PS: Title XVI Regional Chief Counsel Precedents
TN 94 (02-18)
A. PS 18-030 Does the Alabama Family Trust (AFT Trust) comply with the requirements for a pooled trust
Date: April 12, 2017
1. Syllabus
This Regional Chief Counsel (RCC) opinion examines whether the Alabama Family Trust (AFT Trust) complies with the requirements for a pooled trust under section 1917(d)(4)(C) of the Social Security Act (Act) and the relevant provisions of the Program Operations Manual System (POMS). The RCC concludes that because the AFT Trust does not contain acceptable early termination provisions (in accordance with SI 01120.199F.1.), the trust accounts were not established solely for the benefit of the disabled individuals. Therefore, the AFT Trust does not meet all requirements of the pooled trust exception and must be counted as a resource for Supplemental Security Income (SSI) purposes.
2. Opinion
QUESTION
You asked whether the Alabama Family Trust (AFT Trust) complies with the requirements for a pooled trust under section 1917(d)(4)(C) of the Social Security Act (Act) and the relevant provisions of the Program Operations Manual System (POMS).
OPINION
The AFT Trust does not comply with the requirements for a pooled trust under section 1917(d)(4)(C) of the Act and the relevant provisions of the POMS.
BACKGROUND
In 1975, the State of Alabama created the AFT board of trustees, whose role is to establish and administer the AFT Corporation, which is a not-for-profit corporation that qualifies as an organization pursuant to section 501(c)(3) of the United States Internal Revenue Code. See Ala. Code §§ 38-9B-2(3), 38-9B-4(a), 38-9B-5(a).1 The State also authorized AFT Corporation to establish and administer the AFT Trust. See id. § 38-9B-5(b). The purpose of the AFT Trust “is to encourage, enhance, and foster the provision of medical, social, or supplemental services for persons with a mental or physical impairment.” Ala. Code § 38-9B-1(b).
To be eligible to participate in the AFT Trust, a life beneficiary must suffer from an impairment, which is defined as a “mental or physical disability that substantially limits one or more major life activities . . . and where the impairment is verified by medical findings that meet the medical-vocational requirements for a finding of disability under Section 223(d) of the Social Security Act, 42 U.S.C. Section 423(d), or under Section 1614 of the Social Security Act, 42 U.S.C. Section 1382c.” Id. § 38-9B-2(10); see id. § 38-9B-5(c)(1). Although contributions and earnings of the AFT Trust may be administered as one trust for the purposes of investment and management of funds, separate accounts are established for each designated life beneficiary. See id. § 38-9B-5(c)(2). A trust account is established when the Irrevocable Agreement is executed between the settlor and the AFT Corporation as trustee. See Ala. Family Trust, Irrevocable Agreement (revised Oct. 17, 2016), http://www.alabamafamilytrust.com/wp-content/uploads/2015/08/Irrevocable-Agreement-2.pdf (last visited Apr. 4, 2017).
In addition, “[a] financial record is maintained for each sub-account that reflects all activity in the account. Quarterly financial statements are sent to the Co-Trustee or Advocate or can be accessed through the internet.” Ala. Family Trust, Financial Information, http://www.alabamafamilytrust.com/trusts/financial-information/ (last visited Apr. 5, 2017).
In the case where a settlor2 has designated a contributor3 as the life beneficiary, the trust account must be irrevocable, and the amounts remaining in the account upon the life beneficiary’s death must be first dispersed to the AFT Corporation as reimbursement for any funds owed to the State of Alabama or any other State for medical assistance paid on behalf of the life beneficiary under the State plan. See id. § 38-9B-5(c)(4). The life beneficiary’s account is then terminated, and the distribution of the remaining amount depends on whether the life beneficiary received any benefits from the AFT Trust during his or her life. See id. § 38-9B-5(c)(10). If the life beneficiary did not receive any benefits from the AFT Trust during his or her life, the remaining amount is distributed to the successor life beneficiary, and if there is no successor life beneficiary, the remaining amount is distributed to the person designated by the settlor. See id. If the life beneficiary received benefits from the AFT Trust during his or her life, the remaining amount is distributed as follows:
90% of the balance to the person designated by the settlor and the remaining balance to the AFT Charitable Trust. See id. The AFT Charitable Trust is an account within the AFT Trust. See id. § 38-9-B-5(d)(1). The income from the AFT Charitable Trust is “used for the benefit of beneficiaries of AFT individual trusts who have needs that cannot be met from funds available to such life beneficiaries from their AFT individual trusts.” Id.
