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Bar Journal - March 1, 1999

Special Needs Trusts

By:
 

I. OVERVIEW

Special needs trusts are a key part of planning for a family with a disabled family member, along with various other companion documents and strategies for the disabled person, such as powers of attorney or guardianship, and representative payee arrangements, individual service plans and the various estate planning documents for parents which take into account the disabled child's disability and also consider potential future disability of the parents of the person with disabilities.1

A trust to benefit a disabled beneficiary is often funded from the parents' estate with whatever they wish to leave for their disabled child, but other people can also leave property to the disabled beneficiary's trust as well. A separate, second trust may also be established with assets belonging to the disabled beneficiary, such as a personal injuries settlement.

The trust can often benefit a disabled beneficiary, because the trust provides a flexible structure for lifetime protection of a vulnerable beneficiary taking into account the beneficiary's special needs, public benefits, taxation and advocacy needs.

The trust does, however, deeply depend upon the trustee, who should be chosen with care.2 Drafting the trust requires care as well, drawing not only on trust law concepts, but also on rapidly changing public benefits law, tax law, property law, probate law and family law. There is no cure-all in planning for all eventualities, but a trust can prevent an economic free-fall for a disabled child after the death of the parents, and a trust can help a personal injuries settlement or inheritance have a positive effect and fundamentally enhance a disabled person's life over many years. It all starts with getting to know the family and learning the relevant facts.

II. CLIENT CONFERENCES

Ask the person with disabilities and the parents or others involved to describe the disabled beneficiary's typical day and activities. Ask for recent evaluations and the required individual education plan (IEP) developed at school or the individual service plan (ISP) developed through the appropriate agency serving adults with disabilities. Learn the disabled beneficiary's diagnosis, educational level, functional limitations and level of independence. Ask the family to develop a written memorandum of instructions, also called a personal service plan, to describe for a future trustee what activities and services their disabled family member needs and likes, preferred living arrangements, transportation, communications and technology needs and the names, addresses and perspectives of the various people who are significant in the disabled person's life. Identify likely candidates for future fiduciary duties to succeed the parents at their death. Ask about the health of the parents and others involved in the disabled person's life. Determine the disabled person's life expectancy, which would typically be based on generally used actuarial tables unless a physician has indicated otherwise. Ask family members to actually check their annual cash, checkbook and credit card expenditures for their disabled family members which may, upon review, be larger than initially estimated and a significant project to sustain after their death. Determine the size of the disabled heir's inheritance. Determine the resources available. Ask what public and private benefit programs the disabled beneficiary is involved with. Consider realistically how to achieve future lifetime financial stability consistent with decency and health.

III. PUBLIC BENEFITS

People with disabilities often receive public benefits which are based on a finding of disability, but are available regardless of the recipient's level of income or assets. Other important programs are needs-based and the recipient cannot have significant other income or assets and still receive them.

Programs available to disabled people regardless of income and assets include social security disability benefits3 (often called SSA benefits) and Medicare4, both of which are essentially insurance-related benefits based upon wages paid into the system through FICA at work rather then any required indigent status.

Needs-based programs include supplemental security income5 (often called SSI), which is the largest assistance program administered by the federal government, and Medicaid6, administered by each state in accordance with controlling federal requirements and partial federal funding. These needs-based programs are important in estate plans for the family with a disabled child.7 SSI provides a supplement to SSA, if the wages paid in through FICA were small or zero, in order to provide a minimum poverty level monthly check, intended to pay for food, clothing and shelter8. Also, SSI eligibility in most but not all states, guarantees eligibility for Medicaid9. Medicaid provides for many needs beyond SSA, SSI and Medicare, including intermediate health related care and services for people who do not require hospitalization but need help maintaining themselves. If a social service is available for a disabled person and it is unclear what program funds it, Medicaid may well be involved.

