TN 102 (03-18)

A. PS 18-026 Resource Status of a Trust under Kentucky Law to Determine Eligibility for Supplemental Security Income

Date: December 11, 2017

1. Syllabus

This Regional Chief Counsel (RCC) opinion examines whether the Kentucky Guardianship Association, Inc., Special Needs Pooled Trust Fund (Trust), as amended, 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 the amendments correct all issues that previously prevented the Trust from being compliant. Therefore, the Trust, as amended, now complies with all requirements for a pooled trust under the Act.

2. Opinion

QUESTION

You asked whether the Kentucky Guardianship Association, Inc., Special Needs Pooled Trust Fund on behalf of the Kentucky Cabinet for Health and Family Services (Trust), as amended, 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 Trust, as amended, complies with the requirements for a pooled trust under section 1917(d)(4)(C) of the Act and the relevant provisions of the POMS.

BACKGROUND

On June 3, 2015, McClelland & Associates, PLLC (Trustee) submitted the original trust documents to the agency for review. On July 6, 2015, our office issued a legal opinion stating the trust documents did not comply with the provisions of section 1917(d)(4)(C) of the Act and the POMS requiring reimbursement to states for medical assistance provided to A~, the number holder (NH), through their Medicaid plans (copy attached). On July 25, 2016, Trustee submitted the amended trust documents to the agency for review. On September 27, 2016, our office issued a legal opinion stating the amended trust documents did not comply with section 1917(d)(4)(C) of the Act and the POMS because the trust documents did not definitively demonstrate that it was managed by a non-profit association or provide that the Personal Accounts were established for the sole benefit of each beneficiary (copy attached).¹ On October 17, 2017, Trustee submitted the current amended Trust and the Kentucky Cabinet for Health and Family Services Joinder Agreement (Joinder Agreement) to the agency for review.²

DISCUSSION

As discussed in our September 2016 legal opinion, to qualify as a pooled trust under section 1917(d)(4)(C) of the Act, a trust must be established and maintained by an organization that has been established and certified under a state non-profit statute. See Act § 1917(d)(4)(C)(i); POMS SI 01120.203.B.2.c. We previously determined that the original and first amended trust documents indicated the Kentucky Guardianship Association, Inc. (Settlor), was a non-profit corporation.³ We also determined that the Trustee established the Trust for the sole benefit of the Trust beneficiaries, who were under the court-appointed guardianship and care of the Kentucky Cabinet for Health and Family Services (CHFS), and that remains the case under the current amended Trust documents. See Trust, pmbl; Art. III, ¶ A; Joinder Agreement, § VIII; see also Trust, Art. II, ¶ C.

Upon further review, we determined that a precedent did not exist for the Kentucky Guardianship Association in the agency’s Atlanta Precedent and Contacts list. See POMS SI 01130.689E.1. Specifically, the agency did not receive a copy of Settlor’s state non-profit certification or its determination letter from the IRS. See POMS SI 01130.689E.2. Trustee supplemented the amended Trust with a copy of the IRS determination letter that demonstrated the Trust’s tax-exempt status. See POMS SI 01130.689E. Accordingly, we concluded that the Trust meets the requirement that it was established by a non-profit association.⁴

We also determined that the Trust was not managed by Settlor. The prior trust documents indicated that Trustee (presumably a for-profit entity) managed the Trust. See Trust, pmbl; Joinder Agreement, § XV (2016 first amended trust). Notably, the POMS require that, if a non-profit association employs the services of a for-profit entity, the non-profit “must maintain ultimate managerial control over the trust.” POMS SI 001120.225.D.

As amended, the Trust now states that it is “ultimately managed by [Settlor], a Kentucky not for profit association . . . .” Trust, Art. I. Also, the Trust states that Trustee “shall be the appointee of the Settlor who shall act as Trustee of this Special Needs Pooled Trust, under the ultimate authority and management of the Settlor.” Trust, Art. II ¶ N. Other provisions of the Trust and Joinder Agreement also indicate that Settlor retains ultimate authority over the management of the Trust. See Trust, Art. III, ¶ A, ¶ C, ¶ F; Art. VI, ¶ A; Art. VII; Art. XII; Joinder Agreement, §§ VIII; XV. Thus, the Trust, as amended, meets the requirement that it is managed by a non-profit association that maintains ultimate managerial control over the Trust.

The Trust, as amended, also addresses our previous concern that the Personal Accounts⁵ were not established for the sole benefit of each beneficiary. As noted in our September 2016 legal opinion, accounts in purported pooled trusts must be 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.b, .B.2.e. Upon further review, we determined that certain provisions of the Trust could benefit third parties during a beneficiary’s lifetime. The prior trust documents permitted Trustee to charge a personal account on a pro rata basis for legal costs and other expenses associated with defending “all relevant” personal accounts. See Trust, Art. VIII, ¶ H(a) (2016 first amended trust). The relevant POMS provision, however, provides that only payments of legal costs or services rendered “on behalf of the individual with regard to the trust” do not violate the sole benefit rule. See POMS SI 01120.201F.2.c. As written, the first amended Trust provision contemplated the potential use of assets in a beneficiary’s personal account for the benefit of others besides the beneficiary, and thus the personal accounts were not established for the “sole benefit” of any personal account holder.

As now amended, the Trust provides:

Costs and expenses of defending the Special Needs Pooled Trust from any claim, demand, legal or equitable action, suit or proceeding may, either:

(a) be charged only against the Special Needs Pooled Trust Personal Account of the relevant Beneficiary, or

(b) be charged to the Personal Accounts of a group of affected Beneficiaries whose interests may be reasonably expected to be affected by the outcome of the action. . . .

Trust, Art. VIII, § H. In light of this recent amendment, we now conclude that accounts established within the Trust would be for the sole benefit of each beneficiary.⁶

The prior trust documents also contained an early termination provision that permitted the termination of a Personal Account as to that beneficiary as though he or she was deceased. See Trust, Art. XIII, ¶ A(1) (2016 first amended trust). As we explained in our September 2016 opinion, a pooled trust with an early termination provision must require that any funds from an early termination either be paid to another pooled trust, see POMS SI 01120.199.F.2, or be paid first to the state for medical assistance provided to the individual under the state Medicaid plan, with any remaining funds used only for allowable administrative expenses, reasonable compensation to the trustee, or distributions to the trust beneficiary, see POMS SI 01120.199.F.1. The prior early termination provision neither paid the funds in NH’s Personal Account into another pooled trust, nor paid the state(s) for any medical assistance provided under the state(s) Medicaid plan(s). SeeTrust, Art. XIII, ¶ A(1) (2016 first amended trust). Therefore, we concluded the Trust did not comply with POMS SI 01120.199.F.1-2.

As now amended, the Trust provides that:

[T]he Settlor may, in its sole and absolute discretion, declare a Terminating Event, and:

(1) terminate the respective Personal Account as to that Beneficiary after first reimbursing any state Medicaid agency that has paid on behalf of the Beneficiary under respective Medicaid programs; or

(2) determine that the Special Needs Pooled Trust purpose has become impossible to implement for the affected Beneficiary, in which case the Trustee may then transfer the respective Personal Account to another qualifying Special Needs Pooled Trust . . . Subject to reasonable closing administrative expenses, no portion of the Personal Account shall stay in the Special Needs Pooled Trust reserve if the Terminating Event is an early Terminating Event, meaning before the death of the Beneficiary.

Trust, Art. XIII, ¶ A.

The Trust, as now amended, further provides that:

Upon a Terminating Event, unless otherwise permitted by law, to the extent that it is determined that the amount remaining is deemed not to be “retained by the Trust”, under the Joinder Agreement, and reimbursement of Medicaid pursuant to 42 U.S.C. §1396p(d)(4)(C) or (A)], such sums shall be paid to any state(s) that may have provided medical assistance under the State Medicaid Plan(s) [and not limited to any particular states(s)] up to an amount equal to the total of medical expenses paid by that state’s agency on behalf of the Beneficiary for Medicaid assistance or be paid to another qualified pooled trust.

Trust, Art. XIII, ¶ C. Because the Trust now requires that any funds from an early termination either be paid to another pooled trust or be paid first to the state for medical assistance provided to the individual under the state Medicaid Plan, the Trust now complies with the requirements of POMS SI 01120.199.F.1-2.

