Posts Tagged ‘Medicaid’

Maine Service Cutback Leaves Disabled Minor Without Program

FEBRUARY 6, 2012 VOLUME 19 NUMBER 5
Here’s an anecdote that we expect to see repeating itself over the next few years. It involves a fifteen-year-old boy with severe disabilities, and the Maine state Medicaid program. It also involves Maine’s efforts, like those of other states (including Arizona), to trim its eligibility roles for Medicaid, and the real problems that creates for individuals needing services.

CT (his full name is edited out of the reported court case) requires full-time, one-on-one adult supervision to prevent him from injuring himself. His mother applied for and got him on Maine’s program for home and community-based services, so that he could be cared for in a residential center or even at home rather than being institutionalized. That was in 2005 — two years after CT had been placed in a New Hampshire residential facility after failed trials in programs at his family home and in New Jersey.

CT’s mother assumed that getting him eligible for assistance from the State of Maine would mean that he would begin getting services — but that didn’t happen. The problem wasn’t his eligibility, but the availability of programs. He was placed on a waiting list in case a suitable placement opened up, but only twelve children in the state were getting services under the program and it didn’t look too promising.

Just after CT got eligible Maine decided to try to cut its Medicaid program by withdrawing its home and community-based services. Since those programs operate under a special waiver, it would be simple — Maine just stopped running a waiver program. But rather than re-institutionalize all patients already in the community, Maine announced that it would simply cut off new entries into the program, but would not remove services to those already receiving services.

Program officials assured CT’s mother that he would stay on the waiting list for placement. She received a letter from a program official telling her that Maine would “honor our mutual commitment to the children currently receiving, or those having already been approved for services in this waiver program.” Problem was, that letter was incorrect. Because CT was only eligible, not actually receiving services, he would be cut off from any future possible placement under the program.

Four years later CT’s mother finally got a residential home in Maine to make a proposal to care for CT. The proposal was contingent on funding through the waiver program he had been eligible for during those four years. Unfortunately, the Maine Medicaid agency denied the request, pointing to the 2005 cut-off of all new service requests.

CT’s mother appealed, arguing that she had relied on the state’s misrepresentations and that CT was injured by the reversal. The agency denied her again, and a judge upheld that denial. She appealed to the Maine Supreme Court.

The Supreme Court Justices upheld the denial of services for CT. They analyzed the arguments by applying the legal principle of “equitable estoppel.” Under that doctrine, the courts can give relief to someone who has relied on another person’s representations if that reliance has worked to their detriment. The courts can order a result that would not be possible under contractual or other theories, in order to prevent a miscarriage of justice.

There are at least two problems with the application of equitable estoppel to CT’s case, however. First, there is a general rule that one can not assert equitable estoppel claims against the state itself. If an agent of the state misrepresents state policy, that does not usually create a right to recover on behalf of someone who was injured by relying on that misrepresentation.

The second problem with applying equitable estoppel principles to CT’s case is more serious, though. The Supreme Court noted that, though CT (through his mother) relied on the state’s misrepresentation, he was not injured by that reliance. Yes, he was injured — by the withdrawal of eligibility that had previously been extended. But that injury did not occur because he relied on the state’s misrepresentation — it occurred because the state cut back its program.

The Court notes that if CT’s mother had found him a placement shortly after his eligibility, she could have gotten him into the waiver program before it was closed. But the Justices did not see any persuasive evidence that she would have found such a placement but for the misrepresentations that he would remain eligible for future placements if they opened up. Mrs. T v. Commissioner of Department of Health and Human Services, February 2, 2012.

What might CT’s mother have done if she had known how his eligibility would be cut off? She might have found him a placement in Maine more quickly, but in Maine, as in other states, there simply were not enough providers to take care of all the state’s residents with disabilities. As state budgets shrink, we can expect to see variations of CT’s story play out in other states as programs and services are withdrawn from a vulnerable and needy population.