Medicaid benefits can be as little as zero or range up to being quite large depending upon the specific disability and level of services needed and budgeted. If Medicaid and SSI eligibility can be maintained, a modest inheritance can be conserved and used as needed in a positive way over the disabled child's lifetime to replace what the parents provided themselves directly prior to their deaths to supplement public benefits with family funds which might well otherwise go elsewhere. Even a parent who leaves a relatively large amount to a disabled child with enough funds to plan out of public benefits might want at least part of the plan to allow for Medicaid eligibility for the future, as a safety net, if the other plans fail over the years ahead to sufficiently provide for the beneficiary. Quite often Medicaid eligibility is vital even if SSI is not. If the disabled person is eligible for Medicaid because of SSI eligibility, it may be vital to maintain SSI eligibility as well. With regard to personal injury settlements, maintaining eligibility for public benefits allows certain recovered funds to help compensate the injured person for the disability he or she has experienced as the result of the negligence of others.

A. Financial Eligibility for Supplemental Security Income (SSI)

Financial eligibility for supplemental security income (SSI) requires that the program's income and asset limits be met as well as its transfer requirements.

1. SSI Income Limits

The SSI income limit, which is adjusted upwards periodically, was recently fixed at $5,808.00.10 Income includes earned income, unearned income, gifts and inheritances, certain in-kind support for food, clothing and shelter, and certain deemed income from parents in the household. Excluded when computing income are items such as social services, medical care, income tax refunds, proceeds from the sale of a car, and in-kind items received from others or bills paid by others which are not food, clothing or shelter.11

A cash distribution from a trust directly to the SSI recipient in excess of $20.00 per month will be considered income to the SSI recipient and will reduce or eliminate the monthly SSI check. If, on the other hand, the trust bypasses the recipient and distributes to a vendor, such as a store for example, for most purposes other than food, clothing and shelter, such as a stereo system for example, then it has no effect on SSI benefits.

2. SSI Asset Limits

The SSI recipient's resource limit is $2,000.0012. Resources include liquid assets such as bank accounts, stocks, bonds and life insurance policies, which can be readily converted to cash.13 Property that cannot be sold is excluded. A personal residence is excluded. A car is excluded. Equipment such as a wheelchair needed due to physical disability is excluded. Most household goods are excluded. Assets held in certain trusts are also excluded. The trust should also be irrevocable and have a successor beneficiary for the trust.14 The U.S. Social Security Administration Appeals Council has ruled15 that a trust funded with the proceeds of a disabled person's personal injury settlement and meeting the Medicaid safe harbor requirements of 42 USC 1396p(d)(4)(A), does not disqualify that individual from qualifying for SSI as long as the trust is irrevocable.

3. SSI Transfer Rules

There are no transfer or look-back restrictions under SSI unless the disabled child is institutionalized.16

B. Financial Eligibility for Medicaid

Financial eligibility for Medicaid requires that the program's income and asset limits be met, as well as the transfer requirements.

1. Medicaid Income Limits

Medicaid income limits, vary for different age groups and circumstances and from state to state. If the applicable income amount is exceeded, in most states (called spend down states) including New Hampshire, the income may be spent down on an ongoing basis to pay for a portion of the Medicaid services in order to qualify for Medicaid so that the balance of the service costs are paid by the state. In other states such as Florida (called income-cap states) excess income causes a total disqualification. In those income-cap states17, it is necessary to use a federal statutory trust (called a Miller income trust)18 to avoid disqualification and fund it with the income which would otherwise disqualify the disabled person.

2. Medicaid Asset Limits

Although the total amount of assets permitted for Medicaid qualification varies from state to state, $2,000.00 is typical. The New Hampshire figure is $2,500.00. Assets which are not counted include the personal residence, most household goods, an automobile, pensions and certain trust funds.

