Supplemental Needs Trusts and Their Impact on Medicaid and SSI Eligibility

by David Goldfarb Goldfarb Abrandt & Salzman LLP

A supplemental needs trust (“SNT”) enables a person with a disability to maintain eligibility for government benefits (for example, Medicaid and Supplemental Security Income (SSI)). The purpose of the SNT is to enhance the quality of life for a disabled person.

Historically, Estate of Escher, 94 Misc. 2d 952, 407 N.Y.S.2d 106 (Surr. Ct. Bronx Cty., 1978), aff’d mem. 75 A.D.2d 531 (1st Dept. 1980), aff’d 52 N.Y. 2d 1006, 438 N.Y.S.2d 2893 (1981), established the right of a parent to create a discretionary trust for a disabled adult child without jeopardizing the child’s eligibility for government benefits. The concept of the supplemental needs trust was later codified in New York at EPTL 7-1.12.

In order for a trust to qualify as a statutory SNT and benefit from the presumptive rules of construction and interpretation set forth in the statute, the beneficiary of the trust must be a “person with a severe and chronic or persistent disability.” The beneficiary of the trust usually receives government benefits, or is expected to need those benefits at some point in the future.

A third party SNT is established and funded by a person who does not have a legal duty to support the person with a disability. The third party SNT can be established by a will or as an inter-vivos or lifetime trust.

Sole Benefit Rule

A parent may transfer assets to a lifetime trust for the sole benefit of a disabled child without incurring any period of Medicaid or SSI ineligibility for herself. 42 U.S.C. § 1396p(c)(2)(B)(iii); N.Y. Soc. Serv. Law § 366 subd. 5(d)((3)(ii)(C). Any person may transfer assets to a trust established for the sole benefit of a disabled individual under the age of 65 without suffering the imposition of a Medicaid penalty period. 42 U.S.C. § 1396p(c)((2)(B)(iv); N.Y. Soc. Serv. Law § 366 subd. 5(d)(3)(ii)(D); 18 NYCRR § 360-4.4(c)(2)(iii)(c)(iv).

In order for a transfer to a trust to be considered for the sole benefit of one of the individuals described above it must provide for spending the funds in the trust “on a basis that is actuarially sound over the life expectancy of the individual.” CMS State Medicaid Manual §3257(B)(6). If the trust does not so provide then the exemption from the penalty period is void. Also, the remainder interest in the trust must vest in the estate of the beneficiary. CMS State Medicaid Manual §3257(B)(6); see also 96 ADM-8 at 7-8. There is an exception to these two criteria for the sole benefit rule for self-settled trusts which contain a “pay-back” provision. CMS State Medicaid Manual §3257(B)(6). See Discussion of “Self Settled Trusts,” below.

For purposes of SSI, Social Security regional POMS also maintain that a self-settled SNT which conforms to the sole benefit rule and vests in the estate of the beneficiary is revocable under New York law. However the regional POMS stipulates that the Medicaid pay-back provision makes the trust irrevocable. POMS SI NY 01120.200. Social Security also strictly construes the pay-back provision as needing to come before any other payment from the trust including funeral expenses.

Third-Party Supplemental Needs Trusts and Government Benefits

The SNT corpus is not considered “available” for purposes of eligibility for Medicaid or Supplemental Security Income. All distributions from the trust are made in the sole discretion of the trustee and are usually paid directly to third parties that provide goods and services to the beneficiary. The trustee may also have discretion to make payments directly to the beneficiary if appropriate, but any money paid directly to the beneficiary may be counted for purposes of eligibility for some means tested government benefits including SSI and Medicaid.

