2009 REVISIONS TO THE SOCIAL SECURITY ADMINISTRATION POMS RELATING TO SPECIAL NEEDS TRUSTS
by: Thomas D. Begley, Jr.
In January of 2009, the Social Security Administration (SSA) made a number of changes to the POMS relating to both first party and third party special needs trusts. These changes affect the drafting and administration of Special Needs Trusts and drafting Court Orders establishing self-settled special needs trusts. Pooled trusts are also covered in the revisions. This is a brief review of those changes:
1. GENERAL
1.1. Grantor Trust
The POMS states that, subject to State law, a grantor trust is a trust in which the grantor of the trust is also the sole beneficiary of the trust.[1] State law on grantor trusts varies.[2]
Comment: The Grantor is the person whose money is used to fund the trust. A grantor trust is a self-settled special needs trust. The term “grantor trust” as used in the POMS is different from the term “grantor trust” used in the Internal Revenue Code. This addition to the POMS clarifies that State law needs to be consulted as to whether a self-settled special needs trust would be a grantor trust under the POMS.
1.2. Third Party Trust
A third party trust is established with assets of someone other than the beneficiary.[3]
Comment: This provision clarifies that a third party special needs trust is funded with assets of someone other than the beneficiary, while a first party trust is funded with assets of the beneficiary.
|
|
1.3. Fiduciary
The person who establishes a trust should not be confused with the grantor, who provides the assets that form the principal of the trust.[4]
Comment: This provision clarifies that the person establishing the trust is not necessarily the person whose assets are being used to fund the trust. This is an important distinction in the area of self-settled special needs trusts.
1.4. Assignment of Income/Child Support & Alimony Trusts
A legally-assignable payment that is assigned to a trust is income for SSI purposes, unless the assignment is irrevocable. For example, child support or alimony payments made directly to a trust as a result of a Court Order are not income. [5]
Comment: This amendment to the POMS clarifies that child support or alimony payments paid directly into a trust as a result of a Court Order are not income, so long as the assignment is irrevocable.
1.5. Assets of an Individual
The POMS clarifies that special rules apply to trusts established with assets of an individual on or after January 1, 2000.[6] There is an example of a disabled SSI recipient over age 18 who receives child support, which is assigned by Court Order, directly into the trust. Since the child support is the SSI recipient’s income, the recipient is the grantor of the trust and the trust is a resource unless it qualifies as a self-settled special needs trust.[7]
Comment: This clarifies that child support is the recipient’s income and must be diverted to a first party rather than third party special needs trust. The same reasoning would apply to alimony.
1.6. Additions to Trust After Age 65
If the trust contains the irrevocable assignment of the right to receive payments from an annuity or support payments made when the trust beneficiary was less than 65 years of age, annuity or support payments paid to a special needs trust are treated the same as payments made before the individual attained age 65 and do not disqualify the trust from the special needs trust exception.[8]
Comment: For the first time the POMS clarifies that payments under a structured settlement received after age 65 do not disqualify the trust from self-settled special needs trust treatment, so long as the structure was in place prior to age 65.
2. DRAFTING REQUIREMENTS
2.1. Spendthrift Clause or Spendthrift Trust
A spendthrift clause or trust prohibits both voluntary and involuntary transfers of the beneficiary’s interest in the trust income or principal. This means that the beneficiary’s creditors must wait until money is paid from the trust to the beneficiary before they can attempt to claim it to satisfy debts. It also means that a beneficiary cannot sell his/her right to receive payments from the trust to a third party for a lump sum. A valid spendthrift clause would make the value of the beneficiary’s right to receive payments not countable as a resource. If the beneficiary’s right to receive payments from the trust could be sold by the beneficiary for a lump sum, the value of the beneficiary’s right to receive monthly payments would be counted as a resource.[9] If an individual can sell his or her beneficial interest in the trust, that interest is a resource.[10] If the beneficiary has the power to revoke or terminate the trust and gain access to trust assets, the trust may be a resource to the beneficiary.[11]
Comment 1: If there is a valid spendthrift clause, the beneficiary cannot sell the trust assets, so they are non-countable. The key is whether the trust assets can be sold.
