TN 96 (03-18)

A. PS 17-090 Reconsideration of the Third Restated South Dakota Pooled Advocate Trust

Date: May 30, 2017

1. Syllabus

The Regional Chief Counsel (RCC) Opinion examines whether the Trust meets the special needs trust exception for Supplemental Security Income (SSI) purposes. The RCC determined that the Trust does not meet the special needs trust exception and the Trust accounts are countable resources because the Trust places the burden on states to claim Medicaid reimbursement in the form of a lien enforceable under South Dakota law. The RCC added that if the Trust were amended to address this issue, and assuming no other modifications are made, individual trust accounts would not be countable as resources provided that:

Accounts established for the benefit of a competent, disabled adult comply with POMS SI 01120.203(B)(1)(f) (describing “seed” trusts and court-established trusts); and

Joinder agreements name a specific residual beneficiary.

2. Opinion

Question Presented

You asked us to reconsider our opinion regarding the Third Restated Declaration of Trust of the Pooled Advocate Trust (the “Trust”) to determine whether it is a resource for purposes of determining eligibility for Supplemental Security Income (SSI).

Short Answer

We have determined that the Trust does not meet the special needs trust exception and the Trust accounts are countable as resources. The Trust places the burden on states to claim Medicaid reimbursement in the form of a lien enforceable under South Dakota law.

If the Trust were amended to address this issue, and assuming no other modifications are made, individual trust accounts would not be countable as resources provided that:

1) Accounts established for the benefit of a competent, disabled adult comply with POMS SI 01120.203(B)(1)(f) (describing “seed” trusts and court-established trusts); and

2) Joinder agreements name a specific residual beneficiary.

Background

OGC has previously reviewed the Trust. In January 2016, we determined that the Trust did not meet the pooled trust exception, 42 U.S.C. § 1396p(d)(4)(c), because it was not managed by a non-profit association and it placed the burden on the states to claim Medicaid reimbursement in the form of a state lien. We gave the Trustee 90 days to amend the Trust. By letters dated March 3, 2016, and March 9, 2016, the Trustee requested reconsideration of our decision. The Trustee stated that the Trust was intended to be a (d)(4)(A) trust, because it was administered by a Trustee and not a non-profit association. Indeed, although the Trust is titled “Pooled Advocate Trust,” it also states that it is “made pursuant to 42 U.S.C. § 1396p(d)(4)(a) . . . . ” Trust, Intro., § IV. We have identified no legal bar to considering trust accounts as individual trusts. Therefore, in this opinion, we have again reviewed the Trust to determine if it instead conforms with the special needs trust exception, 42 U.S.C. § 1396p(d)(4)(A).

Discussion

I. Whether the Trust is a Resource

The Trust states that it is an “irrevocable trust containing the assets of a South Dakota resident individual . . . .” Trust, Intro., § IV. Trust accounts may be funded with a beneficiary’s own assets; when that occurs, trust accounts are subject to the statutory provisions of Section 1613(e) of the Social Security Act for trusts established on or after January 1, 2000. See 42 U.S.C. § 1382b(e); POMS SI 01120.201. In general, pursuant to these provisions, trusts established with the assets of the individual are considered resources for SSI purposes even if they are irrevocable. However, there is an exception for certain trusts established under 42 U.S.C. § 1396p(d)(4)(A), which is commonly known as the special needs trust exception. See POMS SI 01120.203.

A. Special Needs Trust Exception

For this exception to apply, the trust must:

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

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

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

POMS SI 01120.203(B)(1)(a)-(h). In this case, the Trust does not meet these requirements because it does not properly provide for Medicaid reimbursement upon termination of the Trust.

(1) The Trust states that it will contain the assets of a disabled individual under age 65.

First, in order for a trust to meet the special needs trust exception, it must contain the assets of an individual under age 65 who is disabled. See POMS SI 01120.203(B)(1)(a). Here, the Trust defines “Beneficiary” as “an individual with a disability as defined in § 1615(a)(3) of the Social Security Act . . . and who must be under the age of age sixty-five (65) at the time of a contribution to this Trust.” See Trust, § 1.1.

(2) The Trust is established for the sole benefit of the beneficiary

Second, in order for a trust to meet the special needs trust exception, it must be established for the “sole benefit” of an individual through the actions of a parent, grandparent, legal guardian, or a court. See POMS SI 01120.203(B)(1)(e)-(f). The Trust states that accounts will be “established . . . by a parent, grandparent, legal guardian, or a court . . . .” Trust, Intro., § IV. This complies with our requirements. However, we note that, in the case of a legally competent, disabled adult attempting to transfer their assets into a special needs trust, a parent or grandparent must first establish a “seed” trust using a nominal amount of his or her own money. See POMS SI 01120.203(B)(1)(f). Only after the seed trust is established, may the legally competent disabled adult transfer his or her own assets to the trust. Id. Also, in the case of a trust established through the actions of a court, the creation of the trust must be required by a court order. Id.

Next, the trust must be established for the sole benefit of the disabled individual, which means that the trust must not benefit anyone but that individual during his or her lifetime (other than reasonable compensation for a trustee and reasonable costs associated with managing the trust). See 42 U.S.C. § 1396p(d)(4)(C)(iii); POMS SI 01120.203(B)(1)(a), (e); POMS SI 01120.201(F)(2).

In the event that a trust can be terminated during a beneficiary’s lifetime, the trust must meet several requirements:

1) Termination power is provided to someone other than the trust beneficiary;

2) Upon termination, the trust must reimburse the state(s) in an amount equal to the total amount of medical assistance paid under state Medicaid plan(s); and

3) After reimbursement to the state(s) and payment of allowed expenses, all remaining funds must be given to the trust beneficiary.

See POMS SI 01120.199(F). The Trust satisfies these requirements. It provides that accounts continue until the death of a beneficiary, and therefore does not contemplate early termination. See Third Restated Trust, § 6.1, 6.2, 6.6. Also, in the event a court were to nonetheless order termination prior to the death of a beneficiary, the Trust appropriately directs that State(s) be reimbursed for medical assistance, and effectively provides that remaining amounts be distributed to the beneficiary (by disallowing distributions in accordance with the joinder agreement during the lifetime of the beneficiary). See id. § 6.2, 6.6.

(3) The Trust Does Not Properly Provide for Medicaid Reimbursement.

The Trust contains specific language providing that, to the extent that amounts remaining in a beneficiary’s account after his or her death are not retained by the Trust, the Trust pays to the State(s) an amount equal to the total amount of medical assistance paid on behalf of the individual under the State Medicaid plan(s). See Third Restated Trust, § 6.2. The Trust does not limit payment to any particular State(s) or any particular period of time. See id., see also POMS SI 01120.203(B)(1)(h).¹ Nor does the Trust allow for payment of any prohibited expenses prior to reimbursement. See Third Restated Trust, § 6.1; see also POMS SI 01120.203(B)(3).

However, the Trust requires states seeking reimbursement to “claim[] a lien enforceable under state or federal law and in conformity with A.R.S.D. § 67:46:05:32:03(2)” in order to receive Medicaid reimbursement. See Third Restated Trust, § 6.2. In January 2016, we determined that this language was inconsistent with the POMS, because it placed the burden on the State(s) to request reimbursement and to do so in a specific form—a lien enforceable under South Dakota law. See POMS SI 01120.203(B)(1)(h) (the “State(s) will receive all amounts remaining in the trust, up to an amount equal to the total amount of medical assistance paid on behalf of the individual under the State Medicaid plan(s)” (emphasis added)). The Trustee has requested that we reconsider our interpretation of this language. After discussing this language with OISP, we still conclude that this Trust provision is inconsistent with the POMS.

We note in addition that the Joinder Agreement states, “When the Beneficiary dies, any amount remaining in the Trust Sub Account will usually be retained by the Trust and held for the benefit of other trust beneficiaries.” Joinder Agreement, p. 5, § IV. Retaining funds prior to Medicaid reimbursement is permissible in a pooled trust, but not an individual special needs trust. As such, this language is problematic if we are viewing trust accounts as individual special needs trusts. Compare 42 U.S.C. § 1396p(d)(4)(A) with (d)(4)(C). Nonetheless, the language in the Joinder Agreement likely has no effect, because the Trust does not include a similar reference to retaining funds prior to Medicaid reimbursement, see Third Restated Trust, § 6.2, and the Trust takes precedence over the Joinder Agreement, see id. at § 1.5 (“If there is any conflict between this Declaration of Trust and the Joinder Agreement, this Declaration of Trust shall prevail.”). Nonetheless, if we are informing the Trustee about other issues, we recommend this be included as it would be preferable to eliminate any potential ambiguity or confusion regarding Medicaid payback.²

II. The Trust Accounts Are Not Countable under the Regular Resource Counting Rules

Even where a trust meets the special needs trust exception, it must still be evaluated under the regular resource rules.See POMS SI 01120.200(D)(2)(step 7). Pursuant to these rules, trust property may be a resource for SSI purposes if the individual:

(1) has the authority to revoke the trust and then use the funds to meet his basic needs for food or shelter;

(2) can direct the use of the trust principal for his support and maintenance; or

(3) can sell his beneficial interest in the trust.

See POMS SI 01120.200(D)(1)(a)-(b). We have reviewed these criteria in the event the Trust is amended to address the above issue.
Here, the Trust documents provide that the Trust accounts are irrevocable. See Third Restated Trust, §§ 1.5, 3.4. South Dakota follows the general principle of trust law that if a grantor is also the sole beneficiary of a trust, the trust is revocable regardless of language in the trust document to the contrary. See Restatement (Second) of Trusts § 339 (1959). But after Medicaid reimbursement, the Trust directs the Trustee to distribute the residue to residual beneficiaries identified by the Trust sub-account holder in the Joinder Agreement. See Joinder Agreement, pp. 5-6. Assuming a residual beneficiary is named in the Joinder agreement, the Trust account is irrevocable. See POMS SI 01120.200(D)(3) (“grantor cannot unilaterally revoke the trust if there is a named ‘residual beneficiary’ in the trust document who would, for example, receive the principal upon the grantor's death or the occurrence of some other specific event.”). In the event that a specific Joinder Agreement does not name any residual beneficiaries, however, the Trust is revocable and should be counted as a resource, since the template Joinder Agreement does not make any reference to heirs in lieu of specifically named residual beneficiaries. See id. (providing that “residual beneficiaries are assumed to be created, absent evidence of a contrary intent, when a grantor names heirs, next of kin, or similar groups to receive the remaining assets in the trust upon the grantor’s death. In such case, the trust is considered to be irrevocable.”).

Consequently, should the Trust be amended so as to otherwise meet the special needs trust requirements, we recommend a close review of each Joinder Agreement to ensure that at least one specific residual beneficiary has been identified.

Next, a Beneficiary cannot compel the Trustee to make a distribution of trust sub-account assets to the Beneficiary. Trust, §§ 2.1, 2.2. See POMS SI 01120.200(d)(1)(b).

Finally, the Trust contains a spendthrift clause that precludes a Beneficiary from selling or assigning his or her interest. Id. at § 2.2;³ see also POMS SI 1120.200(D)(1)(a). South Dakota permits a spendthrift clause in a self-settled trust if it meets certain criteria. S.D. Codified Laws § 55-1-36 (referencing “qualified transfers” under S.D. Codified Laws 55-16-1 to 55-15-15). Here, the Trust purports to meet the “qualified transfer” provisions, but we have not reviewed the criteria in detail because here the trust does not provide for mandatory distributions. Thus, even if a beneficiary could sell his or her beneficial interest, it would have no value to be counted.

Conclusion

In sum, we conclude that the Trust does not comply with the special needs trust exception. The Trust places the burden on the State(s) to claim Medicaid reimbursement in the form of a lien enforceable under law.

If the Trust were amended to address this issue, and assuming no other modifications are made, individual trust accounts would not be countable as resources provided that:

(1) Accounts established for the benefit of a competent, disabled adult comply with POMS SI 01120.203(B)(1)(f) (describing “seed” trusts and court-established trusts); and

(2) Joinder agreements name a specific residual beneficiary.

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

Date: April 6, 2017

1. Syllabus

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

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

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

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

In Colorado, the law is unclear.