If prior to death, a life beneficiary ceases to be eligible to participate in the AFT Trust, the trustee may terminate the life beneficiary’s account. See id. § 38-9-B-5(c)(8). Upon termination of the account, a portion of the funds within the account are distributed to the AFT Charitable Trust and the remaining portion of the funds within the account are distributed to the account of the successor life beneficiary. See id. § 38-9-B-5(c)(9).
DISCUSSION
SSI is a general public assistance program for aged, blind, or disabled individuals who meet certain income and resource restrictions and other eligibility requirements. See Act §§ 1602, 1611(a); 20 C.F.R. §§ 416.110, 416.202 (2017).4 “Resources” include cash or other liquid assets or any real or personal property that an individual owns and could convert to cash to be used for his or her support and maintenance. See Act § 1613; 20 C.F.R. § 416.1201(a). “If the individual has the right, authority or power to liquidate the property or his or her share of the property, it is considered a resource. If a property right cannot be liquidated, the property will not be considered a resource of the individual . . . .” 20 C.F.R. § 416.1201(a)(1); accord POMS SI 01120.010.B.
Generally, the Social Security Administration (SSA) must consider the principal or corpus of a trust established with the assets of an individual to be a resource of the individual. See Act § 1613(e)(1)-(3); POMS SI 01120.201.A.1. However, certain exceptions are provided for trusts established in accordance with section 1917(d)(4) of the Act. See Act § 1613(e)(5); POMS SI 01120.201.A.1; POMS SI 01120.203.A. Pooled trusts are one such exception. See Act § 1917(d)(4)(C); POMS SI 01120.203.B.2 (describing an exception in accordance with § 1917(d)(4)(C) as a “pooled trust”). To satisfy the pooled trust exception, a trust must contain the assets of an individual who is disabled (as defined in section 1614(a)(3)) and meet the following requirements:
The trust is established and managed by a nonprofit association.
A separate account is maintained for each beneficiary of the trust, but, for purposes of investment and management of funds, the trust pools these accounts.
Accounts in the trust are established solely for the benefit of individuals who are disabled (as defined in section 1614(a)(3)) by the parent, grandparent, or legal guardian of such individuals, by such individuals, or by a court.
To the extent that amounts remaining in the beneficiary’s account upon the death of the beneficiary are not retained by the trust, the trust pays to the State from such remaining amounts in the account an amount equal to the total amount of medical assistance paid on behalf of the beneficiary under the State plan under this title.
Act § 1917(d)(4)(C); accord POMS SI 01120.203.B.2.a.
The AFT Trust meets the initial requirement of containing the assets of an individual who is disabled. See Act § 1917(d)(4)(C); POMS SI 01120.203.B.2.a. This requirement is met because all life beneficiaries of the AFT Trust must be disabled under the Act. See Ala. Code §§ 38-9B-2(10); 38-9B-5(c)(1).
To meet the first numbered requirement, the trust must be established and maintained by an organization that has been established and certified under a State nonprofit statute. See Act § 1917(d)(4)(C)(i); POMS SI 01120.203.B.2.c. The AFT Corporation established and administers the AFT Trust. See Ala. Code § 38-9B-5(b). Under Alabama law, the AFT Corporation must qualify as a section 501(c)(3) organization, and the Internal Revenue Service (IRS) identifies the AFT Corporation as a tax-exempt organization.5 See Ala. Code § 38-9B-5(a); see also POMS SI 01120.203.F (referring to the procedures in POMS SI 01130.689.E for determining if an organization is a nonprofit or tax-exempt organization); POMS SI 01130.689.E.2 (indicating SSA considers an organization to be a non-profit organization if it can verify it is a tax-exempt organization with the IRS). Thus, the AFT Trust meets the first numbered requirement of the pooled trust exception.
