Using Trusts in Planning for Disabled Beneficiaries
By Jill S. Gilbert
Few estate planning issues have as much potential
to directly impact on the quality of an individual's life as planning
for disabled beneficiaries. While other clients may face a scenario of
more taxes or less taxes, or probate versus nonprobate, for the disabled
beneficiary the alternatives may be as stark as a lifetime of
subsistence level poverty as opposed to one of relative comfort and
independence.
Background Law
To be eligible to receive Medical Assistance or Supplemental Security
Income (SSI), individuals may not have "countable" assets in excess of
$2,000.1 Examples of assets that are not
considered "countable" resources include a personal residence, personal
property and household furnishings, and other specified assets such as
life insurance policies of limited value and burial trusts.2 Persons who receive SSI are automatically eligible
for Medical Assistance benefits. However, there are several instances
where an individual may be receiving Medical Assistance benefits, but
not SSI. A partial list of such persons would include nursing home
residents, individuals receiving home health care under so-called
Medicaid "waiver" programs, severely disabled children under the age of
18 3 and persons whose medical expenses
exceed their income subject to the "Medical Assistance
deductible."4 The monthly benefits of
individuals who receive SSI are reduced dollar for dollar if they also
receive any unearned income in excess of $20 per month. Unearned income
includes distributions from a trust.
This reduction may or may not be avoided by having the trustee make
noncash or "in-kind" payments or distributions on behalf of the
beneficiary, depending upon the type of expense being paid. A
distinction is made regarding in-kind distributions that are deemed to
contribute to the costs of the beneficiary's support and those that are
made for nonsupport purposes. "Support" distributions include food,
clothing or shelter; these noncash distributions cause benefits to be
reduced in an amount equal to the fair market value of the items
purchased.5 In-kind distributions for
expenses other than food, clothing and shelter are not deemed
distributions for support. Examples of such expenses include medical
expenses, adaptive furnishings and equipment, travel, education and
training, and personal services. Nonsupport distributions do not reduce
monthly benefits.
With respect to support distributions, it is important to know the
so-called "presumed maximum value rule." A noncash distribution for
support items to a beneficiary living independently in the community is
presumed to have a maximum fair market value of $177, or in other words,
will not reduce SSI benefits more than $177 per month. This creates an
incentive to provide large one-time in-kind distributions having a value
well in excess of $177 per month, as opposed to smaller periodic
distributions spanning several months.6
Threshold Planning Issues
When planning for a disabled beneficiary, it is helpful to begin with
two threshold questions. First, although seemingly obvious, it should be
determined whether the trust is considered: 1) one that is established
by the individual; or 2) one that is established by a third party.
Second, it is important to consider whether you are planning for a
beneficiary who is likely to be institutionalized or for an individual
who is expected to be living in the community and receiving Medical
Assistance benefits outside of an institutional setting. These
considerations will determine whether the trust's grantor needs to be
concerned that the beneficiary may be ineligible for Medical Assistance
benefits for a "look-back" period subsequent to a transfer to the trust
or a distribution to the beneficiary.
The imposition of such a "look-back" period is an undesirable
economic consequence, and avoiding or minimizing the look-back period is
a concept central to planning for elderly and disabled beneficiaries.
Generally, a 36-month look-back period is imposed upon transfers of
assets made for divestment purposes. However, many distributions
involving trusts are subject to a 60-month look-back period. The
imposition of the 60-month look-back period often can be avoided with
proper planning.
Trusts Established by the Individual
The provisions concerning self-settled trusts potentially affect
individuals who establish revocable living trusts and subsequently face
nursing home placement, disabled individuals who inherit wealth or
receive personal injury settlements and who presently live in the
community, and individuals who may face temporary or permanent
institutionalization. Pursuant to the Omnibus Reconciliation Act of 1993
and Wisconsin Act 437, transferring assets to a trust by a settlor
constitutes establishing a trust.7 Assets in
a trust established by the individual are considered available to the
individual to the extent that the individual is entitled to receive any
beneficial enjoyment from the trust.
Federal law states that "an individual shall be considered to have
established a trust if assets of the individual were used to form all or
part of the corpus of the trust." For purposes of the federal statute,
specifically adopted by Wisconsin, the individual also will be deemed to
have established any trust funded by the individual's spouse or 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."8
If a trust has been established by the individual and the individual
is institutionalized, that individual may not be eligible for certain
Medical Assistance benefits for a 60-month "look-back" period from the
date of the transfer of funds into the trust. This look-back period
generally applies to individuals receiving benefits who are in an
institution and for home-based "waiver" services provided as an
alternative to institutional services.9
Persons who reside in the community, as opposed to an institution, and
who receive noninstitutional Medicaid services and SSI benefits are not
subject to a look-back period.