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

2. Opinion

Question Presented

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

Background

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

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

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

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

Discussion

Revocability where Grantor is the Sole Beneficiary

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

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

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

References:

Colorado:

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

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

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

Montana:

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

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

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

North Dakota:

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

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

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

South Dakota:

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

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

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

Utah:

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

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

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

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

Wyoming:

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

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

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

Validity of Spendthrift Clause

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

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

References:

Colorado:

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

Montana:

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

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

North Dakota:

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

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

South Dakota:

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

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

Utah:

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

Wyoming:

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

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

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

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

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

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

• In Colorado, the law is unclear.

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

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

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

References:

Colorado

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

Montana

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

North Dakota

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

South Dakota

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

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

Utah

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

Wyoming

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

Conclusion

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

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

C. PS 16-058 Review of the Third Restated South Dakota Pooled Advocate Trust –SSI.

DATE: January 7, 2016

1. Syllabus

This Regional Chief Counsel (RCC) opinion discusses whether the Third Restated South Dakota Pooled Advocate Trust is a resource for purposes of determining eligibility for Supplemental Security Income (SSI). It was determined the Trust is not managed by a non-profit association, and places the burden on States to claim Medicaid reimbursement in the form of a lien enforceable under law. The Trust does not meet the pooled trust exception and the Trust sub-accounts are countable as resources. However, the Trust was previously found to have met the pooled trust exception. As such, the Trustee should be given a 90 day amendment period to conform to these requirements.

2. Opinion

Question Presented

You asked us to review the Second Restated South Dakota Pooled Advocate Trust (“Second Restated Trust”), which was subsequently amended by the Third Restated South Dakota Pooled Advocate Trust (“Third Restated Trust”), to determine whether it is a resource for purposes of determining eligibility for Supplemental Security Income (SSI).

Short Answer

We have determined that the Trust does not meet the pooled trust exception and the Trust sub-accounts are countable as resources. The Trust is not managed by a non-profit association, and places the burden on states to claim Medicaid reimbursement in the form of a lien enforceable under law. However, we understand that the Trust was previously found to have met the pooled trust exception. As such, the Trustee should be given 90 days to conform to these requirements.

Background

Definitions, Establishment, and Purpose

A South Dakota nonprofit corporation, Pooled Advocate Trust, Incorporated (“PATI”), established the Trust in 2004. Second Restated Trust, § I. The Trust was reformed and restated in 2009, and again in 2015. Id.; Third Restated Trust, p. 16. PATI is not referenced in the Third Restated Trust. First Premier Bank in Sioux Falls, South Dakota, serves as the Trustee and makes all decisions regarding investments and distributions. Third Restated Trust, §§ 1.11, 7.2, 7.7.

The purpose of a trust sub-account is to provide for the supplemental needs of a beneficiary, i.e., a person who is disabled as defined in 42 U.S.C. § 1382c(a)(3). Third Restated Trust, §§ 1.1, 1.9, 2.1. The Trust defines supplemental needs as “nonsupport distributions,” which include but are not limited to medical, dental, psychological, and diagnostic work; supplemental nursing care; rehabilitative and occupational therapy; housing in institutional settings; and expenditures for education, recreation, television, telephone and internet services, etc. Id. at § 1.9. The Trust defines grantors as “parent(s) or grandparent(s) of the Beneficiary; a legal conservator of the Beneficiary; or a court.” Id. at § 1.4. PATI maintains a separate sub-account for each Beneficiary. Id. at §§ 1.12, 4.1.
Amendment, Termination, and Distribution of Assets upon Termination

The Trust is irrevocable, except that it may be amended to conform to any statutes, rules, or regulations. Id. at § 8.2(A). The Trust also states that if any provision is invalid, the remaining provisions shall “be carried into effect to carry out the intent of this Trust.” Id. at § 8.6.

With regard to termination, the Trust provides that a sub-account “shall continue until the death of a Beneficiary. Thereupon, a Trust Sub Account shall terminate.” Id. at § 6.1. In the event of the death of a beneficiary, the Trust provides for payment of final administrative expenses “such as an accounting of the trust to a court, completion and filing of documents, or other required actions associated with termination and wrapping up the trust.” Id. at § 6.1(B). After payment of such administrative expenses, the Trust pays to the State(s) from such remaining funds in the account an amount equal to the total amount of medical assistance paid on behalf of the beneficiary “for which [the state] claims a lien enforceable under state or federal law . . .” Id. at § 6.2. Any amounts remaining after payment to the State(s) are to be distributed pursuant to the terms of the Joinder Agreement (the Joinder Agreement is set up to direct distributions to specific, named beneficiaries). Id. at § 6.1(1). The Trust further provides that “[i]n no case may any distributions be made pursuant to the terms of the Joinder Agreement or otherwise to or for the benefit of any heir or devisee named in the Joinder Agreement during the lifetime of the Beneficiary.” Id.

Spendthrift Provision

The Trust provides that “no part of [the] Trust, principal or income, shall be subject to anticipation or assignment by a Beneficiary nor shall it be subject to attachment or control by any public or private creditor of a Beneficiary; nor may it be taken by any legal or equitable process by any voluntary or involuntary creditor, including those that have provided for the Beneficiary’s support and maintenance prior to the time when a distribution to a beneficiary is actually carried out.” Id. at § 2.2.

Governing Law

The trust documents are governed by South Dakota law. Id. at § 8.5.

Joinder Agreement

A beneficiary may establish a sub-account in the Trust by executing a Joinder Agreement, obtaining written approval from the Trustee, and contributing money. Id. at §§ 1.5, 3.1. Upon delivery to and acceptance of acceptable property by the Trustee from a grantor, the sub-account purports to be irrevocable and the property is not refundable “except as distributions for the sole benefit of the Beneficiary as provided herein.” Id. at § 1.5.

Discussion

(A) The Master Trust Does Not Meet the Pooled Trust Exception Under 42 U.S.C.

§ 1396p(d)(4)(c).

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

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

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

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

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

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

See id.; POMS SI 01120.203(B)(2). In this case, as discussed below, the Trust does not meet the pooled trust requirements.

1) The Trust is Not Maintained by a Non-Profit Association.

According to the Second Restated Trust, PATI is a nonprofit corporation that established the Trust in 2004. Second Restated Trust, § I. Each beneficiary has a separate sub-account, and presumably, these accounts are pooled for purposes of investing and managing the funds. Third Restated Trust, §§ 1.12, 4.1.

Nonetheless, the Trust is problematic because it is not managed by PATI or another non-profit association. The Third Restated Trust does not contain any reference to PATI or otherwise explain the organization’s role in managing or controlling the Trust. Instead, the Trust documents indicate that First Premier Bank (presumably a for-profit entity) is the Trustee. In this role, the bank has “the power and authority to do any act or thing reasonably necessary or advisable for the proper administration and distribution of trust property. . .” including make distributions and disbursements, hold or deal with trust property, and invest trust assets (or leave them un-invested). Third Restated Trust, §§ 7.2, 7.10; see also § 7.7 (“Trustee is to be afforded the greatest extent of discretion allowable under the law with regards to investment decisions, distribution decisions, and any other decision taken as Trustee of the Trust or any Trust Sub Account.”). 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). For example, the non-profit association must be responsible for determining the amount of trust corpus to invest and making day-to-day decisions regarding the health and well-being of the pooled trust beneficiaries. Id. The Third Restated Trust does not comply with this requirement, as it provides First Premier Bank with the ultimate discretion and control over Trust assets. See Third Restated Trust, §§ 7.2, 7.7, § 7.10.

2) The Trust Does Not Appear to Allow for Possible Early Termination and Transfer of Assets to Someone Other than the Beneficiary; Thus, the Trust Accounts are Established Solely for the Benefit of the Disabled Individual.

The trust must be established for the sole benefit of the disabled individual, which means that the trust must not benefit anyone but that individual during his or her lifetime (other than reasonable compensation for a trustee and reasonable costs associated with managing the trust). See 42 U.S.C. § 1396p(d)(4)(C)(iii); POMS SI 01120.203(B)(2)(a), (e); POMS SI 01120.201(F)(2).

In the event that a trust can be terminated during a beneficiary’s lifetime, the trust must provide that:

1) Upon early termination, the trust must reimburse the state(s) in an amount equal to the total amount of medical assistance paid under state Medicaid plan(s);

2) After reimbursement to the state(s) and payment of allowed expenses, all remaining funds must be given to the trust beneficiary; and

3) The early termination power is provided to someone other than the trust beneficiary.

See POMS SI 01120.199(F). Here, the Trust does not allow for early termination, as it provides that “a Trust Sub Account shall continue until the death of a Beneficiary. Thereupon, a Trust Sub Account shall terminate.” Third Restated Trust, § 6.1. The Trust also states that “[i]t is not contemplated that the Trust or any Sub Account will terminate prior to the death of a Beneficiary. If a court of competent jurisdiction does order a Trust Sub Account terminated prior to the death of a Beneficiary then the payback requirements to the State(s) as set forth above in section 6.2 must be complied with prior to any other distribution from the Trust.” Id. at § 6.6. In turn, section 6.2 provides for reimbursement to the state(s) for the “total amount of medical assistance paid on behalf of the Beneficiary under the South Dakota plan . . . or any entity of like character situation in another state or territory in which the Beneficiary received medical assistance . .. .” Id. § 6.2. Finally, the Trust states that any amounts remaining after payment to the state(s) are to be distributed pursuant to the Joinder Agreement, but that “[i]n no case may any distribution be made pursuant to the terms of the Joinder Agreement or otherwise to or for the benefit of any heir or devisee named in the Joinder Agreement during the lifetime of the Beneficiary.” Id. § 6.2(1). Because these sections limit distribution of the trust property to the State(s) and the trust beneficiary, we conclude that they comply with the early termination provisions. See POMS SI 01120.199(F)(1). Further, it appears that only a court can order a sub-account to terminate prior to the death of a beneficiary. See POMS SI 01120.199(F)(3).

4) The Trust Does Not Properly Provide for Medicaid Reimbursement.

The Trust contains specific language providing that, to the extent that amounts remaining in a beneficiary’s account after their death are not retained by the Trust, the Trust pays to the State(s) an amount equal to the total amount of medical assistance paid on behalf of the individual under the State Medicaid plan(s). See Third Restated Trust, § 6.2. The Trust does not limit payment to any particular State(s) or any particular period of time. See id.; see also POMS SI 01120.203(B)(2)(g). Nor does the Trust allow for payment of any prohibited expenses prior to reimbursement. See Third Restated Trust, § 6.1; see also POMS SI 01120.203(B)(3).

However, the Trust requires states seeking reimbursement to “claim[] a lien enforceable under state or federal law and in conformity with A.R.S.D. § 67:46:05:32:03(2)” in order to receive Medicaid reimbursement. See Third Restated Trust, § 6.2. Thus, the Trust language places the burden on the state agencies to request reimbursement (and to do so in a specific form—a lien enforceable under law). We view this as inconsistent with POMS SI 01120.203(B)(1)(h), which requires that the Trust contain specific language stating that the “State(s) will receive all amounts remaining in the trust, up to an amount equal to the total amount of medical assistance paid on behalf of the individual under the State Medicaid plan(s).” (emphasis added).

Therefore, we conclude that the Trust does not satisfy the pooled trust exception to counting assets in the sub-accounts as resources, because it is not maintained by a non-profit association and because it does not properly provide for Medicaid reimbursement.

We understand that the Trust was previously reviewed and determined to meet all criteria of the pooled trust exception. As such, pursuant to POMS SI 01120.225(A)(2), the Trustee should be given 90 days to amend the Trust documents to conform to the statutory requirements of the pooled trust exception. Sub-accounts that are currently exempted from resource counting should not be counted during the 90-day amendment period, which begins on the day Trustee is informed of this issue. See id.

5) Sub-Accounts Are Not Countable under the Regular Resource Counting Rules.

Even where a trust meets the pooled trust exception, it must still be evaluated under the regular resource rules. See POMS SI 01120.200(D)(2)(step 7). Pursuant to these rules, trust property may be a resource for SSI purposes if the individual: (1) has the authority to revoke the trust and then use the funds to meet his basic needs for food or shelter; (2) can direct the use of the trust principal for his support and maintenance; or (3) can sell his beneficial interest in the trust. See POMS SI 01120.200(D)(1)(a)-(b). Here, we review these criteria in the event the Trust is amended to address the above issues.

