Understanding Changes in Special Needs Trusts

1. POMS 2009Updates to SI 01120.200 Special Needs Alliance February 19, 2009 by Mary Alice Jackson

2. SHOW ME….THE CHANGES • “Words, words, words, I’m so SICK of words, I get words all day through, first from Him now from You, is that all you blighters can do?” • Eliza Doolittle, My Fair Lady

3. INFERRING THE PURPOSE OF THE CHANGES • Sometimes, clarifications are made in titles or in legalese-type language • Sometimes, examples are added to clarify the rules for anyone needing to interpret them • Sometimes, the emphasis of a rule is changed to clarify why certain resources may or may not be countable (keeping folks from going astray…) • A few are just, well, inexplicable

4. FORM • Section titles expanded to include direct references to trusts • “Definitions” are now a “Glossary of Terms” • Often adds the word “trust” to a heading • Form or substance: B. 4 • The beneficiary no longer “owns” the benefits, he or she now “receives” the benefits. • All references to other POMS remain the same

5. SUBSTANCE • Spendthrift clauses • Words: “Revoke v. Terminate” • Grantor trusts v. 3d Party trusts • Show me the money: Grantor v. Funder • Words: Disbursement • When Child support/alimony aren’t income • Words: Medicaid as beneficiary or creditor? • Focus on state law variations

6. Defining Spendthrift Clauses – B.16 • “Anticipatory” transfers replaced with “involuntary and voluntary” transfers • Clarifies that distributions can be reached by creditors even if corpus cannot be • Emphasizes that “valid” spendthrift clause makes “the value of the beneficiary’s right to receive payments not countable as a resource”. Former emphasis was on non-alienable feature as basis for not being counted as asset.

7. Spendthrift Clauses • New language: If state law forbids spendthrift clauses, the right to receive monthly payments is countable resource because may be sold for lump sum.

8. Spendthrift References • D.1.a. • When a trust is a resource – NEW: ..if the beneficiary can sell interest, it’s a resource • D.1.b • When beneficiary has a right to mandatory periodic payments (note that the definition says “monthly” not “periodic”) • D.2 • Modifies language “cannot be used for support and maintenance” by referencing “e.g. has a valid spendthrift clause”.

9. Revocation Vs. Termination: Now Defined B.19 and B.20 • Revocable: ability to reclaim or take-back assets from the trust • If 1st party funded, will be resource • If 3d party funded, may not be resource • Focus on whether the recipient can terminate the revocable trust • If the beneficiary of a 3d party trust can terminate the trust and obtain assets, the trust will be countable as a resource

10. Termination defined • “Terminate” = “end” • Query: If an irrevocable SNT includes a termination provision while primary beneficiary is still living, is there any circumstance under which the assets could be considered available? What if the termination provision includes direct payment to the primary beneficiary?

11. Application of Revocation v. Termination • D.1.a • If beneficiary can revoke OR terminate = asset • D.1.b. Title now reads: • Authority to Revoke or Terminate Trust or Use Assets • D.1.b. Beneficiary • Trust assets are resources if beneficiary can terminate and gain access to assets • D.1.b. Trustee • Replaces “revoke” with “terminate” (?)

12. More Revocation v. Termination • D.2 Drafters, use this language: • “If an individual does not have the legal authority to revoke or terminate the trust or to direct use of the trust assets for his/her own support and maintenance, the trust principal is not the individual’s resource for SSI purposes”.

13. Revocability Rewrite: D3 • Discussion of “residual beneficiaries” • “under the modern view, RBs are assumed to be created…when a grantor names heirs, next of kin, or similar groups to receive the remaining assets on the trust upon the grantor’s death. In such a case, the trust is considered to be irrevocable”. • No comment re: when the trust should be considered irrevocable • Rev trust with language allowing support of dependents upon incapacity of grantor?

14. Revocable v. Terminate Examples • L.2.a – Beneficiary of irrev 3d party trust, full discretionary power in Trustee. • Analysis – beneficiary has no authority to “terminate” the trust (replaces prior phrase which stated no authority to “revoke”), the trust principal is not her resource. • Distinction with or without a difference? • The example contains no reference to the authority to terminate

15. Emphasizing the Source of the Trust Funds • Distinguishing Grantor and 3d Party trusts • B.2 defines “grantor” (settlor or trustor) as the individual who provides the trust principal • B.8 defined “grantor trust” as a trust in which the grantor is also the sole beneficiary of the trust, subject to applicable state law • B.17 “Be alert for situations where a trust is allegedly established with the assets of a third party, but in reality is created with the beneficiary’s property.

16. “The Establisher” • B.18 – Fiduciary Duty • “The person who establishes a trust should not be confused with the grantor, who provides the assets that form the principal of the trust”. • So: Drafter ? • Should we now re-frame the language of SNTs to identify “the establisher”, the “grantor who gave the money”, the “trustee” and the “beneficiary”?

17. The Language of Disbursements • Sufficiently re-written to provoke comment • E.1.a – adds two new paragraphs clarifying the effects of disbursements to third parties • If disbursement is non-cash, it’s in kind unless otherwise excluded • E.1.c – Entirely re-written. • If it’s not in-kind or ISM, it’s not income • Examples include disbursements for education, therapy, medical services not covered by Medicaid, phone bills, recreation, entertainment

18. Disbursements as Income Redux • If beneficiary receives a non-cash item other than food and shelter – not income if the purchased items would have been excluded if retained into next month. • Example provided: Trustee purchases computer for beneficiary. Excluded the next month as a household good, therefore not income. • ?: Why the distinction between paragraphs 1 and 2? Distributions in #1 could also be from 3d party

19. Distributions when principal is a resource – new provision • E.2 now has subsections (a) and a new (b) • (a) adds “…or that result in the receipt of something by the individual”; • (b) if the trust was established with the assets of the individual/spouse and is a resource: • Disbursement not made to or for individual is a transfer as of date of payment, not income; and • Any foreclosure of payment is considered a transfer of resources as of the date of foreclosure (i.e. trigger trusts?)

20. ALIMONY AND CHILD SUPPORT! • G.1.d. – Assignment of income • Now includes the following new example: • For example, child support or alimony payments paid directly to a trust as a result of a court order, are not income.

21. Medicaid: SNT Creditor or Beneficiary? H.1.b • State reimbursement provisions: • See line 4, ending with ..of a debt. • Now reads: “…of a debt, unless the trust instrument reflects a clear intent that the state be considered a beneficiary, rather than a mere creditor (emphasis added).

22. Miscellany (which may still be important) • I. Rep payees and Trusts deletes language referring to use and misuse of benefits and instead simply states “see additional rules which may apply”. • J.2.b. defines an agency relationship – “person acting as an agent of the individual” • J.4 - Documentation of Trust Evidence, references some new electronic systems lingo – DROC, EVID, EDCS and NDRed which appear to replace old form.

23. Miscellany #2 - Caution • L.3.a example leaves something to be desired. • Assumes the beneficiary’s mother, as legal guardian, established a trust without a court order – or doesn’t reference the a order and therefore could create confusion. Settlement funds placed in irrev, sole benefit trust but in this example, the funds are considered an available resource because mother as guardian was standing in his shoes.