Payments made in the form of in-kind distributions for food or shelter are considered “unearned income” and will generally reduce SSI payments by a maximum of one-third. 42 U.S.C. § 1382(a)(2)(A); 20 C.F.R. § 416.1130(b); 18 NYCRR § 360-4.3(e); See also, Gordon v. Shalala, 55 F.3rd 101 (2d Cir., 1995); Ruppert v. Bowen, 871 F.2d 1172 (2d Cir., 1989). Payments for goods and services other than food and shelter will not reduce SSI benefits. 42 U.S.C. § 1382(a)(2)(A); 20 C.F.R. § 416.1130(b). SSI rules on trusts can be found in the Social Security Program Operations Manual System (POMS) at SI 01120.200. The POMS provides that the trust may own a home where the beneficiary lives without a reduction in his or her SSI. See discussion of SSI Provisions, below.

It is important to note that Medicaid does not have an in-kind income rule, and only income and resources actually available to the Medicaid recipient would be counted for purposes of eligibility.

As long as the SNT was established when the parent (or other third party) no longer had a duty to support the disabled beneficiary and the trust was not funded with any property of the beneficiary, the State has no right of recovery and no right to place a lien against the trust property. In New York, when the child is 18 or over, parents can use the SNT to provide for a disabled child for life and are free to direct how any remaining trust property will be distributed upon the child’s death.

The form of SNT’s has become more uniform as a result of the suggested language contained in N.Y. EPTL 7-1.12. The statute sets forth criteria that will afford a supplemental needs trust the benefit of a presumption that the trust is a valid “statutory” supplemental needs trust.

Prohibition Against Court Ordered Invasions of Principal

EPTL 7-1.6(b) authorizes the court with jurisdiction over a trust to give principal to or for the benefit of an income beneficiary whose support or education is not sufficiently provided for. A trust may provide that EPTL 7-1.6(b) shall not apply. For supplemental needs trusts that conform to the statutory criteria there is a presumption that EPTL 7-1.6(b) shall not apply if it would reduce or eliminate the beneficiary’s entitlement to government benefits or assistance. However any trust that anticipates eligibility for government benefits should specify that EPTL 7-1.6(b) shall not apply.

SSI Provisions Regarding Transfer of Assets and Trusts

At the end of 1999 Congress adopted and the President signed the “Foster Care Independence Act of 1999.” Foster Care Independence Act of 1999, §§ 205 & 206, Pub. L. No. 106-169 (1999) (codified at 42 U.S.C. §§ 1382a(a)(2)(G), 1382b(c) and 1382b(e)). This bill included two important provisions affecting SSI recipients.

Transfer of assets will effect eligibility for SSI (as had been the rule prior to 1988). There will be a 36-month look-back, similar to Medicaid, and a penalty period calculated by dividing the amount transferred by the SSI rate (including the state supplement). Unlike Medicaid (which has a 36 month lookback but no cap) there is a 36-month “cap” on any penalty. The penalty begins on the first day of the month “in or after” the transfer occurred. The law provides for transfer exceptions for the home and other resources similar to those in the Medicaid law. This provision applies on or after December 14, 1999.

Both revocable and irrevocable trusts will be considered resources (and earnings considered income) if they are “self settled,” that is, they contain the assets of an individual or an individual’s spouse (unless funded by the spouse’s will). The trust will be counted as a resource (and earnings considered income) if it is revocable or in the case of an irrevocable trust if there are any circumstances (that is, “discretion”) where the trustee can pay corpus (or earnings) to or for the benefit of the grantor or the grantor’s spouse. There are exceptions for supplemental needs trusts established pursuant to 42 U.S.C. §1396p(d)(4)(A) [payback trusts] or (d)(4)(C) [pooled trusts]. This provision became effective on or after January 1, 2000. The Social Security Administration has issued revisions to its Program Operations Manual (POMS) to cover the SSI trust provisions. POMS 01120.200-01120.203.