Here, the Trust documents provide that the sub-accounts are irrevocable. See Third Restated Trust, §§ 1.5, 3.4. Nonetheless, South Dakota follows the general principle of trust law that if a grantor is also the sole beneficiary of a trust, the trust is revocable regardless of language in the trust document to the contrary. See Restatement (Second) of Trusts § 339 (1959); see also Farmers State Bank v. Janish, 410 N.W.2d 188, 190 (S. D. 1987) (“[w]here a person creates for his own benefit a trust with a provision restraining the voluntary or involuntary transfer of his interest, his transferee or creditors can reach his interest.”). Here, however, after Medicaid reimbursement, the Trust directs the Trustee to distribute the residue to beneficiaries identified by the Trust sub-account holder. See Joinder Agreement, p. 3. Therefore, the sub-accounts have an identifiable residual beneficiary and are irrevocable. See POMS SI 01120.200(D)(3) (providing that “residual beneficiaries are assumed to be created, absent evidence of a contrary intent, when a grantor names heirs, next of kin, or similar groups to receive the remaining assets in the trust upon the grantor’s death. In such case, the trust is considered to be irrevocable.”).

Further, a Beneficiary cannot compel the Trustee to make a distribution of trust sub-account assets to the Beneficiary. Third Restated Trust, §§ 2.1, 2.2. With respect to selling a Beneficiary’s interest in a sub-account, the Trust contains a spendthrift clause which precludes a Beneficiary from assigning his or her interest. Id. at § 2.2; see also POMS SI 1120.200(D)(1)(a). Therefore, this is not a revocable trust where a beneficiary could use the funds for his or her support or maintenance.

Conclusion

In sum, we conclude that the Trust documents do not satisfy the pooled trust exception to counting assets in the sub-account as resources. The Trust is not managed by a non-profit association, and places the burden on states to claim Medicaid reimbursement in the form of a lien enforceable under law.

If, however, the Trustee were to amend the Trust to satisfy the pooled trust exception, and assuming no other modifications are made, trust sub-accounts established under the amended Trust would not be countable as resources under the regular resource counting rules.

Finally, because the Trust was previously found to have met the pooled trust exception, the Trustee should be given 90 days to conform to the Trust to these requirements.

John J. Lee

Regional Chief Counsel

Region VIII, Denver

By: Kathryn C. Bostwick

Assistant Regional Counsel

D. PS 16-053 Is this Special Needs Trust (as modified) a resource for the purposes of determining eligibility for SSI

DATE: January 4, 2016

1. Syllabus

This opinion provides guidance that the adult recipient’s parents, acting as legal guardians, could establish the trust with the recipient’s own funds and meet the requirements of section 1917(d)(4)(A) of the Social Security Act. Legal guardians, as third parties, have independent legal authority to act with the assets of the incompetent person. They are not acting under a power of attorney as the incompetent person is unable to grant a power of attorney. Additionally, the opinion provides that requiring the trustee to verify the amount requested by the State(s) as reimbursement does not violate the State Medicaid reimbursement provision.

2. Opinion

Question Presented

You asked whether the K~ Special Needs Trust (as modified) is a resource for the purposes of determining eligibility for supplemental security income (SSI).

Short Answer

The trust should not be counted as a resource because it meets the requirements of the special needs trust exception. K~’s parents, as legal guardians for K~, were responsible for creating The K~ Special Needs Trust Dated September XX, 2010, as Restated March XX, 2013 (hereinafter “The K~ Trust”). Consequently, the trust was established through the actions of a legal guardian, consistent with POMS SI 01120.203.B.1.f. Likewise, the trust language, requiring the trustees verify any reimbursement obligation, is not problematic under the Agency’s rules regarding State Medicaid reimbursement provisions.

Background

In June 2008, a state circuit court in South Dakota found that K~, born October XX, 1985, (1) lacked the capacity to meet essential requirements for his health, care, safety, habitation, and therapeutic needs without the assistance of guardians, and (2) lacked the ability to manage property or financial affairs without the assistance and protection of conservators. Ord. Appointing Guardians and Conservators, File No. Gdn. (7th Jud. Cir. S.D. June 2008). The court appointed K~s parents, R~, and J~, as guardians and conservators. Id.

In September 2010, K~s parents, as guardians and conservators for K~, established the “K~ Special Needs Trust.” Ord. Aff. Modification of the K~ Special Needs Trust, Gdn. (7th Jud. Cir. S.D. Mar. 2013). This trust was later amended on March XX, 2013, and became the K~ Trust at issue here. The trust provided that it was established by “by and between R~ and J~, as Guardians and Conservators of K~ . . .” K~ Trust, Preamble (Mar. 4, 2013). K~’s parents, as legal guardians “assigned, transferred, conveyed and delivered to Trustees that property . . . [which] consists of K~’s own resources which were assets of the K~ Conservatorship . . .” Id., at Art. 2. The trust was irrevocable with a survivor benefit to K~’s parents and sister. Id., at Art. 10. Prior to any of them receiving a survivors’ benefit, the Trust provides for reimbursement of any government agency that provided public assistance to K~ during his lifetime. Id. Upon K~s death, the Trustee “shall notify” any such agency of the fact of death, and “shall verify any claim detail” of the total assistance paid prior to making such reimbursement. Id.

Discussion

SSI is based on need. Thus, in determining eligibility for SSI, the Agency considers whether a claimant has resources that obviate the need for SSI. Some resources, however, are “excluded” from the Agency’s consideration. See 42 U.S.C. § 1382(a)(1); see also Program Operations Manual System (POMS) SI 01110.001. A trust that meets certain requirements is one such “excluded” resource. See 42 U.S.C. § 1382b(e). The present matter concerns the question of whether the trust at issue meets these requirements, such that it is as an excluded resource.

In relevant part, a trust that meets the following requirements is an “excluded” resource, 42 U.S.C. § 1382b(e)(5):

1. Contains the assets of a disabled individual under age 65; and

2. Was “established for the benefit of such individual by a parent, grandparent, legal guardian of the individual, or a court . . .”; and

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

42 U.S.C. § 1396p(d)(4)(A); POMS SI 01120.203(B)(1)(a)-(h). Trusts that meet these requirements are called “special needs trusts.”

The question at issue is whether the K~ Trust is a special needs trust within the meaning of the statute. We limit our analysis to the specific issues you raised.

a. The K~ Trust was established by his parents (as legal guardians) within the meaning of the statute and, therefore, qualifies as a special needs trust.

To meet the statutory exception, a special needs trust must be established through the actions of a parent, grandparent, legal guardian or court—and not by the actions of the disabled individual himself or herself. 42 U.S.C. § 1396p(d)(4)(A)(2); POMS SI 01120.203(B)(1)(f). Here, you asked us to consider whether the fact that K~’s parents were also conservators and legal guardians affects the analysis under POMS SI 01120.203.B.1.f.

The ALJ concluded that K~ established the trust himself—because his parents were acting as his agent when establishing the trust. The ALJ reasoned that parents acting as conservators or legal guardians were no different than parents acting through a power of attorney; and SSA’s policy is that a trust established pursuant to a power of attorney is considered to be established through the actions of the disabled individual himself. See POMS SI 01120.203(B)(1)(g).

The Appeals Council disagreed with the ALJ, concluding the trust was established through the actions of K~’s parents, who had legal authority to act on his behalf given their appointment as his guardians and conservators.

We agree with the Appeals Council’s conclusion. An important distinction in considering this issue is the competency of the disabled person to act on his or her own behalf, because a special needs trust cannot be established through the actions of the disabled individual himself. In the circumstance of a legally competent adult, parents or grandparents might attempt to circumvent this requirement by acting through a power of attorney. In such a case, the agent establishing a trust under the power of attorney does so on the disabled adult’s behalf and the Agency considers the trust to be established through the actions of disabled adult. Id. SI 01120.203.B.1.g; see also id. GN 02410.010.A. In effect, the agent (i.e., person acting under the power of attorney) stands in the shoes of the legally competent, disabled adult.

But, disabled children and legally incompetent, disabled adults cannot establish trusts and cannot enlist agents to act on their behalf. Compare id. GN 00502.139.A.1 (defining “legal guardian” as “a third party appointed by a State court to manage the affairs of an individual who is not able to do so.”) with id. GN 00502.139.A.6 (defining “power of attorney” as “a legal process where one individual grants a third party the authority to transact certain business for that individual”). Thus, the special needs trust provisions anticipate a parent (for a child) or legal guardian (for a legally incompetent, disabled adult) would act on the disabled person’s behalf. For the purposes of POMS SI 01120.203.B.1.f, acting on behalf of disabled children and legally incompetent, disabled adults is not the same as standing in a disabled person’s shoes as an agent.

K~ was found to be legally incompetent by a South Dakota Circuit Court and his parents were appointed legal guardians and conservators. Ord. Appointing Guardians and Conservators, File No. Gdn. (7th Jud. Cir. S.D. June 2008). Because K~’s parents established the trust as legal guardians and conservators (i.e., within their legal power to act on behalf of K~ because he could not do so himself), they were not acting as his agents for the purposes of POMS SI 01120.203.B.1.f. Indeed, the statute and POMS expressly allow a trust to be established through the actions of a legal guardian, as was done here. Consequently, under the Agency’s interpretation of 42 U.S.C. § 1396p(d)(4)(A), the K~ Trust was established by his legal guardians and satisfies the requirements of a special needs trust.

The K~ Trust provides for State Medicaid reimbursement.

To qualify as a special needs trust, the trust must contain specific language providing as follows:

(1) “upon the death of the individual, the State(s) will receive all amounts remaining in the trust, up to an amount equal to the total amount of medical assistance paid on behalf of the individual under the State Medicaid plan(s)”; and

(2) “The State(s) must be listed as the first payee and have priority over payment of other debts and administrative expenses . . .”

POMS SI 01120.203.B.1.h. The trust must provide for payback to any State(s) that provided assistance and may not be limited to any particular period of time. Id.

The trust in the present case meets these requirements. The Trust specifically provides that if K~ has received assistance funded either directly or indirectly from Medicaid, “then prior to the distribution to any other beneficiary of the Trust, . . the governmental agency providing such assistance shall receive all amounts remaining in the Trust up to an amount equal to the total assistance paid to or on behalf of K~.” K~ Trust, Art. 10.

The K~ Trust further provides that the “Trustees shall notify any . . . agency which provided K~ with . . . assistance . . . of the fact of K~’s death, and Trustees shall verify any claim detail . . . prior to any reimbursement . . .” Id. You expressed concern that this provision required the state(s) to affirmatively submit a claim for reimbursement, which we have previously indicated is problematic. Unlike the language we have found to be problematic, the trust here does not place the burden on state agencies to request reimbursement. Rather, the trust here places the burden on the Trustee to notify state agencies of the fact of death. That the Trustee must also “verify” the amount due to the state prior to reimbursement is not problematic. See K~ Trust, Art. 10.

Conclusion

As set forth above, the K~ Trust was established by K~’s parents acting as legal guardians within the meaning of the statute, 42 U.S.C. § 1396p(d)(4)(A). Furthermore, requiring verification of the amount due to a state(s) prior to reimbursement is not problematic under the State Medicaid reimbursement provision. Accordingly, K~ Trust constitutes a special needs trust and is not a resource for the purposes of SSI.

John J. Lee

Regional Chief Counsel, Region VIII, Denver

By: Lars Nelson

Assistant Regional Counsel

E. PS 15-041 Treatment of Trust for SSI Purposes (J~) – REPLY

DATE: December 5, 2014

1. Syllabus

This opinion discusses whether the trust complies with Social Security Act (Act) § 1917(d)(4)(A) such that the trust assets are excepted from resource counting for Supplemental Security Income (SSI) eligibility purposes. The trust was established by the beneficiary’s parents and states that it is irrevocable. The trust does not meet the provision of being for the sole benefit of the beneficiary because it (a) provides benefits to other individuals or entities during the disabled individual’s lifetime; or (b) allows for early termination without meeting SSA’s early termination requirements. The Trust does not contain medical assistance payback provisions. In fact, it contains a provision that could be read to prohibit any such pay back. Since the trust does not meet the sole beneficiary and State Medicaid reimbursement requirements of the special needs trust exception, the trust is a countable resource.