Finally, in our September 2016 legal opinion, we noted that the prior trust documents allowed Trustee to terminate a beneficiary’s participation in the Trust and transfer a beneficiary’s funds “into an individual special needs trust with similar intent and purpose as this Special Needs Pooled Trust Fund.” See Trust, Art. XIII, ¶ D (2016 first amended trust). We explained that the POMS does not allow the transfer of assets from a pooled trust to a special needs trust. Instead, the POMS only permits transfer of assets from a pooled trust to another pooled trust with specific language limiting certain other disbursements. See POMS SI 01120.199.F.2.

As now amended, the Trust provides that “such sums shall be paid to any state(s) that may have provided medical assistance under the State Medicaid Plan(s) [and not limited to any particular states(s)] up to an amount equal to the total of medical expenses paid by that state's agency on behalf of the Beneficiary for Medicaid assistance or be paid to another qualified pooled trust.” Trust, Art. XIII, ¶ C. As such, the Trust now complies with the requirement that sub-accounts be established solely for the benefit of individuals who are disabled. SeePOMS SI 01120.203.B.2.e. Furthermore, the Trust, as amended, also complies with the remaining requirements in 1917(d)(4)(C) of the Act and the POMS provisions implementing those requirements, as discussed in our September 2016 legal opinion.

CONCLUSION

The Trust, as amended, complies with all the requirements for a pooled trust under section 1917(d)(4)(C) of the Act and the implementing POMS provisions.

B. PS 17-121 Validity of Purported Pooled Trusts (FL, KY, MS)

Date: July 19, 2017

1. Syllabus

The Regional Chief Counsel (RCC) Opinion examined whether the trusts established by the National Foundation for Special Needs Integrity, Inc. (NFSNI), in Florida, Kentucky, and Mississippi comply 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 concluded that the Master Trusts do 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. 

2. Opinion

QUESTION

You asked whether the trusts established by the National Foundation for Special Needs Integrity, Inc. (NFSNI), in Florida, Kentucky, and Mississippi comply 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 Master Trusts do 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

According to the information provided, the Social Security Administration (SSA) determined M~ (FL Recipient), W~ (KY Recipient), and M~ (MS Recipient) (collectively, Recipients) were entitled to Supplemental Security Income (SSI) based on disability. SSA has since determined MS Recipient’s disability ceased.⁷

Each of the Recipients has established a sub-account in master trusts that NFSNI created. NFSNI provided a July XX, 2007, letter from the Internal Revenue Service (IRS) stating that NFSNI is an exempt organization under section 501(c)(3) of the Internal Revenue Code. NFSNI established a master trust in Florida on May 15, 2008 (Florida Master Trust); in Kentucky on October 17, 2008 (Kentucky Master Trust); and in Mississippi on February 24, 2009 (MS Master Trust) (collectively, Master Trusts). See Master Trusts, Recitals and Signatures. Each of the Master Trusts purports to be a “pooled trust” for purposes of the Act. Master Trusts, Art. 2.

FL Recipient created a sub-account in the FL Master Trust by execution of a joinder agreement dated March XX, 2009 (FL Joinder). Assets of the “M~ Trust” funded FL Recipient’s sub-account. FL Joinder, § II.A. Based on the information provided, this was a testamentary trust that failed as a special needs trust and was subsequently used to create FL Recipient’s sub-account in the FL Master Trust. KY Recipient created a sub-account in the KY Master Trust by execution of a joinder agreement dated August XX, 2013 (KY Joinder). Assets from the “V~ Trust UAD” funded KY Recipient’s sub-account. KY Joinder, § II.A. MS Recipient created a sub-account in the MS Master Trust by execution of a joinder agreement dated January XX, 2014 (MS Joinder) (collectively, Joinder Agreements). MS Recipient’s own assets funded his sub-account. MS Joinder, § II.A.

The Master Trusts are intended to be administered for the sole benefit of qualified individual “Beneficiaries.” MS Trust, Art. 1, 2, 13.4; KY and FL Trusts, Art. 1, 2, 13.3. A Beneficiary is defined as a person with a disability as determined by the respective state law of the Master Trusts “and/or as qualified under § 1614(a)(3) of the Social Security Act and/or as determined by 42 U.S.C. § 1382c(a)(3). . . .” FL and MS Master Trusts, Art. 5.D.; KY Master Trust, Art. 5.D., and KY Joinder, § I.D. A “Grantor” of the FL and MS Master Trusts may be the Beneficiary or his or her guardian, parent, or grandparent, or a court order funding a sub-account. FL and MS Master Trusts, Art. 5.C. The KY Master Trust uses similar language, see KY Master Trust Art. 5.C., but the Kentucky joinder agreement states that a “Donor” funds a sub-account using funds that “shall not be assets to which Beneficiary had legal ownership, an interest in ownership, or any other legally colorable claim in law or equity,” KY Joinder, § I.C.

The property of each Master Trust is considered “one entity” for investment purposes, but each sub-account is administered for the sole benefit of individual Beneficiaries. See Master Trusts, Art. 2. A Beneficiary of one of the Master Trusts is entitled to an annual accounting. See Master Trusts, Art. 10.2.

The Trustee for each trust is NFSNI and may include its successors in interest and appointed co-Trustees. See Master Trusts, Art. 5.B. A Trustee may exercise powers provided under applicable state law trust codes, including designating a co-Trustee and making distributions for a Beneficiary’s supplemental needs during his or her lifetime. See Master Trusts, Art. 11, 13.2. The Master Trusts define “supplemental” to include payments made to a Beneficiary and payments to third parties during a Beneficiary’s lifetime for goods or services he or she receives. See FL Master Trust, Art. 5.J., 13.5; KY Master Trust, Art. 5.J., 13.5 and KY Joinder, § I.K.; MS Master Trust, Art. 5.J., 13.6. The MS Master Trust may purchase real property for a Beneficiary so long as the owner is the MS Master Trust. See MS Master Trust, Art. 13.3.5. The MS Master Trust may also purchase a vehicle for a Beneficiary so long as the vehicle owner is not the MS Master Trust. See MS Master Trust, Art. 13.3.7.

The Master Trusts allow the Trustee to charge pro-rata to all sub-accounts “extraordinary administrative expenses or for the legal defense of the Trust Pool.” Master Trusts, Art. 10.4. Extraordinary administrative expenses or legal challenges incurred by specific sub-accounts will only be charged to the affected sub-accounts, unless the issue “may materially affect the integrity or administration of other sub-accounts.” Id. The Master Trusts also allow for reasonable compensation for Trustees. See Master Trusts, Art. 15.8. The Master Trusts also charge Beneficiaries an annual fee of 1.5% of the sub-account balance to pay for “day-to-day administration” of the sub-account. Joinder Agreements, § III. In addition, the Master Trusts provide that the trust will indemnify Trustees and their agents for “any and all claims, actions, suits, liabilities, fines or penalties. . . .” Master Trusts, Art. 15.10.

A Trustee may terminate a Beneficiary’s sub-account. See Master Trusts, Art. 16.1. In doing so, the Trustee may “transfer the assets in the Beneficiary’s [sub-account] . . . to a qualified private or geographically appropriate and qualified not-for-profit pooled special needs trust.” Id.

The Trusts define “Remainder” as the amount of money remaining in a Beneficiary’s sub-account after death and after payment of reasonable and allowable administrative expenses of the estate. FL and MS Master Trusts, Art. 5.K; KY Master Trust, Art. 5.L. To the extent that the Trusts do not retain this Remainder, the respective state Medicaid agencies “shall be first payee and have priority of payment over any other debts and administrative expenses” except those permitted by SSA policy. FL and KY Master Trusts, Art. 14.1; MS Master Trust, Art. 14. If a Beneficiary has received Medicaid benefits in more than one state, each state that has provided benefits will be repaid a proportionate share of the amount remaining in the Beneficiary’s sub-account. See FL and KY Master Trusts, Art. 14.2; MS Master Trust, Art. 14.

The Master Trusts state that, if any provision of the trust is deemed invalid, that provision is invalidated. See Master Trusts, Art. 15.4, Joinder Agreements, § IX.C. According to the Master Trusts, the invalidated provision will not invalidate the remaining provisions of the Master Trusts. See id.