The Social Security Administration has clarified its position regarding the ownership of a home by an exempt trust. If the trust holds title to the home of the beneficiary, it is not a resource of the beneficiary, yet the eligible individual is considered to be living in his/her own home. POMS 01120.200(F). The individual is not considered to receive rent free shelter, so his or her SSI benefit will not be reduced. Costs for improvements or renovations are not considered income to the beneficiary. If however, the trust pays shelter or household operating expenses (for example, fuel costs or water charges) these are income in the month the payment is made and the SSI benefit will be reduced. POMS 01120.200(F)(3)(c).

See the discussion of Sole Benefit Rules, above.

Self Settled SNT’s or “Exception Trusts”

Aside from the third-party SNT’s, Medicaid and SSI now provides for the beneficiary to place his or her own funds in an SNT without having the funds counted as income or resources. 42 U.S.C. § 1396p (d)(4). Since these are exceptions to the general SSI and Medicaid Trust rules that the funds are deemed available if the trustee has discretion, these SNT’s are also are referred to as “Medicaid exception trusts.”

For Medicaid in New York there are two “exception trusts” which contain the assets of a person with a disability: an individual “payback” trust established for a disabled person under the age of 65 and a “pooled” trust established for a disabled person of any age. 18 NYCRR § 360-4.5(b)(5). These exception trusts were first authorized by the Omnibus Budget Reconciliation Act of 1993, and are sometimes called OBRA ’93 supplemental needs trusts or Medicaid exception trusts. See 42 U.S.C. § 1396p(d)(4)(A) for individual trusts and 42 U.S.C. § 1396p(d)(4)(C) for pooled trusts. The beneficiary must be disabled as defined in the Social Security Act. For persons over 65 using the pooled trusts see discussion below in the section on Placing Income into an SNT. These trusts are exempt from the SSI and Medicaid rules regarding availability of income and resources. This rule applies even to self-settled trusts. 42 U.S.C. §1396p(c)(2)(B)(iv); N.Y. Soc. Serv. Law. §366 subd. 5(d)(3)(ii)(D); 18 N.Y.C.R.R. § 360-4.4(c)(2)(iii)(c)(iv).

As previously noted, separate provisions provide no penalty period of ineligibility for SSI will be imposed as a result of a transfer of assets into the trust for the “sole benefit” of the disabled person under the age of 65 or to a trust established solely for the benefit of the transferor’s disabled or blind child. For SSI see 42 U.S.C. § 1382 et seq; For Medicaid see N.Y. Soc. Serv. Law § 366 subd. 2(b)(2)(iii).

Individual Payback Trust

An individual “exception” trust must be: (1) established for the benefit of a disabled person under the age of 65; (2) established by a parent, grandparent, guardian or court; (3) funded with the assets of the disabled beneficiary; and (4) require that Medicaid be paid back from the remaining balance, if any, upon the death of the beneficiary. 42 U.S.C. §1396p(d)(4)(A); N.Y. Soc. Serv. Law §366 subd. 2(b)(2)(iii).

Any transfer made into the trust by the disabled person after the age of 65 is treated as a transfer of assets requiring the imposition of a penalty period. 96 ADM-8. But see discussion below on transfers to a pooled trust by persons over 65.

The easiest way to create and fund a self-settled SNT is when a parent, or a grandparent is the “establisher” of the trust although the funds belong to or are the property of the disabled child or grandchild. Note, there is one additional requirement in a trust for an SSI recipient whose trust is created by a parent, grandparent, or guardian, in that the establisher must have actual legal authority to act with regard to the assets. A Power of Attorney from the SSI recipient/applicant to the parent or grandparent should meet this criterion. If the funds are from a settlement or recovery in a personal injury action and the defendant is under an incapacity (minor or incompetent) then the Supreme Court will review and approve the funding of a Supplemental Needs Trust as part of a compromise order. Courts may in addition be involved in the creation and/or funding of an SNT through Article 81 Guardianship because federal and state law permits Courts or guardians to be the “establisher” of an SNT.