To satisfy the second numbered requirement, the trust must maintain a separate account for each trust beneficiary, although the funds may be pooled for investment and management purposes. See Act § 1917(d)(4)(C)(ii); POMS SI 01120.203.B.2.d. The trust must also be able to provide an accounting for each beneficiary’s individual account. See POMS SI 01120.203.B.2.d. The AFT Trust funds are pooled for investment and management purposes, but each life beneficiary has a separate account. See Ala. Code § 38-9B-5(c)(2). The board of trustees is required to prepare an annual accounting of funds in the AFT Trust. Id. § 38-9B-4(c). In addition, “[a] financial record is maintained for each sub-account that reflects all activity in the account. Quarterly financial statements are sent to the Co-Trustee or Advocate or can be accessed through the internet.” Ala. Family Trust, Financial Information, http://www.alabamafamilytrust.com/trusts/financial-information/ (last visited Apr. 5, 2017). Accordingly, the AFT Trust meets the second numbered requirement of the pooled trust exception.
The third numbered requirement mandates that the accounts in the trust are established for the sole benefit of individuals who are disabled within the meaning of the Act. See Act § 1917(d)(4)(C)(iii); POMS SI 01120.203.B.2.e. SSA considers a trust to be for the sole benefit of an individual “if the trust benefits no one but that individual, whether at the time the trust is established or at any time for the remainder of the individual’s life.” POMS SI 001120.201.F.2.a. Therefore, aside from payments for goods or services for the trust beneficiary and reasonable administrative expenses, the trust must not:
(1) provide a benefit to any other individual or entity during the disabled individual’s lifetime; or
(2) allow for termination of a trust account prior to the individual’s death and payment of the assets to another individual or entity. See POMS SI 001120.201.F.2; POMS SI 01120.203.B.2.e.
The Alabama statute that governs the AFT Trust includes an early termination provision for when prior to death, a life beneficiary becomes ineligible to participate in the AFT Trust. See Ala. Code § 38-9B-5(c)(8), (9). A trust with an early termination provision can meet the third numbered requirement if the following criteria are met:
(1) Upon early termination, the State Medicaid plans receive all funds up to the amount the plans paid for medical assistance on behalf of the life beneficiary;
(2) After reimbursement to the State Medicaid plans, all remaining funds are disbursed to the life beneficiary, save for those funds used to pay the expenses listed in POMS SI 01120.199.F.3 and POMS SI 01120.201.F.2.c; and
(3) The power to terminate the trust early is held by someone other than the life beneficiary.6 See POMS SI 01120.199.F.1.
The AFT Trust’s early termination provision indicates that the trustee, which by definition is the AFT Corporation, holds the power to terminate the trust early. See Ala. Code §§ 38-9B-2(17), 38-9B-5(c)(8). Thus, the AFT Trust meets the third criterion. However, the AFT Trust does not meet the two other criteria for an acceptable early termination provision. Upon early termination of a trust within the AFT Trust, the funds that were within the trust are distributed to the AFT Charitable Trust and the successor life beneficiary. See id. § 38-9B-5(c)(9). Thus, the AFT Trust’s early termination provision does not require reimbursement to the State Medicaid plans, and it allows for disbursement to entities or persons other than the life beneficiary—namely, the AFT Charitable Trust and the successor life beneficiary. See id. Therefore, the AFT Trust does not meet the criteria that a trust with an early termination provision must meet to satisfy the third numbered requirement of the pooled trust exception.
Because the AFT Trust does not meet the third numbered requirement, it is not a pooled trust regardless of whether it meets the fourth numbered requirement. See Act § 1917(d)(4)(C) (indicating a trust must meet all four requirements to qualify for the pooled trust exception); POMS SI 01120.203.B.2.a. (same). However, it is worth noting that an account within the AFT Trust could meet the fourth numbered requirement of the pooled trust exception.
