SSA's Guide for Evaluating Special Needs Trusts Problematic

The Social Security Administration (SSA) recently instituted a nationally uniform procedure for review of special needs trusts for Supplemental Security Income (SSI) eligibility, routing all applications that feature trusts through Regional Trust Reviewer Teams (RTRTs) staffed with specialists who will review the trusts for compliance with SSI regulations. 

The SSA has also released its Trust Training Fact Guide, which will be used by the RTRTs and field offices when they evaluate special needs trusts.  In an article in the July/August 2014 issue of The ElderLaw Report, New Jersey attorney Thomas D. Begley, Jr., and Massachusetts attorney Neal A. Winston, both CELAs, discuss the 31-page guide in detail and caution that while it is a significant step forward in trust review consistency, it contains “a few notable omissions or terminology that might cause review problems.”  Following is the authors’ discussion of the problematic areas:  

• Structured Settlements. The guide states that additions/augmentations to a trust at/after age 65 would violate the rule that requires assets to be transferred to the trust prior to the individual attaining age 65. It does not mention that the POMS specifically authorizes such payments after age 65, so long as the structure was in place prior to age 65. [POMS SI 01120.203.B.1.c].

• First-/Third-Party Trust Distinction. Throughout the guide, there are numerous references to first-party trust terms or lack of terms that would make the trust defective and thus countable. These references do not distinguish between the substantial differences in requirements for first-party and third-party trusts.

• Court-Established Trusts/Petitions. This issue is more a reflection of an absurd SSA policy that is reflected accurately as agency policy in the guide, rather than an error or omission in the guide itself. This section, F.1.E.3, is titled “Who can establish the trust?” The guide states that creation of the trust may be required by a court order. This is consistent with the POMS. It would appear from the POMS that the court should simply order the trust to be created based upon a petition from an interested party. The potential pitfall described by the guide highlights is who may or may not petition the court to create a trust for the beneficiary. It states that if an “appointed representative” petitions the court to create a trust for the beneficiary, the trust would be improperly created and, thus, countable. Since the representative would be considered as acting as an agent of the beneficiary, the beneficiary would have improperly established the trust himself.

In order for a court to properly create a trust according to the guide, the court should order creation of a trust totally on its own motion and without request or prompting by any party related to the beneficiary. If so, who else could petition the court for approval? The plaintiff’s personal injury attorney or trustee would be considered an “appointed representative.” Would a guardian ad litem meet the test under the guardian creation authority? How about the attorney for the defendant, or is there any other person? If an unrelated homeless person was offered $100 to petition the court, would that make the homeless person an “appointed representative” and render the trust invalid? The authors have requested clarification from the SSA and are awaiting a response.

Until this issue is resolved, it might be prudent to try to have self-settled special needs trusts established by a parent, grandparent, or guardian whenever possible.

• Medicaid Payback/Administrative Fees and Costs. Another area of omission involves Medicaid reimbursement. The guide states that “the only items that may be paid prior to the Medicaid repayment on the death of the beneficiary of the trust are taxes due from the trust at the time of death and court filing fees associated with the trust. The POMS, [POMS SI 01120.203.B.1.h. and 203B.3.a], specifically states that upon the death of the trust beneficiary, the trust may pay prior to Medicaid reimbursement taxes due from the trust to the state or federal government because of the death of the beneficiary and reasonable fees for administration of the trust estate such as an accounting of the trust to a court, completion and filing of documents, or other required actions associated with the termination and wrapping up of the trust.

While noting that the guide, in coordination with training, “is a marked improvement for program consistency for trust review,” Begley and Winston caution advocates that “the guide should be considered as a summarized desk reference and training manual and not a definitive statement of SSA policy if inconsistent with the POMS.”

Annuities Purchased by a Medicaid Applicant Must Name State as Remainder Beneficiary

The Georgia Supreme Court recently issued an opinion regarding the requirement that an annuity purchased by a Medicaid applicant must name the state as a remainder beneficiary.  The opinion, though, is instructive as much for its deference to CMS and state agency statutory interpretations, as it is for its holding. Reversing an appeals court decision, the court ruled that, because it finds that the federal statute is ambiguous, annuities benefitting a Medicaid applicant need to name the state as a remainder beneficiary in order to avoid a transfer penalty. Cook v. Glover (Ga., No. S13G1127, July 11, 2014).

Jerry Glover purchased an annuity for himself shortly before applying for Medicaid. He later refused to name the state as a remainder beneficiary on the annuity, the state approved his application but assessed a seven-month transfer-of-assets penalty against him.

