TN 89 (01-18)

A. PS 17-075 Revocability of Grantor Trusts and Validity of Spendthrift Clauses in Trusts

Date: April 6, 2017

1. Syllabus

The Regional Chief Counsel (RCC) opinion examines the revocability of grantor trusts and the validity of spendthrift clauses in the six states that comprise Region VIII (Colorado, Montana, North Dakota, South Dakota, Utah, and Wyoming). The opinion states that for third party trusts all states in Region VIII recognize the validity of a spendthrift clause, however for self-settled trusts, the issue is less straightforward:

In Montana, a spendthrift clause in a self-settled trust is invalid.

In North Dakota, a spendthrift clause is valid in a special needs trust or a pooled trust meeting the criteria in POMS SI 01120.203.

In South Dakota, Utah, and Wyoming, a spendthrift clause will be valid in a self-settled trust that meets specific and detailed requirements. The requirements differ for each state.

In Colorado, the law is unclear.

The opinion also discusses the important issue of examining whether the SSI beneficiary may sell his or her beneficial interest in the trust. In the states where a spendthrift clause would be viewed as invalid, thus allowing the beneficial interest to be sold, it is necessary to determine the value of that interest. In conclusion, the RCC recommended that trusts be referred to OGC for further review for Colorado, South Dakota, Utah, and Wyoming, if the trust provides for mandatory distributions (because the beneficial value of those distributions may or may not be countable).

2. Opinion

Question Presented

You have requested a legal opinion on the revocability of grantor trusts and the validity of spendthrift clauses in the six states that comprise Region VIII (Colorado, Montana, North Dakota, South Dakota, Utah, and Wyoming).

Background

A grantor trust is a trust in which the grantor is also the sole beneficiary. The grantor is the individual who provides the trust principal. SSA considers the individual who funds the trust to be the grantor, even if the trust agreement names a person acting on behalf of the individual as the grantor. The grantor is often called the “settlor,” and these terms may be used interchangeably.

Some states follow the general principle of trust law that if a grantor is the sole beneficiary of a trust, the trust is revocable regardless of language in the trust to the contrary. See POMS SI 01120.200(D)(3). However, many of these states also recognize that if the trust names a residual beneficiary to receive the benefit of the trust interest after a specific event, usually the death of the primary beneficiary, then the trust is irrevocable. The primary beneficiary cannot unilaterally revoke the trust because he/she would need the consent of the residual beneficiary. You asked whether states in the Denver region follow these general principles.

A spendthrift clause prohibits voluntary and involuntary transfers of a beneficiary’s interest in the trust income or principal. See POMS SI 01120.200(B)(16). A spendthrift clause is a way to protect the beneficiary’s interest from creditors, because creditors must wait until money is paid from the trust to the beneficiary before they can attempt to claim it to satisfy any debts. Likewise, spendthrift clauses prevent the beneficiary from selling or assigning his or her right to receive future trust distributions to a third party for a lump sum. Under these principles, if a trust has a valid spendthrift clause, the value of the beneficiary’s right to receive payments from the trust is not countable as a resource for SSI purposes. See id.; see also POMS SI 01120.200(D)(1)(a) & (D)(2). However, some states that recognize spendthrift clauses do not allow a grantor to establish a spendthrift trust for his/her own benefit. You asked how these rules apply in the Denver region states.

These considerations are relevant in determining whether a trust is countable as a resource. If the SSI beneficiary has the authority to revoke or terminate the trust and use the funds for support, the trust is counted as a resource. Further, if the SSI beneficiary may sell his or her beneficial interest in a trust, the amount of that interest is a resource; a valid spendthrift clause, however, would prevent such a sale, making the interest not countable.

Discussion

Revocability where Grantor is the Sole Beneficiary

(A) It is appropriate to assume that all six states in Region VIII follow the general principle that, where the settlor is the sole beneficiary of the trust (i.e., does not name any residual beneficiaries), the trust is revocable regardless of the express language of the trust. Montana, Utah, and Wyoming have directly relevant statutes or case law, and we believe the other states would follow the majority rule absent any contrary authority. See Restatement (Third) of Trusts, § 65 (majority of states find trust revocable when settlor is the sole beneficiary); Scott and Ascher on Trusts, § 34.3 (same).

(B) All six states in Region VIII follow the principle that residual beneficiaries are created when the settlor designates heirs, next of kin, or similar groups to receive remaining trust assets upon the primary beneficiary’s death.

(C) As relevant to revocability, it should also be noted that in Colorado, Montana, North Dakota, Utah, and Wyoming, the settlor may revoke a trust unless the trust expressly states that it is irrevocable (even if there are residual beneficiaries). In other words, if the trust is silent with respect to revocability, the trust is revocable. Therefore, when a trust is evaluated under these states’ laws, it is important to confirm that there is specific language in the trust expressly stating it is irrevocable.

References:

Colorado:

(A) No relevant statute or case law so assume state follows majority rule.

(B) Colo. Rev. Stat. § 15-11-710 (abolishing “doctrine of worthier title,” such that reference to heirs or next of kin does not create reversionary interest in settlor).

(C) Colo. Rev. Stat. § 15-16-702(a) (settlor may revoke or amend unless trust expressly states that it is irrevocable).

Montana:

(A) Mont. Code Ann. § 72-38-411 (irrevocable trust may be terminated upon consent of the settlor and all beneficiaries).

(B) Mont. Code Ann. § 72-2-720 (abolishing doctrine of worthier title).

(C) Mont. Code Ann. § 72-38-602 (settlor may revoke or amend unless trust expressly states that it is irrevocable).

North Dakota:

(A) N.D. Cent. Code Ann. § 59-12-11. (411) (omitting provision of Uniform Trust Code (UTC) regarding termination by consent of settlor and beneficiaries). Pursuant to Drafting Committee’s comments to UTC (2004), this omission suggests the state’s prior law controls and prior law was silent on the issue, therefore assume state will follow majority rule.

(B) N.D. Cent. Code Ann. § 30.1-09.1-10. (2-710) (abolishing doctrine of worthier title).

(C) N.D. Cent. Code Ann. § 59-14-02. (602)(1) (settlor may revoke or amend unless trust expressly states that it is irrevocable).

South Dakota:

(A) No relevant statute or case law so assume state follows majority rule.