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).⁸ “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, 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.

Assets of the Disabled Individual

Initially, we note that the KY and MS Master Trusts do not satisfy the threshold requirement of containing the assets of a disabled individual. See Act § 1917(d)(4)(C); POMS SI 01120.203.B.2.a. Based on the information provided, SSA has found MS Recipient’s disability ceased, and MS Recipient has not filed an appeal. Thus, the MS Master Trust does not involve a “disabled” individual to the extent it applies to MS Recipient.

Although SSA has found KY Recipient disabled, the KY Master Trust does not contain “the assets of” KY Recipient. The joinder agreement states a “Donor” has been funding KY Recipient’s sub-account using assets that “shall not be assets to which Beneficiary had legal ownership, an interest in ownership, or any other legally colorable claim in law or equity.” KY Joinder, § I.C. Consistent with these definitions, assets from the “V~ Trust UAD” funded KY Recipient’s sub-account. KY Joinder, § II.A. Although neither the Act nor the POMS defines the term “assets of,” its plain meaning indicates the assets in a valid pooled trust should belong to the SSI beneficiary claiming the benefit of the pooled trust exception. The Act’s plain meaning is conclusive where, as here, it would not lead to lead to an unintended result. See United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 242 (1989). Both the source of the funds and the definitions of the KY Master Trust indicate KY Recipient’s sub-account was not funded with assets belonging to KY Recipient, so the KY Master Trust does not involve “assets of” a disabled individual.

Although we conclude the KY and MS Master Trusts do not involve valid pool trusts based on the limited circumstances presented, we nonetheless address their provisions below as many of them overlap with the FL Master Trust provisions.

Established and Managed by a Non-Profit

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. NFSNI established each of the Master Trusts and manages them as Trustee. See Master Trusts, Recitals and Signature, Art. 5.B. The documents provided include a July XX, 2007, letter from the Internal Revenue Service (IRS) stating that NFSNI is an exempt organization under section 501(c)(3) of the Internal Revenue Code, and the IRS lists NFSNI as a tax-exempt organization on its website.⁹ Thus, it appears the Master Trusts are established and maintained by a nonprofit entity. See 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).

However, the Master Trusts create a possibility of management by a for-profit entity. The Trustee for each trust is NFSNI and may include its successors in interest and any appointed co-Trustees. See Master Trusts, Art. 5.B. The Master Trusts contain no restriction that successors in interest or co-Trustees must only be nonprofit entities. For pooled trusts, a nonprofit management entity like NFSNI may employ the services of a for-profit entity so long as the nonprofit retains ultimate managerial control. See POMS SI 01120.225.B, D. However, such a for-profit entity employed by a nonprofit pooled trust management entity cannot make discretionary disbursements. See POMS SI 01120.225.E. Here, the potential exists that for-profit successors in interest or co-Trustees could exercise all the powers of the Trustee, including making discretionary disbursements for a Beneficiary’s supplemental needs. See Master Trusts, Art. 5.B., 11, 13.2. We have not received any material indicating NFSNI has actually appointed a for-profit successor in interest or co-Trustee for any of the Master Trusts involved in this opinion. Thus, we conclude the Master Trusts meet the first numbered requirement of the pooled trust exception. However, because other revisions to the Master Trusts are required as discussed below, NFSNI should consider redefining “Trustee” or the powers to be exercised by a co-Trustee to ensure a nonprofit entity retains ultimate managerial control of the Master Trusts at all times.

Separate Accounts and Pooled Investment

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 property of each Master Trust is considered “one entity” for investment purposes, but each sub-account is administered for the sole benefit of individual Beneficiaries. See Master Trusts, Art. 2. A Beneficiary of one of the Master Trusts is entitled to an annual accounting. See Master Trusts, Art. 10.2. Our review confirms that the Master Trusts meet the second numbered requirement of the pooled trust exception.

Established for the Sole Benefit of Disabled Individuals

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. More specifically, 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.

Our review of the Master Trusts confirms that they limit lifetime distributions to a Beneficiary or to a third-party for the benefit of the Beneficiary. See FL Master Trust, Art. 5.J., 13.5; KY Master Trust, Art. 5.J., 13.5 and KY Joinder, § I.K.; MS Master Trust, Art. 5.J., 13.6. The Master Trusts allow for reasonable compensation for Trustees. See Master Trusts, Art. 15.8. The Master Trusts also charge Beneficiaries an annual fee of 1.5% of the sub-account balance to pay for “day-to-day administration” of the sub-account. Joinder Agreements, § III. These provisions generally comply with the “sole benefit” requirement. See POMS SI 01120.201.F.1, F.2.b.-c.

However, certain provisions of the Master Trusts could be read to allow a benefit to third parties during a Beneficiary’s lifetime. The Master Trusts allow the Trustee to charge “extraordinary administrative expenses or for the legal defense of the Trust Pool” pro-rata to all sub-accounts. Master Trusts, Art. 10.4. Extraordinary administrative expenses or legal challenges incurred by specific sub-accounts will only be charged to the affected sub-accounts, unless the issue “may materially affect the integrity or administration of other sub-accounts.” Id. In addition, the Master Trusts provide that the trust will indemnify Trustees and their agents for “any and all claims, actions, suits, liabilities, fines or penalties.” Master Trusts, Art. 15.10.¹⁰ The relevant POMS provision provides that only payments of legal costs or services rendered “on behalf of the individual with regard to the trust” do not violate the sole benefit rule. POMS SI 01120.201.F.2.c. Here, the Master Trusts’ provisions contemplate potentially using sub-account assets to pay for administrative or legal expenses without requiring that a Beneficiary had actually incurred those expenses. The provisions therefore contemplate the potential use of assets in a Beneficiary’s sub-account for the benefit of others besides the Beneficiary, and thus the sub-accounts are not established for the “sole benefit” of any sub-account holder.

The Master Trusts also contain early termination provisions that allow for the termination of a trust sub-account before the death of the Beneficiary. See Master Trusts, Art. 16.1. Early termination provisions generally violate the third statutory element required for valid pooled trusts. See POMS SI 01120.203.B.2.e. Such provisions may be acceptable if they otherwise comply with all the requirements for pooled trusts and provide for Medicaid payback, disallow third parties to benefit except for payment of certain approved expenses, and give termination power to someone other than the trust beneficiary. See POMS SI 01120.199.F. However, the Master Trusts’ early termination provisions here do not satisfy any of these requirements. See Master Trusts, Art. 16.1. Where an early termination provision does not satisfy the above requirements, it may still be acceptable if it “contain[s] specific language” that limits distribution only to another valid pooled trust and it disallows other expenses. POMS SI 01120.199.F.2. Here, NFSNI may terminate a Beneficiary’s sub-account and “transfer the assets in the Beneficiary’s [sub-account] . . . to a qualified private or geographically appropriate and qualified not-for-profit pooled special needs trust.” Master Trusts, Art. 16.1. The term “pooled special needs trust” is not sufficiently specific to limit transfer of a sub-account’s funds to another valid pooled trust. See POMS SI 01120.199.F.2. Therefore, the early termination provision violates the “sole benefit” requirement for pooled trusts.

We also note that the MS Master Trust may purchase a vehicle for a Beneficiary provided the owner of the vehicle is not the MS Master Trust. See MS Master Trust, Art. 13.3.7. If funds from a trust that is a resource are used to purchase a vehicle, the individual (or the trust) must be shown as its owner. See POMS SI 01120.201.F.1. The documents provided do not indicate that a vehicle was purchased for MS Recipient or that the owner was listed as someone other than MS Recipient. Thus, this provision does not violate the “sole benefit” requirement based on the information presented. However, because other revisions to the MS Master Trust are required, NFSNI should consider modifying the vehicle-purchase provision to clarify who will be listed as the owner of a vehicle purchased for a Beneficiary of the MS Master Trust.

Medicaid Reimbursement

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. The trust must contain language “substantially similar” to the language in the Act and POMS. POMS SI 01120.203.B.2.g. Further, 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).” Id.