Why You Should Not Create a Special Needs Trust

JANUARY 16, 2012 VOLUME 19 NUMBER 3
Let’s say you have a child with “special needs,” or a sister, brother, mother or other family member. You have not created a special needs trust as part of your own estate plan. Why not?

We know why not. We have heard pretty much all the explanations and excuses. Here are a few, and some thoughts we would like you to consider:

I don’t have enough money to need a special needs trust. Really? You don’t have $2,000? Because that’s all you have to leave to your child outside a special needs trust to mess with their SSI and Medicaid eligibility.

I can’t afford to pay for the special needs trust. We apologize that it can be expensive to get good legal help. But the cost of preparing a special needs trust for your child is likely to be way, way less than the cost of providing a couple month’s worth of care. That is what is likely to happen if you die without having created a special needs trust, since it will take several months of legal maneuvering to get an alternative plan in place. Even if there is no loss of benefits, the cost of fixing the problem after your death will be several times that of getting a good plan in place now.

I’ve already named my child as beneficiary on my life insurance/retirement account/annuity. Ah, yes — our favorite alternative to good planning. If your child is named directly as beneficiary, you may have avoided probate but complicated the eligibility picture. Their loss of benefits will occur immediately on your death, rather than waiting the month or two it would have taken to get the probate process underway. This just might be the worst plan of all.

It’ll all be found money to my kids. I’ll let them take care of it if I die. We have bad news for you: “if” is not the right word here. That aside, you should understand that a failure to plan means you are stuck with what’s called the law of “intestate succession.” That means (in Arizona — if you are not in Arizona you might want to look up your state’s law) that if you die without completing your estate plan, your spouse gets everything unless you have children who are not also your spouse’s children. If you are single, your kids get everything equally. If your child on public benefits gets an equal share of your estate, we will probably need to either (a) spend it all quickly or (b) put it into a “self-settled” special needs trust. That means more restrictions on what it can be used for, and a mandatory provision that the trust pays back their Medicaid costs when they die. All their Medicaid costs. Including anything Medicaid has provided before your death. Wouldn’t you like to avoid that result? It’s simple: just see us (or your lawyer if that’s not us) about a “third-party” special needs trust. The rules are so much more flexible if you plan in advance.

My child gets Social Security Disability (or Dependent Adult Child) Benefits and Medicare. Good argument. Because those programs are not sensitive to assets or income, your child might not need a special needs trust as much as a child who received Supplemental Security Income (SSI) and Medicaid (or AHCCCS or ALTCS, in Arizona). But keep these three things in mind:

  1. Even someone who gets most of their benefits from SSD and Medicare might qualify for some Medicaid benefits, like premium assistance and subsidies for deductibles and co-payments. Failure to set up a special needs trust might affect them, even if not as much as another person who receives, say, SSI and Medicaid.
  2. Even someone receiving Medicare will have some effect from having a higher income. Premium payments are already sensitive to income, and future changes in both Medicare and Social Security might result in reduced benefits for someone who has assets or income outside a special needs trust.
  3. If your child has a disability, it might be that a trust is needed in order to provide management of the inheritance you leave them. If they are unable to manage money themselves the alternative is a court-controlled conservatorship (or, in some states, guardianship). That can be expensive and constraining.

I’m young. We agree. And we agree that it’s not too likely that you will die in the next, say, five years (that’s about the useful life of your estate plan, though your special needs trust will probably be fine for longer than that). But “not too likely” is not the same as “it can’t happen.” You cut down your salt and calories because your doctor told you it’d be a good idea — even though your high blood pressure isn’t too likely to kill you in the next five years, either. We’re here to tell you that it’s time to address the need for a special needs trust.

I’m going to disinherit my child who receives public benefits and leave everything to his older brother. That will probably work. “Probably” is the key word here. Is his older brother married? Does he drive a car? Is he independently wealthy? These questions are important because leaving everything to your older child means you are subjecting the entire inheritance to his spouse, creditors, and whims. And have you thought out what will happen if he dies before his brother, leaving your entire inheritance to his wife or kids? Will they feel the same obligation to take care of your vulnerable child that he does?

I’ll get to it. Soon. OK — when?