(B) S.D. Codified Laws § 29A-2-710 (abolishing doctrine of worthier title).

(C) S.D. Codified Laws § 55-4-30 (settlor may reserve power to terminate trust through terms of the trust).

Utah:

(A) Utah Code Ann. § 75-7-411 (irrevocable trust may be terminated upon consent of settlor and all beneficiaries).

Clayton v. Behle, 565 P.2d 1132, 1133 (Utah 1977) (where settlor is “sole beneficiary . . . he can terminate the trust at any time and compel the trustee to reconvey the property to him”).

(B) Utah Code Ann. § 75-2-710 (abolishing doctrine of worthier title).

(C) Utah Code Ann. § 75-7-605(1) (settlor may revoke or amend unless trust expressly states that it is irrevocable).

Wyoming:

(A) Wyo. Code Ann. § 4-10-412(a) (termination allowed after finding by court that settlor and all qualified beneficiaries consent). Absent contrary authority, it is reasonable to assume court finding not required where settlor is the only beneficiary.

(B) Wyo. Code Ann. § 34-1-137 (abolishing doctrine of worthier title).

(C) Wyo. Code Ann. § 4-10-602(a) (settlor may revoke or amend unless trust expressly states that it is irrevocable).

Validity of Spendthrift Clause

A. Validity of Spendthrift Clause in a Third-Party Trust

In a third-party trust (i.e., the trust is funded with the assets of an individual who is not the SSI beneficiary), all states in Region VIII recognize the validity of a spendthrift clause. Therefore, where a third-party trust includes a spendthrift clause, the beneficiary cannot sell his or her beneficial interest in the trust and that interest is not a resource.

References:

Colorado:

University Nat. Bank v. Rhoadarmer, 827 P.2d 561, 563 (Colo. App. 1991) (“The validity and enforceability of spendthrift provisions in this state is not disputed.”).

Montana:

Mont. Code Ann. § 72-38-502 (“A beneficiary may not transfer an interest in a trust in violation of a valid spendthrift provision . . . .”).

Lundgren v. Hoglund, 711 P.2d 809, 811 (Mont. 1985) (“We hold spendthrift provisions to be valid in Montana.”).

North Dakota:

N.D. Cent. Code Ann. § 59-13-02.(502) (“A beneficiary may not transfer an interest in a trust in violation of a valid spendthrift provision . . . .”).

In re Schauer, 246 B.R. 384, 388 (Bankr. D. N.D. 2000) (“North Dakota law generally recognizes the validity of spendthrift trust provisions.”) (citing Brownell v. Leutz, 149 F.Supp. 98, 103 n.7 (D.N.D. 1957)).

South Dakota:

S.D. Codified Laws § 55-1-34 (“A settlor may provide in the terms of the trust that a beneficiary’s beneficial interest . . . may not be voluntarily or involuntarily transferred before payment or delivery . . . by the trustee.”).

First Northwestern Trust Co. v. IRS, 622 F.2d 387, 392 (8th Cir. 1980) (interpreting South Dakota law, concluding court would enforce spendthrift provision consistent with majority rule).

Utah:

Utah Code Ann. § 75-7-502(3) (“A beneficiary may not transfer an interest in trust in violation of a valid spendthrift provision . . . .”).

Wyoming:

Wyo. Stat. Ann. § 4-10-502(c) (“[A] beneficiary may not transfer an interest in a trust in violation of a spendthrift provision . . . .”).

B. Validity of Spendthrift Clause in Trust for Grantor’s Own Benefit

In a self-settled trust (i.e., the trust is funded with the assets of the SSI beneficiary), the issue is less straightforward:

• In Montana, a spendthrift clause in a self-settled trust is invalid.

• In North Dakota, a spendthrift clause is valid in a special needs trust or a pooled trust meeting the criteria in POMS SI 01120.203.

• In South Dakota, Utah, and Wyoming, a spendthrift clause will be valid in a self-settled trust that meets specific and detailed requirements. The requirements differ for each state.

• In Colorado, the law is unclear.

For SSI purposes, the important issue is whether the SSI beneficiary may sell his or her beneficial interest in the trust. In the states where a spendthrift clause would be viewed as invalid, thus allowing the beneficial interest to be sold, it is necessary to determine the value of that interest.

Where the trust is completely discretionary, meaning the trustee has sole authority to determine when and whether distributions will be made, the beneficial interest will have little to no market value. Even if the beneficial interest may be sold and technically counts as a resource, it will have zero value.

If the trust directs any type of mandatory disbursements, the beneficial interest will generally have a market value and should be considered a resource if it can be sold. Determining whether or not the beneficial interest may be sold is unsettled or complicated in Colorado, Utah, Wyoming, and South Dakota. Therefore, if a trust is governed by the law in one of these states and directs mandatory disbursements, we recommend referring the trust to OGC for further evaluation.

References:

Colorado

Colorado law states that grantor trusts that contain a spendthrift clause do not afford the grantor protection from existing creditors—i.e., existing at the time of the trust’s creation. See Colo. Rev. Stat. § 38-10-111. It is not entirely clear whether the statute applies to future creditors. Compare Alberico v. Health Mgmt. Sys., Inc., 5 P.3d 967, 970 (Colo. App. 2000) (referencing claims at the time of the conveyance) with In re Cohen, 8 P.3d 429, 433-34 (Colo. 1999) (applying statute to future creditors). Moreover, the statute is silent with respect to assignees. Therefore, whether or not a spendthrift clause in a self-settled trust would restrict the settlor from selling his or her beneficial interest it is currently unsettled in Colorado.

Montana

Montana statutes and case law consistently indicate that a spendthrift clause in a self-settled trust is invalid. See Mont. Code Ann. § 72-38-505(1)(b) (regardless of the existence of a spendthrift provision, “a creditor or assignee of the settlor may reach the maximum amount that can be distributed to or for the settlor’s benefit”); In re Ullman, 116 B.R. 228, 231 (D. Mont. 1990) (interpreting Montana law, concluding it is “essential in creation of a spendthrift trust under Montana law that the settlor and a beneficiary be different persons . . . .”).

