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

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).