Mr. Glover appealed, arguing he wasn’t required to name the state as a remainder beneficiary. After a hearing, an administrative law judge upheld the penalty, and a trial court affirmed the decision. The Georgia Court of Appeals reversed. Although agreeing that a plain reading of 42 U. S. C. § 1396p (c) (1) (F) standing alone clearly required that the state be named a remainder beneficiary of any annuity, the Court of Appeals interpreted subsection (G) to unambiguously remove actuarially sound annuities benefitting Medicaid applicants from the requirements of subsection (F) by removing them from the definition of “assets” with respect to a transfer of assets.  

The Georgia Supreme Court reversed, holding that the penalty period is valid. The court examined the statutory language regarding annuities and found that the relationship between the two subsections is not clear and unambiguous.  Because the federal law was vague and ambiguous, the court ruled that the state Medicaid agency's interpretation, which is consistent with the Centers for Medicare and Medicaid Services' interpretation of the statute, is "reasonable and entitled to deference."

For the full text of this decision, go to: http://www.gasupreme.us/sc-op/pdf/s13g1127.pdf

California Heir Liable to Reimburse State for Mother's Medicaid Benefits

A California appeals court has ruled that the heir of an estate who sold her interest in her mother’s house to her brother is liable to the state for reimbursement of her mother’s Medicaid expenses. Estate of Mays (Cal. App., 3d, No. C070568, June 30, 2014).

Medi-Cal (Medicaid) recipient Merver Mays died, leaving her house as her only asset. Ms. Mays’ daughter, Betty Bedford, petitioned the court to be appointed administrator of the estate, but she was never formally appointed because she didn’t pay the surety bond. The state filed a creditor’s claim against the estate for reimbursement of Medi-Cal expenses, and the court determined the claim was valid.  A dispute arose between Ms. Bedford and her brother, Roy Flemons, over ownership of the house. After the court determined Mr. Flemons owned a one-half interest in the property, Ms. Bedford and Mr. Flemons entered into an agreement in which Mr. Flemons paid Ms. Bedford $75,000 and transferred the house to his name.

The state petitioned the court for an order requiring Ms. Bedford to account for her administration of Ms. Mays’s estate. The court determined Ms. Bedford was liable to the state for the amount she received from Mr. Flemons because although she wasn’t formally appointed administrator, she was acting as administrator. Ms. Bedford appealed.

The California Court of Appeal, 3rd Appellate District, affirmed on different grounds. The court ruled that Ms. Bedford cannot be held liable due to her failure as administrator of the estate because she was never formally appointed administrator. The court held, however, that Ms. Bedford is liable as an heir of the estate who received estate property. According to the court, Ms. Bedford’s settlement with Mr. Flemons was “essentially an end-run around the creditor’s claim and the estate process” and “the $75,000 payment represented proceeds of the estate that would otherwise be available to satisfy creditors’ claims.” 

For the full text of this decision, go to:http://www.courts.ca.gov/opinions/nonpub/C070568.pdf

Caregiver Payroll Service

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Inherited IRA's are not Exempt from Creditors in Bankruptcy

In a unanimous opinion, the U.S. Supreme Court has ruled that funds held in an inherited individual retirement account (IRA) are not exempt from creditors in a bankruptcy proceeding because they are not retirement funds. Clark v. Rameker (U.S., No. 13-299, June 13, 2014).

Heidi Heffron-Clark inherited an IRA from her mother. Her inherited IRA had to be distributed within five years, and Ms. Heffron-Clark opted to take monthly distributions. During the five-year period, Ms. Heffron-Clark and her husband filed for bankruptcy and claimed that the IRA, worth around $300,000, was exempt from creditors because bankruptcy law protects retirement funds.

The bankruptcy court found that the IRA was not exempt because an inherited IRA does not contain anyone's retirement funds. Ms. Heffron-Clark appealed, and the district court reversed, ruling that the exemption applies to any account containing funds originally accumulated for retirement. The Seventh Circuit Court of Appeals reversed, holding that the money in the IRA no longer constituted retirement funds, while the Fifth Circuit Court of Appeals decided in In re Chilton (674 F.3d 486 (2012)) that funds from an inherited IRA should be exempt. The U.S. Supreme Court agreed to resolve the conflict.

The U.S. Supreme Court affirmed the Seventh Circuit's decision in Clark, holding that the funds held in inherited IRAs are not "retirement funds." In a unanimous opinion delivered by Justice Sotomayor, the Court finds that funds in an inherited IRA are not set aside for retirement because the holders of inherited IRAs cannot invest additional money in the account, are required to withdraw money from the account even though they aren't close to retirement age, and may withdraw the entire balance of the account at one time.

If you want to ensure that your IRA's are inherited by your heirs and remain exempt from their creditors, see an elder law attorney.  

For the full text of this decision, go to: http://www.supremecourt.gov/opinions/13pdf/13-299_mjn0.pdf