Supplemental Needs Trusts

OBRA 93 and the State enabling legislation (Chapter 170 of the Laws of 1994) specifically address this issue with regard to Medicaid eligibility. For purposes of the treatment of trusts the OBRA amendments state, “an individual shall be considered to have established a trust” (that is, the trust is self-settled) “if assets of the individual were used to form all or part of the corpus of the trust”; if the trust is not testamentary; and if one of the following established the trust: (i) the individual; (ii) the individual’s spouse; (iii) a person, including a court or administrative body, with legal authority to act in place of or on behalf of the individual or the individual’s spouse; (iv) a person, including any court or administrative body, acting at the direction or upon the request of the individual or the individual’s spouse.[4]
“Assets” under OBRA 93 and Chapter 170 are defined as income or resources of the individual and income or resources the individual is entitled to but does not receive because of action by the individual or spouse; or by a person, including a court or administrative body, with legal authority to act in place of or on behalf of the individual or spouse; or by any person including any court or administrative body, acting at the direction or upon the request of the individual or spouse.[5]Together, these provisions regarding who can establish a trust and the definition of assets evidence an intent by the Federal and State legislatures to include court settlements and awards as assets that may reduce, preclude or eliminate the benefits of the applicant or recipient.
Although both the Congress and the state legislature have adopted a broad view of when a trust is “self-settled,” both legislatures have nonetheless carved out an exemption for trusts for the disabled if the following strictures are followed:

• the trust is established for a disabled individual while he or she was under the age of sixty-five;
• the trust is established by a parent, grandparent, legal guardian, or court; and
• the trust provides that upon the death of the disabled individual the state will be paid back by the trust for the medical assistance it has provided, to the extent such amounts remain in the trust.[6]

A Supplemental Needs Trust may now be funded with the monies obtained by the disabled person by a court or through settlement of a medical malpractice or personal injury case. These trusts are referred to herein as “pay-back” trusts because they are valid only if the state is paid back for medical assistance at the end of the trust. Federal guidelines provide that if an individual resides in more than one state, then the trust must provide that the funds remaining in the trust must be distributed proportionately to each State’s share of the total Medicaid benefits provided.[7]
Pay-back trusts that are established when the disabled person is under the age of 65 continue even after the person becomes age 65. Funds added to the trust after the person reaches age 65, however will not be exempt under these rules.[8] Therefore special care may be necessary if the trust is funded by a structured settlement where payments to the trust may continue after the individual reaches age 65.[9]
OBRA 93 and Chapter 170 create a second type of exempt pay-back trust: pooled trusts created by a non-profit association.[10] Pooled trusts are significant because they are available to disabled persons over the age of 65. Also, a pooled trust may be established not only by a parent, grandparent, guardian or court, but also by the disabled individual him or herself. The statutes exempt both types of “pay-back” trusts from the income and resource requirements of the Medicaid law. It is less clear as to whether these provisions exempt the funding of the trust from the Medicaid transfer prohibitions or whether it is necessary to look to other sections of the law for such an exemption. There is a specific exemption for funding of a trust created for a disabled person under the age of 65.[11] If, however, the disabled person is over the age of 65, and the provisions for a pooled trust by a non-profit association are used,[12 ]then there is no specific separate exemption from the Medicaid transfer provisions. The federal Center for Medicare a & Medicaid (CMS) has stated that the transfer to a pooled trust is only exempt from a transfer penalty if it is established for a disabled individual under age 65.[13]
CMS has stated that any pay-back trust where the state’s claim is satisfied before any other disbursements are made will be considered an exception to the rule that a trust must be “for the sole benefit” of a disabled individual in order to be exempt from transfer penalties. Therefore, there should be no problem with having remainder men in a pay-back trust. However, where a third party trust (not a pay-back trust) is used the grantor may face a transfer penalty or waiting period for his or her own Medicaid eligibility unless the trust is “for the sole benefit” of the disabled individual, that is, no other individual or entity “can benefit from the assets transferred in any way, whether at the time of the transfer or at any time in the future.”[14] Naming any beneficiaries other than the disabled person may cause problems for the grantor.
EPTL §7-1.12, which codifies the Supplemental Needs Trust in New York, protects the principal and income of these trusts from more than just consideration by Medicaid. The statute also provides protection from income and resource requirements of state-funded programs such as the Mental Hygiene Law. Therefore, disabled persons having a pay-back trust which meets the statutory requirements of EPTL §7-1.12 will qualify for benefits both under Medicaid and the Mental Hygiene Law. Chapter 170 amended EPTL §7-1.12 which previously provided only for third-party Supplemental Needs Trusts, to allow for trusts funded with the property of the disabled person if the trust meets the requirements set forth in the new sections of the Social Service Law as set forth herein.[15]
The State has promulgated regulations implementing Chapter 170 of the Laws of 1994.[16] One condition imposed by the regulations is that any lien obtained pursuant to Soc. Serv. Law §104-b or 369 on the funds used to establish the trust on account of Medicaid provided prior to the trust establishment, must be satisfied or otherwise resolved in order for those funds to be disregarded.[17] On March 25, 1997, the New York Court of Appeals reversed two lower court cases and held that a Medicaid lien must be repaid before a supplemental needs trust could be funded.[18]
Chapter 170 had provided for the Department of Social Services to promulgate regulations assuring that the fiduciary obligations of the trustee of an exempt pay-back trust be met.[19] According to the regulations a trustee must:

