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d4A SPECIAL NEEDS TRUSTS


This article re d4A Special Needs Trusts was written by Attorney Brian F. Mahoney at the request of the Massachusetts Academy of Trial Attorneys for publication in September, 2007 within the Massachusetts Lawyers Weekly. Although this article concerns funding a d4A SNT Trust with the settlement proceeds due to a Trial Attorney's disabled client, any property owned by the disabled client can be used to fund a so-called d4A SNT. Please note that Parents can leave inheritances to their disabled offspring who is under age 65 through a Third Party SNT.

A. INTRODUCTION

When settling a civil case for a disabled client under age 65 we must consider what their current or future needs for government benefits are. Both the Commonwealth and the Federal governments allow eligibility for Medicaid or SSI if the injured , client's settlement is used to fund a d4A SNT for those under age 65 a so-called d4C Pooled Trust is the vehicle for those disabled clients over 65. The d4ASpecial Needs Trust which this article discusses is also known as a supplemental needs trust or simply as an SNT, and it is authorized under 42 U.S.C. § 1396p(d)(4)(A).

Huge settlements for other than catastrophic injuries are rare today and yet living expenses are constantly rising. So we would need a disabled client to remain eligible for government benefits, if the settlement will not likely cover living needs over the client's remaining life expectancy. But, at the same time, we also must remember that once an d4A SNT is funded with the settlement there are certain limitations on what the Trustee can pay for on behalf of the d4A SNT Beneficiary, because this trust is supposed to "supplement," but not to "supplant," government benefits.

B. GOVERNMENT BENEFITS & PUBLIC ASSISTANCE PROGRAMS

This article's focus is on what a d4a SNT must contain for provisions once it is determined the client's settlement will be funding such a trust. To make that decision we evaluate what public benefits are available and how one qualifies for those benefits.

The main programs available for disabled clients under age 65 are summarized as follows:

For monthly cash payments see: Supplemental Social Security Income (SSI); Social Security Disability Income (SSDI) and the public welfare program in Massachusetts, known as Transitional Aid to Families with Dependent Children (TAFDC),that can provide cash and medical assistance to needy families with dependent children.

For Medical Care see: MassHealth, aka Medicaid or Medicare.

For Housing see: the Housing Choice Voucher Program formerly known as Section 8.

In 2007, for Living Arrangement A--Full Cost of Living �Individual, SSI pays a Federal benefit of $623.00/ month and the State supplement is $114.39 for a total of $737.39/ month.

To be eligible for SSI an inured client can own only $2,000.00 in countable assets, hence the need to fund a d4A SNT with a settlement. A primary residence is not a countable asset. If the d4A SNT is established properly, the settlement that funds this trust is not a countable asset.

If a disabled client qualifies for SSI they also qualify for MassHealth / Medicaid benefits, the Commonwealth being one of the so-called § 1634 states where eligibility for S.S.I. means eligibility under that state's Medicaid program. See also Ramey v. Rizzuto, 72 F. Supp.2d 1202 (D.C. Colo. 1999), aff'd, Ramey v. Reinertson, 268 F.3d 955 ( lOth Cir. 2001) where the Court held that when the state's Medicaid laws are more restrictive than SSI, the SSI rules take precedence over state Medicaid rules. However, please also see Reames v. Oklahoma, 411 F. 3rd 1164 (10th Cir. 2005) where the court acknowledged Ramey, but held that the Courts need to first determine Congress' specific intent, and if a state law is "based on a permissible construction of the statute," then it likely allowable.

SSDI is available to workers under age 65 who are blind or disabled and who had a work history recent to the onset of the disability and have earned a certain amount of so-called "quarters of coverage." There is no asset limit.

Certain family members of the injured worker might be eligible for benefits. See generally: 20 C. F. R. Sec. 404. Individuals eligible for SSDI can become eligible for Medicare benefits after 24 months of SSDI.

Individuals earning less than 133% of the Federal Poverty level are eligible for government sponsored MassHealth to cover health care. through the Medicaid program. Federal poverty levels in 2007 are $10,210.00 per year for an individual and $20,650 for a household of 4.

C. REQUIREMENT OF THE D4A SNT

A d4A SNT is but one type of Special Needs Trust.The Commonwealth describes Special Needs Trusts generally in 130 CMR 515.001:

"Special-Needs Trust - a special-needs trust is one that meets all the following criteria as determined by the Division.
  1. The trust was created for a disabled individual under the age of 65 .N. B. The trust must be funded before age 65 but can continue as the Beneficiary lives beyond age 65.