To meet the fourth numbered requirement, the trust instrument must contain specific language providing that, to the extent that amounts remaining in an individual’s account upon his or her death are not retained by the trust, the trust will pay the remaining amount to the State(s) up to the total amount of medical assistance State Medicaid plan(s) paid on behalf of the individual. See Act § 1917(d)(4)(C)(iv); POMS SI 01120.203.B.2.g. When a contributor to a AFT Trust account is also the life beneficiary of the account, the amounts remaining in the account upon the life beneficiary’s death are first dispersed to the AFT Corporation as reimbursement for any funds owed to the State of Alabama or any other State for medical assistance paid on behalf of the life beneficiary under the State plan. See Ala. Code § 38-9B-5(c)(4)(ii). Thus, whether an account within the AFT Trust meets the fourth numbered requirement of the pooled trust exception must be determined on a case-by-case basis. When the life beneficiary of an AFT Trust account is also a contributor to the account, the account will meet the fourth numbered requirement of the pooled trust exception.
Although the AFT Trust can meet the first, second, and fourth numbered requirements of the pooled trust exception, it cannot meet the third numbered requirement. Accordingly, the AFT Trust is not a pooled trust under section 1917(d)(4)(C) of the Act and the relevant provisions of the POMS.7
CONCLUSION
For the reasons discussed above, the AFT Trust does not meet all the requirements of the pooled trust exception under section 1917(d)(4)(C) of the Act and the relevant provisions of the POMS.
Sincerely,
Mary Ann Sloan
Regional Chief Counsel
By: Richard H. Winters
Assistant Regional Counsel
B. PS 16-184 State Law for Empty and Dry Trusts in Atlanta Region
Date: April 25, 2016
1. Syllabus
This Regional Chief Counsel opinion provides the State law related to trusts established with no funds (i.e., dry or empty trusts), for the States in Region IV to assist field offices in addressing questions regarding how such purported trusts should be considered under the Social Security Administration’s (agency) Supplemental Security Income (SSI) resource rules.
2. Opinion
QUESTION
You asked us to provide the State law related to trusts established with no funds (i.e., dry or empty trusts), for the States in Region IV to assist field offices in addressing questions regarding how such purported trusts should be considered under the Social Security Administration’s (agency) Supplemental Security Income (SSI) resource rules.
BACKGROUND
SSI is a general public assistance program for aged, blind, or disabled individuals who meet certain income and resource restrictions and other eligibility requirements. See Social Security Act (Act) §§ 1602, 1611(a); 20 C.F.R. §§ 416.110, 416.202 (2015).*8 “Resources” include cash or other liquid assets or any real or personal property that an individual owns and could convert to cash to use for his or her support and maintenance. See Act § 1613; 20 C.F.R. § 416.1201(a). “If the individual has the right, authority or power to liquidate the property or his or her share of the property, it is considered a resource. If a property right cannot be liquidated, the property will not be considered a resource of the individual . . . .” 20 C.F.R. § 416.1201(a)(1); see Program Operations Manual System (POMS) SI 01120.010.B. Even if property has no current market value, it may still be considered a resource if it is property that an individual owns and has the right to convert to cash, and the individual is not legally restricted from using the property for his or her support and maintenance. See POMS SI 01110.100.B.2, B.3.
Property held in a trust may or may not be considered a resource for SSI purposes. See POMS SI 01120.200.A.1. Generally, the agency must consider the principal or corpus of a trust established with the assets of an individual to be a resource of the individual. See Act § 1613(e)(1)-(3); POMS SI 01120.201.A.1. Trust principal is a countable resource if the individual (claimant, recipient, deemer) has legal authority to revoke or terminate the trust and use the funds to meet his or her food or shelter needs, or if the individual can direct the use of the trust principal for his or her support and maintenance under the terms of the trust. See POMS SI 01120.200.D.1.a. Also, if an individual can sell his or her beneficial interest in the trust, that interest is a resource. See POMS SI 01120.200.D.1.a. Conversely, if an individual does not have legal authority to revoke or terminate the trust or to direct the use of the trust assets for his own her own support and maintenance, the trust principal is not a resource for SSI purposes. See POMS SI 01120.200.D.2. The revocability of a trust and the ability to direct the use of trust principal depends on the terms in the trust agreement and on State law. See POMS SI 01120.200.D.2.
