1. Presents Establishing and Drafting the (d)(4)(A) SNT With Nancy Fisher Chudacoff, Esq. Sponsored by: February 25, 2014

2. What’s In A Name?

3. First-Party Trust First party = the trust beneficiary. Assets in a first-party special-needs trust are assets to which the trust beneficiary is entitled: From a personal injury case. From an inheritance. From the beneficiary’s savings, including retirement accounts. Contrast assets in a third-party trust which are assets that belonged to the grantor and to which the trust beneficiary was not entitled.

4. A Payback Trust The term “payback” is sometimes used to describe a first-party trust because one of the cardinal rules applicable to first-party trusts is that when the trust beneficiary dies (or the trust is terminated during the beneficiary’s lifetime), any state that has provided Medicaid for the beneficiary must be reimbursed from remaining trust assets for Medicaid provided. Contrast a third-party trust from which no reimbursement is required.

5. (d)(4)(A) Trust Refers to the subsection of the federal statute which governs first-party, special-needs trusts. Contrast a third-party trust which is not a statutory creation.

6. Where’s The Law? Federal Statute Federal Medicaid Rules. Social Security Statute. Social Security Pronouncements (POMS). State Law and Regulations.

7. Federal Medicaid Statute The governing statute for first-party, special- needs trusts is 42 U.S.C. § 1396p(d)(4)(A), as amended by the Omnibus Budget Reconciliation Act of 1993 (OBRA), Pub. L. No. 103-66. This statute is sometimes referred to simply as “(d)(4)(A)” and the enacting law as “OBRA ’93.”

8. Federal Medicaid Regulations In November 1994, the year after OBRA ’93 became effective, the Health Care Financing Administration (HCFA), the government agency that then administered the federal Medicaid program (now the Center for Medicare and Medicaid Services [CMS]), issued Transmittal No. 64. This transmittal interprets Section 1396p(d)(4)(A) but is outdated and does not provide much guidance.

9. Social Security Statute Until 2000, individuals who gave away assets (except to special-needs trusts that met the requirements of Section 1396p[d][4][A]) could be disqualified only for Medicaid, but not for SSI; the SSI rules contained no penalties for giving away assets. In 1999, transfer penalties were added to the SSI rules. 42 U.S.C. § 1382b, as amended by the Foster Care Independence Act of 1999, Pub. L. No. 106-169. The Foster Care Independence Act of 1999 incorporated the Medicaid transfer rules and Medicaid rules regarding special-needs trusts into the SSI statute.

10. Social Security Rules (POMS) Social Security rules regarding special-needs trusts are contained in the Program Operations Manual System (POMS). Although the POMS rules are not technically regulations or rules, they set forth the Social Security Administration’s positions on Social Security matters somewhat like private letter rulings in the tax area. Since most Medicaid recipients also receive SSI, the POMS provides important guidance on special-needs trusts. A special-needs trust that complies with the POMS rules will, in most states, comply with state law applicable to special-needs trust although some states have even more stringent restrictions. POMS provisions regarding special-needs trusts apply only to trust beneficiaries who receive Supplemental Security Income (SSI). If the beneficiary does not receive SSI, some of the POMS provisions applicable to first-party special-needs trusts may not need to be included in the trust.

11. Four Cardinal Requirements for a (d)(4)(A) Trust 1.The trust must be established by a parent, grandparent, court, or guardian. 2.The trust must be for the benefit of the disabled person. 3.Beneficiary must be disabled and under 65. 4.The trust must provide for reimbursement upon the beneficiary’s death to all states that have provided Medicaid for the beneficiary. These four requirements for first-party, special-needs trusts are in a single paragraph, 42 U.S.C. § 1396p(d)(4)(A), and are restated and, in some cases amplified, in the HCFA transmittal, the POMS, and in state law.

12. Establishment of the Trust The trust must be established by a parent, grandparent, court, or guardian. A competent, disabled beneficiary cannot establish first-party trust for himself or herself, although a competent, disabled beneficiary can establish a first-party pooled special-needs trust for himself or herself, 42 U.S.C. § 1396p(d)(4)(C). Note: As of the writing of this presentation legislation was pending in Congress that would allow a competent, disabled person to establish a first-party special-needs trust. Depending upon your state’s law and practice, if a guardian is establishing the trust, the probate court should authorize the guardian to do so. If a court is establishing the trust, the court order should specifically state that the trust is being established by the court, not simply that the court approves establishment of the trust or authorizes establishment of the trust. POMS SI 01120.203B.1.f. An agent acting under a power of attorney for a disabled beneficiary cannot establish the trust. POMS SI 01120.203B.1.g.; see also, Draper v. Colvin (U.S. Dist. Ct., D. S.D., No. 12-4091-KES, July 10, 2013).