2. Opinion

QUESTION PRESENTED

You asked us to review the ALJQ Special Needs Trust (the “Trust”) to determine whether the Trust is a resource for purposes of determining eligibility for SSI, i.e., whether the Trust meets the special needs trust exception.

SHORT ANSWER

The Trust does not meet the requirements of Section 1917(d)(4)(A) of the Social Security Act (the “special needs trust exception”). Although labeled as a “Special Needs Trust,” the Trust does not contain the required provision for reimbursement to Medicaid and, therefore, the Trust is considered a resource for determining SSI eligibility. In addition, because the Trust has been defunded, amendment would appear to be moot.

BACKGROUND

The ALJQ Special Needs Trust was created in September 2002. According to the trust document, A~ and L~ are the “Trustmakers” and J~ is the beneficiary. At the time of the creation of the trust, J~ was a minor and was purported to have a number of conditions that might qualify him as disabled. The trust was funded, according to Schedule A of the trust, with “Ten Dollars Cash” (presumably from his parents) and $10,582.62 in assets bequeathed to J~ by his uncle. ⁴ The trust contains a provision stating that the trust is irrevocable (Section 1.05).

The stated purpose of the trust is to provide for the “supplemental special needs” of J~ (Article 2 – Trust Purpose). The trustee has, under the terms of the trust, complete discretion to distribute the income and principle of the trust to meet the stated purpose of the trust, including the power to terminate the trust (Article 3-6). The trustee has the power to terminate the trust and distribute the trust property if the trust has become uneconomical to administer (Section 6.02). Upon J~’s death, the trustee is authorized to pay various expenses and taxes, and must distribute the balance of trust assets to the descendants and charities designated by J~ pursuant to his will (Article 7). The trust contains a provision that prohibits reimbursement for expenses incurred prior to J~’s death if the trustee decides that such expenses were the obligation of governmental entities responsible to serve person with disabilities (Section 7.02).

A court order dated January 2, 2003, instructs the trustee that withdrawals from the trust are permitted only pursuant to court order.

DISCUSSION

Whether the Trust Is a Resource for Purposes of SSI Eligibility

1. Special Needs Trust Exception

For the special needs trust exception to apply, a trust (established on or after 1/1/00 with assets of the disabled individual) must meet the following three requirements:

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

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

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

POMS SI 01120.203(B)(1)(a)-(h).

In this case, the Trust (established in 2002) does not meet the Special Needs Trust exception requirements because it does not contain a provision allowing for repayment to the applicable state Medicaid plan(s), and it allows for early termination without meeting SSA’s early termination requirements.

Contains the Assets of an Individual Under Age 65 and Disabled

First, in order for a trust to meet the special needs trust exception, it must contain the assets of an individual under age 65 who is disabled. See POMS SI 01120.203(B)(1)(a). Here, J~ is under age 65 and disabled. The Trust contains his assets. As such, the first requirement of the special needs trust exception has been met.

Established for the Sole Benefit of the Disabled Individual

Second, the Trust must be established for the “sole benefit” of an individual through the actions of a parent, grandparent, legal guardian or court. See POMS SI 01120.203(B)(1)(e)-(f). In this case, the Trust was established for J~’s benefit by A~ and L~, his parents, while he was a minor.

However, a trust is not considered to be for the “sole benefit” of the disabled individual if it (a) provides benefits to other individuals or entities during the disabled individual’s lifetime; or (b) allows for early termination without meeting SSA’s early termination requirements. See POMS SI 01120.199; SI 01120.203(B)(1)(e).

Here, the Trust contemplates the possibility of termination prior to J~’s death (Section 6.02). Where a trust can be terminated during a beneficiary’s lifetime, the trust must provide that:

Upon early termination, the trust must reimburse the state(s) in an amount equal to the total amount of medical assistance paid under the state Medicaid plan(s);

After reimbursement to the state(s) and payment of allowed expenses, all remaining funds must be disbursed to the trust beneficiary; and

The early termination power is given to someone other than the trust beneficiary.

POMS SI 01120.199(F). Here, although the power of early termination has been given to someone other than the trust beneficiary, the Trust has no provision for payback to the applicable state Medicaid plan. For this reason, the Trust does not meet the second requirement of the special needs trust exception. See POMS SI 01120.203(B)(1)(e).

Medicaid Payback

Third, to qualify for the special needs trust exception; a trust must contain specific language providing that, upon the death of the individual, the state(s) will receive all amounts remaining in the trust, up to the amount equal to the total amount of medical assistance paid on behalf of the individual under the state Medicaid plan(s). The trust must provide for payback to any state(s) that may have provided medical assistance under the state Medicaid plan(s) and not be limited to any particular state(s). See POMS SI 01120.203(B)(1)(h). Additionally, the states must be listed as first payee(s) and have priority over payment of other debts and administrative expenses, with limited exceptions. Id.

Here, the Trust contains no such payback provision. In fact, it contains a provision that could be read to prohibit any such pay back. Specifically, section 7.02 prohibits reimbursement for expenses incurred prior to J~’s death, if the Trustee determines the payment is the obligation of a government entity, which has a legal responsibility to serve persons with disabilities.

Because the Trust contains no payback provision, the Trust fails to meet the third requirement for the special needs trust exception to apply. See POMS SI 01120.203(B)(1)(h).

2. Court Order Requiring Approval of Withdrawals

The court order requiring approval of withdrawals from the Trust does not change our analysis. Under the applicable provisions of the Social Security Act, if there are any circumstances under which payment from the trust could be made to or for the benefit of J~, the Trust must be counted as a resource—unless an exception applies. See 42 U.S.C. § 1382b(e)(3)(A), (e)(5). As we have explained, the Special Needs Trust exception does not apply. Even if the court order limits the trustee’s discretion, the Act makes clear that such trusts are countable regardless of any restrictions on the trustee’s discretion regarding distributions. See 42 U.S.C. § 1382b(e)(2)(C). ⁵

3. Effect of Defunding

According to the information received from the field office, proof was provided on June 30, 2014 that all the trust funds were withdrawn on May 7, 2014. Had this event not occurred, it might have been possible to amend the trust so that it would not be considered a countable resource. However, since the trust has been defunded, suggestions as to how the trust might be amended would be moot.

Most importantly, the defunding of the Trust, under its own terms, appears to have effectively terminated the Trust (Section 6.01-6.02). Since the Trust no longer exists, as of 5/7/14, it should not be considered a countable resource for future eligibility. However, from the time it was created, through 5/7/14, it should have been considered as a countable resource for SSI eligibility purposes, since it did not qualify, as a special needs trust. In addition, we recommend that the field office inquire about what was done with the trust proceeds, once the trust was defunded, to determine whether the trust was converted to another countable resource or transferred for less than fair market value. See generally POMS SI 01150.001.

CONCLUSION

The trust, although it appears to be the intent, does not meet the criteria of the special needs trust exception, and therefore must be counted as a resource.

John J. Lee
Regional Chief Counsel, Region VIII

By: Paul R. Ritzma

Assistant Regional Counsel

F. PS 15-024 Treatment of the Life Enrichment Pooled Trust

DATE: November 4, 2014

1. SYLLABUS

This RCC opinion discusses whether the Life Enrichment Master Trust Agreements (MTAs or “the Trusts”) and blank Joinder Agreements (JAs) for Montana, North Dakota, South Dakota, Utah, and Wyoming meet the requirements of section 1917(d)(4)(C) of the Social Security Act. The trust's early termination provision states that the trustee “will first try to transfer the sub account assets only to another trust that meets the requirements of 42 USC 1396p(d)(4)(C).” However, it does not address what will happen to the assets if it is not possible to transfer the assets into another pooled trust. This faulty early termination language leaves room for the Trustee to terminate the Trust and transfer trust sub-accounts to someone other than the State(s) or the trust beneficiary; or to refund the assets to the beneficiary without first reimbursing the state(s) for medical assistance.

This opinion also points that in South Dakota, Utah, and Wyoming if a grantor is also the sole beneficiary of a trust, the trust is revocable regardless of language in the trust document. In addition, the RCC believes that the courts in Montana and North Dakota would take the same position. However, we consider the sub accounts as irrevocable because the Master Trust is a residual beneficiary per SI 01120.200D.3.

2. OPINION

Questions Presented

You asked us to review the Life Enrichment Master Trust Agreements (MTAs or “the Trusts”) and blank Joinder Agreements (JAs) for Montana, North Dakota, South Dakota, Utah, and Wyoming to determine whether they conform to section 1917(d)(4)(C) of the Social Security Act (the “pooled trust exception”).

Short Answer

The Trust documents do not meet the pooled trust exception to counting assets in the Trust sub-accounts as resources. The MTAs allow for the possibility that a sub-account could be terminated prior to the death of the beneficiary and the assets could be given to someone other than the beneficiary. If, however, the Trustee were to amend the Trust to satisfy the pooled trust exception (as recommended below), and assuming no other modifications to the MTAs or JAs are made, trust sub-accounts established under the amended trust documents would not be countable as resources under the regular resource counting rules.

Background

Life Enrichment Pooled Trusts and the Joinder Agreement

Life Enrichment offers trusts for Montana, North Dakota, South Dakota, Utah, and Wyoming. ⁶ Except for references to different state statutes in the “Pooled Trust” introductory section of the MTAs, the trust documents are identical. Relevant provisions of the MTAs are discussed below.

Definitions, Establishment, and Purpose

Life Enrichment Trust, a non-profit corporation, established and manages the MTAs and serves as Trustee. MTAs, pp. 4, 5. The purpose of the MTA is to provide for the supplemental needs of the Beneficiary of each Trust sub-account. Id. The Trusts define “Beneficiary” as an individual who is disabled pursuant to the Social Security Act, 42 U.S.C. § 1382c(a)(3). Id. at 5. The Trustee maintains a separate sub-account for each Beneficiary and pools the sub-accounts for the purpose of investing and managing the funds. Id. at 4. Only a disabled individual or his or her parent, grandparent, legal guardian, or the court may establish a trust sub-account. Id. Third parties may contribute funds to an established trust sub-account. Id.

Distribution of Assets and Spendthrift Provisions

The MTA and JA documents provide that each trust sub-account is for the Beneficiary’s sole benefit. Id. at 5; JAs, p. 2. The court or individual who establishes the trust sub-account may designate persons permitted to request distributions for the Beneficiary. Id. The Trustee decides whether to honor distribution requests and is prohibited from making any distributions that will reduce any benefits to the Beneficiary or result in his or her ineligibility for benefits. Id.

Except as permitted by law, a Beneficiary may not pledge, assign, transfer, anticipate, charge, or encumber any trust sub-account property or money for any purpose while in the Trustee’s possession. MTAs, p. 5. The Trustee is not liable for unapproved debts but may, in its sole discretion, choose to pay them. Id. The Trustee is permitted to pay administrative fees to administer the trusts and taxes due on funds deposited in a trust sub-account. Id. at 6.

Irrevocability and Termination

The MTAs and JAs provide that trust sub-accounts are irrevocable. MTAs, p. 4; JAs, p. 3. During a Beneficiary’s lifetime, the Trustee may terminate a trust sub-account by spending down all of the assets. MTAs, p. 4. Further, if it becomes impossible or impractical to carry out the Trust’s purpose, the Board, in its sole and absolute discretion, may choose to terminate the Trust or resign as Trustee. Id. at 6. In either event, the Trustee “will first try to transfer the sub account assets only to another trust that meets the requirements of 42 USC 1396p(d)(4)(C).” Id.

Upon the death of a Beneficiary, the Trust is authorized to retain all residual funds. Id. at 7. All of the funds retained by the Trust are to be used for the benefit of “individuals with disabilities.” Id. To the extent the Trust does not retain funds remaining in a sub-account, the Trust is directed to pay the “state(s) from such remaining amounts in the account an amount equal to the total amount of medical assistance paid on behalf of the individual under the state Medicaid plan.” Id.

Discussion

(A) The Master Trust Does Not Meet the Pooled Trust Exception Under 42 U.S.C.

§ 1396p(d)(4)(C).

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

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

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

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

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

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

See id.; POMS SI 01120.203(B)(2). In this case, as discussed below, the MTAs fail to meet the third pooled trust exception requirement.

(1) The Trust is Established and Maintained by a Non-Profit Association and Separate Sub-Accounts are Maintained.