The Master Trusts provide that, to the extent any amounts remain in a sub-account after payment of reasonable and allowable administrative expenses and amounts retained by the Master Trusts, the respective state Medicaid agencies “shall be first payee and have priority of payment over any other debts and administrative expenses” except those permitted by SSA policy. FL and KY Master Trusts, Art. 14.1; MS Master Trust, Art. 14. If a Beneficiary has received Medicaid benefits in more than one state, each state that has provided benefits will be repaid a proportionate share of the amount remaining in the Beneficiary’s sub-account. See FL and KY Master Trusts, Art. 14.2; MS Master Trust, Art. 14.

This language is insufficient to meet the fourth numbered requirement because the language is not substantially similar to that required by the POMS. The Medicaid payback provisions at issue limit the payback to either the state in which the respective trust is established or to multiple states. For example, a Beneficiary participating in the MS Master Trust could receive Medicaid assistance only from Alabama and, upon death, his or her sub-account would not be required to repay Alabama for any Medicaid assistance. This language is therefore insufficient to satisfy the fourth numbered requirement for pooled trusts.¹¹

Severability Clauses

The Master Trusts state that, if any provision of the trust is deemed invalid, that provision is invalidated. See Master Trusts, Art. 15.4, Joinder Agreements, § IX.C. According to the Master Trusts, the invalidated provision will not invalidate the remaining provisions of the trust. See id. However, for SSI purposes, a null and void clause or savings clause does not cure an otherwise defective trust instrument. See POMS SI 01120.227.D. To qualify for the pooled trust exception, a trust must meet the criteria in section 1917(d)(4)(C) without regard to its severability clause. See POMS SI 01120.227.D.1. Thus, the Master Trusts’ severability clause does not nullify or sever the provisions discussed above that do not satisfy the pooled trust requirements. See POMS SI 01120.227.D.

CONCLUSION

For the reasons discussed above, the Master Trusts do 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: Jeffrey S. Wilson

Assistant Regional Counsel

C. PS 16-186 Validity of Purported Special Needs Trust Governed by Kentucky Law

Date: September 2, 2016

1. Syllabus

The Regional Chief Counsel (RCC) opinion examines whether an amendment to an originally defective trust agreement created a valid special needs trust, and if so, the effective date of the amendment for the purposes of determining a number holder’s resources and eligibility for Supplemental Security Income (SSI). The RCC concluded that the trust amendment could not correct the defect in the original trust agreement, because the trust amendment was not a valid modification under Kentucky law. Although a subsequent court order appears to cure the defect in the original trust agreement, the court order cannot create a valid special needs trust because the number holder was age 65 on the date of the court order.

2. Opinion

QUESTION

For determining a number holder’s resources and eligibility for Supplemental Security Income (SSI), you asked whether an amendment to an originally defective trust agreement created a valid special needs trust, and if so, the effective date of the amendment.¹²

OPINION

The trust amendment could not correct the defect in the original trust agreement because the trust amendment was not a valid modification under Kentucky law. Although a subsequent court order appears to cure the defect in the original trust agreement, the court order cannot create a valid special needs trust because the number holder was age 65 on the date of the court order.

BACKGROUND

According to the information provided, M~, as conservator for L~, the number holder (NH), established the L~ Special Needs Trust (Trust) in January 2016. NH is disabled and is age 65 as of August XX, 2016. The Social Security Administration (SSA) found that the Trust was a countable resource for purposes of SSI. M~, as conservator for NH, filed an amendment to the Trust (Trust Amendment) on March 15, 2016, and SSA requested review to determine if the trust instrument was revocable. Subsequently, SSA received an Order for Special Needs Trust (Order) from the Meade District Court of Kentucky, dated August XX, 2016, approving the Trust and Trust Amendment.

The Trust was established for NH with real property, personal property, household appliances, a checking account, and a life insurance policy (Trust Agreement, Schedule A; Art. III).¹³ The Trust Agreement identifies NH as the settlor (Trust, Art. 1). A March 15, 2016 amendment to the Trust (Trust Amendment) also identifies NH as the settlor (Trust Amendment).

The Trust Agreement states that the Trust is an irrevocable special needs trust for the benefit of NH (Trust Agreement, Art. I), and its purpose is to “supplement and not supplant or diminish” any government entitlements (Trust Agreement, Art. II.A; Art. IV.A). The trustee’s actions must be directed to carrying out this intent (Trust Agreement, Art. II.A).

The Trust Agreement states that it should be construed as a special needs trust in accordance with SSA policy (Trust Agreement, Art. II.A). “Any provision of this Trust which may prevent this Trust from being interpreted as a Special Needs Trust that achieve these objectives shall be null and void.” (Trust Agreement, Art. II.A). The trustee may receive property from others as trust assets (Trust Agreement, Art. II.A). NH “shall not be considered to have access to income and/or principal of the trust and he has no power to direct the Trustee to make distributions of income and/or principal to him.” (Trust Agreement, Art. II.A).

The Trust Agreement identifies NH as the primary beneficiary and contains a spendthrift clause that states neither the principal nor income of the Trust “shall be anticipated, assigned or encumbered” (Trust Agreement, Art. IV.B.1). Additionally, the Trust Agreement states that no part of the corpus should be subject to the claims of voluntary or involuntary creditors for the provision of care and services (Trust Agreement, Art. IV.B.1). For the purpose of determining NH’s eligibility for public benefits, “no part of the principal or income of the trust estate shall be considered available to said beneficiary” (Trust Agreement, Art. IV.B.4).

The Trust Agreement states the Trust will terminate upon the depletion of the assets or upon NH’s death (Trust Agreement, Art. IV.B.5). The Trust Agreement provides that, on NH’s death, the trustee shall distribute any remaining principal and income to NH’s then living heirs-at-law (Trust Agreement, Art. IV.B.5). At the trustee’s sole discretion, the trustee, prior to distributing remaining trust funds to NH’s heirs upon his death, may pay NH’s funeral expenses and expenses related to administration and distribution of the trust estate (Trust, Art. IV.B.7). The Trust Amendment states that, prior to distributing any remaining principle and income to NH’s then living heirs-at-law, the Trust will pay any state that has provided medical assistance to NH under the state Medicaid plans all amounts remaining in the Trust, up to an amount equal to the assistance paid (Trust Amendment, Art. IV.B.5, 7). The states have priority over other debts and administrative expenses (Trust Amendment, Art. IV.B.5, 7). The Trust Agreement indicates that it should be construed in accordance with the laws of Kentucky (Trust Agreement, Art. VII.D).

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 Social Security Act (Act) §§ 1602, 1611(a); 20 C.F.R. §§ 416.110, 416.202 (2016).¹⁴ “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 Program Operations Manual System (POMS) SI 01120.010.B.

Pursuant to section 1613(e) of the Act, SSA generally 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. Special needs trusts are one such exception. See Act § 1917(d)(4)(A); POMS SI 01120.203.B.1 (describing an exception in accordance with § 1917(d)(4)(A) as a “special needs trust”).

To qualify as a special needs trust, the trust must: (1) contain the assets of an individual under age sixty-five who is disabled; (2) be established for the benefit of the individual by a parent, grandparent, legal guardian, or court; and (3) provide that “the State will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State plan under [Title XVIII of the Act].” Act § 1917(d)(4)(A); see POMS SI 01120.203B.1.a. The trust also must list the state(s) as the first payee with priority over payment of other non-exempted debts and administrative expenses. See POMS SI 01120.203B.1.h.

SSA already determined that the January 2016 Trust did not contain a valid Medicaid payback provision and, therefore, the original Trust was not a valid special needs trust (Trust Agreement, Art. IV.B.7). However, the March 2016 Trust Amendment provides that when NH dies, any remaining assets would be used to pay any state that provided medical assistance or benefits to NH during his lifetime until fully repaid (Trust Amendment, Art. IV.B.5). See Act § 1917(d)(4)(A); POMS SI 01120.203.B.1.h. Thus, the Trust Amendment contains a valid Medicaid payback provision. Because whether the Trust is a valid special needs trust is dependent on the Trust Amendment, we looked at whether the Trust Amendment was sufficient for modifying the Trust under state law.