Implications for Revocable Living Trusts
Generally, assets of a revocable living trust are considered
resources, and thus must be counted in determining the trust
beneficiary's Medical Assistance eligibility. The statute provides that
the corpus of the trust shall be counted as the individual's resources
as will "payments to or for the benefit of the individual." Any payments
from the trust to a third party are "considered assets disposed of by
the individual." In other words, payments from a living trust to a third
party are considered a divestment triggering the 60-month look-back
rule. This is an unintended and undesirable consequence, in that
divestments not involving trusts are subject to a 30-month look-back
period.10
The following hypothetical scenario illustrates this provision.
Mabel, at 73, has just been diagnosed with Parkinson's disease based
upon symptoms that have recently appeared. Virtually all of Mabel's
assets of $400,000 are in her funded revocable living trust. She wants
to divest them to her daughter. If Mabel, as trustee, distributes the
assets to her daughter, the transfer will be subject to the 60-month
look-back rule as opposed to the 36-month look-back rule applicable to
transfers that are not made to or from a trust. The solution is for
Mabel to distribute the assets to herself, then transfer them to her
daughter.
Consider another scenario: Mabel is rendered mentally incompetent due
to a neurosurgery; prolonged nursing home confinement is a certainty. In
this scenario, it is hoped that Mabel previously has executed a power of
attorney provision that permits her agent to transfer assets from the
trust to Mabel. Presumably, the agent then can make a transfer on behalf
of Mabel in her individual capacity to Mabel's daughter which will be
subject to a 36- rather than 60-month look-back period.
Another useful technique is to include authority in the living trust
document for the trustee to appoint an agent to exercise a power of
attorney in the event that a power of attorney document cannot be
located, is deemed invalid or is not accepted by another
jurisdiction.
Irrevocable (Income Only) Trusts
With respect to an irrevocable trust established by an individual,
"if there are any circumstances under which payment from the trust could
be made to or for the benefit of the individual, the portion of the
corpus from which, or the income on the corpus from which payment to the
individual could be made shall be considered resources available to the
individual."11 Transfers into the trust
give rise to a 60-month look-back period. Transfers made from the trust
to a third party are considered a divestment subject to a 60-month
look-back period.12 It is important to
remember that a trust is considered revocable under state law if the
applicant is both the settlor and the sole beneficiary.13
Statutory Exempt Trusts
The Omnibus Reconciliation Act of 1993 foreclosed the effective use
of self-settled "trigger" trusts and court-established trusts for
personal injury suits but also provided that certain types of trusts are
exempt from the rules on asset transfers. Two such trusts include: 1)
trusts established for disabled persons under age 65; and 2) pooled
resource trusts managed by not-for-profit associations.
With respect to trusts for disabled persons under age 65, U.S. Code
section 1396p(d)(4)(A) exempts: "[a] trust containing the assets of an
individual under age 65 who is disabled ... and which is established for
the benefit of such individual by a parent, grandparent, legal guardian
of the individual or a court if the State will receive all amounts
remaining in the trust upon the death of such individual up to an amount
equal to the total medical assistance paid on behalf of the individual
... ."
Obvious issues with this type of trust are its loss of exempt status
when the beneficiary attains age 65 and the Medical Assistance lien
imposed upon the trust assets.
With respect to trusts managed by nonprofit associations, section
1396p(d)(4)(C) exempts a trust "containing assets of the individual"
that meets the following conditions:
"(i) The trust is established and managed by a nonprofit
association.
"(ii) A separate account is maintained for each beneficiary of the trust
... [but] the trust pools these accounts.
"(iii) Accounts in the trust are established solely for the benefit of
individuals who are disabled.
"(iv) 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. ..."
As with the exempt trusts for individuals under age 65, the Medical
Assistance lien may be a deterrent to some clients. However, these
pooled asset trusts appear to be an economical planning alternative for
even modest estates. Family members may be appointed as cotrustees to
increase flexibility.
Third Party "Supplemental Needs" Trusts
Testamentary trusts and trusts established by a grantor having no
legal authority to support the beneficiary are subject to a different
set of rules than are self-settled trusts. These trusts are not subject
to the look-back restrictions of section 1396p(d); in other words, the
act of establishing these trusts by third parties during life or by will
is not considered a divestment by the beneficiary. Generally, these
trusts aim to supplement public benefits without increasing countable
assets and resources so as to disqualify the individual from public
benefits, hence the term "supplemental needs" trusts.
It is appropriate to consider the following provisions and/or
suggested language when drafting documents providing for inter vivos or
testamentary supplemental needs trusts:
1) Irrevocability: "This trust is hereby declared to
be irrevocable and may not at any time be altered, amended or revoked
for any reason including the limited value of the trust estate."
2) Intention to supplement rather than
replace benefits: "It is the Settlor's intent that the funding
of this trust will not render the beneficiary subject to a period of
ineligibility for Medical Assistance Benefits or denial of Supplemental
Security Benefits or to duplicate any services provided by such
benefits."
3) Nonsupport purpose: "It is the
intent of the Settlor that Medical Assistance, Supplemental Security and
other government benefit programs be used to provide supportive, medical
care, shelter and other benefits and services to the maximum extent
possible to meet the support needs of the beneficiary."