The Trust documents meet the first requirement, because Life Enrichment is a nonprofit corporation that established and manages the Trust. MTAs, p. 4. Consistent with the second requirement, each beneficiary has a separate sub-account and Life Enrichment pools these accounts for purposes of investing and managing the funds. Id.

(2) The Trust Allows for Possible Early Termination and Transfer of Assets to Someone Other than the Beneficiary; Thus, the Trust Accounts are not Established Solely for the Benefit of the Disabled Individual.

To meet the third requirement, the trust must be established for the sole benefit of the disabled individual, which means that the trust must not benefit anyone but that individual during his or her lifetime (other than reasonable compensation for a trustee and reasonable costs associated with managing the trust). See 42 U.S.C. § 1396p(d)(4)(C)(iii); POMS SI 01120.203(B)(2)(a), (e); POMS SI 01120.201(F)(2).

In the event that a trust can be terminated during a beneficiary’s lifetime, the trust must provide that:

(1) Upon early termination, the trust must reimburse the state(s) in an amount equal to the total amount of medical assistance paid under state Medicaid plan(s);

(2) After reimbursement to the state(s) and payment of allowed expenses, all remaining funds must be given to the trust beneficiary; and

(3) The early termination power is provided to someone other than the trust beneficiary.

See POMS SI 01120.199(F). An exception to this policy is if the early termination provision provides, solely, that a beneficiary’s assets will be transferred to another pooled trust meeting the requirements of 42 U.S.C. § 1396p(d)(4)(C). POMS SI 01120.199(F)(2). This is sometimes referred to as a “trustee-to-trustee” transfer.

Here, the Trust allows for early termination, and the early termination provision does not limit the distribution of Trust property to the State(s) and the Beneficiary. Specifically, the Trust permits the Trustee to terminate a trust sub-account before a beneficiary’s death if it becomes “impossible or impractical” to carry out the purpose of the Trust. MTAs, p. 6. The Trustee must “first try to transfer the sub account assets only to another trust that meets the requirements of 42 USC 1396p(d)(4)(C).” Id. However, the Trust does not specify what will happen to the assets if it is not possible to transfer the funds into another pooled trust. This language is not sufficient to meet the “trustee-to-trustee” transfer exception. Given the vagueness of the early termination language, it is possible the Trustee could terminate the Trust and transfer trust sub-accounts to someone other than the State(s) or the trust beneficiary; or that assets could be refunded to the beneficiary without first reimbursing the state(s) for medical assistance. See POMS SI 01120.199(F)(1). Thus, this section does not comply with the early termination requirements. See id.

(3) The Trust Limits Establishment of an Account to Those Individuals Permitted by Statute.

To meet the fourth requirement, the accounts in the Trust must be established by the parent, grandparent, or a legal guardian of such individual, by such individual, or by a court. See 42 U.S.C. § 1396p(d)(4)(C); see also POMS SI 01120.203(B)(2)(f). The Trust documents comply with this requirement. MTAs, p. 4.

(4) The Trust Properly Provides for Medicaid Reimbursement.

Except for the early termination problem identified above, the Trust documents otherwise satisfy the fifth requirement because the Trust contains specific language providing that, to the extent that amounts remaining in an beneficiary’s account after their death are not retained by the Trust, the Trust pays to the State(s) an amount equal to the total amount of medical assistance paid on behalf of the individual under the State Medicaid plan(s). See MTAs, p. 7. The Trust does not limit payment to any particular State(s) or any particular period of time. See id.; see also POMS SI 01120.203(B)(2)(g).

(B) Assuming the Trust Documents Met the Criteria for an Exception under 42 U.S.C.

§ 1396p(d)(4)(C), Which They Currently Do Not, the Sub-Accounts Would Not Be a Resource under the Regular Resource Counting Rules. The Agency applies the regular resource rules to determine whether a trust that is established with a beneficiary’s own assets is a resource. See POMS SI 01120.200(D). Pursuant to these rules, trust property may be a resource for SSI purposes if the individual: (1) has the authority to revoke the trust and then use the funds to meet his basic needs for food or shelter; (2) can direct the use of the trust principal for his support and maintenance; or (3) can sell his beneficial interest in the trust. See POMS SI 01120.200(D)(1)(a)-(b).Here, the Trust documents provide that the sub-accounts are irrevocable. See MTAs, p. 4; JAs, p. 2. Nonetheless, South Dakota, Wyoming, and Utah follow the general principle of trust law that if a grantor is also the sole beneficiary of a trust, the trust is revocable regardless of language in the trust document to the contrary. See Restatement (Second) of Trusts § 339 (1959); see also Farmers State Bank v. Janish, 410 N.W.2d 188, 190 (S. D. 1987) (“[w]here a person creates for his own benefit a trust with a provision restraining the voluntary or involuntary transfer of his interest, his transferee or creditors can reach his interest.”); Spratt v. Security Bank of Buffalo, Wyo., 654 P.2d 130, 136 (Wyo. 1982) (same); Clayton v. Behle, 565 P.2d 1132, 1133 (Utah 1977) (recognizing that “where the settlor is the sole beneficiary . . . he can terminate the trust at any time and compel the trustee to reconvey the property to him.”). We have found no Montana or North Dakota cases or statutes that specifically address the question of the revocability of settlor trusts. We believe that the courts in these States would take the position taken by the majority of the States that “where the settlor of the trust is also the sole beneficiary and is not incapacitated, the trust is revocable.” Memorandum from OGC Region VIII to ARC, SSA VIII, Validity and Accessibility of Three Trusts in Colorado; State Law in Region VIII, Regarding the Revocability of Grantor or Settlor Trusts (Nov. 30, 1994). Here, however, the Trust is a contingent residual beneficiary because the Master Trust generally retains any funds left over after the beneficiary’s death. MTAs, p. 7. Therefore, the sub-accounts have an identifiable residual beneficiary and are irrevocable. See POMS SI 01120.200(D)(3) (providing that “residual beneficiaries are assumed to be created, absent evidence of a contrary intent, when a grantor names heirs, next of kin, or similar groups to receive the remaining assets in the trust upon the grantor’s death. In such case, the trust is considered to be irrevocable.”).

Further, while a Beneficiary or individual previously designated by the Beneficiary may appeal the Trustee’s refusal to make a distribution, a Beneficiary cannot compel the Trustee to make a distribution of trust sub-account assets to the Beneficiary. MTAs, p. 5. With respect to selling a Beneficiary’s interest in a sub-account, the MTAs contain a spendthrift clause which precludes a Beneficiary from assigning his or her interest. Id.; see also POMS SI 1120.200(D)(1)(a). Where the settlor is also the beneficiary, such spendthrift provisions are generally invalid. See Restatement (Third) of Trusts § 58, cmt. e (2003); see also POMS SI 01120.200(B)(16). However, a Beneficiary’s interest in the Trust has no significant market value because disbursements are within the sole discretion of the Trustee. Thus, a Beneficiary’s interest in the Trust should be considered a resource with zero market value. See Memorandum from Reg. Chief Counsel, Chicago, to Ass’t Reg. Comm-MOS, Chicago, SSI-WI-Review of the WisPACT Pooled Trust I for K~ (Jan. 10, 2011); 20 C.F.R. § 416.1201(a)(1) (“[i]f a property right cannot be liquidated, the property will not be considered a resource of the individual (or spouse).”).⁷

Conclusion

In sum, we conclude that the Trust documents do not satisfy the pooled trust exception to counting assets in the sub-account as resources. If, however, the Trustee were to amend the MTAs to satisfy the pooled trust exception, and assuming no other modifications are made, trust sub-accounts established under the amended MTAs and JAs would not be countable as resources under the regular resource counting rules.

John Jay Lee,
Regional Chief Counsel, Region VIII
By: Kati Bostwick
Assistant Regional Counsel

G. PS 12-045 Treatment of Trust for SSI Purposes (S~ ) – REPLY

DATE: January 23, 2012

1. SYLLABUS

This decision exemplifies an often overlooked element in establishing a special needs trust. This decision shows that a trust must be established by the actions of a parent, grandparent, legal guardian, or a court. The Regional Chief Counsel (RCC)’s office determined that the parents used a power of attorney to establish this trust. Using a power of attorney meant the parents established the trust as the beneficiary’s representative, and evidence showed they used only the beneficiary’s funds to establish this trust. Therefore, the RCC determined the beneficiary was the creator of the trust. The RCC pointed out that the State court approved the trust but did not establish it. We include this decision because it is a straight forward example of the requirements, whether met or not met, for excepting a special needs trust from resource counting.

2. OPINION

Question Presented

You asked us to review the “S~ Special Needs Trust” (hereinafter referred to as the “Trust”) to determine whether the Trust is a resource for purposes of determining S~’s eligibility for Supplemental Security Income (SSI). You also asked whether the agency is bound by a court order amending and approving the Trust nunc pro tunc.

Short Answer

We conclude that the Trust is a resource for SSI purposes because it does not meet the statutory criteria to be excepted as a resource. Specifically, the Trust was not established through the actions of a parent, grandparent, legal guardian, or court. S~’s parents never contributed any money to establish a “seed” trust, and we conclude that South Dakota does not allow the establishment of a “dry” or “empty” trust. Additionally, the South Dakota Third Judicial Circuit Court did not establish the Trust; mere modification and approval of the existing Trust and stating that the amended trust is effective nunc pro tunc does not suffice. S~’s parents had power of attorney at the time they took action to create the Trust, so the agency considers the Trust to have been created by S~ herself. In order to rectify the situation, S~ must revoke the Trust and her parents must create a new seed trust by contributing a nominal amount of their own money prior to the addition of S~’s money. In that event, the Trust would be a valid special needs trust and excluded as a resource.

BACKGROUND

According to the information you provided, S~ is a disabled adult SSI recipient born in 1987. In November 2006, S~ transferred power of attorney to her parents, J~ and K~. The Durable Power of Attorney form, which addressed treatment of S~’s real, personal, and other property, gives J~ and K~ the power to “fund, transfer assets to, and to instruct and advise the trustee of any trust wherein [S~ is] or may be the trustor, or beneficiary.” See Durable Power of Attorney ¶¶ 3, 7. J~ and K~ also have the power to “transact business of any kind or class and as [S~’s] act and deed, to sign, execute, acknowledge and deliver any deed, lease, . . . and such other instruments in writing of any kind or class as may be necessary or proper in the premises.” Id. ¶ 8.

On February 12, 2008, J~ and K~ signed documents setting up the Trust. The Trust refers to J~ and K~ as “settlors” as well as co-trustees. See Trust ¶ ⁸ . The Trust states it is “for the benefit of” S~, “the ‘beneficiary.’” Id. The Trust states that it is “funded with the proceeds of the settlement of a liability claim.” Art. I(B). The Trust further states that it “shall be initially funded with the amounts described on Schedule A.” Id. Art. II(A). Schedule A states that the Trust shall be funded with $429,259.41.1 That amount matches S~’s net proceeds from a personal injury settlement after deduction of attorney fees and costs. See Settlement Statement.

The Trust states that it is irrevocable (see Trust Art. VI(Q)) and provides for reimbursement to medical assistance programs at the time of the beneficiary’s death. See Trust Art. IV(A).

Article VI of the Trust states that the “trustee shall have the power to alter or amend this trust in order to maintain compliance with any law, ruling or decree, or to otherwise assure continuation of the purpose of this trust.” Trust Art. VI(R).

On May 27, 2010, an ALJ issued a decision finding that the Trust was not a valid special needs trust (and therefore constituted a resource for SSI purposes) because, when J~ and K~ created the trust, they were doing so under the legal authority created by the power of attorney, in effect acting as S~’s agent. The ALJ concluded that S~ was overpaid SSI from February 2008 through September 2008; that she was “without fault” in causing the overpayment; and that recovery of the overpayment was waived because recovery would be against equity and good conscience. See Partially Favorable Decision at 3-4.

Attorney E~ , Esq., stated in a July XX, 2010 letter to the Appeals Council that J~ and K~ “created the trust as a ‘seed trust’ with their own assets and that the attorney for S~, on her authority, transferred funds into the trust.” See Letter to Appeals Council at 2. However, there is no evidence that J~ or K~ ever contributed any money to the Trust, nor does the Trust state that they would do so.