This provision is somewhat confusing. The essence of a special needs trust is that the beneficiary not have control over distributions. Generally, a special needs trust would not provide for mandatory distributions to the beneficiary in any amount. However, it is possible that absent a spendthrift clause the beneficiary’s creditors may be able to attach trust assets to satisfy debts. It is good practice to include a spendthrift clause in every special needs trust.
Comment 2: This provision clarifies that if a trust contains a spendthrift clause, the beneficiary is foreclosed from selling the right to future payments in exchange for a lump sum settlement, so that the trust assets would not be considered an available resource to the beneficiary. Under the same principle, if state law does not recognize a spendthrift clause in a self-settled trust, the amount that can be reached by the beneficiary would be considered as a countable resource.
Drafting Tip: Use the term “Spendthrift Clause” in the document, rather than “Protective Provision” or such similar language.
2.2. Revoke
The grantor of a trust may have the power or authority to revoke (i.e., reclaim or take back) the assets deposited in the trust. If the individual at issue is the grantor of the trust, the trust will generally be a resource to that individual if the individual can revoke the trust and reclaim the trust assets. However, if a third party is the grantor of the trust, the trust will not be a resource to the beneficiary (emphasis added) of the trust merely because the trust is revocable by the grantor. In a third party trust situation, the focus should be on whether the individual can terminate the trust and obtain assets for him or herself.[12]
Comment: This is a new provision in the POMS and makes clear that if the grantor of a third party special needs trust revokes the trust, the trust will not be a resource to the beneficiary. If the beneficiary had the right to revoke the trust, the assets in the trust would be considered to be available to the beneficiary.
Drafting Tip: Include language in the document prohibiting the beneficiary from revoking the trust.
2.3. Terminate
This is also a new provision. In rare instances, a trustee or beneficiary of a third party trust can terminate the trust and obtain the assets for him or herself.[13]
Comment: This is another new section that simply contains the definition of termination. Previously the POMS stated that if a beneficiary had a right to revoke a trust, the assets would be countable to the beneficiary. This provision simply states that if the beneficiary has the right to terminate the trust, the assets in the trust would be considered countable assets to the beneficiary.
If a special needs trust includes a provision allowing for termination of the trust during the lifetime of the beneficiary and distribution of the trust assets to the beneficiary, the assets in the trust would be considered available. If the termination provision includes direct payment to a third party other than the beneficiary, the “sole benefit of” requirement would be violated and the trust would be countable to the beneficiary as a resource.
Drafting Tip 1: Include language in the document prohibiting the beneficiary from terminating the trust.
Drafting Tip 2: Do not include language in a self-settled special needs trust permitting termination of the trust during the lifetime of the beneficiary.
2.4. Revocability of Grantor Trust
Some States follow the general principal of trust law that if a grantor is also the sole beneficiary of the trust, the trust is revocable regardless of language in the trust to the contrary. However, many of these States recognize that the grantor cannot unilaterally revoke the trust, if there is a named “residual beneficiary” in the trust document. Under the modern view, residual beneficiaries are assumed to be created, absent evidence of a contrary intent, when a grantor names heirs, next-of-kin, or similar groups to receive the remaining assets in the trust upon the grantor’s death. In such a case, the trust is considered to be irrevocable.[14]
Comment: In many States, a minor or incompetent person cannot engage in estate planning. This means that a trust in those jurisdictions cannot name specific individuals to inherit on the death of the beneficiary of a self-settled special needs trust. In most States, a beneficiary cannot revoke a trust if there are residual beneficiaries. This POMS clarifies that when “heirs-at-law” and “next-of-kin” are named as a class of individuals that would receive the residuary of a self-settled trust rather than specific named individuals, in most states, the trust would be considered to be irrevocable, and thus not countable.
Drafting Tip: In drafting a self-settled special needs trust for a minor, include language granting a limited power of appointment to the minor. If the minor fails to exercise the limited power of appointment, include language stating that upon the death of the minor distribution shall be to heirs-at-law and next-of-kin. In drafting a self-settled special needs trust for the benefit of an incompetent person, use language stating that on the death of the beneficiary distribution shall be made to the beneficiary’s heirs-at-law and next-of-kin. Use the words “heirs-at-law and next-of-kin” so that those at Social Security will be familiar with them. In case the beneficiary later moves to a state that does not recognize the principle described in the comment above, also name a specific beneficiary for a nominal amount to avoid the trust becoming countable.