4) Prohibit or limit cash distributions: "Cash
distributions may not be made from the trust, except under the following
circumstances ... ." Situations exist where it might not be appropriate
or desirable to ban cash distributions outright. One example may be for
a beneficiary who has a terminal condition but whose life expectancy is
not ascertainable (for example, HIV-positive or AIDS diagnosed
individuals). Also causing concern is the possibility that future
reductions in government benefits simply will not provide for a
subsistence level existence. Thus, practitioners will need to balance
carefully the risk of lost benefits against the need to provide
sufficient flexibility to ensure the beneficiary's basic comfort.
5) Prohibit/limit distributions of food,
clothing and shelter: "The trustee shall be prohibited from
providing food, clothing, and shelter to the beneficiary unless, in the
sole discretion of the trustee, all available government benefits are
inadequate to meet the basic subsistence needs of the beneficiary. Such
payments shall be rendered no more frequently than _____." Objective:
Take advantage of the statutory presumption that monthly in-kind
distributions for food, clothing and shelter do not have a fair market
value in excess of $177.
6) Sole discretion of trustee: "The
beneficiary may not direct or otherwise require the trustee to use the
trust estate or income therefrom for the support and maintenance of the
beneficiary or any other person."
7) Permit contributions for education, vocational training or
a plan of self-support: Direct payments for school tuition and
education do not reduce benefits, so long as such expenditures do not
include room and board.14 Plans calculated
to achieve the beneficiary's economic self-sufficiency that are approved
by the Social Security Administration for this purpose will not cause
ineligibility for benefits.15
8) Permit purchases of exempt
assets: A grantor may wish to specifically provide for
distributions of exempt assets such as burial trusts, vehicles or
long-term service contracts.16
9) Identify other appropriate nonsupport expenses: A
grantor or beneficiary may wish to specify personal priorities or types
of nonsupport expenses contemplated. For example, the grantor may wish
to ensure the beneficiary's ability to attend family gatherings or
obtain continuing education and improved housing. Specified priorities
will help guide institutional and noninstitutional trustees.
10) Home ownership; rent: A home is considered a
"noncountable" asset for purposes of SSI and Medical Assistance
benefits; it does not count as a resource. However, tax and mortgage
payments may result in a loss of benefits, subject to the rule that an
in-kind distribution will have a presumed maximum value of $177 per
month. Rent payments in excess of the statutory presumed maximum value
also are not counted as income.
11) Permit loans: Even noninterest bearing loans are
not counted as income or assets, so long as the funds are expended in
the month received.17 Conveniently, such distributions
can be used for paying real estate taxes or for home repairs.
12) Negate Wisconsin statute 701.13(2): This statute
provides that a court may order support for an income beneficiary if the
trust terms do not otherwise effectively preclude such payment.
Jill S. Gilbert, DePaul 1984, is a CPA with an
LL.M.-Taxation. She concentrates her practice in estate planning. She
has been certified as an elder law attorney by the National Academy of
Elderlaw Attorneys, the certifying entity approved by the ABA.
Conclusion
Proper planning can enable disabled beneficiaries of trusts who
reside in the community to attain the highest possible standard of
living by maximizing eligibility for SSI and Medical Assistance
benefits. Careful consideration should be given to the use of statutory
exempt trusts in providing for such individuals. Similarly,
practitioners should be careful to avoid unintended results when
drafting revocable living trusts. Finally, practitioners will need to
carefully ascertain the grantor's objectives in drafting testamentary
and other third-party trust instruments for disabled beneficiaries, and
balance the need for flexibility against the possibility of reduced
benefits.
Endnotes
1 20 C.F.R.
416.1212.
2 20 C.F.R.
416.1216.
3 20 C.F.R.
1416.1240.
4 Wis. Admin. Code
103.08(2).
520 C.F.R.
1130-1145.
6 20 C.F.R.
416.1140-1141. The maximum value is one-third of the maximum federal
benefit rate plus the $20 income exclusion. Additionally, the "one-third
reduction rule" provides that benefits will be reduced by one-third for
SSI recipients "living in another person's household." 20 C.F.R.
416.1131-1132.
7 42 U.S.C.
1396(p)(d)(2)(A); Wis. Stat. 49.45.
8 42 U.S.C.
1396(p)(d)(2)(A)(i).
9 42 U.S.C.
1396(p)(C)(B)(i).
10 42 U.S.C.
1396(p)(d)(3)(A).
11 42 U.S.C.
1396(p)(d)(3)(B).
12 42 U.S.C.
1396(p)(d)(3)(B); HCVA transmittal No. 64, State Medicaid Manual,
3259.6.B.
13 Wis. Stat.
701.12.
14 20 C.F.R.
416.1103(f).
15 20 C.F.R.
416.1124(b)(13).
16 20 C.F.R.
416.1216(c); 20 C.F.R. 416.1102.
17 20 C.F.R.
416.1103(f).
Wisconsin
Lawyer