Supplement Needs Trusts

Supplement Needs Trusts

Resource Manual

Michelle A. Daubert, JD student, University at Buffalo School of Law

Anthony Szczygiel, Professor

Legal Services for the Elderly Clinic,University at BuffaloSchool of Law

Sally Speed, Director

Medicaid Training Resource System

Funding for this research project was provided by the Department of Health Training Resource System, Contract year 2006: Project 1052504, Award 38403; Contract year 2007: Project 1059690, Award: 41708, through the Center for Development of Human Services, College Relations Group, Research Foundation of SUNY, Buffalo State College.
TABLE OF CONTENTS

I. INTRODUCTION ………………………………………………………………………3

II. STATUTORY BASIS FOR SNTs…………………………………………………….4

III. TRUST DISTRIBUTIONS …………………………………………………………...7

A.Trust Expenditures for Beneficiaries who Receive Medicaid Only…………7

B.Trust Expenditures for Beneficiaries who Receive Medicaid and SSI...…….8

IV. INITIATION AND FEES…………………………………………………………….10

A. Limits on Marketing…………………………………………………………...10

B. Limits on Administrative Fees………………………………………………...11

1. Pooled SNTs……………………………………………….…………….11

a. Fees for Pooled SNTs Located in New York………………….14

2. Individuals SNTs………………………………………………………..17

V. THE REMAINDER IN POOLED SNTs…..…………………………………………19

VI. OVERSIGHT………………………………………………………………………….23

VII. CONCLUSION………………………………………………………………………28

I.INTRODUCTION

A Supplemental Needs Trust (“SNT”) enables a person with a disability to maintain eligibility for government benefits (primarily Medicaid and Social Security Income (“SSI”)), despite having transferred his or her own income or resources into a self-settled trust that exists for the benefit of the disabled individual. The use of both individual and pooled SNTs is growing. This research project examines the underlying law of SNTs (pursuant to both Federal and New YorkState law), including their creation, marketing, administration and impact on public benefits.

Medicaid’s general budgeting rule includes in the amount of income and resources considered available to such person the maximum amount of payments that may be permitted to be distributed under the terms of a self-settled trust, assuming the full exercise of discretion by the trustee or trustees. An SNT is an exception to the general rule, as only the amount provided directly to the individual is included as income and the corpus of the trust is unavailable. The purpose of the SNT is to enhance the quality of life for the disabled person, by permitting the trust to pay for expenses not paid for by Medicaid and/or SSI. The use of SNTs is growing. As the amount of money being held in these types of trusts increases, it is appropriate to look at the legal limits on the use of SNTs, including their marketing and administration.

As the use of SNTs grows, so does the variety of circumstances of the beneficiaries who choose to set up SNTs. An SNT is an irrevocable trust, which means that once money is put into it, that money cannot be removed for any other reason than to purchase items for services for the benefit of the beneficiary. It is, therefore, important that individuals make an informed choice in whether to establish an SNT and if so, in selecting the type of SNT that best meets their needs. The use of SNTs must remain consistent with the primary goal of enhancing the quality of life of the disabled person. As a consequence, it is important to understand the legal limits on using SNTs. This Research Project analyzes the laws that provide this unique treatment of SNTs. Additionally, the Research Project identifiesand analyzesthe laws, or lack thereof, regarding the marketing of SNTs and their administration.

II. STATUTORY BASIS FOR SNTs

SNTs are statutorily regulated on both the federal and state levels. This research project focuses on Federal and New York law. Federal law does not define an SNT. However, New York law does provide such a definition. An SNT is defined in § 7-1.12 of the Estates, Powers and Trusts Law (“EPTL”), as a discretionary trust “established for the benefit of a person with a severe and chronic or persistent disability.”[1] Thus, an SNT may only be established in New YorkStatefor individuals who are disabled within the meaning of both the federal Social Security Disability law[2]and the state law. Pursuant to EPTL § 7-1.12(a)(4), a “person with a severe and chronic or persistent disability” means a person (i) with mental illness, developmental disability, or other physical or mental impairment; (ii) whose disability is expected to, or does, give rise to a long-term need for specialized health, mental health, developmental disabilities, social or other related services; and (iii) who may need to rely on governmental benefits or assistance.

Establishing an SNT can be very beneficial to disabled individuals. However, there is a tradeoff of creating these trusts: the payback requirement. Any remaining funds left in a self-settled individual SNT after the beneficiary dies must be paid back to Medicaid, up to the amount equal to the total medical assistance utilized by the disabled individual.[3] For a pooled SNT, any remaining money not kept by the non-profit association trustee must be paid back to Medicaid, up to an amount equal to the total medical assistance paid on behalf of the disabled individual.[4] Both the federal and state laws are dependant on the following factors:

1. Age of the disabled individual—whether under 65 or over 65.
2. Whose money is used to establish the trust—funds of the disabled individual in a “self-settled” trust, or funds of a third party in a “third-party” trust.
3. Type of benefit—whether a SNT is established to protect solely Medicaid benefits or additionally SSI benefits.

