Understanding Self-Funded Special Needs Trusts for Persons Age 65+

By Sharon L. Pope, JD 1

Introduction

Estate planning for a family member with disabilities or special needs can be challenging, especially if this family member relies on government benefits such as income from social security2 or medical coverage through Medicare or Medicaid3. The focus of this article is on the pooled trust.

There is a common misunderstanding that a family member who is reliant on government benefits must be disinherited in order to preserve these important benefits. Furthermore, it has been thought that in order to qualify for certain benefits, this family member must be forever in a state of impoverishment.

But in 1993, Congress amended the Social Security Act4 and exempted certain types of trusts, but only for persons with disabilities, referred to as “beneficiaries” in this article. These trusts are called special needs or supplemental needs trusts, hereinafter referred to as SNTs and the resources in these trusts are not counted toward the income or asset limitations of certain government benefit programs.

This article will primarily describe the different types of SNTs under this Act and under what circumstances these SNTs will be useful. We have included a section on Third party SNTs, but these are not the focus of this article. We have also included hypothetical case studies for both the self-funded and Third party funded SNTs.

Self-funded or Payback SNTs

First, the self-funded or payback SNT is known by its federal statutory designation, (d)(4)(A), (B)5, or (C). These designations come from the federal statutory authority at 42 U.S.C. § 1396p(d)(4).

All of these SNTs are designed as a means of protecting the SNT beneficiary’s assets and income, as well as his or her eligibility for government benefits. The money or other property in these SNTs is deemed non-countable or unavailable to the beneficiary of the SNT for Medicaid6 and Supplemental Security Income “SSI” purposes as well as for some other programs7. In addition, the transfer of the money or other property to the SNT is deemed a non-penalty transfer for Medicaid8.

The Federal Statutory authority for these SNTs is listed below.

  1. d(4)(A) Trust (42 U.S.C. § 1396p(d)(4)(A)):
    1. (i) A trust containing the asset of an individual9 under age 6510;

    2. (ii) who is disabled (as defined in section 1382c(a)(3) of this title)11, and which is;

    3. (iii) established for the benefit of such individual by a parent, grandparent, legal guardian of the individual12, or a court;

    4. (iv) if the State will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State plan under this subchapter.

  2. d(4)(C) Trust (42 U.S.C. § 1396p(d)(4)(C)): A trust containing the asset of an individual13 who is disabled (as defined in section 1382(c)(a)(3) of this title) that meets the following conditions:
    1. (i) The Trust is established14 and managed by a non-profit association15.

    2. (ii) 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.

    3. (iii) Accounts in the trust are established solely for the benefit of individuals who are disabled (as defined in section 1382c(a)(3) of this title) by the parent, grandparent, or legal guardian of such individuals, by such individuals, or by a court.

    4. (iv) To the extent that amounts remaining in the beneficiary’s account upon the death of the beneficiary are not retained by the trust, 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 title.

In addition to the requirements of 42 U.S.C. § 1396p(d)(4)(C), the Centers for Medicare and Medicaid Services “CMS’ sent out a Regional Bulletin to Region I on May 12, 2008, which stated that transfers by individuals age 65+ “may” incur a penalty. Although the CMS used the word “may”, the State has, implemented new requirements for a Pooled SNT for individuals age 65+. The State is now requiring that individuals with disabilities age 65+, who transfer funds into Pooled SNTs, prove that the transfers were not penalty transfers. The beneficiaries must demonstrate they will receive or are expected to receive fair value for their transfers. The State requires the following, as set out in Information Bulletin No. 09-02:

  • First, if the beneficiary transfers less than $380.00 monthly into the Pooled SNT, there is no penalty, as this amount represents less than a one (1) day penalty from July 1, 2013 to June 30, 2014. This number typically changes each July 1 and is the average daily rate for nursing home care in Connecticut.

  • Second, if the beneficiary transfers or assigns $380.00 or more monthly into the Pooled SNT, he or she must expend the excess, in its entirety, within six months to avoid a penalty. The beneficiary must indicate how the funds will be used. He or she must have a definite plan16, which must be approved by the Department of Social Services, and the beneficiary must receive fair value for these transferred funds. This is not a pooled trust requirement; it is the requirement of DSS.