  2. The trust was created for the sole benefit of the individual by the individual's parent, grandparent, legal guardian, or a court.

  3. The trust provides that the Commonwealth of Massachusetts will receive amounts remaining in the account upon the death of the individual up to the amount paid by the Division for services to the individual.

  4. When the member has lived in more than one state, the trust must provide that the funds remaining upon the death of the member are distributed to each state in which the member received Medicaid based on each state's proportionate share of the total amount of Medicaid benefits paid by all states on the member's behalf.
For the settlement funding a trust to be considered "unavailable resources," or for "transfers to fund the trust to be considered transfers that will not result in a penalty period," a so-called d4A SNT trust must also comply with the requirements of 42 U.S.C. § 1396p(d) and with the Social Security Administration policies, as set forth in the Program Operations Manual System (aka: POMS.)

Requirements summarized in: POMS SI 01120.203.D.l include:
  1. The Trust must contain a specific provision making the Trust irrevocable.

  2. The trust is established with the assets of the beneficiary, i. e. the net personal injury settlement, and in concert with state law it must be established by someone who has legal authority to act with regard to the disabled client / SNT beneficiary's assets. A d4A SNT can be established under state and federal law by: the beneficiary's parent, grandparent, legal guardian or by a court.

  3. If the beneficiary has no parents or grandparents, appointment of a Guardian is necessary and then one could look to M. G. L. c. 201 Sec 38: "Management of estate; support of ward and family; custody of wills; estate plan;" to M. G. L. c. 215 Sec. 6, regarding general equity jurisdiction, or to the Court where the personal injury lawsuit is pending.

  4. Similar to Massachusetts law, the Beneficiary must be under age 65 and the trust funded before reaching age 65.

  5. Consistent with 130 CMR 515.001,Social Security requires the d4A SNT beneficiary must disabled as that term is defined in the Social Security Act. In 130 CMR 515.001 entitled "Mass Health General Policies ,Definition of Terms," we find this definition: "Permanent and Total Disability � a disability as defined under Title XVI of the Social Security Act or under applicable state laws."

  6. Generally under Federal Law, Disability for adults is the "inability to do any substantial gainful activity (SGA) by reason of any medically de?terminable 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 12 months and you must have a severe impairment, which makes you unable to do your previous work or any other substan?tial gainful activity which exists in the national economy. To determine whether you are able to do any other work, we consider your residual functional capacity and your age, education, and work experience." S.G.A. for 2007 is set at only: $900/motnth or $10,800 annually. This can be a problem. Clients can include mentally retarded adults who work at a supermarket who can readily approach or exceed this annual income ceiling. Such a worker may also have health benefits through the employer, but what happens when they can no longer work or they are laid off? The goal is to keep them eligible for benefits and to allow the disabled client to reap the benefits of their settlement by means of the d4A SNT.

    Analysis of the Client's latest pay stub is needed as is obtaining a medical report from a doctor regarding their opinion on the issue of disability. A denial on any issue before MassHealth requires an appeal for a Fair Hearing within thirty days of the adverse decision. They allow for faxing of the appeal, but certified mail, if not hand delivery should be done. A fair hearing can come up rather quickly sometimes, so obtain all proof of disability before establishing and funding the d4A SNT and well before an adverse decision is rendered state or federal.

  7. A further d4A SNT requirement is that no benefits go directly to the Beneficiary.

  8. The d4A SNT's benefits must supplement public assistance and not supplant them.

Failure of a trust to comply with 42 U.S.C. § 1396p(d)(4)(A)and the POMS will result in trust assets being considered an available resource or the settlement used to fund d4A SNT could be considered transfers without fair consideration, resulting in a penalty period, or a denial of benefits if the trust property is deemed to be available to the beneficiary.

D. MANAGEMENT OF TRUST ASSETS:

Drafting should include guidelines for the categories of allowable investments by the Trustee. The disabled client may never again come into possession of thousands of dollars. Shouldn't a Trustee therefore consider maintaining the safety of the Trust principal versus making growth a priority due to risk inherent in investments that might allow for the most growth potential?