On October XX, 2010, J~ and K~ filed a petition for modification of the Trust in the South Dakota Third Judicial Circuit Court. They stated in the petition that the Trust “was funded with the proceeds of the settlement of a liability claim.” See Trustees’ Petition for Modification of the S~ Special Needs Trust (hereinafter “Petition”) ¶ 5. In the Petition, Mr. and Mrs. stated that they “request that the Court establish the S~ Special Needs Trust . . . so that S~ may reapply for SSI benefits.” Id. ¶ 11. Later in the petition, J~ and K~ requested that the Court “enter an Order modifying and amending the terms of the initial paragraph of the Trust and the signature line for the settlers of the Trust making the Court the settlor of the Trust. . .” Id. ¶ 14.

On November 8, 2010, the court entered an “Order Nunc Pro Tunc Approving Modification of the S~ Special Needs Trust” (hereinafter “Order”). The Court stated that it was “authorized to establish” a special needs trust for S~’s benefit, and that the Trust would “be modified and restated,” effective nunc pro tunc February XX, 2008, with the Court as settlor of the Trust. Order ¶ 4(1). The Court stated that the Trust would be “modified and restated as attached hereto and is approved and executed by” the Court. Id. ¶ 5.

Discussion

The Trust was funded with S~’s own assets, the proceeds of a litigation settlement. Thus, the Trust is subject to the statutory provisions of Section 1613(e) of the Social Security Act for trusts established on or after January 1, 2000. See 42 U.S.C. § 1382b(e); POMS SI 01120.201. Generally, under these provisions, trusts established with the assets of the individual or the individual’s spouse are considered resources for SSI purposes even if they are irrevocable. However, there is an exception for certain trusts established under 42 U.S.C. § 1396p(d)(4)(A), commonly known as the special needs trust exception. See POMS SI 01120.203. For this exception to apply, the trust must:

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

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

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

POMS SI 01120.203(B)(1)(a)-(h). Here, the Trust does not meet these requirements because it was not established through the actions of a parent, grandparent, legal guardian, or a court.

A. The Trust Contains the Assets of An Individual Under Age 65 Who is Disabled.

In order for a trust to meet the special needs trust exception, it must contain the assets of an individual under age 65 who is disabled. See POMS SI 01120.203(B)(1)(a). According to the information provided S~ was born in 1987, and began receiving SSI in 2007. S~ funded the Trust with her own money from a personal injury settlement, thus the Trust contains her assets.

B. The Trust Is for S~’s Sole Benefit.

In order for a trust to meet the special needs exception, it must also be established for the “sole benefit” of an individual. See id. However, if a trust contains provisions that provide benefits to other individuals or entities during the disabled individual’s lifetime, or allow for termination of the trust prior to the individual’s death and payment of the trust corpus to another individual or entity (other than to the state(s) or another creditor for payment for goods and services provided to the individual), it will not be considered to be for the “sole benefit” of the disabled individual. See POMS SI 01120.203(B)(1)(e). Here, the trust provides only for distributions “for the benefit” of S~ during her lifetime; there are no provisions that would allow trust property to be distributed to other individuals or entities. Trust Art. III(A). In addition, the Trust allows for termination only “by exhaustion of the trust estate” or the death of the beneficiary. Trust Art. IV(A). The former clause indicates that the Trust may terminate during S~’s lifetime only if the trust estate is exhausted, but in that event, there would be no benefit to other individuals or entities. Thus, the Trust is for S~’s sole benefit.

C. The Trust Was Not Established Through the Actions of a Parent, Grandparent, Legal Guardian, or a Court.

The Trust does not meet the special needs exception because it was not established by the actions of a parent, grandparent, legal guardian, or court. POMS SI 01120.203(B)(1)(f); 42 U.S.C. § 1396p(d)(4)(A). We assume S~ is a competent adult since she had the capacity to sign a power of attorney, and we have no evidence of guardianship proceedings. In the case of a legally competent disabled adult, a parent or grandparent may establish a seed trust using a nominal amount of his or her own money, or if the state law allows, an “empty” or “dry” trust. After the seed trust is established, the legally competent disabled adult may transfer his or her own assets to the trust or another individual with legal authority (e.g., power of attorney) may transfer the individual’s assets into the trust. See POMS SI 01120.203(B)(1)(f). Although Eric contends that J~ and K~ created a seed trust prior to funding the trust with S~’s assets, we do not agree. The Trust plainly states that it is funded with the proceeds of a litigation settlement. Trust Art. I(B). It further identifies the trust as being “initially funded” by the sources listed on Schedule A. Trust Art. II(A). We have several copies of Schedule A, some of which are completely blank, and others listing $429.259.41 – an amount that corresponds exactly with the proceeds of S~’s personal injury settlement. Thus, it is evident that the Trust was funded solely with S~’s assets, and that J~ and K~ did not create a seed trust.

Because J~ and K~ did not create a seed trust, the Trust can be considered “established” by the parents only if South Dakota recognizes the existence of “empty” trusts – i.e., trusts with no assets.

We conclude that South Dakota does not recognize an “empty” trust. We did not find any statute or case law expressly addressing the establishment of an “empty” or “dry” trust. Nonetheless, a basic trust principle is that a trust governs property. The Restatement (Third) of Trusts provides that a trust cannot be created unless there is trust property in existence and ascertainable at the time of the creation of the trust. See Restatement (Third) of Trusts (2003) § 2, cmt. i. A leading authority on trusts agrees, stating a trust is, among other things, a relationship with respect to property. Mark, William, Scott, on Trusts (4th Ed. 2001) § 2.3. South Dakota statutes and caselaw are consistent with this authority. South Dakota statutes recognize that property is an essential element of a trust. For example, in order to create a trust, the trust must indicate with reasonable certainty the “subject . . . of the trust,” among other requirements. S.D. Codified Laws § 55-1-4. The “subject” of the trust means the trust property. In addition, South Dakota courts have implicitly recognized property as an essential element of a trust. See, e.g., Higgins v. Higgins, 71 S.D. 17, 20 N.W. 2d 523, 525 (1945) (to be a valid trust, the provisions “must be reasonably certain as to the property, the beneficiaries and the objects”) (emphasis added).

Because South Dakota does not recognize an empty trust, and J~ and K~ did not create a seed trust prior to S~’s transfer of assets to the trust, the trust was not “established” through the actions of a parent. Moreover, because J~ and K~ had power of attorney prior to the creation of the trust—which means they were appointed to act as S~’s agents in such matters—the facts here represent a situation where a claimant establishes a trust through her own actions. See POMS SI 01120.203(B)(1)(g) (“a trust established under a POA [power of attorney] will result in a trust we consider to be established through the actions of the disabled individual himself/herself because the POA merely establishes an agency relationship”). However, “[t]he special needs trust exception does not apply to a trust established through the actions of the disabled individual himself.” Id. SI 01120.203(B)(1)(f).

Nor was the trust established through the actions of the South Dakota Third Judicial Circuit Court. J~ and K~, as trustees, petitioned to modify the original Trust in 2010 to reflect, among other (minor) changes, that the South Dakota Third Judicial Circuit Court was the “settlor” of the Trust. See Petition ¶ 14. In its November 8, 2010 Order, the court approved modification of the Trust, listed itself as settlor, stated that the Trust was “made and entered into by the Court effective nunc pro tunc February 12, 2008,” and concluded that the Trust would be “modified and restated as attached hereto and is approved an executed by this Court.” See Order ¶¶ 4-5. We conclude, however, that the court did not establish the Trust through these actions. To be established through the actions of a court, “the creation of the trust must be required by court order.” POMS SI 01120.203(B)(1)(f). “Approval of a trust by a court is not sufficient.” Id. Thus, if the court had ordered at the time of S~’s personal injury settlement that the Trust be created with the proceeds, the Trust would meet this requirement. That, however, did not occur here. Rather, the Court merely approved an amendment to an already-existing trust. ⁹ And despite the court calling itself the “settlor,” S~ herself was the true settlor of this Trust, both before and after the amendment. “A grantor (also called a settler or trustor) is the individual who provides the trust principal (or corpus).” POMS SI 01120.200(B)(2). As such, the Trust was not “established” by the Court within the meaning of the Act and POMS. Cf. In re G~, 756 N.Y.S.2d 835 (N.Y. Surr. Ct. 2003) (where trust was really created by individual acting through agent, court could not later “establish” trust by entering an order nunc pro tunc).

D. The Trust Provides for Medicaid Payback Upon Termination of the Trust.

To qualify for the special needs trust exception, the trust must contain specific language that provides that, upon the death of the individual, the state(s) will receive all amounts remaining in the trust, up to the amount equal to the total amount of medical assistance paid on behalf of the individual under the state Medicaid plan(s). 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). See POMS SI 00120.203(B)(1)(h). Here, the Trust states that upon the beneficiary’s death, “the trust assets remaining shall be paid to the medical assistance programs for those states that provided medical assistance to the beneficiary, including the South Dakota Department of Social Services, or its successor agency, as reimbursement for the amount of medical assistance benefits provided to the beneficiary during the beneficiary’s lifetime.” Trust Art. IV(A). Although the Trust mentions South Dakota in particular, its provisions do not limit reimbursement to South Dakota only. Thus, the Trust meets this requirement for the special needs trust exception.

CONCLUSION

In sum, we conclude that the Trust is a resource for SSI purposes. The Trust was not established through the actions of a parent, grandparent, legal guardian, or a court. We conclude that the State of South Dakota does not allow for the establishment of a “dry” or “empty” trust, and J~ and K~ did not create a seed trust, so the Trust was not established through the actions of a parent. Rather, J~ and K~ set up the Trust while holding power of attorney for S~, meaning the Trust was established through the actions of S~ herself. We also conclude that the South Dakota Third Judicial Circuit Court did not, in its November 8, 2010 Order, establish the trust through its actions, nunc pro tunc to February 2008.

John Jay Lee
Regional Chief Counsel

By: Dorrelyn K. Dietrich
Assistant Regional Counsel

H. PS 12-026 Treatment of Trust for SSI Resources Purposes (I~)

DATE: December 8, 2011

1. SYLLABUS

This opinion evaluates whether a Master Trust Agreement (MTA) and an Amended Joinder Agreement (AJA) meet the statutory requirements to be excluded under section 1917(d)(4)(C) of the Social Security Act. Secondly, it establishes that SSA is not bound by an Administrative Law Judge’s “nunc pro truc” (now for then) opinion to permit the claimant to amend the original Joinder Agreement to include Medicaid payback language. While the trust documents meet the first two requirements under the pooled trust exception, they do not meet the following requirements: Medicaid reimbursement language; established for the sole benefit and for the benefit of a disabled individual; and, established by the individual, a parent, grandparent, a legal guardian, or a court. Amendments to the MTA and AJA to satisfy the pooled trust exclusion requirements, will apply prospectively, at which time the trust needs to be evaluated under appropriate resource rules.

2. OPINION

Question Presented

You asked whether the South Dakota Guardianship Program Trust (SDGPT) Master Trust Agreement and the Amended Joinder Agreement conform to section 1917(d)(4)(C) of the Social Security Act (“the pooled trust exception”). You also asked whether SSA is bound by the Administrative Law Judge’s (ALJ’s) comment that the claimant should be permitted to amend the original Joinder Agreement to include Medicaid payback language, nunc pro tunc, November 20, 2009, the date he applied for Supplemental Security Income (SSI) benefits.

Short Answer

No. The trust documents do not meet the pooled trust exception to counting assets in the trust sub-accounts as resources. The distribution provisions of the Master Trust Agreement conflict with the Medicaid payback language of the Amended Joinder Agreement. Moreover, we have identified three additional problems with the Master Trust Agreement that are contrary to the pooled trust exception. Further, the amendment of the original Joinder Agreement (and any future amendments of the trust documents) are modifications that apply prospectively, and SSA is not bound by the ALJ’s nunc pro tunc comment. Lastly, if SDGPT were to amend only the problematic (and no other) provisions of the MTA to satisfy the pooled trust exception, the claimant’s sub-account would not be countable as a resource under the regular resource counting rules.

BACKGROUND

I~’s Family Settlement Fund Management Trust

In April 1994, the claimant’s parents petitioned the court to appoint a guardian/conservator of the estates of their three minor children (including the claimant), and to establish I~’s Family Settlement Fund Management Trust (“I~’s Family Trust”) with the children’s share of settlement proceeds from a wrongful death suit. The court approved the claimant’s mother as guardian/conservator of the children’s estates and Nations Bank Trust as trustee. Petition for Appointment of Guardian and Conservator of the Estates of . . . and Petition for Protective Arrangement (”Petition”) (Office of Hearings Operations (OHO) Exhibit 2). OHO provided us with a copy of the exhibits considered by the ALJ.