Trusts are treated differently under the Medicaid rules established in Omnibus Budget Reconciliation Act of 1993 (called OBRA-93)19 than under SSI rules20. Under the OBRA-93 Medicaid rules, assets held in a self-settled trust are generally considered an available resource if payments can be made from the trust to or for the benefit of the Medicaid recipient, regardless of trust purposes, trustee discretion, or distribution restrictions21, unless the trust is a federal statutory trust permitted under OBRA-93.22

3. Medicaid Transfer Rules

There are no Medicaid look-back restrictions on typical non-nursing home related transfers, but states deny eligibility to an institutionalized individual if assets have been transferred for less than market value within the OBRA-93 look back period.23 OBRA-93 look-back restrictions are administered to apply to retired persons making transfers prior to going into nursing homes as opposed to people who have a pre-retirement disability and are eligible for a federal statutory special needs trust. Under the OBRA-93 rules, funds transferred to a federal statutory special needs trust24 do not have any transfer restriction or look-back period if the beneficiary is under age 65 at the time of transfer.25 The absence of transfer restriction, if the beneficiary is under the age of 65, applies to the subsection A pay-back trust, and also to the Subsection C not-for-profit pooled trust.26

IV. TYPES OF TRUSTS

There are many kinds of trusts and combinations of trust provisions in trusts for disabled children. There are at least seven basic types of trusts in use, four which developed under common law and three which are statutory under OBRA-93.

A. Common Law Trusts

The United States Supreme Court recognized as early as 1875 a trust for protection from "...ills of life, the vicissitudes of fortune and incapacity for self-protection...."27 Common law trusts developed over the years to address the needs of disabled beneficiaries include mandatory distribution trusts, discretionary trusts, discretionary supplemental needs trusts and spray trusts.28

1. Mandatory Distribution Trusts

Mandatory distribution trusts are typically third-party trusts established by parent for child, which provide that the income shall be regularly distributed to the beneficiary and that the principal shall be also available for non-routine purchases and purposes. It is in essence a management trust, as all trusts are, and not much more. This type of trust is used where needs based public benefits are of no concern or where the disability does not rise to the level of the social security definition29. For example, a mandatory distribution trust may be made for a loved family member who is legally competent under social security rules but simply untouched by financial concerns. Also, some parents would rather forego needs-based public benefits for family autonomy reasons or because the SSI limits for food, clothing and rent seem wholly inadequate. Mandatory distribution trusts are not as effective as other types of trusts in relation to eligibility for SSI or Medicaid. The funds released to the beneficiary might cause disqualification. The mandatory trust may be used in combination with another type of trust more focused on public benefit qualification, so that some funds will be set aside for unforeseen circumstances when public benefits might be needed.

2. Discretionary Trusts

Purely discretionary trusts give the trustee the discretion to decide whether to make distributions for the support of the beneficiary. The trustee may distribute income and principal for any purpose or for stated purposes such as the beneficiary's support, maintenance, medical expenses, care, comfort and general welfare, but the trustee is given the sole discretion to determine the merit of any given distribution. The assets do not belong to the beneficiary and may never be turned over, but the question is whether a court would find, after the parent has died, based on the trust language, that the deceased trust grantor intended that the funds be used to pay for what would otherwise be provided by SSI or Medicaid, thereby resulting in disqualification and obligating the trustee to make distributions on the basis that the trustee is required to do what the grantor of the trust intended.30 There are cases where courts have ordered discretionary trust funds to be used to disqualify the beneficiary from public benefits31 and also cases holding to the contrary32. This discretionary formulation is used in spendthrift trusts when a beneficiary is not financially responsible and creditor protection is desired. Because of the split of opinion in the case law consider adding language to make the purely discretionary trust a discretionary common law supplemental needs trust instead and also deleting words such as support and welfare which do seem to cover food, clothing and shelter.

3. Common Law Supplemental Needs Trusts

The discretionary common law supplemental needs trust is like the previously described discretionary trust in that the trustee has sole discretion over distribution of income and principal, except that offending words such as support and welfare are removed and the trust also specifically provides that trust distributions are intended to supplement rather than replace government benefits (hence the name supplemental needs trust). The Court in New York33 held that such a discretionary trust was not an available asset for Medicaid consideration. Hence this common law supplemental needs trust has also been called an Escher trust after the name of that case. The key is that the deceased trust grantor's intent is crystal clear on the issue of public benefits.