NH is a resident of Kentucky. The Trust Agreement indicates that it should be construed in accordance with the laws of Kentucky (Trust Agreement, Art. VII.D). Pursuant to the Kentucky Trust Code, this designation of applicable law is controlling. See Ky. Rev. Stat. Ann. § 386B.1-050(1) (West 2016).¹⁵ The Trust Amendment also indicates that the Trust is amended pursuant to section 638B.4¹⁶ of the Kentucky Revised Statutes (Trust Amendment). Therefore, we look to Kentucky law to determine whether the Trust Amendment is a valid modification of the Trust.

NH and the trustee executed the Trust Amendment on March XX, 2016, which the Meade District Court of Kentucky approved on August XX, 2016 (Trust Amendment, Order). The Amendment indicates that it is not a revocation or amendment in the entirety, but should be construed to supplant the Trust Agreement (Trust Amendment). The Trust Agreement does not provide NH or the trustee with the authority to amend the Trust. Under Kentucky law, a purportedly irrevocable trust generally can be modified if the settlor and all beneficiaries consent to the modification. See Ky. Rev. Stat. Ann. § 386B.4-110(1) (permitting modification or termination of a trust even if inconsistent with the material purpose of the trust if all beneficiaries consent).¹⁷ The Trust Amendment is based on the consent of NH and the trustee, but it does not appear that the Trust Amendment was based on the consent of all of NH’s heirs-at law, who are also remainder beneficiaries of the trust (Trust, Art. IV.B.5; Trust Amendment). See Ky. Rev. Stat. Ann. § 386B.1-010(3) (a trust beneficiary includes a person who “[h]as a present or future beneficial interest in a trust, vested or contingent”). Therefore, the March XX, 2016, amendment based on consent was ineffective at the time of execution and could not correct the defect in the original Trust Agreement.

However, under Kentucky law, a court may reform the terms of a trust to conform the terms to the settlor’s intention if the terms of the trust were affected by a mistake of fact or law, whether in expression or inducement. See Ky. Rev. Stat. Ann. § 386B.4-150. A court may modify a special needs trust upon a showing that “there is just cause to modify the trust to preserve the trust purposes of protecting the trust assets for the benefit of the special needs person.” Ky. Rev. Stat. Ann. § 387.890. The court cannot modify a special needs trust to defeat the trustee’s duty to reimburse the state for benefits paid on behalf of the special needs person or to permit the termination of the trust during the lifetime of the special needs person. See id. Additionally, a conservator may petition the court to create, establish, or approve a special needs trust under section 1917(d)(4)(A) of the Act. See Ky. Rev. Stat. Ann. § 387.865.

Here, the court approved the Trust and the Trust Amendment on August XX, 2016 (Order). As the Order is titled “Order for Special Needs Trust,” it appears the court approved the Trust and the Trust Amendment under its authority to modify a special needs trust or under its authority to create, establish, and approve a special needs trust based on a petition from a conservator. See Ky. Rev. Stat. Ann. §§ 387.865, 387.890. The Order did not specify that it was retroactive. Therefore, the Order renders the Trust Amendment effective as of August XX, 2016, and the Trust, as amended by the Trust Amendment, satisfies the requirements of the Medicaid payback provision as of that date. Although the Order appears to cure the defect in the original Trust Agreement and any problems associated with the attempt to modify the Trust Agreement by consent, because NH was no longer under age 65 as of the date of Order, the Order cannot create a valid special needs trust for the benefit of NH. See Act § 1917(d)(4)(A) (specifying that the special needs trust provisions apply to a disabled individual under the age of 65); POMS SI 01120.203B.1.a (same). Therefore, the Trust does not meet the requirements of a special needs trust under section 1917(d)(4)(A).

CONCLUSION

For the reasons discussed above, the Trust Amendment could not correct the defect in the original Trust Agreement because it was not a valid modification under Kentucky law. Although the subsequent Order appears to cure the defect in the original Trust Agreement, the Trust, as amended, does not create a valid special needs trust because NH was age 65 on the date of the Order.

Sincerely,

Mary Ann Sloan

Regional Chief Counsel

By: Rebecca Ringham

Assistant Regional Counsel

D. 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).*¹⁸ “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

E. PS 16-123 Life Plan of Kentucky Special Needs Pooled Trust Legal Opinion.

DATE: April 22, 2016

1. Syllabus

This Regional Chief Counsel opinion finds that the Life Plan of Kentucky Pooled Special Needs Trust (Master Trust) established on December 7, 2011 meets all the requirements for a pooled trust exception under section 1917(d)(4)(C) of the Social Security Act (Act) and the relevant provisions of the Program Operations Manual System (POMS).

2. Opinion

QUESTION

You asked whether the Life Plan of Kentucky Pooled Special Needs Trust (Master 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 Master Trust complies with the requirements for a pooled trust under section 1917(d)(4)(C) of the Act and the relevant provisions of the POMS.

BACKGROUND

On December 7, 2011, the Board of Directors of Life Plan of Kentucky, Inc., a non-profit corporation (Trustee), established the Master Trust. See Declaration of Trust (Trust Decl.), pmbl. The Trust Declaration indicates that the Master Trust was established pursuant to 42 U.S.C. § 1396p(d)(4)(C) and POMS SI 01120.203B.2. See Trust Decl., Art. 1.

The Trust Declaration also states that the Master Trust is to be administered for the sole benefit of the Beneficiaries. See Trust Decl., Art. 1, Art. 14, § 14.3. Beneficiaries are defined as individuals who are disabled within the meaning of section 1614(a)(3) of the Act. See Trust Decl., Art. 4, § 4. Each Beneficiary has a Sub-Account that a Grantor creates under the terms of the Master Trust. See Trust Decl., Art. 2, Art. 4, §§ 3, 4, 8. The Trust Declaration limits those individuals or entities, who can be a Grantor, to Beneficiaries, courts, and the parents, grandparents, and legal guardians of Beneficiaries. See Trust Decl., Art. 4, § 3. However, the Trust Declaration also defines Grantor and Beneficiary as the same person. Trust Decl., Art. 4, §§ 3, 4. The property within the Sub-Accounts is “pooled together for the purpose of custody, investment, and management.” Trust Decl., Art. 4, § 9. However, each Beneficiary receives an accounting of the transactions that are specific to his or her Sub-Account at least once per year. See Trust Decl., Art. 11, § 11.2.

The Master Trust states that it is not intended “to provide for any basic care, maintenance or support, and [a] Beneficiary shall have no right to command payment of such basic care and support, nor shall the Beneficiary have recourse to any court to compel the Trustee to make payments for basic care and support or medical care.” Trust Decl., Art. 6; see Trust Decl., Art. 17, § 17.1. The Master Trust is also “absolutely irrevocable” except that “Trust Property may be transferred to another pooled trust, as appropriate.” Trust Decl., Art. 7; see Trust Decl., Art. 17, §§ 17.1, 17.2. Further, a Beneficiary can neither sell any portion of his Sub-Account, nor compel the Trustee to make any disbursement. See Trust Decl., Art. 9.

The Trustee can incur expenses for legal services, fund management, and administration of the Master Trust, and the Trustee can pay such expenses from a Beneficiary’s Sub-Account. See Trust Decl., Art. 11, § 11.4, Art. 12, §§ 3-5, Art. 14, § 14.5. The Trust Declaration expressly states that the Trustee has a “duty to act for the Beneficiary’s best interest, keeping such best interest first in mind as it conducts its business” and has “no duty to consider the needs or desires of potential remainder beneficiaries in making decisions to disburse or not to disburse funds to or for the benefit of the Beneficiary.” Trust Decl., Art. 13.

Upon a Beneficiary’s death,

. . . the Trustee shall first distribute to the Kentucky Department of Medicaid Services, then to any other appropriate State agency entitled to reimbursement from the remaining principal and income of this trust, up to the amount remaining in this trust, an amount equal to the total medical assistance paid on behalf of the Beneficiary by the Medicaid program. . . . If the Beneficiary has received Medicaid from more than one state, and if on termination of this trust the remaining income and principal is insufficient to satisfy the foregoing payment requirement in full, then payment shall be made to each such state pro rata based on the percentage that each state’s Medicaid payments were made to, or on behalf of, the Beneficiary.”