North Dakota

North Dakota statute indicates that a spendthrift clause in a self-settled trust is generally invalid, but provides a specific exception for “special needs trusts.” See N.D. Cent. Code Ann. § 59-13-03.(503)(2)-(3) (listing exceptions that would make spendthrift provisions unenforceable and noting such exceptions “do not apply to a self-settled special needs trust or a third-party special needs trust . . . nor to any trust that meets the qualifications of 42 U.S.C. 1396p(d)”); N.D. Cent. Code Ann. § 59-13-05.(505)(1) (regardless of the existence of a spendthrift provision, “with respect to an irrevocable trust, other than a special needs trust, a creditor or assignee of the settlor may reach the maximum amount that can be distributed to or for the settlor’s benefit”) (emphasis added). Therefore, assuming that the trust was established in compliance with the requirements of POMS SI 01120.203 (which track 42 U.S.C. 1396p(d)), the spendthrift clause is valid.

South Dakota

South Dakota statute indicates that, where the settlor is also a beneficiary of the trust, spendthrift provisions and protections apply to a “qualified transfer pursuant to chapter 55-16 . . . .” S.D. Codified Laws § 55-1-36. Therefore, some spendthrift clauses in South Dakota will be valid, even in a self-settled trust. The criteria for a “qualified transfer” are numerous. See S.D. Codified Laws §§ 55-16-1 to 55-16-16.

Conversely, if the settlor is a beneficiary and the transfer is not a “qualified transfer . . . a provision restraining the voluntary or involuntary transfer of the settlor’s beneficial interest does not prevent the settlor’s creditors from satisfying claims from the settlor’s interest in the trust estate.” S.D. Codified Laws § 55-1-36. The statute is specific to creditors and silent with respect to assignees. Therefore, whether or not the settlor is restricted from selling his or her beneficial interest appears unsettled in South Dakota. We also note that South Dakota specifically rejects certain sections of the Restatement (Third) of Trusts and the Uniform Trust Code for purposes of interpreting these statutes. See S.D. Codified Laws § 55-1-25.

Utah

Utah statute indicates that a spendthrift clause in a self-settled trust is generally invalid, but provides a specific exception for “asset protection trust” as defined in another section. See Utah Code Ann. § 75-7-505(1)(b) (regardless of spendthrift provision, “[w]ith respect to an irrevocable trust other than an irrevocable trust that meets the requirements of Section 25-6-14, a creditor or assignee of the settlor may reach the maximum amount that can be distributed to or for the settlor’s benefit.”) (emphasis added). The requirements for an asset protection trust are numerous. See Utah Code Ann. § 25-6-14(5)(a)-(m).

Wyoming

Wyoming statutes recognize the validity of spendthrift clauses in two types of self-settled trusts if certain criteria are met. See Wyo. Code Ann. § 55-10-506 (discussing creditor’s claim against settlor generally, noting creditor and assigning claims limited for discretionary trusts created in accordance with other Wyoming provisions). There are numerous criteria under both provisions. See Wyo. Code Ann. §§ 55-10-504; 55-10-510.

Conclusion

We recommend that trusts be referred to OGC for further review in the following situations:

In Colorado, South Dakota, Utah, and Wyoming, if the trust provides for mandatory distributions (because the beneficial value of those distributions may or may not be countable).

B. PS 17-069 Special Needs Trust Network, Incorporated

Date: March 24, 2017

1. Syllabus

This Regional Chief Counsel (RCC) opinion discusses whether the Special Needs Trust Network’s Declaration of Trust (Trust) meets the pooled trust exception under section 1917(d)(4)(c) of the Social Security Act. The RCC concludes that the Trust satisfies all conditions to meet the pooled trust exception as outlined in POMS SI 01120.203(B)(2). Furthermore, the subaccounts are non-revocable and the funds cannot be used or sold to meet a beneficiary’s basic needs for food or shelter. Therefore, the Trust and subaccounts therein are not a countable resource for SSI purposes.

2. Opinion

Question Presented

You asked us to determine whether The Special Needs Trust Network’s Declaration of Trust (Trust) and Transfer Agreement conform to the pooled trust exception at 42 U.S.C. § 1396p(d)(4)(C).

Short Answer

The Trust satisfies the pooled trust exception to counting assets in the Trust sub-accounts as resources.

Background

Definitions, Establishment, and Purpose

A Colorado nonprofit corporation, The Special Needs Trust Network, Inc. (“SNTN”), established the Trust in September 2010. See Trust, Preamble. The purpose of the Trust is to provide for the supplemental needs of Beneficiaries, i.e., persons with disabilities as defined in the Social Security Act (Act) who have sub-accounts established within the Trust. See Art. II.1, III.1, VI.1. The Trust defines supplemental needs as “the requisites for maintaining a Beneficiary’s good health, safety, and welfare” that are not otherwise being provided through public assistance or other sources of income. Art. II.5. This includes “medical or nursing services not provided by programs of government assistance, supportive social services, education, training, case management services, private rehabilitative therapy, transportation, recreation, vacations or outings, telephone or television service or other supplemental needs which will contribute to the good health, safety, and welfare of a Beneficiary.” Id.

SNTN maintains a separate sub-account for each Beneficiary, but the sub-accounts are pooled for the purpose of investing and managing the funds. Art. VI.1.

Amendment, Termination, and Distribution of Assets upon Termination

The Trust is irrevocable, but may be amended (1) by a binding joinder agreement with the Beneficiary and Colorado Department of Health Care Policy and Financing (“COHCPF”) in order to comply with state law and regulations relating to a Beneficiary’s Medicaid benefits, and (2) as otherwise determined by the Trustee to carry out the purpose and intent of the law and Trust, although a court order is required where COHCPF objects to the amendment. Art. X.

If it becomes impossible or impracticable to carry out the Trust’s purpose with respect to all Beneficiaries, the Trustee will petition a court of competent jurisdiction for instructions. Art. XI.3. Otherwise, individual sub-accounts only terminate upon the death of a Beneficiary. Art. XI. Any amounts remaining in the Beneficiary’s sub-account “shall be deemed surplus Trust property and shall be retained by the Trust and, in the Trustee’s sole discretion, used either for the benefit of other Beneficiaries or for administrative expenses of the Trust. Art. XI.1. To the extent that amounts remaining in a Beneficiary’s sub-account upon the death of the Beneficiary are not retained by the Trust, the Trust “pays to the state Medicaid agency, from such remaining amounts in the sub-account, an amount up to the total amount of medical assistance paid on behalf of the Beneficiary.” Art. XI.2.