Many disabled persons do not have a living parent or grandparent; they have capacity and do not need a guardian; and yet they have a need to create and fund an SNT. This scenario may arise if the following ways: a deceased parent named a disabled child the beneficiary of an IRA, or the named beneficiary of an insurance policy. Given the stringent rules for SSI and the less severe but equally compelling mandates of the Medicaid program, (that a recipient is ineligible if liquid resources exceed $ 4000) there may be the need for an expedited method of creating a self-settled SNT that would meet the guidelines of these programs.

New York State Supreme Courts have approved the creation of a SNT by petition in a special proceeding . The trust should be attached to the papers so that the court can review and ensure it is a “payback trust”. The Order to Show Cause and Petition are served on the local Department of Social Services. Typically the Social Service District will waive appearing but will send a letter to the court acquiescing to the creation and approval by the Court for the creation and funding of the Trust. A similar proceeding can be brought as a Miscellaneous Proceeding in the Surrogate’s Court.

The final step prior to execution and funding of the Trust is to submit to Court the order with a draft of the Trust attached.

Government and Judicial Supervision of Exception Trusts

N.Y. Soc. Serv. Law § 366(2)(b)(2)(iv) authorizes the Department of Social Services to promulgate regulations. These Regulations provide that the trustee must provide the local DSS with notice of the following: the creation or funding of the trust; in advance of distributions for less than fair market value; in advance of ”substantial depletions” from trusts in excess of $ 100,000, defined as 5% for trusts between $100,000 and $ 500,000, 10% for trusts between $ 500,000 and $ 1,000,000, and 15% for trusts in excess of $ 1,000,000); and of the death of the beneficiary. 18 NYCRR § 360-4.5(b)(5)(iii).

When an SNT is established by a guardian or Court with assets of the disabled person, then the court approving the establishment of the trusts may impose additional requirements on the trustee. These include an annual accounting, bond, court approval for certain expenditures and proposed budgets. See Matter of Goldblatt, 162 Misc 2d 888, 618 NYS 2d 959 (Surr. Ct. Nassau Cty, 1994) and Matter of Morales, NYLJ, July 28, 1995, p.25. col.1 (Sup.Ct., Kings Cty).

In DiGennaro v. Community Hospital of Glen Cove, 204 A.D.2d 259, 611 N.Y.S.2d 591 (2d Dep’t 1994) the court disapproved a supplemental needs trust where the parents were to be both trustees and remaindermen, citing a conflict of interest. Since making discretionary payments to the lifetime beneficiary would adversely effect the trustee/remainderman, such a provision might also run afoul of the New York law against a trustee making discretionary payments in his own favor unless the trust expressly states that the provision does not apply. N.Y. EPTL § 10-10.1.

Medicaid’s right to a payback from a self settled trust cannot be defeated by having a structured settlement or annuity pay into a supplemental needs trust, but have a separately designated remainderman. In Sanango v. N.Y. City Health & Hosp. Corp., 6 A.D.3d 519, 775 N.Y.S.2d 343 (2d Dep’t 2004), the Court below had allowed an annuity to be purchased and provide payments for the life of the beneficiary into the SNT, with guaranteed payments for 240 months. The Court below directed that, in the event of the beneficiary’s death prior to the receipt of all guaranteed payments, payments would be made to the beneficiary’s estate and not into the SNT. The Appellate Division reversed holding that the arrangement prejudiced and impaired Medicaid’s right to receive reimbursement up to the total value of all medical assistance provided.

In Cano v. Shmonie Corp., N.Y.L.J., July 22, 2004 (Sup. Ct. Bronx County 2004), the Court allowed a provision for an application to amend the trust in order to make the SNT “portable,” and to comply with potential objections of the local DSS offices in other States, in the event that the beneficiary move out of New York State.

Pooled Trusts

The other kind of exception trust is an OBRA ’93 pooled trust that conforms to the following requirements: It must be “established and managed” by a “nonprofit association;” the assets must be pooled for purposes of investment and management. Each beneficiary has a separate account within the pooled trust. The individual trust account can be funded by the same entities that fund the individual SNT, however the disabled individual himself or herself can also fund the account.