Trust Decl., Art. 15, § 15.1. The Trust Declaration allows the Trustee to pay

. . . [t]axes due from the Trust to the State or Federal government because of the death of the Beneficiary” and “[r]easonable fees for administration of the Trust estate, such as accounting of the Trust to the court, completion and filing of documents, or other related actions associated with termination and wrapping up of the trust,” prior to making the above-referenced disbursement to the State Medicaid plans.

Trust Decl., Art. 15, § 15.1.

The Trust Declaration indicates that it is governed by the laws of Kentucky. See Trust Decl., Art. 16, § 16.3. The Joinder Agreement reiterates the contents of the Trust Declaration. See Joinder Agreement.

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 (2015).¹⁹ “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:

1. The trust is established and managed by a nonprofit association.

2. 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.

3. 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.

4. 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.

To meet the first 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. Life Plan of Kentucky, Inc. purports to be a Kentucky non-profit corporation, and the Internal Revenue Service (IRS) identifies Life Plan of Kentucky, Inc. as a tax-exempt organization.²⁰ See Trust Decl., pmbl.; 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 Master Trust meets the first requirement of the pooled trust exception.

To satisfy the second 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 Master Trust’s funds are pooled for investment and management, but each Beneficiary has a separate Sub-Account. See Trust Decl., Art. 2, Art. 4, §§ 4, 8, 9. Further, the Trustee must provide each Beneficiary with an accounting of the transactions that are specific to his or her Sub-Account at least once per year. See Trust Decl., Art. 11, § 11.2. Accordingly, the Master Trust meets the second requirement of the pooled trust exception.

The third 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.b, 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 third requirement also limits those who can establish an account within the trust to disabled individuals, courts, and the parents, grandparents, and legal guardians of disabled individuals. See Act § 1917(d)(4)(C)(iii); POMS SI 01120.203.B.2.f.

The Trust Declaration defines Beneficiary as an individual who is disabled under the Act. See Trust Decl., Art. 4, § 4. The Trust Declaration also states that the Master Trust is to be administered for the sole benefit of the Beneficiaries. See Trust Decl., Art. 1, Art. 14, § 14.3. Other than expenses for legal services, fund management, and administration of the Master Trust, the Trust Declaration does not permit any disbursements that do not benefit the Beneficiary. See Trust Decl., Art. 11, § 11.4, Art. 12, §§ 3-5, Art. 14, § 14.5. Indeed, the Trust Declaration expressly states that the Trustee has a “duty to act for the Beneficiary’s best interest, keeping such best interest first in mind as it conducts its business” and that the Trustee has “no duty to consider the needs or desires of potential remainder beneficiaries in making decisions to disburse or not to disburse funds to or for the benefit of the Beneficiary.” Trust Decl., Art. 13. The Master Trust is also “absolutely irrevocable,” and therefore cannot be terminated prior to the Beneficiary’s death.²¹ Trust Decl., Art. 7. Additionally, the Trust Declaration limits those who can be a Grantor to Beneficiaries, courts, and the parents, grandparents, and legal guardians of Beneficiaries. See Trust Decl,, Art. 4, § 3. Because the Trust Declaration includes these provisions, the Master Trust satisfies the third requirement of the pooled trust exception.

To meet the fourth 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. The Trust Declaration includes this required language regarding reimbursement to the State(s) and the priority of such reimbursement following permitted tax and administrative payments and amounts retained by the Master Trust. See Trust Decl., Art. 15, § 15.1. Thus, the Master Trust meets the fourth requirement of the pooled trust exception.

The foregoing analysis demonstrates that the Master Trust meets the requirements to be a pooled trust under section 1917(d)(4)(C) of the Act.

The Trust Declaration and Joinder Agreement contain typographical errors in their references to pertinent statutes. The Trust Declaration references 42 U.S.C. § 1917(d)(4)(C) on several occasions. See Trust Decl., Art. 1, Art. 2, Art. 4, §§ 3-4. No such section exists in the United States Code. See 42 U.S.C. § 1917. However, it is reasonable to assume that references to 42 U.S.C. § 1917(d)(4)(C) were intended to refer to section 1917(d)(4)(C) of the Social Security Act, which is codified at 42 U.S.C. § 1396p(d)(4)(C). The Trust Declaration also references 42 U.S.C. § 1382(a)(3) when discussing the definition of disabled. See Trust Decl., Art. 4, §§ 3-4. That section of the United States Code is not relevant to defining disability. See 42 U.S.C. § 1382(a)(3). However, it is reasonable to assume that references to 42 U.S.C. § 1382(a)(3) were intended to refer to 42 U.S.C. § 1382c(a)(3), which defines disabled under the Act. Further, the Joinder Agreement references 42 U.S.C. § 1306p(d)(4)(C)(iv). See Joinder Agreement, Art. 3. No such section exists in the United States Code. However, it is reasonable to assume that references to 42 U.S.C. § 1306p(d)(4)(C)(iv) were intended to refer to 42 U.S.C. § 1396p(d)(4)(C)(iv).

The foregoing errors do not affect our analysis because they do not obscure the intent of the Master Trust’s settlor. Both the Trust Declaration and the Joinder Agreement state that they should be construed in accordance with Kentucky law. See Trust Decl., Art. 16, § 16.3; Joinder Agreement, Art. 5, § 5.05. Pursuant to the Kentucky Uniform Trust Code, this designation of applicable law is controlling. See Ky. Rev. Stat. Ann. § 386B.1-050(1) (West 2016). Under Kentucky law, the terms of a trust instrument should be interpreted in a manner that is consistent with the settlor’s intent. See Commonwealth Bank & Trust Co. v. Young, 361 S.W.3d 344, 353 (Ky. Ct. App. 2012) (citing De Charette v. St. Matthews Bank & Trust Co., 283 S.W. 410, 414 (1926)); see also Ky. Rev. Stat. Ann. § 386B.1-100 (West 2016) (stating the rules of construction that apply to interpreting provisions of a will also apply to interpreting terms of a trust). From the text surrounding the typographical errors in the Trust Declaration and Joinder Agreement, it is apparent which statutes the settlor intended to reference. See Trust Decl., Art. 1, Art. 2, Art. 4, §§ 3-4; Joinder Agreement, Art. 3. Thus, we believe a Kentucky court would interpret the Trust Declaration and Joinder Agreement as referencing the statutes that we identified above as the statutes the settlor intended to reference. Accordingly, the identified typographical errors do not invalidate the Master Trust.

CONCLUSION

For the reasons discussed above, the Master Trust meets the requirements of the pooled trust exception.

Sincerely,

Mary Ann Sloan

Regional Chief Counsel

By: Peter S. Massaro, III

Assistant Regional Counsel

F. PS 08-108 In Re: Nathan , SSN: ~ -- Supplemental Security Income (SSI) Trust Policy on Residual Beneficiaries in Kentucky

DATE: May 6, 2008

1. SYLLABUS

This opinion evaluates a trust created for an SSI beneficiary in the state of Kentucky. Whether the subject trust is ultimately determined to be a countable resource for SSI purposes will depend largely on whether the trust was funded with the beneficiary's assets or those of a third party. The opinion does not speak directly to the funding of the trust. The trust was created on January 17, 2002 by the beneficiary's mother and legal guardian. Terms of the trust provide for reimbursement to Medicaid upon the beneficiary's death and leave all distribution discretion to the Trustee. At issue is whether the trust language establishing a remainder interest to the beneficiary's heirs at law establishes an irrevocable trust. Many states have adopted the general rule put forth in the Restatement (Third) of Trusts that creates an renders a trust irrevocable by creation of a remainder interest to indefinite parties such as "heirs at law". The opinion goes on to say that Kentucky has not adopted the position put forth in the Restatement (Third) of Trusts and, as such, would not recognize a trust as irrevocable solely on the basis of a remainder interest to "heirs at law".

2. OPINION

Question Presented

You asked whether the Nathan Trust instrument established a valid irrevocable trust under Kentucky law when it states, at the death of Nathan (Claimant), remaining trust funds are to be first distributed to any state in which he lived and received medical assistance, and then to Claimant's heirs at law living at the time of his death.

Opinion

Whether this trust is countable as a resource available to Claimant depends on whose assets were used to establish the trust corpus. If the trust was created with assets not belonging to Claimant, it would not be countable as a resource available to him. However, if it was created with Claimant's assets, it would be countable as a resource available to him because it would not be irrevocable under Kentucky law.