Spendthrift Provision

The Trust provides that Beneficiaries have no “right to anticipate, sell, assign, mortgage, pledge, or otherwise dispose of or encumber all or any part of the Trust” and that no part of the Trust “shall be subject to attachment, garnishment, execution, creditor’s bill, or other legal or equitable process.” Art. III.4.

Governing Law

The trust documents are governed by Colorado law. Art. 14.5; Transfer Agreement ¶ I.4.

Joinder Agreement

The Trust is effective as to a Beneficiary upon execution of a Joinder Agreement by a Grantor, or by court order, subject to the approval of SNTN. Art. V. The Trust becomes irrevocable as to the Grantor and Beneficiary upon delivery and acceptance of property. Id.

Discussion

A. The Master Trust and Joinder Agreement Meet the Pooled Trust Exception Under 42 U.S.C. § 1396p(d)(4)(C)

In general, irrevocable trusts created after January 1, 2000, that are established with the assets of an individual by means other than transfer by a will are considered to be a resource of that individual for SSI eligibility purposes. See 42 U.S.C. § 1382b(e)(2)(A). The purpose of the trust, the discretion of the trustee, and restrictions on distributions will not affect its status as a resource. See id. at § 1382b(e)(2)(C). There is an exception to this general rule for trusts that are established pursuant to the provisions of § 1917(d)(4)(C) of the Act, commonly known as the pooled trust exception. See 42 U.S.C. § 1396p(d)(4)(C). For this exception to apply, the pooled trust must satisfy certain requirements:

1) The trust must be established and maintained by a non-profit association;

2) A separate account must be maintained for each beneficiary of the trust, but the trust pools these accounts for purposes of investing and managing the trust;

3) Accounts in the trust must be established solely for the benefit of the disabled individual;

4) The sub-account at issue must be established by the individual, a parent, a grandparent, a legal guardian, or a court; and

5) The trust must provide that, to the extent that amounts remaining in the beneficiary’s sub-account upon the death of the beneficiary are not retained by the trust, the state(s) will receive all amounts remaining in the trust upon the death of the individual up to an amount equal to the total medical assistance paid on behalf of the individual under the state Medicaid plans.

See id.; POMS SI 01120.203(B)(2). As discussed below, the Trust satisfies these requirements:

1. The Trust Is Established and Maintained by a Nonprofit Association

The Trust was established by SNTN, a Colorado nonprofit corporation. While the Trust provides that the Trustee may designate “a Co-Trustee or Co-Trustees to serve at its pleasure,” Art. VII, it does not specifically discuss the appointment of a for-profit investment advisor or fund manager. Thus, SNTN appears to maintain ultimate managerial control over the Trust.

2. Separate Sub-Accounts Are Maintained

Consistent with the second requirement, each beneficiary has a separate sub-account, which is then pooled for purposes of investing and managing the funds. Art. VI.1.

3. The Trust Satisfies the Requirement that Accounts Be Established Solely for the Benefit of the Disabled Individual

Each beneficiary’s sub-account must be established for the sole benefit of the disabled individual in order to meet the third requirement. See POMS SI 01120.203(B)(2)(a), (e). The sub-account cannot benefit any other individual or entity during the disabled individual’s lifetime, or allow for termination of the account prior to the individual’s death and payment of the corpus to another individual or entity. Id. Exceptions are permitted for certain administrative expenses and payments to a third party for goods, services, and limited travel expenses. POMS SI 01120.201(F)(2)(b)-(c).

The Trust satisfies this requirement. The Trust states that sub-account funds are “for the benefit of each Beneficiary,” Art. III.2, and does not otherwise indicate that Trust funds can be used to impermissibly benefit third parties. See Art II.5. The Transfer Agreement also states that “funds in the Trust sub-account for the Beneficiary will be administered and distributed for the sole benefit of the Beneficiary.” Transfer Agreement ¶ G.

Further, the Trust does not contain any provision expressly providing for early termination. It does, however, state that the Trustee should petition the court for further instructions if it becomes impossible or impracticable to effectuate the purpose of the Trust with respect to all Beneficiaries. Art. XI.3. Thus, while this provision would seemingly allow a court to order the termination of a sub-account prior to the death of a beneficiary, it does not itself provide for any impermissible third-party benefit during the disabled individual’s lifetime. We assume that if a court of competent jurisdiction did order a Trust sub-account terminated prior to the death of a beneficiary, it would do so in a manner consistent with the purpose of the Trust and in accordance with the payback requirements of POMS SI 01120.199(F). Because it is too speculative to assume a court would do otherwise, the Trust appears to satisfy the third requirement of the pooled trust exception.

4. Only Individuals Authorized by Statute May Establish a Sub-Account

To meet the fourth requirement, a sub-account must be established by a parent, grandparent, legal guardian of an individual, individual himself, or by a court. See 42 U.S.C.
§ 1396p(d)(4)(C); see also POMS SI 01120.203(B)(2)(f). Here, only those designated parties may establish sub-accounts. See Art. II.3; Transfer Agreement (definition of “Transferor”). Thus, all sub-accounts will meet the pooled trust exception (based on our conclusion that all other criteria are met).

5. The Trust Properly Provides for Medicaid Reimbursement

The Trust also satisfies the fifth requirement because, as permitted by the POMS, the Trust states that any amounts remaining in a sub-account following a Beneficiary’s death “shall be retained by the Trust.” See Art. XI; POMS SI 001120.203(B)(2)(g). It also states that “[t]o the extent that amounts remaining in the Beneficiary’s sub-account upon the death of the Beneficiary are not retained by the Trust, the Trust pays to the state Medicaid agency, from such remaining amounts in the sub-account, an amount up to the total amount of medical assistance paid on behalf of the Beneficiary.” Art. XI.2. A trust that limits Medicaid payback to a particular state is problematic. POMS SI 01120.203(B)(2)(g). But unlike a trust that specifically names only one state, we do not think the phrase “state Medicaid agency,” standing alone, would be interpreted as limiting payback to a particular state.