Surely we do not want to let trust funds languish in a savings bank account, nor do we want to allow funds to get clobbered by a stock market downturn, especially when a disabled client will likely never again get the chance to replenish assets that are lost. I have had clients require me to insert the following language into trusts:

"The Trustee may not invest in:

  1. Stocks of an individual company (but can invest in mutual funds which own stock shares in individual companies,)
  2. Commodities,
  3. Precious Metals."
Please also the Prudent Investor Act found in M. G. L. c. 203c, Sections 1 through 11, which can govern a Trustee's obligations unless the Trust specifically provides otherwise. Section 4 of that act states:" A trustee shall reasonably diversify the investments of the trust unless, under the circumstances, it is prudent not to do so."

Please also see the Principal and Income Act, M. G. L. C. 203d, before drafting a trust.

Prohibited Expenses or Payments under POMS SI 01120.203.B.3. are: payments of debts owed to third parties; funeral expenses, and payments to residual beneficiaries (prior to re-payment of the state.)

The Trustee can normally pay for vacations and related expenses. Entertainment is generally allowed, such a movie tickets and other social events, but the money should not go directly to the Beneficiary, but for $20/month.

Be careful if the Trustee is a close family member and receiving pay for acting as the Trustee, essentially the government wants to assure itself that money is not being funneled through the trustee to the Beneficiary.

Placing assets into a d4A SNT can in and of itself result in Section 8 imputing income if the funding of the d4A SNT is deemed a "transfer of assets for less than fair market value," and that can reduce benefits. A recurring monthly payment of $100 for the disabled client's electric bill by the trustee could be counted as income which can reduce benefits.

If the d4A Trust were to own a home, the following could be considered by SSI to be countable housing expenses if paid by the trustee: mortgage, real estate taxes, water and electricity. Rent paid by the trustee is countable. Telephone, cable TV, laundry, cleaning products, and repairs are likely not countable.

Ideally you want trust income to be taxed at the income tax rate of the d4A SNT beneficiary because the disabled client's rate would likely be in the lowest income tax bracket, as opposed to higher trust income tax levels. Generally, income and capital gains generated by property owned by a so-called Grantor trust are taxed at the rate of the grantor's individual tax rate, and income, deductions, and credits of the trust are reported on the disabled client / grantor/ beneficiary's personal tax return each year.

Initially the plaintiff will be recognized as the grantor of a Special-Needs Trust, even if a third party, such as a court or legal guardian, creates the trust. A d4a SNT can be considered a so-called Grantor trust if it meets the requirements of § 671-679 of the Internal Revenue Code.

E. THE CORPUS OF d4A SNT IS SUBJECT TO LIENS

Although an SNT was not properly before the Court due to procedural error, the Court cannot permit settlement proceeds to be used to fund a d4A SNT to avoid a Commonwealth lien for medical benefits paid for the injury in question. See Whelan v. Division of Medical Assistance, 44 Mass. App. Ct. 663 (1998.)

An individual who has received or will be receiving payments from a third party as a result of an accident, injury, or other loss must first repay the MassHealth agency for medical assistance under M.G.L. c. 118E, §22 (DIVISION OF MEDICAL ASSISTANCE) and also under 42 U.S.C. 1396a(a)(25)(A) and (B) and repay the Department of Transitional Assistance for financial assistance under M.G.L c. 18, §5G (DEPARTMENT OF TRANSITIONAL ASSISTANCE, Claimant; subrogation), even if such third-party payments have been or will be placed into a special-needs trust in accordance with 42 U..S.C. 1396p(d)(4).

One can use an I.M.E. report which in whole or in part, reports that that medical treatment paid for by MassHealth was unrelated to the accident in an attempt to reduce the lien.

If the client is on SSDI, remember the possibility of a Medicare lien.

F. DRAFTING ISSUES AND SAMPLE D4A SNT TRUST CLAUSES:

  1. COMBINED STATEMENT OF SPECIAL NEEDS and TRUST INTENT:

    "While I understand in creating this trust that my Trustee has sole and absolute discretion concerning all distributions from this trust of principal and income made for or on behalf of the Beneficiary, I intend the following information to govern the Trustee in exercising discretion in the Beneficiary's best interest.

    This d4A Special Needs Trust contains instructions for providing for the supplemental needs of the Beneficiary, who is currently a permanently, totally disabled adult caused by BI-POLAR ILLNESS and MENTAL RETARDTION and who is unable to make financial decisions.

    My intent is to supplement any benefits received (or for which the Beneficiary may be eligible) through or from various State or Federal governmental assistance programs and not to supplant any such benefits.

    Another primary purpose of this trust agreement also is management of TRUST assets for the Beneficiary."