2.5. Payback Provisions
2.5.1. Creditor
According to the law in most States, the State is not considered a residual or contingent beneficiary, but is a creditor and the reimbursement is payment of a debt unless the trust instrument reflects a clear intent that the State be considered a beneficiary rather than a mere creditor. [15]
Comment: In drafting a self-settled special needs trust care should be taken to ensure that language is included naming the trust as a creditor rather than as a beneficiary. State law must be consulted.
Drafting Tip: Draft the trust document to identify the State as creditor rather than a beneficiary.
2.5.2. Extent of Lien
A Medicaid payback may not be limited to any particular period of time (i.e., payback cannot be limited to the period of establishment of the trust).[16]
Comment: This clarifies a previously gray area. This section of the POMS makes clear that a Medicaid payback must include any funds paid on behalf of the person with disabilities since birth. The payback is not limited to Medicaid expenditures made after the trust was established.
Drafting Tip: Include language in the trust document defining the payback requirement to include all medical assistance paid during the lifetime of the beneficiary.
2.5.3. Prohibited Payment of Taxes
Taxes due from the estate of the beneficiary, other than those arising from inclusion of the trust in the estate and inheritance taxes due for residual beneficiaries are not permitted prior to reimbursement of the state for medical assistance.[17]
Comment: This POMS clarifies that taxes, other than death taxes, are prohibited distributions prior to the Medicaid payback.
Drafting Tip: Include language in the trust document permitting payment of estate and inheritance taxes prior to the Medicaid payback, but prohibiting payment of any other taxes prior to the Medicaid payback. Alternatively, cite the terms of this POMS section at time in effect at time of death of the Beneficiary as the controlling requirements for post death distributions.
2.6. Established for the Benefit of the Individual/Sole Benefit Of
SSA has interpreted this provision to require that the trust be for the sole benefit of the individual. The special needs trust will be disqualified if it contains provisions that:
• provide benefits to other persons or entities during the lifetime of the beneficiary, or
• allow for termination of the trust prior to the individual’s death and payment of the corpus to
another individual or entity (other than the State(s) or another creditor for payment for goods or services provided to the
individual).[18]
Comment: For the first time POMS addressed the issue of what happens if a trust provides for termination prior to the individual’s death. Although not clearly written, it is intended to mean that a valid self-settled trust cannot allow for termination or revocation prior to the Beneficiary’s death. Upon death, it cannot allow for payment to another individual or entity before the state is paid back except for payment to “another creditor” for goods or services provided to the individual, presumably before death.
Drafting Tip: Use the words “for the sole benefit of” in the self-settled special needs trust document.
2.7. Who Established the Trust?
2.7.1 Legal Authority to Establish Trust
A party must have “legal authority” to establish a trust. Otherwise the trust will be invalid or the corpus will be countable to the beneficiary.[19] The POMS clearly states that a legally competent disabled adult may transfer his/her own assets into the trust, or another individual acting under a validly created power of attorney may establish the trust or transfer the assets. [20] However, the disabled individual may both sign and fund a pooled trust.
Comment 1: The POMS clarifies a frequent misunderstanding in terminology caused by the statute which caused problems in meeting the “legal authority” requirement. “Established” or “created” has two meanings that were not clearly delineated in the original POMS. The first establisher or creator is the party that took physical action to sign the trust, and the second type of establisher or creator, the traditional type under trust law, is the beneficiary who self-settled the trust corpus. This has been respectively clarified with meanings of “established through the actions of” a defined individual or court to sign the trust, and “established by” the beneficiary contributing funds.[21]
Comment 2: In the case of a trust established through the actions of a court, the creation must be by court order, effectively having the judge sign the trust, or ordering a party to sign the trust under court order. If a court only allows or assents to a trust signed by a third party (other than a parent, grandparent, or guardian), then the trust will be invalid. However, the disabled individual may both sign and fund a pooled trust.