  • Finally, if the beneficiary transfers an asset (generally a one-time transfer of a larger amount) into a Pooled SNT with the intent of expending the asset during his or her lifetime, the Department of Social Services will not impose a penalty. Again, the beneficiary must have a definite plan, approved by the Department, regarding how he or she will use the asset, and the beneficiary must receive fair value for it. Part of the plan must include a time frame, so that the Department of Social Services can determine, based on the beneficiary’s life expectancy, whether the plan is actuarially sound.

Self-Funded SNT Hypothetical Case Studies

Pooled SNT, over asset: Client is a 75 year old male who was injured in an accident 3 years ago. He is wheelchair bound. He is currently receiving 40 hours a week of homemaker services and home health care under the Connecticut’s Home care Program for Elders, which is a Medicaid-waiver program with an asset limit of $1,600 and a monthly income limit of $2,163.00.(2014) His personal injury lawsuit was just settled and his net award is $350,000. Not taking into account Workers Compensation and Medicare issues17 including conditional payments, he could would set up a Self Funded d(4)(C) SNT and place the $350,000 into the SNT. There would be no penalty transfer and no lapse in his benefits coverage.

Pooled SNT, over income: Client is an 85 year old male living at home. He is currently on the Connecticut Home Care Waiver Program for Elders, which has an asset limit of $1,600 and a monthly income limit of $2,163.00. He gets approximately 72 hours of assistance a week through the program, which includes companion care, homemaker services, and home health aides. This Medicaid program also covers co-pays, deductibles, and prescription drugs. He was just approved for the Veteran’s Aid and Attendance Pension, which will bring his income over the $2,163.00 monthly limit by $1,000. The client could create a Self-Funded d(4)(C) Pooled SNT and place his excess income into the SNT on a monthly basis. He would place the excess $1,000 into the trust monthly and have the trustee pay out approximately $900 monthly towards any unreimbursed medical expenses, additional caregiver services, and other living expenses such as his mortgage (if any), property taxes, utilities, etc. He would remain on his benefits without any lapse in coverage.

Pooled SNT, over income: Client, age 68, resides in a nursing home but it has been determined that the client could receive the care needed in the community instead of in a nursing home. The client is already on Medicaid in the nursing home. The Money Follows the Person program is assisting the client in this discharge planning but discovers the client’s income is over the income limit for this home care program. The client does not have any funds to pay the pooled trustee fees for establishment of the trust, nor the attorney fees for the legal advice. What should the attorney do?

Third Party Special Needs Trusts.

A Third Party SNT is an SNT established by a third party, with assets of a third party, but for the benefit of a person with disabilities, often a child. This is not a payback trust. There is no federal statutory authority governing Third Party SNTs. Authority must be found by looking at the case law18, state statutes19, and the POMS manual20. The Third Party SNT can testamentary or an intervivos revocable or irrevocable trust. This SNT must contain specific language that funds are to supplement, not supplant, government benefits. Careful drafting is essential so that the result is achieved of preserving government benefits while having funds for supplemental purposes.

There is no requirement for a payback provision for Medicaid, as with the Self-Funded SNT. Thus, the Settlor dictates the residuary beneficiaries of the SNT corpus. The money or other property in these SNTs is deemed non-countable or unavailable to the beneficiary of the SNT for Medicaid and SSI purposes as well as for some other programs.

It is not required to get the State’s approval prior to executing these SNTs, but once the beneficiary is receiving government benefits and the SNT is funded, the State will need to be notified of the SNT and will scrutinize it to ensure it is in compliance with applicable Connecticut law.

Third Party SNT Hypothetical Case Studies

Testamentary Third Party SNT. Client has a 19 year old child with down syndrome. Child is high functioning, but still lives at home with Client and is in need of supervision. The Child receives benefits from the Connecticut Department of Developmental Services under the Medicaid Waiver and a monthly SSI check. The Client wants to ensure that the Child will remain in the community once he passes away, but is not currently in a financial position to transfer money to an SNT. The Client can set up a Third Party Testamentary Special Needs Trust in his Will where upon his death, his probate estate and a life insurance policy will fund the SNT. The assets in the trust will not be considered assets of the child, and will not affect her Medicaid or her SSI benefits. The State will not be the remainder beneficiary upon the Child’s death.