The discretionary common law supplemental needs trust established by a parent for a disabled child is a third-party trust. The assets are not coming from the child with disabilities, as opposed to a self-settled trust established with the disabled child's own funds. When Congress enacted OBRA-93, many types of self-settled trusts were disallowed leaving three statutory trusts as exceptions, but OBRA-93 did not in its language disallow third-party trusts. Only trusts holding assets of an individual Medicaid recipient are covered by the OBRA-93 rules.34 42 U.S.C. S 1396p(d)(1) states that the OBRA-93 rules apply to "a trust established by such individual", as opposed to third-party trusts such as a discretionary supplemental needs trust established by a parent for a disabled child with the parent's assets. In the third-party discretionary common law supplemental needs trust, the disabled beneficiary has never owned the trust's assets and has no control over their disposition. Unlike the OBRA-93 statutory trust, the discretionary common law supplemental needs trust may contain no pay-back provision to the state upon the death of the disabled beneficiary, because the trust funds do not belong to the beneficiary and it is not a self-settled trust.

4. Spray Trusts

The spray trust is an Escher type discretionary common law supplemental needs trust, but with a second beneficiary added. The trustee is then given the discretion to provide any amount from the trust to either beneficiary. The disabled beneficiary has no right to complain and no vested or fixed right to anything at all. It is thought that this further isolates the Escher type common law supplemental needs trust from disqualification. Used in trusts for many years and based on common law notions of vesting, there are cases supporting the use of spray provisions with disabled beneficiaries as well.35 This type of ultra trustee discretion has been advanced recently in part as a reaction to the passage of the stricter trust rules in OBRA-93 and the 1996 and 1997 anti-planning statutes recently declared unconstitutional.36 Even so, many people do in fact turn to the safe harbor of the federal statutory trusts out of a general fear of disqualification.

B. Federal Statutory Trusts

The Omnibus Budget Reconciliation Act of 1993 (OBRA-93) specifically recognized three types of trusts designed to benefit people with disabilities.37 These statutory trusts are designated as "special needs trusts" in the US Health Care Financing Administration's Transmittal Letter No. 64 (Nov. 1994).38 They are also sometimes called federal trusts to emphasize their relationship to the federal statute. The three types of federal statutory special needs trusts are the (1) subsection A pay-back trust39, (2) subsection B Miller income trust,40 and (3) subsection C not-for-profit pooled trust.41 The New York Court42 has declared that these federal trusts "balance needs of disabled persons with the rights of government." These federal trusts are all self-settled trusts in the sense that they are trusts containing assets or income of the disabled individual as opposed to the third-party Escher type common law discretionary supplemental needs trust.

1. Federal Pay-Back Trust

The OBRA-93 legislation43 exempts from Medicaid asset determinations and transfer rules those assets which are held in a trust meeting certain statutory requirements. The first of the three types of statutory safe harbor trusts, the federal pay-back trust, permits a trust to be established by a parent, grandparent, legal guardian or court containing assets of an individual44 under the age of 6545, for the sole benefit of the individual46 who is disabled under 42 U.S.C. 1614(a)(3)47 if the state will receive all amounts remaining in the trust upon the death of such individual up to the total medical assistance paid by the state for the individual, hence the name pay-back trust. Often there will be nothing left at the death of the disabled child with a long life expectancy, so this pay-back requirement may be ineffective at times. On the other hand, a beneficiary with a short life expectancy may still benefit because private pay rates for needed services are often higher than the state-negotiated Medicaid rate.

2. Miller Income-Only Trust

In a minority of states, called "income-cap" states,48 a disabled person is denied all Medicaid if his or her income exceeds the Medicaid limit in that state. The OBRA-93 legislation49 exempts pension, social security and other income placed in trust if the trust provides that the state will receive the trust balance at the death of the individual to the extent required to reimburse for the Medicaid assistance provided (typically all of it). As a result, because the excess income is not counted during lifetime, the disabled person will be eligible to receive Medicaid to pay for the balance of the services. This type of trust is also called a Miller trust because of the case which established the concept.50

3. Not-For-Profit Pooled Trusts

The OBRA-93 exempt not-for-profit pooled trust51 involves a non-profit organization as trustee.52 It may be established by the individual or by the same people referenced in the subsection A pay-back trust. It has the same disability requirement and sole benefit requirement as the pay-back trust. It has a different pay-back provision from the pay-back trust and the Miller income trust. It allows funds to be retained by the trust after the death of the beneficiary and only if the funds are not retained is there a pay-back to the state. A non-profit organization can be the trustee of a pay-back trust or a not-for-profit pooled trust.