13. What Court is a Court? Although it is not clear from federal Medicaid statutes or regulations or POMS, it appears that the court that can establish a first-party trust must be a court of competent jurisdiction – a court that has statutory authority or equitable powers to establish a trust. At least in New England, a probate court cannot establish a special-needs trust as part of probate of a decedent’s estate. In a 1995 letter to a Boston-area elder-law attorney, the associate regional director of the New England regional office of HCFA, now CMS, stated that a probate court does not have jurisdiction to establish a special-needs trust as part of probate of a decedent’s estate. Letter dated July 24, 1995, from Ronald Preston to Donald N. Freedman, published in Elder and Disability Law Conference (MCLE, Inc. 1999).

14. The Sole Benefit Rule The federal statute itself provides only that the trust must be for the benefit of the disabled beneficiary. The HCFA transmittal added the word “sole” before benefit. POMS also emphasizes sole benefit. SI 01120.201F.2.

15. Beneficiary Must Be Disabled And Under 65 The trust can be established only for a beneficiary who is under 65. No assets can be added to the trust after the beneficiary is 65. Assets that a beneficiary may not be entitled to receive until after he or she is 65 can be irrevocably assigned to the trust before the beneficiary is 65.

16. Reimbursement The trust must provide for reimbursement upon the beneficiary’s death to all states that have provided Medicaid for the beneficiary. There are no exceptions to the reimbursement rule. POMS provisions prohibit certain payments before reimbursement. POMS SI 01120.203B.3.b. Language in the trust document should not contravene the POMS prohibited payments.

17. Funding a First-Party Trust Competent Beneficiary If the trust beneficiary is competent and the trust is established by the beneficiary’s parent or grandparent, the POMS contains a very convoluted requirement: The parent or grandparent must establish a “seed trust”—must fund the trust with a small amount of his or her own money. Then the disabled beneficiary can transfer his or her own assets to the trust. POMS SI 01120.203B.1.f. An agent acting under a power of attorney for a disabled beneficiary can transfer the beneficiary’s assets to the trust.

18. Funding a First-Party Trust Incompetent Beneficiary If the trust beneficiary is not competent by reason of age or disability, a guardian who establishes a first-party, special-needs trust should get probate court authorization to transfer assets to the trust. If the trust is being established by a court, the court could order transfer of the beneficiary’s assets to the trust. See, POMS SI 01120.203B.1.g. If a trust for an incompetent beneficiary is established by the beneficiary’s parent or grandparent, a guardian must be appointed and the guardian must obtain court permission to transfer the beneficiary’s assets to the trust.

19. Look To The POMS A first-party, special-needs trust usually must include provisions that comply with POMS and must exclude provisions contrary to POMS. In certain cases, however, for a beneficiary who does not receive SSI, compliance with some POMS provisions may not be necessary. Refer to POMS SI 01120.203B.1 and POMS SI 01120.200D.1.a and b and make sure that the trust document complies with those provisions.

20. Mandatory Provisions A first-party (d)(4)(A) trust must provide that the beneficiary does not have legal authority to revoke or terminate the trust. cannot direct use of trust principal for his or her support and maintenance. The trust must be completely discretionary and not require mandatory distributions to the beneficiary. The trust must prohibit payment of certain expenses, such as funeral expenses, upon the beneficiary’s death, prior to Medicaid reimbursement. POMS SI 01120.203B.3.b. The trust must be irrevocable. POMS SI 01120.203B.1.b.

21. Irrevocability POMS takes the position that a (d)(4)(A) trust may be revocable if it does not contain named remainder beneficiaries. POMS SI 01120.203B.1.b. This position is based upon the doctrine of worthier title which has been specifically revoked in some states. In a state that has not revoked the doctrine of worthier title, the trust document should designate remainder beneficiaries by name or by class (my children, for example) and not provide for a remainder to the beneficiary’s heirs-at-law.

22. Less Is More First-party special-needs trusts, like third-party special- needs trusts, often contain a list of ways the trustee could spend trust funds for the beneficiary’s benefit. Some of these common items, such as paying friends and relatives to visit, are now restricted by POMS provisions. Since the trustee of a special-needs trust has complete discretion, current wisdom is not to include such a list because some items listed may become unacceptable. The drafting attorney can provide the trustee with a list of permissible expenditures. Parents of a disabled beneficiary could provide a memorandum to the trustees of suggested expenditures.

23. Eschew Forms Don’t use a form for a (d)(4)(A) trust unless you know that the form is up to date and in accordance with recent POMS.

24. A Trust Is A Trust Is A Trust A first-party, special-needs trust is really just a completely discretionary trust with bells and whistles included to accomplish its goal. Because a special-needs trust is a trust, the drafter must be knowledgeable about trust law as well as about special-needs law.

25. Support (866) 296-5509 support@specialneedsplanners.com Contact Nancy Fisher Chudacoff: nancy@chudacoff.net