B. The Sub-Account Would Not Be a Resource Under the Regular Resource Counting Rules

The sub-account must still be evaluated under the regular resource rules. See POMS SI 01120.203(B)(1)(A); POMS SI 01120.200. Although the information provided does not indicate who is funding the sub-account, the Trust and Transfer Agreement state that funding must come from either the Beneficiary or a parent, grandparent, guardian, or the court. See Art. II.3; Transfer Agreement (definition of “Transferor”). Whether funded with the Beneficiary’s own assets or those of a third party, the Agency applies the regular resource rules to determine whether the sub-account counts as a resource. See POMS SI 01120.200(A)(2)(b), SI 01120.200(D). Pursuant to these rules, trust property may be a resource for SSI purposes if the individual: (1) has the authority to revoke the trust and then use the funds to meet his basic needs for food or shelter; (2) can direct the use of the trust principal for his support and maintenance; or (3) can sell his beneficial interest in the trust. See POMS SI 01120.200(D)(1)(a)-(b).

1. Is the Trust Revocable?

No. The Trust provides that the sub-accounts are irrevocable as to the grantor and beneficiary. Art. V. Despite this language, Colorado follows the general principle of trust law that if a grantor is also the sole beneficiary of a trust, the trust is revocable regardless of language to the contrary in the trust document. See In re Green Valley Fin. Holdings, 32 P.3d 643, 646 (Colo. App. 2001); Restatement (Second) of Trusts § 339 (1959). But here, even assuming that the grantor was also the beneficiary, the Trust remains irrevocable because the Trust and Transfer Agreement identify residual beneficiaries—the master Trust generally retains any funds left over after the Beneficiary’s death. See Art. XI.1; Transfer Agreement ¶ F. See also POMS SI 01120.200(D)(3) (providing that “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 remaining assets in the trust upon the grantor’s death. In such case, the trust is considered to be irrevocable.”).

2. Can the Beneficiary Direct the Use of the Trust Principal?

No, beneficiaries do not have the right to direct the use of the Trust principal for their support and maintenance. The authority to control the Trust principal may be indicated by either “specific trust provisions allowing the beneficiary to act on his or her own or by permitting the beneficiary to order actions by the trustee.” POMS SI 01120.200(D)(1)(b). Here, in contrast, the Trustee has sole discretion over disbursements. See Art. III.2, VI.5.

3. Can the Beneficiary Sell His Beneficial Interest in the Trust?

Maybe, but it would be a resource with zero value. The Trust contains a spendthrift provision precluding a Beneficiary from assigning his interest in the Trust. See Art. III.4; see also POMS SI 01120.200(D)(1)(a). Under Colorado law, a spendthrift provision that names the grantor or settlor as the beneficiary is invalid as against a creditor. See Colo. Rev. Stat. § 38-10-111; see also In re Cohen, 8 P.3d 429, 433 (Colo. 1999) (recognizing that a settlor cannot create a spendthrift trust for his own benefit). But here—and assuming that the beneficiary was also the grantor—it is not clear whether such a spendthrift clause would be invalid as against an assignee under Colorado law.

But resolution of that issue is not necessary because the Trust still legally restricts beneficiaries from using any Trust funds for their support and maintenance—disbursements are at the sole discretion of the Trustee. See Art. III.2, VI.5. Given this limitation, the Beneficiary’s interest in the Trust would have very little, if any, market value. So while it may technically count as a resource, it would be a resource with zero value. See POMS SI 01120.200(D)(1)(a) (stating that if the beneficiary can sell his interest in the trust, that interest is a resource); POMS SI 01140.044(1).

Conclusion

In sum, we conclude that the Trust satisfies the pooled trust exception to counting assets in the sub-accounts as resources. Further, the sub-accounts are not countable as resources under the regular resource counting rules.

C. PS 16-015 Colorado Disability Trust - Is it a resource for SSI?

Date: November 16, 2015

1. Syllabus

This Regional Chief Counsel (RCC) opinion discusses whether the Colorado Disability trust is a resource for purposes of determining eligibility for Supplemental Security Income (SSI). It was determined that the Trust does not comply with SSA rules for special needs trusts regarding Medicaid reimbursement, because the trust broadly allows for the payment of taxes before Medicaid reimbursement. Therefore, the Trust should be counted as a resource.

2. Opinion

Question Presented

You asked us to review the Colorado Disability trust on K~ (the “Trust”) to determine if the Trust is a resource for purposes of determining K~’s eligibility for Supplemental Security Income (SSI).

Short Answer

We have determined that the Trust does not comply with SSA rules regarding Medicaid reimbursement because it broadly allows for the payment of taxes before Medicaid reimbursement. Therefore, the Trust should be counted as a resource.

Background

Based on the information you provided, K~ was born on July XX, 19XX, and is a resident of the State of Colorado. As a minor, K~ received funds from family members that were placed in a Uniform Gifts to Minors Act (UGMA) account. On April XX, 20XX, approximately two months before K~’s 18th birthday, M~ and S~, K~’s parents, established the Trust. The Trust was initially funded with the assets in Schedule A, which were described as $10.00 in cash paid by M~. Other documentation shows that funds transferred into the Trust originated from K~’s UGMA account, and that as of July 20XX, the Trust had an account balance of $175,058.39.

Discussion

a. Transfer of UGMA funds into the Trust

First, you have questioned whether K~s parents had “legal authority” to act with respect to K~’s assets. Here, K~’s mother transferred funds into the Trust from an UGMA account in K~’s name (K~’s mother was listed as a custodian of the account). Colorado repealed the UGMA and adopted the Uniform Transfers to Minors Act (UTMA) on July 1, 1984. Colo. Rev. Stat. §§ 11-50-101, et seq. The UTMA specifically provides that transfers of funds that reference the UGMA are governed by the UTMA. See Colo. Rev. Stat. §§ 11-50-122; 11-50-123. Under the UTMA, any kind of property, real or personal, tangible or intangible, can be transferred from a donor to a custodian for the benefit of a minor. POMS SI 01120.205(A)(2).¹ The custodian of an UTMA account has all the rights, powers, and authority over custodial property that “unmarried adult owners have over their own property . . . .” Colo. Rev. Stat. § 11-50-114(1). The statute further empowers the custodian to “deliver or pay to the minor or expend for the minor’s benefit so much of the custodial property as the custodian considers advisable for the use and benefit of the minor . . . .” Id. § 11-50-115(1). However, the statute directs that the custodian “shall observe the standard of care that would be observed by a prudent person in dealing with the property of another . . . .” Id. § 11-50-113(2). The statute specifically permits transfers of UTMA funds to a trust, so long as the standard of care is not breached. See id. § 11-50-114(1.5)-(2).