DISCUSSION
Alabama:
Alabama statutory law indicates a trust may be established through the conveyance of property but does not otherwise explain the property requirements to establish a trust. See Ala. Code § 19-3B-401, comment (2016). Alabama case law, however, has clarified that the existence of property held by a trustee for the benefit of a trust as an essential element of a trust. See Corretti v. First Nat’l Bank of Birmingham, 276 So. 2d 141, 147 (Ala. 1973); Gordon v. Central Park Little Boys League, 119 So. 2d 23, 27 (Ala. 1960). Thus, Alabama law does not appear to recognize a trust that is established with no funds.
Florida:
Florida statutory law indicates a trust may be created when property or a property interest is transferred to a trustee, but does not further explain the property requirements to establish a trust. See Fla. Stat. Ann. § 736.0401 (West 2016). Florida case law, however, indicates an express trust is not created until property is conveyed for the purpose of the trust. See McLemore v. McLemore, 675 So. 2d 202, 205 (Fla. Dist. Ct. App. 1996); In re Herskowitz’s Estate, 338 So. 2d 210, 212 (Fla. Dist. Ct. App. 1976). Thus, Florida law does not appear to recognize a trust that is established with no funds.
Georgia:
Georgia statutory law requires express trusts to include trust property. See Ga. Code Ann. § 53-12-20 (West 2016). Georgia case law also holds that an essential element of an express trust is the existence of trust property. See Hayes v. Clark, 530 S.E.2d 38, 39 (Ga. Ct. App. 2000); Lummus Supply Co. v. Fidelity Fed. Sav. & Loan Ass’n, 234 S.E.2d 671, 672 (Ga. Ct. App. 1977). Thus, Georgia law does not appear to recognize a trust that is established with no funds.
Kentucky:
Kentucky statutory law indicates a trust may be created through the transfer of property to a trustee or by a declaration that an owner of property has made that the owner holds identifiable property as trustee, but does not further explain the property requirements to establish a trust. See Ky. Rev. Stat. Ann. § 386B.4-010 (West 2016). Kentucky case law clarifies that a fundamental element of a trust is the devotion of trust property to the benefit of the trust beneficiaries. See Siter v. Hall, 294 S.W. 767, 770 (Ky. Ct. App. 1927). Such property must be in existence and identified to establish the trust. See DeLeuil’s Ex’rs v. DeLeuil, 74 S.W.2d 474, 477 (Ky. Ct. App. 1934). Thus, Kentucky law does not appear to recognize a trust that is established with no funds.
Mississippi:
Under the Family Trust Preservation Act of 1998, Mississippi statutory law defines trusts to mean an express trust, private or charitable, or a trust created or determined by a judgment or decree under which the trust is to be administered in the manner of an express trust. See Miss. Code Ann. § 91-9-501(a) (West 2016). Mississippi excludes from this definition of a trust the following: constructive trusts, other than those created by a judgment or decree under which the trust is to be administered in the manner of an express trust, and resulting trusts; guardianships and conservatorships; executors and administrators of decedent's estates; totten trust accounts; custodial arrangements pursuant to the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act of any state; business trusts that are taxed as partnerships or corporations; investment trusts subject to regulation under the laws of this state or any other jurisdiction; common trust funds; voting trusts; security arrangements; transfers in trust for purpose of suit or enforcement of a claim of right; liquidation trusts; or any arrangement under which a person is nominee or escrowee for another. See Miss. Code Ann. § 91-9-501(b). Missisippi statutory law does not appear to contain any additional definition of a trust or further explanation regarding any property requirements to establish a trust.
Mississippi case law also does not appear to address whether there are property requirements to establish a trust. Cases that describe the essentials of an express trust do not address this question. See, e.g., Smiley v. Yllander, 105 So. 3d 1171, 1175 (Miss. Ct. App. 2012) (identifying two types of trusts, express and implied, and noting express trusts or any trust holding real property must be written, while implied may either be constructive or resulting, without addressing whether property is a prerequisite to establishing any type of trust); Sligh v. First Nat’l Bank of Holmes Cty., 735 So. 2d 963, 974 (Miss. 1999) (describing a trustee’s duties and noting guarantorships and conservatorships are not trusts); Ogle v. Durley, 77 So. 2d 688, 691-92 (Miss. 1955) (explaining that real property that was devised to a survivor in a will with condition of splitting the income of said property with another survivor did not create trust, but instead created an equitable charge). Thus, we found no Mississippi statute or case law authorizing the establishment of a trust with no funds.
