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Bar News - March 5, 2004 Making Special Needs Trusts More Useful for Moderate-Income Families By: Deborah A. Fauver MANAGING THE FINANCES and medical care of a severely disabled person requires a complicated patchwork of public and private resources and services. For many families, the Special Needs Trust (SNT) has been a key piece of the overall plan. But recent developments suggest that such trusts are not to be created lightly, as distributions made on behalf of the disabled beneficiaries may trigger the loss of critical Medicaid benefits. Hoping to add clarity and consistency to the morass of state and federal regulations governing Medicaid and state financial assistance, a small group of private attorneys has been working with the NH Department of Health & Human Services over the proper characterization of distributions made from SNTs. The ongoing work of this group has been fostered by frequent updates to members of the Bar’s Elder Law, Estate Planning & Probate Section through its monthly meetings and its heavily-used email discussion group. (See page 2 for article on the activities of the section.) Legislation is also pending that would expand the scope of allowable trust distributions, a measure that DHHS opposes as being too expensive. For over a decade lawyers have been touting the Special Needs Trust (SNT) as one way for aging parents to assure that a disabled adult child will have someone to manage his or her money, and provide some buffer against complete dependence on state and federal benefits, while still being eligible for Medicaid’s comprehensive health insurance and related home-based resources. Since 1993, the federal Omnibus Budget Reconciliation Act has allowed parents, grandparents, and legal guardians to use an SNT to hold assets for disabled dependents, without impacting Medicaid eligibility, so long as the trust expenditures were used to supplement federal medical and disability benefits; and if, after the beneficiary’s death, the trust assets would be available to reimburse the state for Medicaid assistance paid out on the beneficiary’s behalf. Comparing notes a year ago, several private attorneys discovered that more and more SNT beneficiaries were losing Medicaid benefits, because DHHS, unlike the federal government, counts nearly all SNT distributions as income. That isn’t the way an SNT is designed to work, according to attorney Ann Butenhof,1 who describes an SNT as a way to encourage family contributions to enhance the lives of severely disabled people who must ultimately rely on public benefits for basic food, shelter, and medical care. The overall result may be to bring more private money to the table, she said. "This isn’t for people with millions of dollars," Butenhof said. "If you could afford to support yourself, you wouldn’t tie yourself to the limitations of the Medicaid and SSI system. Say you are a severely disabled person and your parents want to give you $50,000; you could never get on public benefits with that money in your own bank account. But if you title the money in a Special Needs Trust, you can become eligible for Medicaid and SSI (Supplemental Security Income), and your own funds can be used to maintain a car, a computer, a television, or travel to visit relatives." "The federal government has acknowledged that this process is fine, and that’s it’s not cheating the system," Butenhof continued. "Here in New Hampshire, the issue is not whether to allow Special Needs Trusts, but how to define ‘income" at the DHHS level." DHHS regulations2 treat payments from SNT’s as income, whether the payments are made to the beneficiary, or on behalf of the beneficiary. "These people often need 24/ 7 care, and that means that the caregiver needs respite care," Butenhof said. "If a relative can fly out from Colorado for a couple of weeks to provide that care, the trust ought to be able to buy the ticket without the beneficiary risking the loss of Medicaid benefits. If the relative paid for that ticket, it would not be counted as income to the beneficiary, but if the trust pays for the ticket, DHHS counts the value of the ticket as income." DHHS is well within the law in so doing, according to DHHS attorney Lisabritt Solsky, who said that New Hampshire opted out of the SSI eligibility standard for Medicaid recipients in 1972. "When the federal government sunset four federal programs under SSA, consolidating them into SSI, it was inspirational that the states would provide Medicaid to all people eligible for SSI," Solsky said. "But Congress realized that would be expensive, so it also gave states the discretion to be more restrictive than SSI, so long as they were not more restrictive than they had been in 1972." Only 11 states, including New Hampshire, still maintain what is known as the more restrictive 209B status, according to Solsky. Butenhof counters that the 1972 regulations did not envision trust distributions, let alone the particular issue of the SNT, so SNT distributions properly fall under the more permissive federal income definition. Pending Legislation Senate Bill 516, still in committee, and with an amendment pending, excludes certain types of SNT distributions from "countable income" for determining eligibility for public financial and medical assistance. Butenhof said the bill furthers the ultimate goals of the SNT concept. But DHHS "wholeheartedly opposes" the bill as drafted, according to Solsky, who provided the fiscal note for the bill suggesting that the price tag would be over $1.6 million in the first year of the program, and $4.5 million the second, with "exponential" increases thereafter. "We began keeping close track of these trusts in 1997," Solsky said. "That year there were 10 new SNTs, then by 2003, we had 75 new SNTs in a single year." The Department now has a record of 284 SNTs. "Obviously, this is a very needy group of individuals," Solsky went on. "But Medicaid – is a poverty level program – it is a payor of the last resort. To the extent that these SNT’s pay resources, these [beneficiaries] are better off than the other 94,000 people in New Hampshire who are receiving Medicaid - and who are living within the limits of the program, not because they like it, but because they have no choice." Under SB 516, Solsky says that state costs will increase exponentially in part because more and more people are using the trusts, and because the bill contemplates giving state financial assistance to the SNT beneficiaries, when that population has traditionally received only Medicaid, and not the so-called "State Supp" payments from Old Age Assistance, Aid to the Needy Blind, and Aid to the Permanently and Totally Disabled. "In reviewing the disbursement pattern of these trusts, the kind and quality of disbursements that we are counting as income are what the average Medicaid population would consider an extravagance," Solsky said. "We are trying to achieve parity between different types of Medicaid populations." To estimate the cost of the bill, Solsky began by noting "conservatively," that each of the 284 SNT beneficiaries might lose three months of Medicaid benefits under the current rule based on the disbursement patterns of their trusts. If SB 516 becomes law, each of the trust beneficiaries would get those three months of benefits, as well as state supplemental benefits, and new SNT beneficiaries would enter the system each year. Butenhof isn’t convinced that the bill will cost the state money. "Probably the SNTs are saving the state money," she said. "We just don’t have the data on that, and it’s clear that the state doesn’t have the money to fund a study. That would be a great subject for a grant proposal." An amendment to SB 516, filed at Bar News press time, would add three new components to the bill; (1) DHHS would seek a waiver to require that all trusts with excluded status include a payback provision saving trust assets remaining at the beneficiary’s death to reimburse the state for Medicaid payments, (2) differential treatment of trust distributions depending on the size of the trust, and (3) a specific provision granting standing to DHHS and others to bring trustees to court for abuse of the trust. Butenhof, who does not support the amendment, notes that it goes beyond SNTs, requiring that third-party trusts also include the payback provision, and asks "Why would anybody set up one of those trusts under this law?"
 Deborah A. Fauver, an inactive member of the Bar who lives in Freedom, wrote this article on assignment from Bar News. She is a regular contributor to Bar News.
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