V. TAX ISSUES

There are gift and estate as well as income tax planning issues in designing a trust for a disabled beneficiary.

A. Gift and Estate Tax Issues

Where parents establish a trust for a disabled child, it is usually funded at the parents' death, so there are typically no gift tax issues presented because the gift tax concerns intervivos transfers. Under the typical scenario, when the parents die, they still control the assets under I.R.C. 2038 and 2036, so the disabled child's inheritance is part of the parent's taxable estate. The parents leave a portion of the parental assets after any estate taxes have already been paid. Therefore, there are often no gift or estate tax issues in the context of adding a trust for a disabled child to an estate plan. Beyond that, many parents of a disabled child do not have taxable estates in the first place.

However, a family with a taxable estate will want to attend to estate tax issues. The first low-impact step, establishing credit shelter trusts, does not require any irrevocable act. Beyond that, consider establishing an irrevocable life insurance trust utilizing the annual gift tax exclusion with non-disabled children and grandchildren as holders of demand powers rather than the disabled child (who might then be disqualified from receiving needs-based public benefits) to complete the gifts for gift tax purposes. Life insurance is a vehicle of choice for funding a special needs trust so that the disabilities trust at the parents' death will have liquid assets to effectively benefit the disabled child. However, real estate and other assets can also go into the same irrevocable life insurance trust, so that they are removed from the parents' taxable estate and available at the parents' deaths to pour over into a supplemental needs trust.

At times, however, a parent will want to fund a supplemental needs trust prior to death, to "test the trustee waters" so to speak, to see with a limited gift how the trustee who has been chosen to succeed the parents as a future protector of the disabled child, performs. This approach also, upon notice to the state, triggers a review of the trust to get that accomplished. In a taxable estate, disabilities trust funding prior to the parent's death should be considered from the irrevocable insurance trust from trusts funds in excess of premiums, rather than directly from the parent to the disabilities trust, because a gift even within the annual exclusion limit by the parent directly to the supplemental needs trust will be a gift only of a future interest under I.R.C. 2503 and therefore still includable in the parents' estate. Doing that sort of non-exempt gifting year after year could cause unexpected estate tax consequences.

Contributions to a special needs trust from the disabled child's own funds are not completed gifts and remain in the disabled child's estate under I.R.C. 203653, but would be subject at the disabled child's death to deductions for debt to the state and/or a charitable deduction to the state or a qualifying non-profit organization to benefit other disabled citizens.

B. Income Taxation

Once the supplemental needs trust is funded, the question arises as to income taxation. A self settled trust will generally be a grantor trust. Under the grantor trust rules at I.R.C. 641-663, a third-party supplemental needs trust will not be a grantor trust. Income tax on distributions made for the benefit of the disabled beneficiary are generally passed through to the beneficiary. Tax exempt investments may also be considered. The trust will be a "complex trust" for IRC 661, et seq. "DNI" rules because the trustee is given the discretion to distribute income and principal.54

VI. DRAFTING CONSIDERATIONS

After analysis of the clients' circumstances, public benefits, taxation and review of the various overall trust types, it is incumbent upon the drafting attorney to consider specific trust provisions.

In the trust, consider giving the trustee full discretion as to income and principal but with supplemental needs language, and adding that distributions are to go to vendors, not directly to the beneficiary. Consider naming the state as a claimant at the death of the initial beneficiary followed by chosen heirs, and adding authority to pool, and consider a special power of appointment to appoint the trust assets to another trust having the same purposes for future flexibility.