  2. STATE PAYBACK LANGUAGE:

  3. "However, before any distributions are made to any remainder beneficiaries upon the death of the Beneficiary, the Trustee shall, from trust property and undistributed income, reimburse the Commonwealth of Massachusetts and any other state which has paid for the Beneficiary's care under the Medicaid or MassHealth programs up to an amount equal to the total amount of Medicaid benefits if any) paid on behalf of the Beneficiary, but only to the extent required by law,, but if the Beneficiary has lived in more than one state, the trust shall reimburse each state in which the Beneficiary received Medicaid based on each state's proportionate share of the total amount of Medicaid benefits paid by all states on the Beneficiary's behalf, or to the extent such medical assistance or other benefits have not already been reimbursed from any other source ,and reimbursement shall be only to the extent required by State and / or Federal law as of the date of death of the Beneficiary."

    N. B. Payback language notwithstanding, the Trust must name contingent beneficiaries who take upon the beneficiary's death, after repayment to the State for medical assistance benefits paid.

  4. POWER OF APPOINTMENT LANGUAGE:

  5. "Upon the death of the Beneficiary, the Trustee, shall, subject to the governmental payback provisions herein, pay the trust property and undistributed income and the entire balance of the trust, if any, to such persons or entities and in such manner as the Beneficiary may appoint in her Last Will and Testament but, excluding herself or her creditors, but in the absence of such an appointment, then all remaining trust property and undistributed income shall be distributed in equal shares to: Insert Name of those who take upon the Death of the D4a SNT Beneficiary after Payback."

  6. TRUST ASSETS DO NOT BELONG TO BENEFICIARY AND RESTRICTIONS

  7. "For purposes of determining the beneficiary's Medicaid eligibility, no part of the principal or undistributed income of the trust estate shall be considered available to him, nor is it to be held in his name. The Trustee shall deny any request by the beneficiary for my Trustee to release principal or income of the trust to or on behalf of the beneficiary to pay for benefits, equipment, medication, or services that Medicaid could provide if the trust did not exist."

  8. LEGAL ACTION TO DETERMINE BENEFICIARY'S ELIGIBILITY

  9. "My Trustee may, in the Trustee's discretion, take necessary administrative or legal steps to protect the beneficiary's Medicaid eligibility, including obtaining a ruling from a court of competent jurisdiction that the trust principal is not available to the beneficiary for purposes of determining Medicaid eligibility. Expenses for this purpose, including reasonable attorney fees, will be a proper charge to the trust estate."

    Young v. Dept. of Public Welfare, 416 Mass. 629 (1993) discussed that a Probate Court Judge can interpret and issue declaratory judgments concerning the provisions of a Trust and this judge declared the Trust in issue to be a supplemental needs trust pursuant to M. G. L. c. 215 Sec. 6 and Burn v. McAllister, 321 Mass. 660 at 661 (1947.)The Probate Court later amended its order to allow the Trustee to make payments for the Beneficiary's care and welfare during the time when the Beneficiary was not entitled to Medicaid benefits. However, this does not govern MassHealth or the Social Security Administration as they may interpret their own regulations as applied to the Trust.

  10. AVOID MEDICAID QUALIFYING TRUST LANGUAGE

  11. Essentially trust language that allows liberal, discretionary benefits under the Trust that are not within the State and Federal guidelines I referenced earlier, but that allows the Trustee to later restrict benefits as are required in a d4A SNT, will be classified as so-called "Medicaid Qualifying," trust language and the entire trust income and principal will be deemed available to the Beneficiary. See Kokoska v. Commissioner of the Division of Medical Assistance, 423 Mass. 399 (SJC 1996).

G. CONCLUDING THOUGHT

When the d4A SNT is drafted and the disabled client's parent or grandparent is alive, then, consider drafting a second SNT, a so-called Third Party SNT that can be established by a parent or grandparent and which can be funded with any inheritance the disabled client might receive. That type of special needs trust is very similar to the d4A SNT.

MATA member Brian F. Mahoney, a former accountant, first joined MATA in 1985 and is a member of the National Academy of Elder Law Attorneys. He concentrates in Estate Planning, Elder Law, Asset Protection and litigation of Estate & Will contests, Attorney Mahoney has been practicing Law for 25 years in Massachusetts with locations in Boston, Canton and Dedham.

Please call him at 781-828-0083 or contact him at:
brian@attybrianmahoney.com




© Brian Mahoney, Esq. - Estate Planning Attorney - Brian Mahoney - Serving Canton and Dedham, Massachusetts