• notify the social services district of the creation or funding of the trust;
• notify the social services district of the death of the beneficiary;
• notify the social services district in advance of any transactions tending to substantially deplete the principal of the trust (substantially deplete is defined in the regulation as disbursements of various percentages of the principal and accumulated income of the trust);
• notify the social services district in advance of any transactions involving transfers of principal for less than fair market value; and
• provide the social services district with proof of bonding.[20]

The statute and the regulations provide that Social Services may commence an action or proceeding under Executive Law §63 to assure the trustee’s compliance and protect the state’s remainder interest in the trust.[21]
The practitioner is therefore advised to provide notice to the social services district whenever a trust is created and/or funded. It is our experience that when the trust is being created in connection with a court proceeding, the local agency, the state agency, or both, will appear in the court proceeding and make known any objections they have to the trust or its provisions. This provides an opportunity to settle any issues and produce a so-ordered stipulation incorporating all negotiated terms including that the social services district and the state agree that the income and resources of the trust will not be considered in determining Medicaid eligibility. This should prevent problems later when Medicaid and other benefits are applied for or obtained.[22] See article “Courts Add Criteria to Supplemental Needs Trusts.”
Medicaid recipients may now use Supplemental Needs Trust for income and reduce or eliminate their spend downs. Any disabled individual receiving community based care (including home care) and disabled individuals under age 65 in nursing homes can have their pension or Social Security placed into a supplemental needs trust and it will not be budgeted toward their Medicaid spend down. Disabled individuals over age 65 must used a pooled trust established by a not-for-profit, while individuals under age 65 may use a pooled trust or an individual pay-back Supplemental Needs Trust. See New York State Office of Temporary & Disability Assistance Administrative Memo 96-ADM 8.
Many disabled persons also receive income from the federally administered Supplementary Security Income (SSI) program. Although Medicaid eligibility for aged and disabled persons often follows SSI income and asset rules, they sometimes differ. That is the case when considering trusts.[23] The SSI trust rules are discussed in detail in the Social Security Program Operations Manual (POMS).[24] The following is a brief synopsis of the SSI rules.

SSI considers the beneficiary to be the “Grantor” of the trust if the trust is set up by an agent or someone empowered to act on the beneficiary’s behalf, with funds or property that belong to the beneficiary. Whether the funds of the “Grantor Trust” are a resource for SSI purposes depends on whether the beneficiary can revoke and use the assets of the trust. SSI looks not only to the terms of the trust for revocability, but also to State law. In New York a trust may be revoked upon the consent of the settlor and “all the persons beneficially interested.”[25] Since the settlor and the primary beneficiary are the same person, the trust is considered “revocable” unless there is at least a “residual beneficiary” in the trust document who would receive funds at the beneficiary’s death.
For SSI purposes, disbursements from the trust will be counted as income unless they are “in-kind” payments by the trustee to a third-party that result in the beneficiary receiving items which are not food, clothing or shelter. If the in-kind payments are for food, clothing or shelter, then SSI has presumed maximum value (PMV) rules, to calculate how much will be deemed as income and thus reduce the individual’s SSI benefits. Income paid directly to the beneficiary will reduce benefits dollar for dollar. The practitioner would be well advised to draft the Supplemental Needs Trust so that it is insulated against consideration by SSI by including a residuary beneficiary and providing only for in-kind payments.[26] The Trustee should be cautioned that if he or she chooses to pay for basics such as food, clothing or shelter, there will be a reduction of SSI benefits.
Footnotes
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