Arizona Restricts Use of “Self-Settled” Special Needs Trusts

JANUARY 12, 2004 VOLUME 11, NUMBER 28

Last week Elder Law Issues described how a “Special Needs” trust can be used to protect the beneficiary’s access to public benefits programs like Supplemental Security Income (SSI) and Medicaid (in Arizona, AHCCCS or ALTCS). There is one glaring problem with Special Needs trusts just now in Arizona, however—the Arizona Long Term Care System (ALTCS) has aggressively attacked the use of Special Needs trust planning.

It is important to clarify at the outset that ALTCS’ scrutiny of Special Needs trusts has been limited to those funded with personal injury settlements or other funds once belonging to the beneficiary. So far, at least, ALTCS seems to understand that trusts established by parents with their own money for the benefit of children with disabilities should not be challenged.

What are often called “self-settled” Special Needs trusts, though, have come under increasingly intense attack by the ALTCS administration. The government challenges range from demands that the trusts be amended each year, to insistence that the trustee predict exact expenditures for a year in advance, to registering objections to payments for the benefit of the trust’s beneficiary.

ALTCS takes the position that they are not constrained by the straightforward language of federal law on self-settled Special Needs trusts. Although the State will be entitled to receive most, if not all, of the trust assets on the death of the beneficiary, the administrators’ approach seems to be calculated to make the use of Special Needs trusts as unattractive as possible.

Although federal law clearly contemplates that personal injury settlement money, for example, could be used to purchase a home for the beneficiary or pay for caretakers in addition to the care provided through the Medicaid benefit, Arizona imposes severe limitations on both types of expenditures. The State’s demand for an annual budget and its insistence on no deviation without 45 days’ advance notice makes it difficult (if not impossible) to employ the flexibility necessary in administration of the care provided to most disabled beneficiaries.

The practical effect of Arizona’s assault on self-settled Special Needs trusts has been to substantially increase the cost of administration of such trusts and to reduce the benefit to beneficiaries. It would be incorrect to say that Special Needs trusts are no longer useful for Arizona residents, but the ALTCS position makes it imperative that any proposal to establish a Special Needs trust be reviewed by an experienced attorney.

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