Subject to the court’s written approval, the “grantor” (identified as the children’s guardian/conservator) could terminate the trust without the consent of the trustee or any beneficiary. Trust, §§ 2, 9 (OHO Exhibit 1). I~’s Family Trust also provided for a monthly payout of $220 to each beneficiary. However, for a beneficiary that was a minor, adjudicated incompetent or in the trustee’s judgment unable to manage the distribution, the trustee could retain the distribution and use all or any portion of it for the beneficiary’s support, maintenance, health and education as the trustee, in its sole discretion, deemed advisable. Petition, § VII; Trust, § 4. “If a Beneficiary . . . die[d] before complete distribution of his or her share of the trust property, then the undistributed balance of such share [would] be distributed to the deceased Beneficiary’s estate.” Trust, § 4(c).

The claimant had an application for SSI pending when his mother as guardian/conservator established the Trust. Petition, § IX. His parents received advice “that if monies are placed in trust and any income generated does not, when combined with other family income, exceed the sum of $2,000 per month, SSI benefits can likely be maintained for their children.” Petition, § IX.

Transfer of Guardianship/Conservator and Management of the Trust Accounts

Effective December 15, 2008, the court appointed the South Dakota Guardianship Program, Inc. (SDGP) as successor guardian for the claimant (and another of I~’s Family Trust beneficiaries). Order Appointing Successor Guardian/Trustee/Conservator (OHO Exhibit 4). The court also transferred management of Issac’s Family Trust accounts for all three children to SDGPT, a division of SDGP. The court sought and received the consent of all three beneficiaries (all of whom had reached the age of majority) to make these changes.

The claimant applied for SSI benefits on November XX, 2009, and listed a trust valued at $33,000 as a resource. At the initial and reconsideration levels, SSA determined the trust was a countable resource and denied his application for benefits. The claimant requested a hearing before an ALJ. The ALJ considered the SDGPT Master Trust Agreement (discussed further below) and the original Joinder Agreement. In a decision dated August 5, 2011, the ALJ determined “[t]he sole issue before [him] . . . [was] whether the claimant’s trust must be included as a resource that precludes [him] from receiving [SSI] benefits.” The ALJ ultimately found that “[t]he claimant’s trust was properly included as a countable resource in [his] income and resource determination.” The ALJ found that the Master Trust Agreement and Joinder Agreement did not satisfy the pooled trust exception because “[n]either . . . contain[ed] provision to reimburse South Dakota, or any other State, for any medical assistance paid on behalf of the claimant beneficiary.” The ALJ also stated that “all of the elements of section 1396p(d)(4)(C) are met except [the Medicaid payback requirement].” The ALJ commented further that

[g]iven that it was always the intent of [SDGPT] to provide for the claimant and assist [him] in remaining eligible for [SSI] and Medicaid benefits, . . . the claimant should be afforded [the] opportunity to amend the trust to contain the proper language, nunc pro tunc, November XX, 2009, the date of the claimant’s original application for benefits under Title XVI of the Social Security Act.

The SDGPT Master Trust Agreement and the Amended Joinder Agreement Definitions, Establishment, and Purpose

SDGPT established the Master Trust Agreement (MTA) in July 1997. The MTA defines “trustors” as “[a]ny individuals or other entities who wish to have the Trustee administer property for the benefit of a person who is developmentally or otherwise disabled [and who] adopt this Agreement” by executing a Joinder Agreement. MTA, Art. I(A) (OHO Exhibit 18, pp. 61-71). The purpose of a trust sub-account is to provide for the supplemental needs of a beneficiary, i.e., “a person who is developmentally or otherwise disabled.” The MTA defines supplemental needs as expenses approved by the trustee, in its sole discretion, that are not covered by any public benefits program. MTA, Art. III(A) & (B); Amended Joinder Agreement (AJA), § 5. SDGPT may resign and choose a successor trustee and replace any successor trustee with another trustee. MTA, Art. IX(A) & (B). The trustee maintains a separate sub-account for each Beneficiary, MTA, Art. I(B), and trust sub-accounts are pooled for the purpose of investing and managing the funds. MTA, Art. II, Art. VII.

Distribution of Assets

The trustee, in its sole discretion, may distribute income and principal to a beneficiary to meet his or her supplemental needs. MTA, Art. V; AJA, § 5.

Amendment and Termination

Article VI(D) of the MTA provides that the trust “shall terminate upon the death of the [b]eneficiary or upon revocation of the Trust if revocation is provided for in Section 7 of the Joinder Agreement.” The AJA states explicitly that the sub-account cannot be revoked. AJA,§ 7.

Article VI(A) provides “[t]he Joinder Agreement may be amended only by a superseding Joinder Agreement and only by the [t]rustors who have the power to revoke the Trust.” The trustee may amend the MTA, “except for those portions . . . which pertain to the amount of distributions of income and principle to the Beneficiary or the amount of distributions to the [t]rustor or to individuals or other entities upon termination of the trust.” MTA, Art. VI(B). The MTA provides that “[n]o amendment of the Joinder Agreement or this Agreement or any Trust created hereunder shall be considered a termination of any such Trust.” MTA, Art. VI(C). The MTA also states “[i]f any provision of this instrument is unenforceable, the remaining provisions shall nevertheless be carried into effect.” MTA, Art. VIII(C).

Distribution of Assets upon Termination of a Sub-Account

Article IV of the MTA provides for the distribution of assets upon death of a beneficiary or other termination of the trust. “If the [t]rustee under Section 5 of the Joinder Agreement is given direction as to distribution of principal, the [t]rustee may in the [t]rustee’s sole discretion pay the last illness and funeral expenses, attorneys’ fees and other costs in administering the [b]eneficiary’s estate.” MTA, Article IV(A). Section 5 of The AJA provides that income and principal are distributed in the trustee’s discretion.

Upon a beneficiary’s death, the trustee must distribute the balance of the assets “to the individuals or other entities as provided in section 6 of the Joinder Agreement.” MTA, Art. IV(B). Section 6 of the AJA provides:

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.

If the sub-account is revoked or terminated before death of the beneficiary, the assets shall be distributed to the trustors and any other transferors of property to the trust or their heirs in the proportions of their transfers to the Trust. MTA, Art. IV(C) & (D).

Upon death of a “trustor,” the trustee shall use trust assets to pay inheritance taxes imposed on the estate because of the trustor’s death, unless the trustor has made adequate provision for payment of such taxes in his or her will. MTA, Art. V.

Spendthrift Provision

The MTA provides that “[n]o interest in the principal or income of the Trust shall be anticipated, assigned, encumbered, or subjected to creditor’s claim or legal process before actual receipt by the Beneficiary.” MTA, Art. VIII(I).

Governing Law

The trust documents are governed by South Dakota law. MTA, Art. VIII(D).

Discussion

1. The MTA Sub-Account Is a New Trust Subject to the Statutory Trust Resource Rules

As an initial matter, we considered whether the court’s transfer of management of the claimant’s trust sub-account to SDGPT resulted in formation of a new trust or reformation of I~’s Family Trust. If the transfer resulted in a new trust, the statutory trust resource rules of section 1613(e) of the Social Security Act apply. If, however, the transfer was a reformation of I~’s Family Trust, only the regular resource counting rules apply (because I~’s Family Trust was established prior to 1/1/00). As explained below, we conclude the court terminated Family Trust and created a new trust.

Under South Dakota law, “the court may reform the terms of the trust to conform to the trustor’s intention, if the failure to conform was due to a mistake of fact or law and the trustor’s intent can be established.” S.D. Codified Laws § 55-3-28. Here, however, the Order Appointing Successor Guardian/Trustee/Conservator does not state the court is “reforming” I~’s Family Trust. In fact, the court referred to the MTA sub-accounts as “successor trusts” and approved the transfer nunc pro tunc, December 15, 2008, the date of the hearing, rather than retroactively to July 2004, the date I~’s Family Trust was established.

While arguably in establishing I~’s Family Trust, the trustor intended to provide for the beneficiaries’ maintenance and support without preventing them from qualifying for Medicaid or SSI, the court does not discuss the trustor’s intent or any mistake of fact or law. Moreover, I~’s Family Trust does not contain any provisions that specifically authorize the trustee to conduct a trustee-to-trustee transfer, and the transfer was certainly not out of the beneficiaries’ control, since the court requested and obtained their consent. See Memorandum from Reg. Chief Counsel, Chicago, to Ass’t Reg. Comm.-MOS, Chicago, SSI—Wisconsin—Review of the WisPACT I Trust (July 29, 2005) (discussing elements of trustee-to-trustee transfers). Thus, we believe there is ample evidence to conclude the transfer resulted in the creation of a new trust that must satisfy the statutory trust resource rules.

2. The MTA and the AJA Do Not Meet the Pooled Trust Exception under 42 U.S.C.§ 1396p(d)(4)(C).

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

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

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

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

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

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

See id.; POMS SI 01120.203(B)(2). Here, as discussed below, the trust documents fail to meet the third, fourth, and fifth requirements. (And although the MTA has a null and void clause, MTA Art. VIII(C), such clause “cannot nullify provisions that would otherwise make the trust a countable resource. . . [and] cannot overcome missing or conflicting trust provisions.” POMS SI 01120.27(D).)

Established and Maintained by a Non-profit Association, Separate Accounts Maintained

The trust documents meet the first and second requirements of the pooled trust exception. SDGPT is a division of SDGP, Inc., a non-profit association. SDGPT established and manages the pooled trust. Consistent with the second requirement, each beneficiary has a separate sub-account, but SDGPT pools these accounts for purposes of investing and managing the funds. MTA, Art. II, Art. VII.

Accounts Established Solely for the Benefit of Disabled Individuals

To be established “for the sole benefit” of an individual, the trust must benefit no one but that individual during his or her lifetime (other than reasonable compensation for a trustee and reasonable costs associated with managing the trust). See 42 U.S.C. § 1396p(d)(4)(C)(iii); POMS SI 01120.203(B)(2)(a), (e); POMS SI 01120.201(F)(2).

Where a trust can be terminated during a beneficiary’s lifetime, the trust must provide that:

Upon early termination, the trust must reimburse the state(s) in an amount equal to the total amount of medical assistance paid under state Medicaid plan(s);

After reimbursement to the state(s) and payment of allowed expenses, all remaining funds must be disbursed to the trust beneficiary; and

The early termination power is given to someone other than the trust beneficiary.

See POMS SI 01120.199(F). Here, the MTA seems to allow for early termination of the trust, at which time assets shall be distributed to the trustors and any other transferors of property to the trust or their heirs in the proportions of their transfers to the Trust. MTA, Art. IV(C) & (D). The early termination provisions of the MTA do not provide for reimbursement to the state(s) for Medicaid, and do not provide that remaining funds go to the trust beneficiary. Thus, the sub-account is not for the “sole benefit” of the claimant during his lifetime.

The MTA is also problematic because it appears to define disability more broadly than the statute. To meet the pooled trust exception, the sub-accounts must contain assets of disabled individuals “as defined in section 1614(a)(3)” of the Social Security Act (“the Act”). The Act provides that an individual shall be considered to be disabled if he or she is unable to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. See 42 U.S.C.§ 1382(a)(3)(A). An individual under the age of 18 shall be considered disabled if that individual has a medically determinable physical or mental impairment, which results in marked and severe functional limitations, and which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. See id. 42 U.S.C.§ 1396p(d)(4)(C). Here, the MTA allows any individual or entity to establish a sub-account “for the benefit of a person who is developmentally or otherwise disabled.” MTA, Art. I(A). Thus, the MTA does not define a disabled individual pursuant to section 1614(a)(3) of the Act.

Accounts Established by the Individual, Parent, Grandparent, Legal Guardian or Court

To meet the pooled trust exception, accounts in the trust must be established “by the parent, grandparent, or legal guardian of such individuals, by such individuals, or by a court.” 42 U.S.C. § 1396p(d)(4)(C)(iii); see also POMS SI 01120.203(B)(2)(f). The MTA permits any individual or entity to establish a sub-account. MTA, Art. I(A). Thus, contrary to the Act, the trust allows individuals/entities other than those identified in the statute to establish a pooled trust on behalf of a disabled individual.