Consider stating that trust assets need not be conserved for the remainderman or diversified for investment and that the trust may hold use assets. Allow the trust to hold a mortgage on a principal residence owned by the beneficiary. Designate a trust situs but give the trustee the authority to change the trust situs.

Include a provision to protect the trust assets from claims of third parties under RSA 564:23, I and II, which new law specifically references and protects self-settled and third-party special needs trusts in New Hampshire. New Hampshire currently provides the most effective creditor protection for disabled beneficiaries of any State in the United States, even more protections than other States with new creditor protection for self-settled trusts.55 One person's claimed debtor can after all be someone else's beloved and vulnerable disabled child. Finally and most importantly, include trust language to require the trustee to visit with the beneficiary on a regular basis.

ENDNOTES

1.

Disability planning has been a topic of interest in New Hampshire for many years, and has been discussed in a number of articles. See e.g., Miolla, Estate Planning for the Handicapped or Disabled 26 N.H.B.J. 297 (No. 4 1985); K. Robinson, Financial Planning Issues (N.H.B. Ass'n C.L.E. 1991); A. Lotter & K. Robinson, Protection Against Creditors (N.B.I. C.L.E. 1991); S. Heintz and J. Kitchen, Guardianship and Planning for Disabilities (N.H.B. Ass'n C.L.E. 1992); J. Malloy and J. Baird, Public Benefits (N.H.B. Ass'n C.L.E. 1992); L. Bratko and J. Kitchen, The Sandra Cocores Trust, 13 NH Trial Bar News (Spring 1993); R. Ansell, Special Needs Trusts (N.H.B. Ass'n C.L.E. 1995).

2.

In re: Quirin Estate 116 NH 845 (1976) sets forth fiduciary suitability characteristics.

3.

42 U.S.C. SS 1395 et seq.

4.

42 U.S.C. SS 401 et seq.

5.

42 U.S.C. S 1381 et seq.; 20 C.F.R. Part 416; see also 42 U.S.C. S 401 et seq. and 20 C.F.R. 404 et seq. concerning social security disability income (SSDI). SSDI, also known as Title II, provides monthly cash benefits for disabled workers who have a qualifying employment history.

6.

42 U.S.C. S 1396 et seq.; 42 C.F.R. Parts 430-456.

7.

Also check to see whether housing assistance, general welfare, food stamps or other needs-based programs are involved.

8.

Shelter means rent. Home ownership is treated differently under SSI rules. If a home or condominium of one's own is possible for a disabled person with appropriate supports in place, then the monthly SSI check can go for food and clothes and other necessary expenditures without a large percentage of it going for housing expenses.

9.

42 U.S.C. S 1396a(r)(2)(A) and (B); 42 U.S.C. S 1396a(f). In most states, where SSI eligibility guarantees Medicaid eligibility, it may not matter that the Medicaid rules differ from the social security rules because the SSI eligibility guarantees Medicaid. In the few states (called 209(b) states), such as New Hampshire, where SSI eligibility does not in and of itself guarantee Medicaid eligibility and a separate state Medicaid application is used, the old 1972 Medicaid eligibility rules, which are required to be used instead, are more beneficial than the newer OBRA-93 Medicaid rules. New Hampshire Medicaid rules may be no more restrictive than the 1972 federal requirements and N.H. State Plan approved on January 1, 1972. See 42 USC 1396a(f) and Rowling v. Soule Civil Action No. 88-273 JD (D.N.H.). For an example of a special needs trust in traditional use in New Hampshire, see C. DeGrandpre Wills, Trusts and Gifts, First Edition, Discretionary Support Trust for Handicapped Child, Form 34B (Equity, 1986).

10.

42 U.S.C. S 1382 (a)(1); 61 Fed. Reg. 55, 346 (Oct 25, 1996).

11.

20 C.F.R. S 416.1103.

12.

42 U.S.C. S 1382b(a); 20 C.F.R. S 416.1210.

13.

20 C.F.R. S 416.1201.

14.

See also 20 C.F.R. S 416.1212(d); Fed. Reg. 43, 283 (Aug. 23, 1994).