These statutory provisions appear to allow the custodian of an UGMA account to transfer funds into a trust account so long as it is not a breach of the standard of care. While no Colorado case specifically addresses the custodian’s discretion to invest in trusts that might restrict the beneficiary’s control of the assets or the liquidity of the assets after reaching the age of majority, state law generally recognizes that where the custodian’s motive for transferring assets is the best interests of the minor, it is likely that the custodian will not be in breach of the custodial standard of care. See, e.g., In re Estate of King, 668 N.W.2d 6, 9 (Minn. App. 2003) (no breach of duty as long as trustee was acting in good faith, from proper motives, and within the bounds of reasonable judgment); Buder v. Sartore, 774 P.2d 1383, 1385-87 (Colo. 1989) (finding that the father breached the custodial standard of care where he transferred his children’s UTMA assets to speculative investments, which resulted in a total loss of the assets); Estate of McLaughlin, 483 N.Y.S.2d 943 (N.Y. Surr. 1985) (finding that the parents violated the custodial standard where they transferred UTMA assets to a Totten trust, naming themselves as settlors and providing no benefit to the child until their death); Gordon v. Gordon, 70 A.D.2d 86 (N.Y. App. Div. 1979) (holding that even a change of intent or misunderstanding of the asset vesting does not permit removal of assets from an UTMA account for the benefit of any person other than the minor).

In this case, K~’s mother transferred the UGMA funds into a trust established for K~’s benefit. Trust, Art. 3.01. The Trust was also established to preserve K~’s eligibility for SSI benefits (although, as we discuss below, the Trust does not accomplish this goal). See id. Art. 1.01. Thus, K~’s mother, a custodian with the legal authority to act on K~’s behalf, was arguably acting consistently with these statutory provisions and case law and did not breach the standard of care when she transferred the UGMA funds to the Trust. We conclude that Colorado law permits the transfer of UGMA funds into a trust and that K~’s mother acted with proper legal authority in making this transfer.²

b. Whether the Trust is a Resource

You have also asked us to determine whether the Trust is a resource for purposes of determining K~’s eligibility for SSI benefits.

The UGMA funds should be considered K~’s assets. See POMS SI 01120.201(B)(2) (an “asset” includes “any other payment or property to which the individual . . . is entitled, but does not receive or have access to because of action by: . . . a person or entity (including a court) with legal authority to act in place of, or on behalf of, the individual . . . .”). Although K~ would not have received the UGMA funds nor had access to them before he reached the age of majority, he had ownership (though not necessarily control) of the UGMA funds. See POMS SI 01120.010(B)(1) (“An individual must have some form of ownership interest in property in order for the property to be considered a resource.”). Therefore, the UGMA funds must be considered K~’s assets. Because the Trust was funded with K~’s assets, it is subject to the statutory provisions of Section 1613(e) of the Social Security Act for trusts established on or after January 1, 2000. See 42 U.S.C. § 1382b(e); POMS SI 01120.201. In general, pursuant to these provisions, trusts established with the assets of the individual are considered resources for SSI purposes even if they are irrevocable. However, there is an exception for certain trusts established under 42 U.S.C. § 1396p(d)(4)(A), which is commonly known as the special needs trust exception. See POMS SI 01120.203.

1. Special Needs Trust Exception

For this exception to apply, the trust must:

(1) Contain the assets of an individual under age 65 and who is disabled; and

(2) Be established for the sole benefit of such individual through the actions of a parent, grandparent, legal guardian, or a court; and

(3) Provide that the state(s) will receive all amounts remaining in the trust upon the death of the individual up to the amount equal to the total medical assistance paid on behalf of the individual under a state(s) Medicaid plan.

POMS SI 01120.203(B)(1)(a)-(h). In this case, the Trust does not meet these requirements because it does not comply with SSA rules regarding Medicaid reimbursement.

Under age 65 and disabled

First, in order for a trust to meet the special needs trust exception, it must contain the assets of an individual under age 65 who is disabled. See POMS SI 01120.203(B)(1)(a). Here, K~ is under age 65 and apparently disabled. See Trust, p. 1 (referring to K~ as a “disabled person”).

Established through the actions of a parent

Second, in order for a trust to meet the special needs trust exception, it must be established for the “sole benefit” of an individual through the actions of a parent, grandparent, or legal guardian. See POMS SI 01120.203(B)(1)(e)-(f). In this case, as discussed above, the Trust was established for K~ by his mother while K~ was still a minor.³

Sole benefit of K~—early termination provisions

If a trust contains provisions that provide benefits to other individuals or entities during the disabled individual’s lifetime, or allow for termination of the trust prior to the individual’s death and payment of the trust corpus to another individual or entity (other than to the state(s) or another creditor for payment for goods and services provided to the individual), it will not be considered to be for the “sole benefit” of the disabled individual. See POMS SI 01120.203(B)(1)(e). The Trust provides that “[u]nless sooner terminated by exhaustion of the corpus, this Trust shall terminate upon the death of the Beneficiary or if the trust is no longer required for Medicaid eligibility.” Trust, Amended Art. 4.01. Upon termination, the Trust provides for reimbursement to the state(s) Medicaid plans that provided medical assistance to K~. Id. In the event that assets remain after Medicaid reimbursement, the Trust provides that the balance “shall be paid to a Special Needs Trust solely for the benefit of K~” and if K~ is no longer living, the balance is to be paid to M~ and S~ or their descendants. Trust, Amended Art. 4.02.

Pursuant to POMS SI 01120.199, in order for an early termination clause in a trust to be acceptable, it must provide that:

(1) Upon early termination (i.e., termination prior to the death of the beneficiary), the State(s), as primary assignee, would receive all amounts remaining in the trust at the time of termination up to an amount equal to the total amount of medical assistance paid on behalf of the individual under the State Medicaid plan(s); and

(2) Other than payment for those expenses listed in SI 01120.199(F)(3) in this section, no entity other than the trust beneficiary may benefit from the early termination (i.e., after reimbursement to the State(s), all remaining funds are disbursed to the trust beneficiary); and

(3) The early termination clause gives the power to terminate to someone other than the trust beneficiary.