I don’t like lawyers. We do understand this objection. Some days we’re not too fond of them, either. But they are in a long list of people we’d rather not have to deal with but do: doctors, auto mechanics, veternarians, pest control people, parking monitors. Some days we think the only other human being we really like is our barista. We understand, though, that if we avoid our doctor when we are sick the result will not be positive. Same for the auto mechanic when our car needs attention. Also for the vet and all the rest. In fact, the only one we probably could avoid altogether is the barista, and we refuse to stay away on principle.

Seriously — lawyers are like other professionals. We listen to your needs, desires and information, and we give you our best advice about what you should do (and how we can help). Most of us really like people. In fact, all of us at Fleming & Curti, PLC, really like people — it’s a job requirement. We want to help, and we have some specialized expertise that we can use to assist you. Give us a chance to show you that is true.

We also know a good barista.

Principles of Self-Settled (“First Party”) Special Needs Trusts

SEPTEMBER 26, 2011 VOLUME 18 NUMBER 34
There is so much confusion about the difference between “self-settled” and “third-party” special needs trusts, that we want to try to explain and simplify some of the key concepts. Here are some of the most common questions (and misunderstandings):

What is the difference between “self-settled” and “third-party” special needs trusts?

This is one of the most perplexing concepts to explain to people, but it is also one of the most important. In general terms, there are two kinds of special needs trusts: “self-settled” and “third-party” trusts. Some people call the former “first-party.” Some make the distinction between “special needs” and “supplemental benefits” trusts. Some talk about “litigation” trusts. But most practitioners use the “self-settled” / “third-party” distinction, and so will we.

“Third-party” special needs trusts (the kind we’re not talking about here) are set up by one person (the third party — sorry about the illogical numbering) for the benefit of another (the first party) who is receiving benefits from the government (the second party in this scenario). Let’s make it simple: if you create a trust for your daughter (who has a developmental disability), and put your own money into the trust, that is a third-party trust. But if your daughter creates her own trust, to hold her money, that is a self-settled trust.

To make things more confusing, most self-settled trusts are not literally self-settled at all. You, for instance, might sign the trust document creating your daughter’s self-settled trust. A judge might authorize you to do so. Your daughter might not be involved at all — in fact, she could theoretically object and still be treated as if she had set up the trust. The key is this: was there a moment in time during which she had the right to receive the money in the trust outright? If so, it is probably a self-settled trust.

Most (but certainly not all) self-settled special needs trusts are set up to receive personal injury settlements or judgments arising from a lawsuit. That may be the easiest way to distinguish self-settled from third-party trusts: if the trust is the result of a personal injury or wrongful death lawsuit, it is almost certainly a self-settled trust.

The second most common circumstance in which a self-settled trust might be created is when a family member leaves money or property outright to an heir who has a disability. Because the recipient had a right to receive the money (or property) outright for at least a moment in time, that kind of trust will usually be a self-settled trust, as well — even though arising from an inheritance.

What difference does it make whether a trust is self-settled or third-party?

All the difference in the world. The former type of trust must have a “payback” provision, returning up to the full value of the trust to any state which provided Medicaid benefits upon the death of the beneficiary (or, in most states, upon the termination of the trust). Third-party trusts do not need to have a payback provision, and it is almost always a blunder to include one.

There are other differences: the self-settled trust will be scrutinized much more closely for types of expenditures (in most states — your experience may vary on this one). Third-party trusts usually fly largely under the radar of public benefits agencies. Self-settled trusts are usually supervised by a court (again, state experience may vary widely); third-party trusts almost never are court-supervised. In Arizona, any self-settled special needs trust must include very restrictive language about how it can be used; third-party trusts need not include that language. In general, if you had a disability or were a trustee you would much rather have your trust be third-party than self-settled.

Who is the “grantor” of a self-settled special needs trust?

This is a particularly fun question. There are at least three different concepts involved here, and they have different language. Everyone — including seasoned practitioners — tends to use the terms interchangeably and the result can be confusing.