Comment 3: In the case of a trust established through the actions of a court, the creation must be by court order, effectively having the judge sign the trust, or ordering a party to sign the trust under court order. If a court only allows or assents to a trust signed by a third party (other than a parent, grandparent, or guardian), then the trust will be invalid. However, the disabled individual may both sign and fund a pooled trust.
Drafting Tip: Consider using the term Establisher to identify the entity signing the trust. Use the term Grantor for the beneficiary funding the trust.
2.7.2. Power of Attorney
A trust may be established (signed) through the actions of a qualified individual under a validly created power of attorney, and the trust corpus may also be established (funds transferred into the trust) under a validly created power of attorney granted by the beneficiary.
Comment 1: A validly drafted power of attorney can be used to either establish a trust through the actions of a parent or grandparent, or to fund the trust with the assets of the beneficiary. For the former, the power of attorney must be validly created according to state law by the parent or grandparent granting authority to an independent agent to establish a trust for the beneficiary on behalf of the parent or grandparent. For the later, the beneficiary must be competent to grant the agent authority to transfer the beneficiary’s funds into the trust. Howe, a trust established (emphasis added) under a POA will result in a trust that SSA considers established through the actions of the disabled individual himself/herself, because the POA merely establishes an agency.[22]
Comment 2: Since a minor, or adult incompetent individual, would never have authority to create a valid power of attorney, unless there was a pre-existing valid power of attorney for the adult, a power of attorney can never be used under these circumstances. State law may allow a parent to be considered the child’s parental guardian without formal appointment, and therefore granting legal authority for the parent to transfer the child’s funds into the trust.
Drafting Tip: Never draft a self-settled special needs trust where the parent or grandparent uses a power of attorney to establish (sign) the trust unless the power of attorney specifically allows the agent to do so on behalf of the principal.
2.7.3. Seed Trust
Some states do not consider a self-settled trust as being established or created unless the trust has an asset provided by the party that establishes (signs) the document. The SSA recognizes this distinction, and thereby allows the establishing party to “seed” the trust with a nominal amount of their own funds.[23]
Comment: The SSA recognizes this state law distinction for creating a trust, and allows a parent, grandparent, or guardian to establish a “seed” trust using a nominal amount of his or her own money Otherwise, if State law allows, establish an empty or dry trust to be funded entirely with the beneficiary’s assets.
Drafting Tip: In States where a “dry” trust is not valid, draft language in a self-settled special needs trust permitting the parent or grandparent to seed the trust with a nominal amount of their own funds (i.e., $10) and note the contribution in a writing attached to the trust.
2.7.4. Trust Established by Guardian
A trust may be established through the actions of a guardian (meaning “signed” as allowed by state law), and a guardian may also have legal authority to fund the trust with the disabled individual’s assets, also according to state law. The POMS attempts to clarify the different concepts.[24]
Comment 1: The new POMS tries to distinguish the different duties that a guardian may perform in establishing a trust though its actions (signing), and funding a trust (establishing) as guardian of the incompetent beneficiary. In effect, the guardian may “wear two hats”, and must distinguish its duties in signing and funding the trust or run afoul of lacking “legal authority” to establish either aspect of the trust. Care must be taken to distinguish that the different actions taken by the same fiduciary are separate and distinct.
Drafting Tip: If a person appointed guardian performs different duties, specifically so state in the document. For example, if the guardian establishes the trust through its actions (signs) the trust, cite the court order authorizing it to do so. Likewise, if transferring funds into the trust, state the legal authority according to court order or state law allowing it to do so. If acting in another capacity such as Trustee, distinguish the different fiduciary duties as being independent of each other.