POMS SI 01120.199(F)(1).

In this case, although the Trust appears to allow for potential early termination, i.e., “if the trust is no longer required for Medicaid eligibility,” it provides that the funds are to be used for Medicaid reimbursement and then transferred to a special needs trust solely for the benefit of K~, if he is still living. In addition, K~ does not have the power to terminate the Trust. This clause complies with POMS SI 01120.199(F)(1).

Medicaid payback provision

Finally, a special needs trust must also contain specific language that provides that, upon the death of the individual, the state(s) will receive all amounts remaining in the trust, up to the amount equal to the total amount of medical assistance paid on behalf of the individual under the state Medicaid plan(s). A 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). See POMS SI 01120.203(B)(1)(h). Here, the Trust (as amended) provides for reimbursement to any state(s). Trust, Amended Art. 4.01, 4.02.

However, the Trust allows for payment of “federal and state taxes” upon the death of the Beneficiary. Trust, Art. 3.05. The Trust does not specify the type of taxes to be paid, nor does it specify that payment of taxes is allowed only after Medicaid reimbursement. See id. Under SSA rules, the only taxes that may be paid prior to Medicaid reimbursement are taxes due from the trust to the State or Federal government due to the death of the beneficiary or termination of the trust. POMS SI 01120.203(B)(3)(a)-(b); POMS SI 01120.199(F)(3). Inheritance and any other taxes are prohibited. POMS SI 01120.203(B)(3)(a)-(b). Because the provision regarding payment of taxes is not so limited, the Trust does not comply with SSA rules regarding Medicaid reimbursement. See POMS SI 01120.203(B)(1)(h).

As such, the Trust must be counted as a resource because it does not satisfy the special needs trust exception under 42 U.S.C. § 1396p(d)(4)(A).

2. Regular Resource Rules

If the Trustee were to amend the Trust to satisfy the special needs trust exception, and assuming no other modifications are made, the Trust would not be countable as a resource under the regular resource counting rules.

Pursuant to the regular resource counting rules, a trust will be a resource if: (1) the SSI beneficiary can revoke the trust and use the assets for his support and maintenance; (2) the individual can direct the trustee to pay him the funds or use the funds for his support and maintenance; or (3) the individual can sell his beneficial interest in the trust. See POMS SI 01120.200(D)(1)(a)-(b).

The first requirement to consider in evaluating the regular resource counting rules is whether K~ can revoke the Trust and use the assets for his support and maintenance. POMS SI 01120.200(D)(1)(a)-(b). Here, the Trust provides that it is irrevocable, and K~ has no power to alter, amend, revoke, or terminate the Trust or any terms of the Trust. See Trust, Art. 8.01.⁴ Despite this language, Colorado follows the general principle of trust law that if the grantor is also the sole beneficiary of a trust, the trust is revocable regardless of language in the trust document to the contrary. See e.g., In re Green Valley Financial Holdings, 32 P.3d 643, 646 (Colo. App. 2001). Here, however, K~ is not the sole beneficiary. After Medicaid reimbursement, the Trust directs the Trustee to distribute the residue to K~’s parents or their descendants. See Trust, Amended Art. 4.02. Therefore, the Trust has identifiable residual beneficiaries. See POMS SI 01120.200(D)(3) (providing that “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 case, the Trust is considered to be irrevocable.”); see generally In Re Marriage of Dale, 87 P.3d 219, 222 (Colo. App. 2012) (a named trust beneficiary has a property interest in an irrevocable trust). Because the Trust names residual beneficiaries upon termination of the Trust, it is irrevocable. Therefore, this is not a revocable trust where K~ could use the funds for his support or maintenance. See POMS SI 01120.200.

The second requirement to consider in evaluating whether the Trust is a resource is whether K~ can direct the Trustee to pay him the funds or use the funds for his support and maintenance. See POMS SI 01120.200(D)(1)(a). The authority to control the trust principal may be “a specific trust provision allowing the beneficiary to act on his or her own, or permitting the beneficiary to order actions by the trustee.” POMS SI 01120.200(D)(1)(b). Here, the Trust provides the Trustees with the “sole and absolute discretion” to make distributions from the principal or income of the Trust. Trust, Art. 3.01. As such, K~ has no authority to direct the Trustee to pay him funds or use the funds for his support and maintenance. See POMS SI 01120.200(D)(1)(b).

The final requirement to consider in evaluating whether the Trust is a resource is whether K~ could sell his beneficial interest in the Trust. Here, as noted above, K~ has no authority to direct the Trustee to pay him or use the funds for his support and maintenance. See Trust, Art. 3.01 (the Trustee has “sole and absolute discretion” for determining what discretionary distributions of income and principal shall be made from the Trust). Given this restriction, K~’s interest in the Trust would have very little, if any, market value. Thus, while it may technically be a resource, it would be a resource with zero value. See POMS SI 01140.044(1), POMS SI 01120.200(D)(1)(a) (stating that if the beneficiary can sell his interest in the trust, that interest is a resource).

Conclusion

In sum, we conclude that the Trust does not satisfy the special needs trust exception and must be counted as a resource.

D. PS 15-120 Treatment of Amendments to the Arc of the Pikes Peak Region Pooled Income Trust (PL 15-24)

Date: May 7, 2015

1. Syllabus

This Regional Chief Counsel opinion discusses whether the second amendments to the Arc of the Pikes Peak Region Pooled Income Trust (the “Trust”) remedy the deficiencies in the Trust such that the Trust now conforms to section 1917(d)(4)(C) of the Social Security. It is determined that the second amendments remedy all of the deficiencies identified in earlier opinions. The amended provisions satisfy the early termination requirements because they limit distribution of trust funds to the state medical assistance program and the beneficiary. The trust is not a countable resource.

2. Opinion

Question Presented

You asked us to review the second amendments to the Arc of the Pikes Peak Region Pooled Income Trust (the “Trust”) to determine if they remedy the deficiencies in the Trust such that the Trust now conforms to section 1917(d)(4)(C) of the Social Security Act (the “pooled trust exception”).

Short Answer

We have determined that the second amendments remedy all of the deficiencies identified in our earlier opinions.