Facts

On January 17, 2002, Kimberly, Claimant's legally-appointed guardian and mother, established a trust for Claimant's benefit. Claimant's mother transferred to the trustee certain property listed in a separate schedule as the initial corpus of the trust, and indicated that she may transfer additional assets. See Trust Instrument, Art. II. The trust states it is irrevocable and cannot be altered, amended, revoked, or terminated by Claimant's mother. See id. , Art. III. The Trustee may use the trust funds for Claimant's benefit, except for his basic support, maintenance, and health needs, see id. , Art. IV.A.1, and shall avoid making actual distributions to Claimant, to the extent feasible, see id. , Art. IV.A.3. At Claimant's death, the trustee shall first reimburse any state for medical assistance under a State plan, see id. , Art. IV.B.1, and "shall distribute any remaining trust funds to [Claimant's] heirs at law living at [Claimant's] death under the laws of the Commonwealth of Kentucky then in existence," see id., Art. IV.B.2.

Legal Authority

Under the Social Security Act (Act), aged, blind, or disabled individuals who meet certain income and resource limitations are eligible for SSI. See Act § 1611(a), 42 U.S.C. § 1382(a). "Income" is defined as funds that are earned as wages or other employment-type compensation or as unearned income from a variety of sources, which can be used to meet a claimant's food and shelter needs. Act at § 1612(a)(1)-(2); 42 U.S.C. § 1382a(a)(1)-(2); accord 20 C.F.R. § 416.1102 (2007). Resources are 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. 20 C.F.R. § 416.1201(a) (2007).

Trusts may be countable as resources for SSI purposes in certain circumstances. See Act at § 1613(e); 42 U.S.C. § 1382b(e). However, this general rule does not apply to trusts validly established under section 1917(d)(4) of the Act, 42 U.S.C. § 1396p(d)(4), generally termed "Medicaid-Qualifying" or "Special Needs" trusts. See Act at § 1613(e)(5). For such trusts, the general resource-counting rules apply. See Act at §§ 1611(a)(1)(B), (2)(B), (3).

For trusts established after January 1, 2000, the Agency must determine the identities of both the settlor and the beneficiary. See POMS SI 01120.200-01120.204. The Agency must then determine whose property comprised the corpus of the trust. See POMS SI 01120.202.A.1.b. If the trust corpus was established solely with the assets of a third party, the trust is generally not a resource provided the claimant has no right to direct the use of or revoke the trust. See POMS SI 01120.200.D.2. However, if a trust (or any portion of a trust) contains any assets of the claimant, then the trust (or the portion made up of the claimant's assets, on a pro rata basis) may be considered a resource if the trust is revocable, if the trust is irrevocable and the claimant can receive funds from or direct the distribution of funds, or if the trust is a Special Needs or Medicaid Trusts that is revocable. See Act at § 1613(e)(3); POMS SI 01120.200.D, SI 01120.201.A, SI 01120.203.B.1.

DISCUSSION

Although you asked whether Claimant's trust is irrevocable trust Kentucky law, that question does not alone control whether trusts established after January 1, 2000, are considered resources. The Agency must also determine the identities of the settler and the beneficiary. Here, Claimant's mother is the settlor of the trust and Claimant is its beneficiary.

Next, the Agency must determine whether Claimant's trust was created with funds that belonged in any part to Claimant. If we determine the funds or assets that make up the corpus of the trust were entirely those of Claimant's mother, then this trust is not subject to section 1613(e) of the Act. See POMS SI 01120.200.A.2.b. For such trusts, the Agency must determine the extent to which, if at all, Claimant has any authority to direct the use of the trust or its assets to meet his own food or shelter needs. See POMS SI 01120.200.D. Here, Claimant can neither revoke nor use trust assets as he wishes or for his own support and maintenance. Only the Trustee has the responsibility to use the trust assets or funds as appropriate. See Trust Instrument, Art. IV. Moreover, the trustee may not use trust funds to pay for Claimant's basic support and maintenance. See id., at Art. IV.A.1. Thus, if the trust contains no funds belonging to Claimant, the trust is not countable as a resource to him. See POMS SI 01120.200.D.2.

If Claimant's trust was created with assets or funds that belonged, in any part, to Claimant, other rules apply. See POMS SI 01120.202.A.1.b (referring to POMS SI 01120.201-204 for such trusts). If the entire corpus of the trust is comprised of Claimant's assets or funds, then the entire trust is reviewable under these sections; but, if only a portion of the corpus is based on Claimant's assets or funds, his pro rata amount is reviewed under these sections. See POMS SI 01120.201.C.2.c. The instructions refer to the following questions to answer to determine whether such a trust is countable as a resource:

1. Was the trust established with the assets of an individual under age 65?

If yes, go to Step 2.

If no, go to Step 8.

2. Was the trust established with the assets of a disabled individual?

If yes, go to Step 3.

If no, go to Step 8.

3. Is the disabled individual beneficiary of the trust?

If yes, go to Step 4.

If no, go to Step 8.

4. Did a parent, grandparent, legal guardian or a court establish the trust?

If yes, go to Step 5.

If no, go to Step 8.

5. Does the trust provide specific language to reimburse the State for medical assistance paid upon the individual's death as required in SI 01120.203B.1.f.?

If yes, go to Step 6.

If no, go to Step 8.

6. The trust meets the special needs trust exception to the extent that the assets of the individual were put in trust prior to the individual attaining age 65. Any assets placed in the trust after the individual attained age 65 are not subject to this exception.

Go to Step 7 for treatment of assets placed in trust prior to age 65.

Go to Step 8 for treatment of assets placed in trust after attaining age 65.

7. Is the trust irrevocable?

If yes, assets placed in the trust prior to age 65 are not a countable resource. STOP.

If no, evaluate the trust under SI 01120.200 to determine if it is a countable resource.

8. The trust (or portion thereof) does not meet the requirements for the special-needs trust exception. Determine whether the pooled trust exception in SI 01120.203B.2. applies.

POMS SI 01120.203.D.1 (internal citations omitted). If some or part of Claimant's assets funded the trust and that Claimant is disabled, the trust would meet steps one through six.

Therefore, the remaining question would be whether the trust is irrevocable. Generally, a trust is revocable, regardless of the terms of the agreement, if the settlor is the sole beneficiary of the trust. See POMS SI 01120.200. The settler, or true grantor, is the sole beneficiary if there is no other person or entity holding a beneficial or remainder interest in the trust property. The "Doctrine of Worthier Title," in its common law form, provided that a conveyance of land by a grantor with a limitation over to his own heirs resulted in a reversion in the grantor rather than creating a remainder interest in his heirs. Hatch v. Riggs Nat'l Bank, 361 F.2d 559, 561 (D.C. Cir. 1966). That is, a conveyance to a person for life with the remainder to his heirs created an unrestricted ownership for that person. This common law rule no longer exists, but "the question of construction" persists and, in the absence of evidence of contrary intent, there is no intent by an owner to create a remainder interest in his heirs. Restatement (Second) of Trusts § 127, comment b (1959); see also H~, 361 F.2d at 562. The general rule is:

He is . . . the sole beneficiary where he transfers property in trust to pay the income to himself for life and on his death to pay the principal to his estate, or to his personal representatives. . . . On the other hand, if the beneficial interest is limited to the settlor for life and on his death the property is to be conveyed to his children, or issue, or descendants, he is not the sole beneficiary of the trust, but an interest in remainder is created in his children, issue, or descendants. . . . [A] question of construction arises where the owner of property transfers it in trust to pay the income to himself for life and upon his death to pay the principal to his heirs or next of kin. In the absence of a manifestation of a contrary intention, the inference is that he is the sole beneficiary of the trust and that he does not intend to create any interest in the persons who may become his heirs or next of kin. The same thing is true where the principal is to be paid to the persons who would be entitled to his property on his death intestate, or to the persons who would succeed to his property under the statute of descent and distribution [intestacy statute].

