transfer the after-tax assets to the DASNT.
There would be no Medicaid estate recovery from the estate of the grantor, but there would be estate recovery from the estate of the beneficiary. Since the state requires a payback, then the payback would replace the estate recovery provisions. The payback would include all medical assistance paid to the beneficiary since birth.
Transfers of assets to a DASNT would be subject to elective share considerations. It is good practice for both spouses to contribute the assets to the DASNT.
CONSIDERATION DAT DASNT
Typical Grantor Parent/Grandparent Parent/Grandparent
Typical Trustee Family Member (Non-Beneficiary) Family Member (Non-Beneficiary)
Assets Available Yes No
SSDI/Medicare Yes Yes
SSI/Medicaid No Yes
Transfer Penalty No No
HEMS Standard Yes No
SNT Standard No Yes
(1) 42 U.S.C. §1396p(c )(2)( B).
The post Disability Annuity Special Needs Trusts first appeared on SEONewsWire.net.]]>by Thomas D. Begley, Jr., CELA
One of the trusts used in Medicaid Planning is a Disability Annuity Special Needs Trust (“DASNT”). A previous article discussed a Disability Annuity Trust (“DAT”). These trusts are designed so that an individual can establish a trust and transfer assets to the trust for the benefit of a disabled child of any age or a disabled individual under age 65 without incurring a Medicaid transfer of asset penalty. The problem with that trust is that the assets in the trust are considered available for public benefit purposes. Therefore, if a DAT were established for the benefit of an individual receiving Supplemental Security Income (“SSI”) and/or Medicaid, they would become ineligible for those public benefits because the assets in the trust would be countable. The solution would be to wrap a DAT inside a Special Needs Trust (“SNT”). In a Medicaid Planning context, the monies to be used to fund the trust would belong to the third party, usually a parent or a grandparent, so the SNT would be a Third-Party Special Needs Trust (“TPSNT”). In a typical situation, the parent would require long-term care and be applying for Medicaid. In order to become immediately eligible, from an asset standpoint, the parent would transfer the assets to a DASNT. The trust is exempt from the SSI and Medicaid transfer of asset penalties, and the assets in the trust would not be considered available because of the special needs provisions.
Generally, a family member, other than the trust beneficiary, would be the trustee of the DASNT, although a professional trustee could be utilized.
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A common Medicaid Planning strategy is to transfer assets to third parties, wait for the five-year lookback to expire and apply for Medicaid. If assets are transferred to children, there are certain risks to be considered. If the child is sued by a creditor, the assets transferred by the parent to the child are subject to the claims of the creditors. If the child is subsequently divorced, the son or daughter-in-law may be able to claim additional funds by virtue of the assets that were transferred by the parent to the child. Basic divorce law says that so long as the transferred funds were not co-mingled by the child and the child’s spouse they are not subject to claims for equitable distribution, but Family Law practitioners all advise that the judge will figure out something else to give the son or daughter-in-law and advise against this strategy. If the child to whom the assets are transferred dies, the parent’s assets can be left by the child’s Will to the child’s spouse or, absent a Will, the child’s spouse will normally inherit by intestacy.
An alternative would be to transfer assets to a Children’s Trust. Under the Children’s Trust, one or more of the children could serve as trustee. The parent would give up all access to the principal being transferred to the trust and any income earned by that principal. The trust could provide that distributions could be made to a child from the principal and/or income. After five years, the assets transferred to the trust would be out of the parent’s name and would not be counted for Medicaid eligibility purposes.
Ideal assets to fund a Children’s Trust are depreciated assets. A primary residence may be the best choice for funding the trust. A second home is also a good choice, particularly if it has appreciated in value.
Retirement accounts are never a good asset to fund a Children’s Trust, because the income tax on the retirement account would have to be paid when the funds are withdrawn to fund the trust.
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by Thomas D. Begley, Jr., CELA
Types of Trusts. Trusts established and funded after August 10, 1993, are governed by OBRA-93. The Medicaid-qualifying trust rules were repealed by OBRA-93, and new rules for revocable and irrevocable trusts created after August 10, 1993, were established. OBRA-93 also created special disability trusts, each of which has rules. These trusts include Self-Settled Special Needs Trusts and Pooled Trusts. OBRA-93 also established a Miller Trust, to be used when a potential Medicaid recipient has income in excess of the income cap. The fourth trust authorized under OBRA-93 is a sole benefit of trust.
The commonly-used trusts in Medicaid Planning include the following:
What Constitutes a Transfer. The key to understanding the transfer rules pertaining to trusts is to understand when the transfer has taken place. If there is a transfer from an individual then to a trust under conditions by which the trust assets are still available to the individual, for Medicaid purposes there has been no transfer. Therefore, where the trust is revocable, the assets are still available to the individual after the trust is funded so there is no transfer at this point. The transfer is considered to have taken place on the date of payment from the trust to a third party.
If the trust is irrevocable, the transfer is considered to have been made as of the date the trust was established and funded, or upon such later date that payment to the settlor was foreclosed. However, if the settlor can still benefit from the assets with which the trust is funded, those assets are still available so there is no transfer. If and when those assets are paid out to a third party, the transfer occurs. If the settlor places assets in an irrevocable trust and can no longer benefit from any of the trust corpus, there has been a transfer of assets when the trust is funded.[1]
Drafting Considerations for Trusts. There are seven main issues to be considered in drafting any trust involving a potential Medicaid recipient. These considerations are:
[1] 42 U.S.C. § 1396p(c)(1)(B); HCFA Transmittal 64 § 3258.4E.
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