Federal law has created two types of SNTs: an individual SNT and a pooled SNT. Both types of SNTs are self-settled, meaning they are created using the individual’s own assets. They are usually funded with either a disabled person’s personal injury settlement, inherited funds, unprotected testamentary trusts from probate, or unprotected lifetime gifts.

An individual SNT is a trust limited to individuals under 65. It must be established for the benefit of the disabled individual by a parent, grandparent, legal guardian, or a court. A trustee must be appointed to manage the trust and make disbursements. Individual SNTs are created pursuant to N.Y. Soc. Servs. Law § 366(2)(b)(2)(iii)(A); 18 NYCRR § 360-4.5(b)(5)(i)(a); and 42 U.S.C. § 1396p(d)(4)(A), thus, they are often called “D-4-A” trusts.

A pooled SNT can be created for the benefit of a disabled individual of any age. Thus, disabled individuals over age 65 may use a pooled SNT. In fact, for persons with disabilities who are over the age of 65, a pooled SNT is their only option because they are legally prohibited from establishing an individual SNT. Nevertheless, a penalty on transferring assets will be imposed for individuals over age 65.[5] The SSI penalty applies to disqualify the individual from SSI for up to three years, depending on the amount that is transferred into the SNT. Unlike the individual SNT, a pooled SNT may be self-created. The pooled SNT must be established and managed by a non-profit association. Pooled SNTs maintain a separate account for each beneficiary of the trust, but pool the accounts for purposes of investment and management of funds. Thus, an advantage of pooled SNTs is that the assets of many individuals are joined together for investment purposes to receive a higher return. Pooled SNTs work best for individuals with a limited amount of money to deposit because the initial cost and set up fees for the settler are less than the fees that would be charged by the trust department of a bank for one small individual trust. They are created pursuant toN.Y. Soc. Servs. Law §366(2)(b)(2)(iii)(B);18 NYCRR § 360-4.5(b)(5)(i)(b) and 42 U.S.C. § 1396p(d)(4)(C).

SNTs may also be third-party trusts when they are funded with the assets of someone other than the disabled individual. These “third-party trusts” may be individual or pooled SNTs, either established during the grantor’s life with an inter vivos gift[6] or through a testamentary transfer.[7] Unlike self-settled SNTs, third-party SNTs have no payback requirement because the disabled beneficiary was never entitled to the money in the trust. Therefore, the third-party is free to direct how any remaining trust property will be distributed upon the disabled individual’s death. Additionally, there is no age requirement for the beneficiary. However, there is one exception. In the case of the third-party being a parent, the child must be age 21 or older so that the parent no longer has a duty to support the disabled child. Only self-settled trusts are addressed by statute; third-party trusts rely on common law.

The key aspects of any SNT, regardless of whether it is individual or pooled, self-settled or third-party, are that: (1) the beneficiary does not have the power to assign, encumber, direct, distribute, or authorize any distributions from the trust;[8] and (2) the trust document prohibits the trustee from expending or distributing funds in any way that would supplant, impair, or diminish the beneficiary’s eligibility for or receipt of any type of government benefit.[9]

III. TRUST DISTRIBUTIONS

SNTs, both individual and pooled, are set up to meet supplemental needs, rather than basic needs. In doing so, they are intended to provide services and items that do not jeopardize means-tested benefits. For Medicaid and SSI, all money in either an individual or pooled SNT is not considered a resource of the beneficiary. A trust program should seek input and advice from the disabled person and/or their family members whenever possible. However, the SNT is designed to protect Medicaid, SSI, and publicly funded services, so the trustee must have sole discretion as to how disbursements are made, including how much is spent and items and services that are purchased.[10]

A.Trust Expenditures for Beneficiaries who Receive Medicaid Only:

The trustee of the individual or pooled SNT may make direct payments to third parties that provide goods and services to the beneficiary. These in-kind payments are not considered income for Medicaid purposes, regardless of what the payments are for.[11] In other words, Medicaid does not have an in-kind income rule. Thus, payments made by the trust to third parties for rent, clothing, food, etc. do not reduce Medicaid benefits. Cash paid directly from the trust to the individual, however, would be considered income and would reduce Medicaid benefits.

B.Trust Expenditures for Beneficiaries who Receive Medicaid and SSI:

Food or shelter received as a result of disbursements from the SNT by the trustee to a third party are income in the form of in-kind support and maintenance and are valued under the presumed maximum value (“PMV”) rule.[12] In-kind support and maintenance is defined in 20 C.F.R. § 416.1130. “Both earned income and unearned income include items received in kind.”[13] In-kind support and maintenance is defined as the following: “any food or shelter that is given to you or that you receive because someone else pays for it.”[14] In-kind support and maintenance does not include room or rent that beneficiaries are paying the amount charged for under a business arrangement. There are two rules for how in-kind support and maintenance is valued.[15] First, a one-third reduction rule applies if the A/R is living in the household of a person who provides both food and shelter.[16] Second, the PMV rule applies in all other situations where the beneficiary is receiving countable in-kind support and maintenance.[17] These payments are “unearned income” and will generally reduce SSI payments by a maximum of one-third of the monthly federal benefit amount plus $20, which is the “general income exclusion.”[18]