Comment 2: The SSA considers the guardian, when performing traditional duties for the individual such as transferring the individual’s assets into the trust, to be akin to a legal alter ego of the individual. An example in the revised POMS clarifies this principal and the pitfalls involving state law under such a scenario. A 17-year old SSI recipient received a $125,000 judgment as a result of an automobile accident that left him disabled. The recipient’s mother, as his legal guardian, established the trust (transferred) with funds that belonged to the recipient, and it is treated as if the recipient established the trust himself, for he is considered the grantor of the trust. He is also the sole beneficiary of the trust. Since state law in this example states that any such trust in which the same individual funds and is beneficiary is revocable, the trust becomes a countable resource regardless of the language in the trust document that the trust is irrevocable.[25]
2.7.5. Foreclosure of Payment
In cases in which the trust principal is considered as a resource, the SSA has clarified that if the trust is established with assets of an individual or his or her spouse, any foreclosure of payment (an instance in which no disbursement can be made to the individual under any circumstances) is not considered income, but is considered to be a transfer of resources as of the date of the foreclosure.[26]
Comment: What is the effect of this language on a trigger trust? There should not be a transfer of asset penalty, if the trust converts to a self-settled special needs trust because (d)(4)(A) trusts are specifically exempt from transfer of asset penalties.
Drafting Tip: Use caution.
3. ADMINISTRATION
3.1. Distributions that are Income
Distributions from the trust to third parties that result in the beneficiary receiving non-cash items are countable as income the month of receipt if the items would not be a partially or totally excluded non-liquid resource if retained into the month after the month of receipt.[27]
Comment: This rule simply distinguishes that payments to third parties for in-kind goods and services that are not for food or shelter are not countable income to the beneficiary as long as countable resources are not purchased (i.e., a second vehicle). Otherwise, it clarifies that purchases of countable resources are also considered income the month of receipt.
3.2. Distributions that are Not Income
Disbursements made from the trust to a third party that result in the beneficiary receiving non-cash items (other than food or shelter) are not income if those items would become a totally or partially excluded non-liquid resource if retained into the month after the month of receipt.[28]
Comment: This is a new section that clarifies that distributions to third parties for purchases of non-countable assets are not income.
3.3. Distributions Not to or for the Benefit of the Beneficiary/ Transfer of Assets
If a trust is established with assets of the individual or his or her spouse, any disbursement from the trust that is not made to or for the benefit of the individual is considered a transfer of resources as of the date of the payment and is not considered income to the individual.[29]
Comment: This provision simply clarifies that distributions from a self-settled special needs trust for the benefit of someone other than the person with disabilities would be considered a transfer of assets.
3.4. Disbursements for Credit Card Bills
If a trust pays a credit card bill for the trust beneficiary, whether the individual receives income depends on what was on the bill. If the trust pays for food or shelter items on the bill, the individual will generally be charged with in-kind support and maintenance up to the PMV. If the bill includes non-food, non-shelter items, the individual usually does not receive income as a result of the payments unless the item received would not be a totally or partially excluded liquid resource the following month. For example, if the credit card bill includes restaurant charges, payment of those charges results in ISM. If the bill also includes purchase of clothing, payment of clothing is not income.[30]
Comment: This is the first time the POMS clarifies how payment of credit cards will be treated. This is a very important provision for trustees to understand and follow. However, credit cards cannot be used by the individual to obtain cash from an ATM without the cash being counted as income, and if any goods obtained by the credit card are then sold by the individual, the cash received will count as income.
3.5. Disbursements for Gift Cards and Gift Certificates
Gift cards and gift certificates are considered cash equivalents. If a gift card/certificate can be used to buy food or shelter (e.g., restaurant, grocery store or VISA gift card), it is unearned income in the month of receipt. Any unspent balance on the gift card/certificate is a resource beginning the month after the month of receipt. If the store does not sell food or shelter items (e.g., book store or electronic store), but the card does not have a legally enforceable prohibition on the individual selling the card for cash, then it is still unearned income.[31]
Comment: Trustees love to use gift cards. For the first time the POMS has clarified how gift cards and gift certificates will be treated. Caution must be taken in using gift cards. As a general rule, utilizing credit cards is far superior to utilizing gift cards.
4. COURT ORDER
In the case of a trust established through the actions of a Court, the creation of the trust must be by a Court Order. Approval of a trust by the Court is not sufficient.[32]
Comment: A clarification under this POMS is that the Court must order that the trust be established rather than simply approving a trust established by an ineligible party. Appropriate language must be inserted in each Court Order.
Practice Tip: Draft the trust so that the judge actually signs it or orders another party other than the beneficiary or spouse to sign it.