Depending on the terms of the pooled trust, the person creating the account may have an election regarding the distribution of the remaining balance (if any) upon the death of the disabled person. In a self-settled account, if the remaining balance in an account is retained by the pooled trust after the death of the beneficiary, then Medicaid is not entitled to be paid back. In a self-settled account, any amounts not retained by the pooled trust must be used to reimburse Medicaid for the cost of medical assistance provided to the beneficiary during her lifetime.

Although there is no penalty period for Medicaid for the transfer of a disabled beneficiary’s assets into a pooled trust by a person under the age of 65, New York imposes a penalty period for transfers into pooled trusts if the beneficiary is over 65. 96 ADM-8. In Matter of Banks, Index # 400646/97 (Sup. Ct. N.Y. Cty., June 14, 2000), Justice Parness approved a motion by a guardian to fund a pooled trust with funds discovered to be held by an incapacitated person while she was receiving Medicaid. The transfer to the pooled trust did cause a future disqualification or penalty period for institutional care. Although New York’s Administrative Memo penalizes transfers into pooled trusts by persons over the age of 65, the federal CMS State Medicaid Manual appears to provide otherwise. The CMS State Medicaid Manual states at § 3259.7(B)(2): “Resources placed in an exempt trust for a disabled individual are subject to imposition of a penalty under the transfer of assets provisions … unless the resources placed in the trust are used to benefit the individual, and the trust purchases items and services for the individual at fair market value.… These rules apply to both income and resources placed in the exempt trusts discussed in this section.”

Placing Income Into a Supplemental Needs Trust For Medicaid Eligibility.

It has always been clear that in “income cap” states income could fund a supplemental needs trust. 42 U.S.C. § 1396p (d)(4)(B). These trusts are also called “Miller Trusts.” New York has no “income cap,” but rather allows a “spend down” to the Medicaid level. However, New York State Department of Health in a Letter from Ann Clemency Kohler, Director of Office Medicaid Management, issued a release amending 96 ADM-8, clarifying the availability in New York to fund a supplemental Needs Trust with an income stream:

On page 8, under Trust, paragraph b., after the first sentence, add the following: “While most exception trusts are created using the individual’s resources, some may be created using the individual’s income, either solely or in conjunction with resources. Income diverted directly to a trust or income received by an individual and then placed into a trust is not counted as income to the individual for Medicaid eligibility purposes. Verification that the income was placed into the trust is required. In order to eliminate the need to verify this on a monthly basis, it is recommended that you advise the recipient to divert the income directly to the exception trust.

A “so ordered” stipulation in Joseph R. K. v. DeBuono, US Dist.Ct. Northern District of NY, 97-CV-0948, February 25, 1998, states that “in determining eligibility for plaintiff… the Albany County Department of Social Services (ACDSS) will recalculate the excess monthly income required to be spent down for medical expenses. In performing such recalculation… ACDSS will not consider income diverted into the…supplemental needs trust, or income received by the plaintiff and then placed into the trust….”

In In re Ullman, 184 Misc. 2d 7, 707 N.Y.S.2d 603 (Sur. Ct. Onondaga County 2000), the Surrogate’s Court, Onondaga County, denied a request to establish a supplemental needs trust to be funded with the beneficiary’s Supplemental Security Income (SSI).

However, the same Surrogate’s Court approved a petition to create a supplemental needs trust that was to be funded with the beneficiary’s Social Security Disability Income benefits in In re Lynch, File No. 90-1897 (Sur. Ct. Onondaga County 2000). [Note that this unreported case was a re-argument and reversal of the case reported at 703 N.Y.S.2d 653 (Sur. Ct. Onondaga County 1999)] The court approved the funding of the trust with the Social Security Disability Income based on the “unique circumstances.” Id. at 3.