15.

Matter of M.W. o/b/o C.W., US Social Security Administration Appeals Council (NY, 1997).

16.

20 C.F.R. S 416.1246.

17.

Alabama, Alaska, Arkansas, Colorado, Delaware, Florida, Georgia, Idaho, Iowa, Louisiana, Nevada, New Jersey, New Mexico, Oklahoma, South Carolina, South Dakota, Tennessee, Texas and Wyoming.

18.

42 U.S.C. S 1396P(d)(4)(B); Miller v Ibarra 746 F. Supp. 19(D. Colo. 1990).

19.

42 U.S.C. S 1396(p)(d)(1),(2) and (3).

20.

SSA Program Circular 95-002.

21.

42 U.S.C. S 1396(p)(d)(4).In most states, where SSI eligibility guarantees Medicaid eligibility, it may not matter that the Medicaid rules differ from the social security rules. In the few states (called 209(b) states), such as New Hampshire, where SSI eligibility does not in and of itself guarantee Medicaid eligibility and a separate state Medicaid application is used, the old 1972 Medicaid eligibility rules, required to be used instead, are more beneficial than the newer OBRA-93 Medicaid rules. New Hampshire Medicaid rules may be no more restrictive than the 1972 federal requirements and N.H. State Plan approved on January 1, 1972. See 42 USC 1396a(f) and Rowling v. Soule Civil Action No. 88-273 JD (D.N.H.). For an example of a special needs trust in traditional use in New Hampshire, see C. DeGrandpre, Wills, Trusts and Gifts, First Edition, Discretionary Support Trust for Handicapped Child, Form 34B (Equity, 1986).

22.

The three types of federal statutory trusts explicitly permitted under OBRA-93 are discussed later in this article in Section IV(B).

23.

42 U.S.C. 1396p(c)(1).

24.

42 U.S.C. SS 1396p(d)(4)(A),(B) and (C).

25.

42 U.S.C. S 1396p(c)(2)(B)(iii)-(iv); HCFA Transmittal No. 64 (Nov. 1994), SS 3258.10 and 3259.7.

26.

See 42 U.S.C. S 1396p(c)(2)(B) as well as the "NOTE" appearing at HCFA State Medicaid Manual Transmittal No. 64 (Nov. 1994) S 3259.7B. In accord, see also: BNA Tax Management Estates, Gifts and Trusts Portfolios.

27.

Nicholas v. Eaton 91 U.S. 716, 727 (1875). See also the early reported New Hampshire case of Banfield v. Wiggin N.H. 155 (1877).

28.

See Hanford v. Clancy 87 N.H. 458 (1936); Athorne v. Athorne 100 N.H. 413 (1957).

29.

20 C.F.R. 416.905.

30.

Restatement Second, Trusts 2d 5187(j).

31.

Commonwealth Bank v. Dept. of Public Welfare 598 A.2d 1279 (Pa. 1991); Bohac v. Graham 424 N.W. 2d, 144 (N.D. 1988); Bureau of Support v. Kreitzer 243 N.E. 2d 83 (Ohio, 1968).

32.

Snyder v. Dept. of Public Welfare 598 A.2d 1283 (Pa. 1991); Alyers v. Dept. of Social and Rehab. Services 866 P.2d 1052 (Kan. 1994).

33.

Estate of Escher, 407 NYS 2d 106 (Sur. Ct. 1978).

34.

42 U.S.C. S 1396p(d)(1); 42 U.S.C. S 1396p(d)(2)(A).

35.

Simpson v. Kansas Dept. of Social Services 906 P.3d 174 (Kansas App. 1995); Snyder v. Dept. of Public Welfare 598 A.2d 1283 (Pa 1991).

36.