Intervivos Third Party SNT. Client has a 30 year old child with schizophrenia who has been determined disabled and is on SSI. Client is 65 years old and in good health. Client is doing long term care planning for himself. He executes an irrevocable intervivos Third Party SNT and transfers money directly to the SNT while he is living. Five years pass and the client does not need Medicaid long term care yet, but he is out of the look-back for Medicaid. The SNT will not be considered an asset of his child’s and the State will not be the remainder beneficiary.

Selecting a Trustee

The trustee’s job is a very important one because the trustee will be responsible for ensuring that the beneficiary retains government benefits and that the funds in the trust are only used to supplement those benefits. Under no circumstances can the beneficiary be a trustee as this would allow the assets to be considered available for purposes of government benefits.

The Settlor can be the trustee. For example, a parent could both establish an SNT and be the trustee. However, rarely is a parent or family member conversant on the complexities of SNTs. We have frequently found putting a family member in charge of a beneficiary’s money causes considerable family strife, especially when utilizing a self-funded SNT. It is often better for the family member to stay in the position of being a family member and not be the one who refuses the distributions from the trust.

A better choice is a trustee who is familiar with various income and asset rules for government benefits programs. Many bank trust departments are not versed in these programs and are not willing to handle administration of SNTs. However, attorneys, or non-profit trustees focusing on SNT administration can be utilized. We recommend that if a family member is chosen as a trustee, that a special needs attorney be retained for advice.

Other Issues

Disclosure. For both d(4)(A) and d(4)(C) SNTs, if the beneficiary has received or is currently receiving benefits, the SNT must be disclosed to and approved by the Connecticut Department of Social Services Office of Legal Counsel and Administrative Appeals for Medicaid and the Social Security Administration for SSI recipients. There are specific rules set forth for the timing of these disclosures.

Recovery/Liens. For both (d)(4)(A) and (d)(4)(C) SNTs, there may be lien or recovery issues, which are outside the scope of this article.

Distributions. An SNT trustee typically has sole, absolute and uncontrolled discretion regarding any distribution from the SNT to the primary beneficiary. However, the assets in the self-funded SNT must be used for the sole benefit of the beneficiary. They can be used for such things as supplemental therapy, field trips, vacations, or dental care not covered by Medicaid. However, the assets are not to be used for items which are covered by benefits. For example, Medicaid covers prescription drugs; therefore the trustee should not use SNT assets for this purpose.

The trustee can consult with the beneficiary and the family or friends of the beneficiary to help determine what distributions are needed. Goods and services can be paid with SNT funds, but under most circumstances money should not be given directly to the beneficiary. Usually, this would violate the terms of the SNT document and jeopardize the beneficiary’s benefits. There are exceptions, but obtaining counsel familiar with these rules is critical.

A thorough knowledge of the distributions rules for each benefit program that the beneficiary is eligible for and receiving is mandatory to ensure that distributions from the SNT do not interfere with benefits. For example, if a beneficiary on SSI receives payments from the SNT for housing or food, the SSI monthly amount will be reduced.

Taxation. Self-Funded SNTs are Grantor21 trusts and taxed to the beneficiary; the social security number of the beneficiary can be used or an EIN may be obtained. Depending on whether a Third Party Special Needs SNT is revocable or irrevocable, an EIN might also be needed.

Accountings. If the probate court is used to set up the SNT, continuing probate court supervision will be required22.

Conclusion

Self-Funded and Third Party SNTs are valuable tools to help persons with disabilities of any age significantly increase the quality of their lives, and often allow them to remain in the community living as independently as possible. This article presents the fundamentals of Special Needs Trusts and planning. There are many other factors to consider when using Special Needs Trusts. Consultation with an attorney who is familiar with this area, before attempting disability planning for your clients, is well worth the investment.