Background

In July 2014 and January 2015, we reviewed the Trust and amendments to the Trust to determine whether it conformed to the pooled trust exception. We determined that the Trust and the amendments did not conform to our requirements because, among other things, they allowed for circumstances in which a sub-account could be terminated prior to the death of the beneficiary and the assets could be given to someone other than the beneficiary. See Memorandum from OGC Region VIII to ARC-MOS Region VIII, Treatment of Amendments to the Arc of the Pikes Peak Region Pooled Income Trust, January 8, 2015; Memorandum from OGC Region VIII to ARC-MOS Region VIII, Treatment of the Arc of the Pikes Peak Region Pooled Income Trust, July 21, 2014.

Subsequently, the Arc of the Pikes Peak submitted an “Amended and Restated Trust Agreement of the Arc of the Pikes Peak Region Pooled Income Trust” (hereinafter, “Second Amended Trust”). The Arc of the Pikes Peak did not submit an updated Joinder Agreement, but we assume that the Joinder Agreement has not changed.

Discussion

(A) The Second Amended Trust Meets the Pooled Trust Exception Under 42 U.S.C. § 1396p(d)(4)(C).

As we previously advised, irrevocable trusts created after January 1, 2000, that are established with the assets of an individual by means other than transfer by a will are considered to be a resource of that individual for SSI eligibility purposes. See 42 U.S.C. § 1382b(e)(2)(A). The purpose of the trust, the discretion of the trustee, and restrictions on distributions will not affect its status as a resource. See id. at (e)(2)(C). There is an exception to this general rule for irrevocable trusts that are established pursuant to the provisions of § 1917(d)(4)(C) of the Act, commonly known as the pooled trust exception. See 42 U.S.C. § 1396p(d)(4)(C). For this exception to apply, the pooled trust must satisfy certain requirements:

1. The trust must be established and managed by a non-profit association;

2. A separate account must be maintained for each beneficiary of the trust, but th trust pools these accounts for purposes of investing and managing the trust;

3. Accounts in the trust must be established solely for the benefit of the disabled individual;

4.  Accounts must be established by the individual, a parent, a grandparent, a legal guardian, or a court; and

5.  The trust must provide that, to the extent that amounts remaining in the beneficiary’s sub-account upon the death of the beneficiary are not retained by the trust, the state(s) will receive all amounts remaining in the trust upon the death of the individual up to an amount equal to the total medical assistance paid on behalf of the individual under the state Medicaid plans.

See id.; POMS SI 01120.203(B)(2).

 In January 2015, we determined that although the Amended Trust remedied some of the problems we had previously identified, it contained another provision that did not comply with the early termination requirements. Specifically, Section 8.5 (Ineligibility) allowed for early termination of a sub-account within a beneficiary’s lifetime and referred to Section 4.2, which provided that any funds remaining in the account could be retained by the Trust. See

Amended Trust, Art. 4,2; 8.5. We determined that these sections did not comply with the early termination requirement, because they did not limit distribution of the trust property to the State(s) and the trust beneficiary. See POMS SI 01120.199(F)(1).

The Second Amended Trust replaced Section 8.5 with a section that now reads:

If Trustee’s discretionary right to provide a Beneficiary with non-support items has the effect of rendering such Beneficiary ineligible for public assistance, or if any public assistance program or other creditor is found to have a right to reimbursement for benefits provided, Trustee is authorized to terminate such Beneficiary’s sub-account, and the remaining balance shall be distributed in accordance with Section 4.4.

In turn, Section 4.4 provides that:

If it becomes impossible or impracticable to carry out the trust’s purposes with respect to any or all Beneficiaries, Trustee shall either (a) terminate the trust sub-account of such Beneficiary(ies) and distribute the trust estate as provided in Section 4.3; or (b) transfer the assets held in the sub-account(s) of such Beneficiary(ies) to another pooled trust that meets the requirements of 42 U.S.C. § 1396p(d)(4)(C) and applicable state laws.

Finally, Section 4.3 states that:

The Trustee, in its sole discretion, may refund all or any portion of the property in a trust sub-account if it becomes impossible to fulfill the conditions of the trust with respect to such Beneficiary for reasons other than the death of the Beneficiary. To the extent that property is refunded, the state medical assistance program shall receive an amount equal to the total medical assistance paid on behalf of the Beneficiary, and only after such repayment, any amount remaining shall be refunded to the Beneficiary.

Second Amended Trust, Art. 4.3, 4.4, 8.5.

We conclude that these provisions satisfy the early termination requirements because they limit distribution of trust funds to the state medical assistance program and the beneficiary. See POMS SI 01120.199(F)(1). It is also permissible to transfer the sub-account assets to another pooled trust. See POMS SI 01120.199(F)(2); see also SSI-WI Review of the Draft of ARC of Milwaukee, Inc. Community Trust II (Region V, Nov. 4, 2010) (noting that POMS SI 01120.199 also permits the transfer of trust assets from a Section 1917(d)(4)(C) pooled trust to a Section 1917(d)(4)(A) individual trust). Therefore, we conclude that the Second Amended Trust documents satisfy the pooled trust exception to counting assets in the sub-account as resources. Further, as discussed in our previous Memorandum, we believe that the sub-accounts are not countable as resources under the regular resources counting rules. See Memorandum, Arc of the Pikes Peak Pooled Trust, p. 6-7.

John Jay Lee,

Regional Chief Counsel

Region VIII

By: Kati Bostwick

Assistant Regional Counsel

Footnotes:

[1]

^. In Colorado, the age of majority is 21 years old. See Colo. Rev. Stat. § 2-4-401(6).

[2]

^. POMS SI 01120.205(E)(3) states that “[i]f an UTMA account is revoked or closed by the donor or custodian before the minor reaches the age of majority, the action [the agency will] take will depend upon whether fraud or similar fault exists.” We have no reason to believe that “fraud or similar fault” exists in this case.

[3]

^. K~’s parents also established the Trust by first “seeding” the Trust with $10.00 prior to transferring K~’s assets into the Trust. However, because K~ was not a legally competent adult at the time the Trust was established, this action appears to have been unnecessary. See POMS SI 01120.203(B)(1)(f).

[4]

^. As noted above, the Trust provides that it may be terminated if it is no longer necessary for Medicaid eligibility. See Trust, Amended Art. 4.01. This provision does not allow K~ to revoke the Trust, it merely sets forth a circumstance under which the Trust may terminate.