42 U.S.C. S 1320a-7b(a). This 1997 law, which replaced the original 1996 anti-planning law, both of which prohibit certain forms of legal advice concerning Medicaid, has been challenged by the New York Bar Association on constitutional grounds. The US Attorney General, in defending the suit, has said the Justice Department will not enforce this law. The Attorney General declared in the court pleadings that the law is "plainly unconstitutional under the First Amendment." The Court has issued a preliminary injunction against its enforcement. In addition to this court finding of unconstitutionality, the specific language of this recent anti-planning legislation does not apply to third party trusts. Also, if it ever were interpreted to apply to self-settled trusts, it could only apply to transfers actually resulting in ineligibility under certain circumstances. Since self-settled special needs trusts established for beneficiaries under the age of 65 typically have no transfer look back period, this prohibitory legislation does not apply anyway. Further, a trust created in a will is not considered a trust for the benefit of an individual under Medicaid rules. 42 U.S.C. S 1396p(d)(i); HCFA State Medicaid Manual Transmittal No. 64 (No. 1994) S 3259.1.A.

37.

42 U.S.C. S 1396p(d)(4).

38.

HCFA State Medicaid Manual Transmittal No. 64 (No. 1994) S 3259.7.

39.

42 U.S.C. S 1396p(d)(4)(A).

40.

42 U.S.C. S 1396p(d)(4)(B)), see also Miller v. Ibarra 746 F.Supp. 19(D.Colo. 1990).

41.

42 U.S.C. S 1396p(d)(4)(C).

42.

Estate of Eubanks King's Co., Sur, NYLJ (May 24, 1995) p. 31, col. 4.

43.

42 U.S.C. S 1396p(d)(4)(A).

44.

Note reference to the self-settled nature of this trust, even though it must actually be set up by certain others who are not disabled on behalf of the person who is disabled.

45.

The U.S. Health Care Financing Administration has indicated that the exception for a trust created for a person with disabilities under the age of 65 can continue but not receive additional funds after the individual becomes 65. HCFA Pub 45-3 S 3259.7.A.

46.

See HCFA Transmittal No. 64 S 3257.B.6. See also HCFA Pub 45-3 S 3259.7.A which provides that the trust may provide for disbursal of funds to other beneficiaries provided the trust does not permit such disbursals until the state's claim is satisfied. See also SSA Program Circular 95-002, concerning naming a successor beneficiary under SSI rules.

47.

42 U.S.C. S 1614(a)(3) is the particular definition of disability used by the US Social Security Administration to determine disability in various federal programs. The disabled person must be unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve months (or, in the case of a child under the age of 18, if he suffers from any medically determinable physical or mental impairment of comparable severity)....a physical or mental impairment is an impairment that results from anatomical, physiological, or psychological abnormalities which are demonstrable by medically acceptable clinical and laboratory diagnostic techniques. See also HCFA Pub. 45-3 sec. 3259.7.A.

48.

Ibid, 17.

49.

42 U.S.C. S 1396(d)(4)(B).

50.

Miller v. Ibarra 746 F.Supp. 19 (D.Colo. 1990).

51.

42 U.S.C. S 1396p(d)(4)C).

52.

There are a number of organizations nationwide which serve as non-profit trustees, whether of common law supplemental needs trusts or OBRA-93 trusts. Many of these organizations were founded in part with help from the Alliance for the Mentally Ill (AMI) and the Association for Retarded Citizens (ARC). The author serves on the board of directors of a New Hampshire non-profit organization which provides this service, the Enhanced Life Options Group.

53.

See also Arrington v. United States 76 AFT R.2d 95-5453 (Cl. Ct. 1995); I.R.S. Tech Adv. Mem. 95-06-004 (Nov. 1, 1994).

54.

The OBRA-93 non-profit pooled trust does not constitute a pooled income fund under IRC 642(c)(5), which refers to an income only interest trust where income is distributed directly to the lifetime beneficiary. See Rev Proc 1988-53, 1988 Cum Bull 712. The qualifying IRC 501 tax exempt non-profit organization is of course itself exempt from the income tax.

55.

Del. Code Ann. Title 12, Sections 3571 and 3572; Alaska Stat. Section 34.40.110..

The Author

Attorney John S. Kitchen is a partner with the firm of Connor & Kitchen, Manchester and Laconia, NH.

 

 

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