5. POOLED TRUST
5.1. Transfer
A transfer of resources to a pooled trust for an individual age 65 or over may result in a transfer penalty. [33] “May” means that if a person age 65 or over transfers assets to a pooled trust for their own benefit, a transfer of asset penalty is imposed. But, if a person age 65 or over transfers assets to a pooled trust for the benefit of a disabled individual other than the grantor, there is no transfer of asset penalty.
Comment: The language used is “may.” Rather than resolve the SSA’s position on a different federal Medicaid agency interpretation of the statute resulting from inconsistent drafting when it was passed, this still leaves open the question of whether a transfer to a pooled trust constitutes a transfer of assets subject to transfer of asset penalty for SSI purposes.
5.2. Sole Benefit Of
The POMS clarifies that a pooled trust would not be an exempt trust if it allows for termination of the trust prior to the individual’s death which results in payment of the corpus to another individual or entity not allowed under the statute.[34]
Comment: This does not preclude total distribution of the trust corpus for the benefit of the beneficiary for purposes allowed by the trust. This is specifically designed to clarify that a trust cannot contain a clause that allows it to be terminated prior to the individual’s death. Upon death, it must provide for payments as allowed under the POMS, payment to the nonprofit association, and payback to the state before distributions can be made to other parties.
5.3. Who Established the Trust Account?
Unlike a stand-alone self-settled trust, a legally competent disabled individual who is establishing or adding to a pooled trust account with his or her own funds has the legal authority to act on his or her own behalf. In the case of a trust established through the actions of a Court, the creation of the trust must be required by a Court Order. Approval of the trust by a Court is not sufficient.[35]
Comment: These provisions are virtually the same as the provisions pertaining to stand-alone self-settled special needs trusts.
5.4. Payback
The trust must provide payback for any State(s) that may have provided medical assistance under the State Medicaid Plan(s) and not be limited to any particular State(s). Medicaid payback may also not be limited to any particular period of time (i.e., payback cannot be limited to the period after establishment of the trust).[36]
Comment: The provision pertaining to multiple States is new, although it has always been in the statute. The clarification that the payback is for all medical assistance received from birth has been a requirement for a stand-alone self-settled special needs trust and now SSA has clarified that it also applies to pooled trusts.
[1]POMS SI 01120.200 B 2.
[2] POMS SI 01120.200 B 8.
[3] POMS SI 01120.200 B 17.
[4] POMS SI 01120.200 B 18.
[5] POMS SI 01120.200 G 1 d.
[6] POMS SI 01120.201 B 7.
[7] POMS SI 01120.201 C 2 b.
[8] POMS SI 01120.203 B 1 c.
[9] POMS SI 01120.200 B 16.
[10] POMS SI 01120.200 D 1 a.
[11] POMS SI 01120.200 D 1 b.
[12] POMS SI 01120.200 B 19.
[13] POMS SI 01120.200 B 20; POMS SI 01120.200 D 1 b.
[14] POMS SI 01120.200 D 3.
[15] POMS SI 01120.200 H 1 b.
[16] POMS SI 01120.203 B 1 h.
[17] POMS SI 01120.203 B 3 b.
[18] POMS SI 01120.203 B 1 e.
[19] POMS SI 01120.203B 1 g.
[20] POMS SI 01120.203 B 1 f.
[21] POMS SI 01120.203 B 1 f. Note.
[22] POMS SI 01120.203 B 19.
[23] POMS SI 01120.203 B 1 f.
[24] POMS SI 01120.203 B 1 f. and g.
[25] POMS SI 01120.200 L 3.
[26] POMS SI 01120.200 E 2.
[27] POMS SI 01120.200 E 1 a; POMS SI 01120.201 I 1 a.
[28] POMS SI 01120.200 E 1 c.
[29] POMS SI 01120.200 E 2; POMS SI 01120.201 I 1 c.
[30] POMS SI 01120.201 I 1 d.
[31] POMS SI 01120.201 I 1 e.
[32] POMS SI 01120.203 B 1 f.
[33] POMS SI 01120.203 B 2 a.
[34] POMS SI 01120.203 B 2 e.
[35] POMS SI 01120.203 B 2 f.
[36] POMS SI 01120.203 B 1 h and B 2g.