Medicaid Reimbursement Provision

The trust documents also fail to satisfy the fifth requirement of the pooled trust exception—that the trust contain specific language providing that, to the extent amounts remaining in an individual’s account are not retained by the trust, the trust pays to the State(s) from such remaining amounts in the account an amount equal to the total amount of medical assistance paid on behalf of the individual under the State Medicaid plan. See POMS SI 01120.203(B)(2)(g).

Although the AJA includes the required provision, the MTA has conflicting provisions. Specifically, the MTA provides that, if the trustee is given discretion to distribute principal under section 5 of the Joinder Agreement, the trustee may pay last illness and funeral expenses, attorney fees, and other costs incurred in administering the beneficiary’s estate. MTA, Art. IV(A). After such expenses are paid, the balance of the account shall be distributed as provided in section 6 of the Joinder Agreement. MTA, Art. IV(B). Section 5 of the AJA gives the trustee discretion to distribute principal; as such, the MTA allows the trustee to pay funeral and other expenses before all Medicaid services have been reimbursed. However, these types of expenses cannot be paid until after all Medicaid services have been reimbursed. See POMS SI 01120.203(B)(3)(a)-(b) (distinguishing between allowable administrative expenses and prohibited expenses). The MTA also appears to require payment of inheritance taxes due for residual beneficiaries prior to reimbursement to the state(s) for Medicaid services, contrary to POMS SI 01120.203(b). When a “trustor” dies, the MTA provides that the trustee “shall pay out of the principal” any “Federal or State inheritance taxes” imposed on the estate because of the trustor’s death. MTA, Art. V.

3. The ALJ’s Comment That the AJA Should Apply Retroactively to the Date the Claimant Applied for Benefits Is Not Binding.

You asked whether SSA is bound by the ALJ’s comment that the claimant “should be afforded t[he] opportunity to amend the trust to contain the proper language, nunc pro tunc, November 20, 2009,” the date he applied for SSI benefits. We note that this issue is essentially moot, given that the trust sub-account continues to be countable as a resource.

Nonetheless, we conclude that the ALJ’s comment is not binding. “Nunc pro tunc” literally means “now for then,” and indicates retroactive legal effect. Courts have inherent power to enter orders nunc pro tunc in order to correct errors and conform the record to the court’s original intent. See generally 56 Am. Jur. 2d Motions, rules, and Orders § 62 (2011).

Even assuming an ALJ has the same inherent authority to enter an order nunc pro tunc, the ALJ here did not merely correct an error. Rather, the ALJ made a substantive judgment regarding the effect of a future amendment to the trust (and as explained below, the ALJ’s substantive judgment on this point is contrary to trust principles).

An ALJ’s authority is derived from, and is limited by, the Act and regulations. The ALJ has authority to decide “all the issues brought out in the initial, reconsidered or revised determination, that were not decided entirely in [the claimant’s] favor.” 20 C.F.R. § 416.1446. Here, the issue before the ALJ was whether the claimant had excess resources exceeding the maximum allowed for SSI eligibility. See Notice of Hearing, p. 3 (OHO Exhibit 29). The ALJ had no authority to decide issues that were not presented—such as whether the claimant would have excess resources at some future date, after amending the trust. As such, the ALJ’s comment regarding the effect of a future amendment to the trust is merely dicta and is not binding. Similarly, the ALJ’s statement that the trust documents satisfied all elements of the pooled trust exception, except the Medicaid payback provision, is considered dicta and is not binding. As we have explained, there are a number of problematic provisions in the MTA.

4. Amendment of the Joinder Agreement and Future Amendments of the Trust Documents to Satisfy the Pooled Trust Exception Are Modifications That Apply Prospectively.

“[South Dakota] statutes do not explicitly recognize the validity of non-judicial reformations, but the statutes can be fairly interpreted to mean that seeking court affirmation of . . . reformation is permissive rather than mandatory. Simmons, Decanting and Its Alternatives: Remodeling and Revamping Irrevocable Trusts, 55 S.D. L. Rev. 253, 267 n. 69 (2010) (citing S.D. Codified Laws § 55-3-24). However, reformation is a tool to enforce rather than change the agreement. According to the Restatement (Third) of Trusts, there are two separate methods to alter a trust document— reformation and modification. Reformation involves the use of interpretation (including evidence of mistake, etc.) in order to ascertain and properly restate the true, legally effective intent of the settlors with respect to the original terms of the trust they created. See Restatement (Third) of Trusts § 62, reporter’s notes (2001). In other words, a reformation alters an original donative document to correct a mistake of fact or law so that the text conforms to the intent of the donor. See Restatement (Third) of Property § 12.1 (2003); S.D. Codified Laws § 55-3-28. In contrast, a modification involves a change from the true, original terms of the trust. See id. A reformation may relate back to the original date of execution. See id. A modification, however, is a later departure from the intention of the donor. See Restatement (Third) of Trusts § 62, reporter’s notes. It is therefore not retroactive.

Here, in addition to the AJA, future changes to the MTA would be necessary in order for the trust sub-accounts to meet the pooled trust exception. Under South Dakota law, a “court may reform the terms of the trust to conform to the trustor’s intention if the failure to conform was due to a mistake of fact or law . . .” S.D. Codified Laws § 55-3-28. There is no indication the MTA and the original Joinder Agreement did not accurately reflect the settlors’ intentions on the date of execution. Moreover, the significant problems with the MTA could not fairly be viewed as mistakes of law or fact. Indeed, we could not conclude that a reformation occurred any time a trust document were altered to conform to the pooled trust exception simply because the settlor intended to establish a trust that would qualify the beneficiary for SSI benefits; this would be an overly broad interpretation of the reformation criteria. Here, to meet the pooled trust exception, at a minimum, SDGPT would have to adopt a vastly different distribution scheme than that originally intended. Therefore, we conclude the AJA was a modification with only prospective effect. Likewise, any future amendments to the trust documents would be modifications that would not relate back to the date of trust formation.

5. Assuming the Sub-Account Met the Criteria for an Exception under 42 U.S.C.§ 1396p(d)(4)(C), Which it Currently Does Not, the Sub-Account Would Not Be a Resource under the Regular Resource Counting Rules.

Assuming SDGPT were to amend only the problematic (and no other) provisions of the MTA to satisfy the pooled trust exception, the claimant’s sub-account must still be evaluated to determine if it is a countable resource. See POMS SI 01120.203(b)(1)(A); POMS SI 01120.200. Under the regular resource counting rules, trust property may be a resource for SSI purposes if the individual: (1) has the authority to revoke the trust and then use the funds to meet his basic needs for food or shelter; (2) can direct the use of the trust principal for his support and maintenance; or (3) can sell his beneficial interest in the trust. See POMS SI 01120.200(D)(1)(a).

Article VI(A) of the MTA provides that, “The Joinder Agreement may be amended only by a superseding Joinder Agreement and only by the [t]rustors who have the power to revoke the Trust.” Read in isolation, this section suggests the claimant may revoke the trust. However, Article VI(D) of the MTA states the Joinder Agreement determines whether the trust can be revoked, and the AJA states explicitly that the sub account cannot be revoked.

With respect to requirements two and three above, the claimant does not have the right to direct use of the sub-account principal for his support and maintenance; rather the trustee has sole discretion over distributions. The sub-account does not provide for mandatory payments that the beneficiary could sell. In any event, even if the claimant could sell his beneficial interest in the trust sub-account, that interest would have no significant market value, since disbursements are completely within the discretion of the trustee. Since the sub-account is irrevocable, the claimant’s beneficial interest in the trust would be considered a resource with zero value – if the trust were otherwise amended to conform to the pooled trust exception. See POMS SI 01140.044.

CONCLUSION

The claimant’s sub-account is a new trust that is subject to the statutory resource counting rules. The trust documents do not satisfy the pooled trust exception to counting assets in the sub-account as resources. The ALJ’s statement that SSA should apply a future amendment of the Joinder Agreement retroactively is merely dicta and non-binding on the agency. The AJA and any future amendments of the MTA to satisfy the pooled trust agreement should be considered modifications that apply prospectively. If SDGTP were to amend only the problematic (and no other) provisions of the MTA to satisfy the pooled trust exception, the sub-account would not be countable as a resource under the regular resource counting rules.

John Jay Lee
Regional Chief Counsel, Region VIII

By: Yvette G. Keesee
Assistant Regional Counsel

Footnotes:

[1]

^. We note that the Third Restated Trust, § 6.2, “Mandatory Payback to States,” begins by referencing only South Dakota, but then goes on to reference “State(s),” and the South Dakota Department of Social Services “or any entity of like character situated in another state or territory in which the Beneficiary received medical assistance, calculated proportionately.” We believe this reference to other states is sufficient to overcome any concerns that only South Dakota would be reimbursed for medical assistance.

[2]

^. We also note that the powers of the trustee include broad authority to change the situs of the trust to another state or country, and to “elect that the law of such other jurisdiction shall govern the Trust . . . .” Third Restated Trust § 7.10(M). We considered that applying the laws of another country may allow the Medicaid payback provision to be avoided, but conclude such result is very unlikely under general choice of law principles (and because the terms of the Trust should control regardless of choice of law). See Restatement (2nd) of Conflict of Laws § 270 cmt. b (1971) (effect will be given to a choice of law provision if the designated state has a substantial relation to the trust and the application of its local law does not violate a strong public policy of the state with which, as to the matter at issue, the trust has its most significant relationship; designated state has a substantial relation to the trust if it is the domicile or place of business of the trustee at the time of the creation of the trust).

[3]

^. Section 2.2 of the Trust appears to erroneously cite SDCL ch. 15-16. The correct citation should be SDCL ch. 55-16. To the extent the Trustee is informed about these issues, we recommend these typographical errors be noted.

[4]

^{. . . . . . .} The actual check endorsed and presumably transferred to the trust was in the amount of $8,522.75.

[5]

^{. . .} Because a trust is at issue, the rules regarding conservatorship accounts do not apply. See POMS SI 01140.215.

[6]

^{. . .} Life Enrichment also manages pooled trusts in the State of Colorado. In September 2012, we reviewed the Colorado Life Enrichment Master Trust Agreement (“CMTA”) and determined that it did not meet the pooled trust exception for several reasons. See Memorandum from OGC Region VIII to ARC-MOS Region VIII, Tretment of Trust for the SSI Program – Colorado Life Enrichment Trust (September 26, 2012). In October 2012, the Life Enrichment Trust Administrator submitted proposed amendments to the CMTA, and in November 2012, we determined that the proposed amendments addressed our previous concerns and that the CMTA, as amended, would satisfy the pooled trust exception. In February 2013, we reviewed another set of amendments and determined that the CMTA, as amended, continued to satisfy the pooled trust exception. Life Enrichment has not submitted any updated documents related to the Colorado trust. Assuming that they have not made any changes to the CMTA since the February 2013 amendments, we believe that the CMTA continues to meet the pooled trust exception. In addition, we note that the version of the CMTA reviewed in February 2013 appears to have an identifying mark in a box at the end of the signature page, R013013.

[7]

^{. . .} Although not related to our analysis of the resource issue, it should also be noted that representative payees may not transfer Title II or Title XVI benefits to the Life Enrichment pooled trusts, because the trust could be viewed as prohibiting expenditures for current maintenance such as food and housing. See POMS GN 00602.075(3). Specifically, the MTAs provide that “distributions will not be made that make the Beneficiary ineligible [for SSI]” and “Trust funds will not be distributed if the distribution would cause the Beneficiary to lose eligibility for benefits.” MTAs, p. 5. Because distributions for food and housing are considered in-kind income, such distributions could affect SSI eligibility; as such, we interpret the trust as potentially prohibiting expenditures for food and housing.

[8]

^{. . .} You provided several copies of the Trust in both its original and amended forms. In some of the copies, Schedule A was left blank. However, in at least one copy of the original Trust, Schedule A stated that the Trust would be funded with $429,259.41. No copies of Schedule A indicated that Mr. or Mrs. contributed any amount of money so as to create a “seed” trust.

[9]

^{. . .} Because we conclude that the Court did not “establish” the trust within the meaning of the Act and POMS, we need not address whether SSA give the amendment retroactive effect, per the Court’s nunc pro tunc order.