Prior to March 9, 2005, clothing was also counted as in-kind income, but the Social Security Administration amended this rule so that currently, an SNT or a third party may purchase clothing for the beneficiary and it will not be counted as income.[19] Shelter expenses include: room, rent, mortgage payments, real property taxes, heating fuel, gas, electricity, water, sewerage, and garbage removal services.[20]

Direct payments for goods and services other than food and shelter will NOT reduce SSI benefits. The following are not shelter costs: cable, telephone, cell phone, internet service. The following are all permitted to be paid by the trust and will not be counted as income: payment for travel and local transportation, entertainment expenses, educational expenses, and clothing (since 3/9/05). Cash paid directly from the trust to the individual is unearned income and would reduce SSI benefits.[21]

IV. INITIATION AND FEES

The typical initiation and startup steps of a pooled SNT are the following: (1) an existing not-for-profit organization (“NPO”) becomes committed to establishing a pooled SNT, or a NPO is incorporated for that express purpose; (2) attorneys, typically pro bono, draft the trust agreement and related necessary documents; (3) the NPO hires or trains staff to market and operate the pooled SNT; (4) marketing begins; (5) new clients execute Joinder Agreements and pay initial sign-up fees; and then (6) the NPO manages the pooled SNT, often delegating out financial and legal aspects of administering the trust.[22]

A. Limits on Marketing

Marketing of SNTs may assist or complicate the decision that disabled individuals face as to whether or not to establish an SNT. The marketing of SNTs is a concern for CDHS because aggressive tactics have been used to encourage disabled individuals to join a pooled SNT. The marketing tactics employed have included visiting disabled individuals directly at their home or contacting family members. Unfortunately, there are no laws, either in New York or on the federal level, that regulate the marketing or advertising of SNTs. Through my own research I found no such laws or regulations that address marketing with respect to SNTs. I also consulted the following individuals regarding this issue: Bruce D. Reinoso, a partner at Magavern, Magavern & Grimm, L.L.P., who concentrates his practice in the areas of elder law, estates and trusts and health law; and Kenneth F. Joyce, a Distinguished Teaching Professor and Professor of Law at the University of Buffalo Law School, State University of New York, whose teaching and scholarship focus onestates, trusts, and estate planning. Both of these lawyers who specialize in trusts were unaware of any statutory restrictions imposed on pooled SNT sponsors in marketing their trusts other than the obvious prohibitions against misrepresentation. In the event a disabled individual joins a pooled SNT based on deceptive marketing or advertising that rises to the level of misrepresentation, such a victim may have a choice between two avenues of redress: (1) a tort action for damages, or (2) a right to avoid the enforceability of the contract by way of rescission.[23]

Analogies between marketing regulations in other healthcare areas to pooled SNTs are unfortunately unworkable. The federal Medicare/Medicaid Anti-Kickback Statute[24] and the physician self-referral law (“STARK”)[25]both address marketing in healthcare contexts. However, these are inapplicable to sponsors of pooled SNTs because they only address marketing by healthcare providers.[26] Medicare Part D has extensive marketing guidelines and requirements for prescription drug plans.[27] Nevertheless, Medicare Part D marketing restrictions are most likely not analogous to pooled SNTs because there is much more market competition in Part D plans and the regulations are too specific to Part D alone.

It should be noted that pooled SNT administration, as discussed below, is difficult and costs are high. Marketing is a time-consuming function that some pooled trusts do not perform. Hence, only pooled SNTs with higher cost structures will perform vigorous (or any) marketing.

B. Limits on Administrative Fees

1. Pooled SNTs

Pooled trust administration performed by the trustees can be costly and difficult. It includes, amongst other things: investing assets; managing the mechanics of prorating gains and losses to sub-accounts that are constantly changing in value; filing annual tax returns for the sub-accounts; designing forms; completing the joinder processes; making appropriate distributions for the benefit of sub-account beneficiaries; handling the mechanics of making distributions;maintaining record keeping; and general management.[28] It is often expected that pooled SNTs will charge lower fees than corporate fiduciaries. Nevertheless, with added personal care and attention, low fees may not be realistic unless the trust is continually subsidized.[29]

New YorkState law sets forth that an NPO may act as trustee of a pooled SNT so long as a trust company acts as a co-trustee. This is a result of a 1997 legislative amendment. New York Senate Bill 4775 was enacted into law by the New YorkState legislature to amend the New York Medicaid statute. New York Social Services Law §366(2)(b)(2)(iii)(B)currently states:

Notwithstanding any law to the contrary, a not-for-profit corporation may, in furtherance of and as an adjunct to its corporate purposes, act as trustee of a trust for persons with disabilities established pursuant to this subclause, provided that a trust company, as defined in subdivision seven of section one hundred-c of the banking law, acts as co-trustee.