By Alan Polack
Special Needs Trusts (SNT) are common estate planning tools established under Section 1917(d)(4)(A) of the Social Security Act.
They are designed to protect the assets of persons who have been determined disabled by the Social Security Administration (SSA).
If these individuals are not eligible for Social Security disability benefits, they can receive Supplemental Security Income (SSI) and automatically receive Medicaid benefits from the State of Michigan.
The SSA reviews every one of these trusts established for recipients of SSI.
The trust must meet several requirements including provisions that upon the death of the disabled beneficiary, the trust must reimburse the state for any Medicaid benefits paid for the benefit of the disabled individual.
In reviewing Special Needs Trusts, the Administration follows rules that are published in the Social Security Program Operations Manual System (POMS).
These rules are amended periodically.
The SSA has announced new rules effective October 1, 2010 which establish new requirements for trusts that contain early termination provisions. These rules apply only to Special Needs Trusts established on or after January 1, 2000.
An early termination provision allows a trust to terminate before the death of a beneficiary.
Commonly, such provisions or clauses provide for termination of the trust when, for example, the beneficiary is no longer disabled or otherwise becomes ineligible for SSI and Medicaid, or when the trust fund no longer contains enough trust assets to justify its continued administration.
Under the new rules, in order for the trust assets to not be a countable resource, the early termination provision must include a mandatory requirement that the trustee pay to the state as primary assignee all the amounts remaining in the trust at the time of the termination up to an amount equal to the total amount of Medicaid paid on behalf of the individual under the State Medicaid Plan and no person other than the trust beneficiary may benefit from the early termination.
That means if the early termination clause is triggered and the state is reimbursed for Medicaid expenses, only the beneficiary can receive any residue.
In addition, the early termination clause must give the power to terminate to someone other than the trust beneficiary.
Here are some evaluation examples.
Example 1: A disabled child is the beneficiary of a SNT which was established after January 1, 2000 with the assets of the child. The trust contains an early termination clause that states, upon early termination, all assets remaining in the trust will be distributed to the beneficiary.
SSA evaluates the trust and determines that the trust meets the criteria of Section 1917(d)(4)(A).
However, the administration also determines that the trust is a countable resource because, upon early termination, the document does not allow for reimbursement first to the state for providing medical assistance to the trust beneficiary.
Example 2: A disabled child is a beneficiary of a SNT that was established after January 1, 2000 with assets of the individual. The trust contains an early termination clause and states that, upon early termination, the state will first be reimbursed for medical assistance provided to the trust beneficiary.
Per the trust document, after reimbursement to the state any remaining assets will be distributed to the beneficiary.
The clause bestows the power to terminate to the trustee. Upon evaluation, the SSA determines that the trust meets the criteria of Section 1917(d)(4)(A) and that the early termination clause will not prevent the trust from meeting the criteria to be excepted from resource counting and that the trust assets are not a countable resource.
Obviously, SSA feels that this rule change is necessary to prevent SNTs from avoiding their obligation to reimburse Medicaid expenses by simply self-destructing before the death of the beneficiary.
Does this mean that the SSA will scour its files for trusts already approved under the old rules and disapprove those with incorrect termination clauses as of October 1, 2010?
Since SNTs contain non-modification provisions, will those with faulty termination clauses have to be amended in probate court? Will these new rules result in SSI overpayment cases? There are a lot of sticky issues here.
If the drafter of a SNT feels it necessary to include an early termination clause, the clause must (1) provide that the state be reimbursed for the cost of medical assistance; (2) that if any trust assets remain after state reimbursement, only the beneficiary can receive those assets; and (3) the beneficiary cannot have the authority to terminate the trust.
Another alternative, of course, is to simply not include an early termination clause.
The POMS can be found online at http://www.socialsecurity.gov.
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Alan F. Polack specializes in elder and probate law and practices out of Shelby Township. He is a former president of the Macomb County Probate Bar Association.