North Carolina:
North Carolina statutory law indicates a trust may be established when property is transferred to or held by a trustee, but does not further describe the property requirements to establish a trust. See N.C. Gen Stat. Ann. § 36C-4-401 (West 2016). North Carolina case law, however, requires the conveyance of property in order for a trust to be created. See Bissette v. Harrod, 738 S.E.2d 792, 799 (N.C. Ct. App. 2013). Thus, North Carolina law does not appear to recognize a trust that is established with no funds.
South Carolina:
South Carolina statutory law indicates a trust may be established when property is transferred to a trustee or through a written, signed declaration from an owner of property that the owner is holding the property as a trustee, but does not further explain the property requirements to establish a trust. See S.C. Code Ann. § 62-7-401 (2016). South Carolina case law, however, indicates that a trust generally can exist only if it is funded. See Foster v. Foster, 682 S.E.2d 312, 314 (S.C. Ct. App. 2009) (listing trust res as a necessary element to establish a trust); Mayer v. M.S. Bailey & Son, 555 S.E.2d 406, 410 (S.C. Ct. App. 2001) (noting a trust generally can exist only if it is funded). Thus, South Carolina law does not appear to recognize a trust that is established with no funds.
Tennessee:
Tennessee’s Uniform Trust Code includes a provision identifying the requirements for creating a trust particularly with respect to identifying a settlor with the requisite capacity and intention, a trustee with duties to perform, and a definite beneficiary. See Tenn. Code Ann. § 35-15-402 (West 2016). However, neither this provision nor other provisions of Tennessee statutory law appear to discuss whether the trust must contain property. Under Tennessee case law, however, for an express trust to exist, the trust must contain a corpus, or property. See Myers v. Myers, 891 S.W.2d 216, 218 (Tenn. Ct. App. 1994). Thus, Tennessee law does not appear to recognize a trust that is established with no funds.
CONCLUSION
If you have any questions regarding this memorandum, please contact the undersigned at (404) 562-1094.
Sincerely,
Mary Ann Sloan
Regional Chief Counsel
By: Natalie Liem
Assistant Regional Counsel
Footnotes:
. All references to the Alabama Code are to the West 2017 edition.
. A settlor is “[a] person who establishes an AFT Trust account for a life beneficiary.” Ala. Code § 38-9B-2(15).
. A contributor is “[a]ny person who makes a donation directly to the AFT Corporation or the AFT Charitable Trust.” Ala. Code § 38-9B-2(7).
. All references to the Code of Federal Regulations are to the 2017 edition.
. IRS Exempt Organizations Select Check, https://apps.irs.gov/app/eos/pub78Search.do?ein1=63-1144514&names=&city=&state=All...&country=US&deductibility=all&dispatchMethod=searchCharities&submitName=Search (last visited Apr. 6, 2017).
. These requirements need not be met for early termination provisions in pooled trusts established under section 1917(d)(4)(C) when such provisions only allow for the beneficiary to transfer his or her assets upon termination to another pooled trust established under section 1917(d)(4)(C) to which he or she remains the beneficiary. See POMS SI 01120.199.F.2. The AFT Trust provides for something other than a transfer to another pooled trust with the same beneficiary to happen upon early termination. See Ala. Code § 38-9B-5(c)(8), (9). Thus, this exception does not apply to the AFT Trust’s early termination provision.
. We have reviewed several versions of the Irrevocable Agreement that is signed when an account is established within the AFT Trust. However, none of these versions contain language that indicates the early termination provision operates in a manner that would allow the account to meet the third numbered requirement of the pooled trust exception. Further, because Alabama law mandates the terms of the AFT Trust that prevent the AFT Trust from meeting the third numbered requirement of the pooled trust exception, see Ala. Code § 38-9B-5(c)(8), (9), we do not believe that an Irrevocable Agreement could change the terms of the AFT Trust such that it would meet the third numbered requirement of the pooled trust exception. See Bankers & Shippers Ins. Co. of N.Y. v. Blackwell, 51 So. 2d 498, 502 (Ala. 1951) (indicating that contracts that violate the law may be unenforceable).
. * All references to Code of Federal Regulations are to the 2015 edition.