1 The author would like to thank Attorney Rebecca Hajosy who co-authored an earlier article on this topic.

2 Title XVI of the Social Security Act, 42 U.S.C. § 1381 et seq. For Supplemental Security Income “SSI”, the benefit Maximum for an individual living alone in 2011 is $674/month and the asset limit is $2,000. In general, income offsets SSI dollar for dollar.

3 Title XIX of the Social Security Act; 42 U.S.C. § 1396 et seq. Depending on the program, asset limits are generally $1,600 and income limits for homecare programs are generally $2,163.00/month in 2014. Benefits available to recipients can be significant.

4 Omnibus Budget Reconciliation Act of 1993 “OBRA ’93”

5 42 U.S.C. § 1396p(d)(4)(B) allows for an “income only” SNT, often referred to as a “Miller Trust”; see Miller v. Ibarra, 746 F.Supp. 19 (D.Colo. 1990). Miller Trusts are commonly used in “income cap” states, but are not permitted in Connecticut, as Connecticut is a “medically needy” state and does not recognize Miller Trusts.

6 See the DSS Uniform Policy Manual “UPM” 4030.80

7 This article discusses only the protection of assets and income for Medicaid (T-19) Programs and Supplemental Security Income (SSI). There are many programs that treat assets in a Special Needs Trusts differently, such as state supplemental programs, cash assistance, and HUD, Housing and Urban Development such as Section 8 housing.

8 See UPM 3029.10 & UPM 3029.11

9 i.e. self-funded, typically from savings, a personal injury settlement, inheritance, or divorce.

10 The Health Care Financing Administration (HCFA) has interpreted the provision: “the Trust beneficiary is under age 65 when the Trust is created” to permit the SNT to continue to be non-countable for Medicaid eligibility purposes even after the individual attains age 65, provided the SNT was created and funded while the beneficiary was still under that age limit. HCFA Transmittal #64 (12/31/94).

11 The individual must be considered disabled according to criteria under the Federal Supplemental Security Income (SSI) program . Individuals receiving SSI or Social Security Disability Insurance (SSDI) would qualify. However, if the individual does not receive SSI or SSDI, the State of Connecticut has an equivalent method for finding this person disabled. (See the W-300 series of forms from DSS.)

12 A Voluntary or Involuntary Conservator of Estate is commonly used to establish and fund a SNT for an individual with no parent or grandparent. (See C.G.S. 45a.655(e)). See also, Department Of Social Services v. Saunders, Conservatrix, 247 Conn. 686 (1999).

13 Of any age

14 Can be established by a parent, grandparent, legal guardian, court or by the individual himself or herself.

15 PLAN of Connecticut, a not-for-profit trust organization, has the only Connecticut Pooled Trust, which has authority under C.G.S. §36a-386. For more information, please visit www.PLANofCT.org

16 Although the Information Bulletin 09-02 is silent on the format of the plan or what expenses the distributions from the PLAN Pooled SNT can be used for, there have been instances when the Department of Social Services Regional offices have required a standard of “extra ordinary” needs and have questioned plans that have monthly budgets for food and shelter costs or have costs for permanent nursing home residents.

17 Using Medicare Set-Aside Arrangements and Medicare Set-Aside Special Needs Trusts are commonly used for complying with the Medicare Secondary Payer Act for those types of claims.

18 Corcoran v. Department of Social Services, 271 Conn. 679 (2004); Zeoli v. Commissioner of Social Services, 179 Conn. 83, 425 A.2d 553 (1979); Kolodney v. Kolodney, 6 Conn. App. 118 (1986); Bridgeport v. Reilly, 133 Conn. 31, 47 A.2d 865 (1946).

19 C.G.S. 17b-261(c) defines an available asset as one that is actually available to the applicant or one that the applicant has the legal right, authority or power to obtain or to have applied for the applicant’s general or medical support.

20 A Special Needs Trust must comply with the Program Operations Manual System (POMS) § SI 01120.200 et seq., which is a Social Security Administration publication.

21 See IRC 674 and 675

22 See C.G.S. 45a-177