Restatement (Second) of Trusts § 127 cmt. b (1959). The Kentucky Supreme Court has held that a person who is both settlor (grantor) and sole beneficiary of an inter vivos trust may revoke the trust, even when the instrument specifically provides that the trust is irrevocable. Phillips v. Lowe, 639 S.W.2d 782, 783 (Ky. 1982). Citing the Restatement (Second) of Trusts, § 339 (1959), the P~ court concluded, "In essence, the corpus of the trust belongs to the settlor who is also the sole beneficiary. Assuming that she is not under an incapacity at the time she requests a change, the settler-sole beneficiary's actions affect that which is hers alone." Id., at 784. Kentucky courts have also adopted the common law doctrine of reversions with respect to inter vivos conveyances. See Alexander v. DeKermel, 81 Ky. 345, 1883 WL 7842 (Ky. App. 1883). Later, in a case involving construction of a will, a Kentucky appeals court noted the question of reversions was first presented in Kentucky in Alexander, which adopted the common law doctrine of "reversion," and found that thereafter the "doctrine of reversions has become firmly ingrained in the law of our state." Mitchell v. Dauphin Deposit Trust Co., 142 S.W.2d 181, 183-84 (Ky. App. 1940). This is the longstanding Kentucky position.

Historically, the general terms of "heirs," "heirs at law," "next of kin," "survivors," or similar non-specific language were insufficient to establish a residual interest in a trust that could render a "grantor trust" irrevocable. See Restatement (Second) of Trusts, § 339, case citations. However, some states have amended their law to allow such terms to create a binding interest. For example, Florida amended its law to recognize such language as rendering a trust irrevocable. See Fla. Stat. Ann. (abolishing the Doctrine of Worthier Title) (effective July 1, 2007). Other states have indicated that they follow the rules found within the Restatement (3d) of Trusts, which has recommended a change in the historical rule to recognize indefinite terms like those listed above are sufficient to create an inalienable remainder interest. Unlike Florida or the other states adopting the Restatement (3d) of Trusts, Kentucky has not amended its law by either abolishing the common law Doctrine of Worthier Title or adopting the Restatement (3d) of Trusts. Indeed, caselaw in Kentucky cites the Doctrine of Worthier Title as recently as 1997, see, e.g., Dennis v. Bird, 941 S.W. 2d 486, 489 (Ky. App. 1997), and caselaw as recently as September 2007 has cited the Restatement (2d) of Trusts, see, e.g., Elliott v. J.C. Bradford & Co., LLC, 2007 WL 2687413 *5 (Ky. App. 2007). Thus, the longstanding position of Kentucky law remains in effect and any portion of Claimant's trust created with his assets would be considered a trust created by a person who is both the settler and beneficiary. See POMS SI 01120.200.B.2, SI 01120.201.B.7. Therefore, Claimant could revoke the trust created with his assets despite its language stating that it is irrevocable.

Finally, this trust provides that, at Claimant's death, the trustee shall first reimburse any state for medical assistance under a State plan, see id. , Art. IV.B.1, before distributing any remaining trust amounts Claimant's heirs at law living at Claimant's death under the laws of the Commonwealth of Kentucky then in existence," see id., Art. IV.B.2. Despite this provision, the trust does not create any remainder interest for the state. Instead, this provision creates a "creditor" interest in the state. See Carden v. Astrue, 2008 WL 867942, *4 (S.D. W.Va. 2008) (finding that West Virginia had not indicated that the state was a beneficiary). The state's interest is only payable if there are funds left in the trust when Claimant dies, after administrative costs are paid. If nothing is left, nothing is owed the state(s). As in C~, no Kentucky statute or caselaw indicates that the state should be a residual beneficiary rather than a creditor.

CONCLUSION

For the reasons stated above, this trust, to the extent it was created with Claimant's assets, is countable as a resource available to him because it is not irrevocable under Kentucky law. However, to the extent that this trust was created with assets not belonging to Claimant, it would not be countable as a resource to him provided that no disbursements from the trust could be payable for his food, clothing, or shelter needs.

Mary Ann Sloan
Regional Chief Counsel

By Jerome M. Albanese
Assistant Regional Counsel

Footnotes:

[1]

We incorporate the previous opinions by reference except for the updates specifically set forth in this Supplemental Opinion.

[2]

For clarity and brevity, we refer to the current amended trust documents as the Trust and the Joinder Agreement.

[3]

The Internal Revenue Service (IRS) identifies Settlor as a tax-exempt organization. Exempt Organizations Select Check, https://apps.irs.gov/app/eos/pub78Search.do?ein1=26-1519500&names=Kentucky+Guardianship+Association&city=&state=KY&country=US&deductibility=all&dispatchMethod=searchCharities&submitName=Search (last visited Dec. 11, 2017).

[4]

Our office suggests that the agency verify the organization’s non-profit status pursuant to POMS SI 01130.689E, in future cases.

[5]

“Personal Account” means an account within the Trust, segregated by Trustee for the specific use and benefit of a beneficiary. See Trust, Art. II, ¶ I, Art. VIII, ¶ A.

[6]

The Trust defines beneficiary as an individual who is disabled under the Act. See Trust, Art. II, ¶ B; Joinder Agreement, §§ III, IV.

[7]

MS Recipient does not currently receive SSI, but we nonetheless use the identifying term “Recipient” for purposes of consistency in this opinion.

[8]

^. All references to the Code of Federal Regulations are to the 2017 edition.

[9]

Specifically, the IRS’s website indicates NSFNI is a public charity to which certain contributions could be tax deductible. See Exempt Organizations Selection Check, https://apps.irs.gov/app/eos/pub78Search.do?ein1=20-8405771&names=&city=&state=All...&country=US&deductibility=all&dispatchMethod=searchCharities&submitName=Search (last visited July 10, 2017).

[10]

Indemnity is a legal obligation to be held responsible for another’s wrongdoing despite a lack of any personal negligence or fault. See, e.g., Zeiger Crane Rentals, Inc. v. Double A Indus., Inc., 16 So. 3d 907, 911 (Fla. Dist. Ct. App. 2009); Frear v. P.T.A. Indus., Inc., 103 S.W.3d 99, 107 (Ky. 2003); Gully v. First Nat. Bank, 184 So. 615, 617 (Miss. 1938).

[11]

We also note that the Master Trusts indicate they “shall not be used to reimburse any state . . . government for any benefits or maintenance representing basic medical care. . . .” Master Trusts, Art. 6. This prohibition is not limited to the lifetime of a Beneficiary and could conflict with the pooled trust requirement that a sub-account pay back Medicaid upon the death of a Beneficiary. NFSNI should consider clarifying this language.

[12]

^. Although you originally asked whether the trust was revocable under Kentucky law, we have not addressed revocability because we concluded the trust was not a valid special needs trust.

[13]

^. According to the information provided, some of the assets listed in Schedule A have not been transferred to the Trust. Accordingly, they would not be considered part of the Trust corpus in determining NH’s countable resources.

[14]

^. All references to the Code of Federal Regulations are to the 2016 edition.

[15]

^. All references to the Ky. Rev. Stat. Ann. are to the 2016 version.

[16]

^. The Trust Amendment contains a typographical error when referring to section “386.4.” We note that the Kentucky code contains no section 386.4 (Trust Amendment). The Trust Amendment most likely was referring to sections 386B.4-100 to 386B.4-160, which govern modifications of trusts.

[17]

^. Although Kentucky law states that modification by consent is inapplicable to special needs trust created under section 1917(d)(4)(A) of the Act, see Ky. Rev. Stat. Ann. § 386B.4-110(6)(b), the Trust was not a valid special needs trust at the time the Trust Amendment was executed because it lacked a Medicaid payback provision.

[18]

^. * All references to Code of Federal Regulations are to the 2015 edition.

[19]

^. All reference to the Code of Federal Regulations is to the 2015 edition.

[20]

^{. . .} Exempt Organizations Select Check, https://apps.irs.gov/app/eos/pub78Search.do?ein1=&names=%22Life+Plan%22&city=&state=KY&country=US&deductibility=all&dispatchMethod=searchCharities&submitName=Search (last visited Apr. 22, 2016).

[21]

^. The Trust Declaration allows the Trustee to transfer property within the Master Trust to other pooled trusts. See Trust Decl., Art. 7, Art. 17, §§ 17.1, 17.2. However, this type of early termination clause does not prevent a trust from meeting the requirements of a pooled trust. See POMS SI 01120.199.F.2.