JUNE 25, 2012 VOLUME 19 NUMBER 24
A recent Arkansas Court of Appeals case reminds us (yet again) how important it can be to plan for the possibility of a future disability in your family. Here’s the background (with names changed to help protect internet privacy): Ruth Olsen, like thousands of other seniors, created a revocable living trust. She provided for gifts for nine grandchildren, including her granddaughter Christie.
When the trust was signed (in 2009), Christie was in her early 20s and living in another state. A year later she was diagnosed as suffering from schizophrenia and a guardian was appointed. Just one month after the guardianship Ruth Olsen died.
Christie was receiving Medicaid benefits from the state where she lived. Her grandmother’s trust did include language indicating that the trustee should have discretion about whether or not to distribute either income or principal of her trust share to her or for her benefit, but it did not include specific language making clear that Ms. Olsen intended the trust to be a special needs trust.
The trustee of the trust is a bank headquartered in Arkansas, where Ms. Olsen lived and died. The trustee asked the local courts to allow the trust for Christie to be modified — just to make clear that it should be a special needs trust, and that the trustee should be required to try to protect Christie’s eligibility for Medicaid in her state.
The trial judge in Arkansas refused. He pointed out that — in Arkansas, at least — the Medicaid program was intended to be available only for people who had not other access to resources. According to the trial judge, it would violate the public policy of the State of Arkansas to allow court modification of a trust to prevent it being counted as a resource for Medicaid eligibility purposes.
The Arkansas Court of Appeals agreed (more accurately, it did not disagree — but the effect is the same). The appellate court declined to follow the lead of the Washington State Court of Appeals — the Washington court had allowed just such a modification, and in very similar circumstances.
The Court of Appeals cited a number of Arkansas cases in which courts refused to allow transfer of an individual’s assets into a self-settled special needs trust — thereby preventing eligibility for Arkansas Medicaid. Ruth Olsen’s trustee argued that (a) this trust was not a self-settled trust but a third-party trust, and the request was for clarification of the trust’s terms, not creation of a trust, and (b) the law and public policy in question should be those of the state where Christie lived, not Arkansas. Those arguments did not prevail. The appellate court declined to reverse the trial judge’s finding. Matter of Owen Trust, June 13, 2012.
We do not practice law in Arkansas (for which, incidentally, we are thankful), but there are a number of important points we take away from the Arkansas court decisions:
- Courts often have a very hard time clearly separating “self-settled” special needs trusts from “third-party” special needs trusts. That should not be surprising — trust settlors, trustees and lawyers often have the same problem. It is confusing. But one key element should be kept in mind: if you are setting up a trust with your money for the benefit of someone who has (or might have) a disability, you are permitted to impose appropriate restrictions to make sure the money is not treated as an available resource for public benefits calculations.
- Even if a formal finding of disability has not been made, it is prudent to include strong “special needs” trust language in your estate plan (your will or trust). That way you protect the availability of the money you leave to a child or grandchild and their eligibility for public benefits.
- State laws vary. Some states (like Arkansas) take a dim view of transfers into special needs trusts — or, apparently, of efforts to ensure that even a third-party trust has appropriate provisions. Other states (like Washington) would more likely permit a clarification such as the one Ruth Olsen’s trustee proposed. Where is Arizona in this continuum of state approaches? Much closer to Washington than to Arkansas. In general, states which have adopted the Uniform Trust Code (about half of the states have) are more likely to allow modifications like the one proposed here — but not always (Arkansas has adopted the Uniform Trust Code, but it didn’t help Christie).
- Just to keep things confusing, it is not even clear that the proposed modification is necessary. The state Medicaid rules in Christie’s new state are more important in analyzing her grandmother’s trust than are the state laws in Arkansas. And Christie might well move to yet another state before she actually makes a Medicaid application. Her grandmother’s trust — even though not perfectly written — might well be treated as a third-party special needs trust, depending on the state (and, candidly, on the eligibility worker, the law at the time of her Medicaid application and perhaps a handful of other factors).
What is the ultimate take-away message? Plan carefully. Talk with a qualified lawyer — one who knows something about disability, public benefits and the surprises that can be in store. Make sure you fully share information about your family, your concerns, and your wishes. Learn local laws and practices. Having a disability — or having a family member with a disability — can make planning much more difficult and complicated, and the results much more uncertain.