In Matter of G.G., F.H. No. 3660793L (Onondaga County April 1, 2002), the Department of Health held: ”If the Agency finds that the trust in question meets the legal definition, the Agency is directed to exempt monthly income which the Appellant places in (or diverts to) the trust.”

In Matter of Kennedy, 3 Misc. 3d 907, 779 N.Y.S.2d 346 (Sur. Ct. Nassau County 2004), the Surrogate’s Court, Nassau County, approved the establishment of a supplemental needs trust funded solely with social security disability payments. The Court held that although the spend down requirement of N.Y. Soc. Serv. Law § 366(2)(a)(7) appeared to be inconsistent with the supplemental needs trust provisions of N.Y. Soc. Serv. Law § 366(2)(b)(2)(iii), they should nevertheless be construed together and the court therefore considered the SNT as an exception to the general Medicaid rules including the spend down rules. Id. at 910, 348.

A disabled individual under the age of 65 can divert or place income into an individual payback supplemental needs trust or a pooled trust. If the individual receives income above the Medicaid allowable level, it can be placed in the trust and should not affect either Medicaid community based services (including home heath care) or institutional (nursing home) care. The trust could then use the funds for the individual’s needs, which could include rent payments that would otherwise make it impossible for the individual to live in the community.

A disabled individual over the age of 65 can divert or place income into a pooled supplemental needs trust that will accept income (e.g., NYSARC Trust II). Because of transfer penalties for institutional care for persons over the age of 65, this will only assist someone who requires community based services. The trust could then use the funds for the individual’s needs. The pooled trust’s provisions would determine the amount that would remain in the trust for the benefit of other trust members on the beneficiary’s death. Beyond this, there would be a Medicaid payback provision. Some pooled trusts require minimum initial funding; however, the NYSARC Trust has no minimum. (See discussion above on the New York and CMS positions on transfers to pooled trusts by persons aver age 65).

Persons over 65 receiving Medicaid will usually not have been determined to be disabled. The New York State Department of Health requires a separate disability determination in such cases. 05 OMM/INF-1. Disability determinations for all individuals who are over age 65 and are contributing to a pooled trust are to be performed by the State Disability Review Team in Albany. Specific instruction are in 05 OMM/INF-5. The forms required are a Transmittal Sheet (LDSS-654), a Disability Interview Form (DSS-1151) filled out at the face-to-face interview, a release of medical evidence form, and appropriate sections of the “Medical Report for Determination of Disability” Form LDSS-486T. The M-11 Q cannot be used for this determination of disability.

Within these contexts, income transferred into a supplemental needs trust should not be counted for eligibility or spend-down. In Matter of M.O., F.H. No. 3945750N (New York City MAP, Feb. 25, 2004), the New York Department of Health held that income may be diverted to the NYSARC Trust and will not be considered income for the purposes of computing available income for contribution to the cost of care.

The state takes the position that income diverted to an SNT will not be disregarded for purposes of chronic care budgeting (nursing home care), even where the beneficiary is under 65 and there would be no transfer penalty. 05 OMM/INF-1. This is the same position taken in GIS 04 MA/027 (11/8/04) regarding the exclusion for income earned on certain exempt resources. This is apparently based on 42 CFR 435.832(c), which states that only specific enumerated deductions apply to post eligibility institutional care budgeting and “[i]ncome that was disregarded in determining eligibility must be considered in this process.” See also 42 U.S.C. § 1396a(r)(1)(A).

Advocates however, claim the above position is incorrect for two reasons: (1) If the income is irrevocably assigned to the trust it is no longer income which comes under the disregard rules; (2) the chronic care budgeting rules are inconsistent with the later laws providing for exempt trusts and as the Kennedy case (cited above) and the State Medicaid Manual point out, the laws must be read so that they are not a nullity. CMS State Medicaid Manual § 3259.7.

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