Trust law recognizes that someone has to have set up a trust. In trust law that person is usually called the “settlor.” Sometimes you see “trust creator” or some similar language — but the sense is the same. The settlor is the person who said “I hereby create a trust.” Usually they say it in writing, but that is not actually required — or at least not in Arizona. But we digress.

Federal income tax law introduces a different kind of person — the “grantor.” The settlor might not be the grantor. There might be one, two or dozens of grantors for a given trust. But usually, the grantor is the person whose money was transferred into the trust. In the case of a self-settled special needs trust, that will always be the beneficiary — the person with a disability whose public benefits are being protected by establishment of the trust.

Along comes public benefits law and invents another role: the trust “establishor,” if you will. Federal law says every self-settled special needs trust must be “established” by one of the following: the beneficiary’s parent, grandparent, or guardian — or by the court. Notice anyone missing from that list? You’re right — the beneficiary isn’t on the list.

So in many self-settled special needs trusts, there are three different people with three different roles:

  1. The grantor, who is also the beneficiary, who did not sign the trust document
  2. The establishor, who might be a judge and might not sign the document at all, and
  3. The settlor, who signed the trust document — perhaps at the judge’s direction.

Can there be more than one grantor in a self-settled special needs trust?

Technically, yes — but only technically. Some states (not including Arizona, happily) require that the establishor of a self-settled special needs trust put some money or property into a trust in order for it to exist. In those states a parent might sign a special needs trust, and staple a $10 bill to the trust to show that it has been legally created. That makes the parent a grantor for tax purposes — as to the $10 investment. The rest of the money comes from the beneficiary’s personal injury settlement (or inheritance, or savings), which makes the beneficiary the grantor for the bulk of the trust’s assets. So technically the parent and the beneficiary are both grantors. Sound like an absurd distinction? It is.

Does a self-settled special needs trust need a new tax identification number?

No. At least, not usually. The beneficiary’s Social Security number will suffice just fine. Some banks, brokerage houses and accountants may argue otherwise, but there is a special IRS rule for such trusts, even though the grantor/beneficiary is not the trustee. But because the trustee is not the beneficiary, it is permissible for the trust to get a separate number — it is called, incidentally, an Employers Identification Number (or EIN), even if the trust does not have any employees.

What can a self-settled special needs trust pay for?

Ah, that is a great question — and very difficult to answer. It depends on so many factors. One must look at the trust instrument itself, at state law governing self-settled special needs trusts and at the appropriate Social Security and Medicaid rules. Sometimes there are things that the trust could pay for that it should not. Sometimes there are things that the trust ought to be able to pay for, but that it can’t — even though everyone might agree that they would benefit the beneficiary. You might look at the Special Needs Alliance’s “Handbook for Trustees” for better guidance, but at some point you are just going to need to talk to an experienced and capable lawyer. The Special Needs Alliance might be able to help you there, too.

We hope that helps explain what a self-settled special needs trust is. Next week we plan on telling you about third-party trusts, and some of the rules governing them.

We Invite Your Questions, and Answer a Few

MAY 30, 2011 VOLUME 18 NUMBER 19
Periodically we try to answer some of our readers’ frequent questions, which we enjoy receiving. Some more recent questions and our quick attempts at simple answers follow. Remember, please, that slight variations in fact patterns can lead to different answers; these are intended as illustrations and guidance, not as iron-clad answers to your legal concerns. Please consult your lawyer (and we’d be interested in taking on that role, if you live in Arizona and would like to call and make an appointment) before relying on this information.

Can I leave my IRA account to a third-party special needs trust for my daughter?

Yes, you can. It may not be the best answer, and it may raise a number of other issues and concerns, so please talk to your lawyer about your specific situation. But one of your choices is indeed to leave the IRA (or a retirement plan of any kind) to your daughter’s special needs trust.

If a significant portion of your wealth is tied up in an IRA, 401(k), 403(b) or other tax-deferred retirement plan, there is plenty of information out there about how important it is to name individual beneficiaries, how the plan ought to be divided upon your death into shares for each beneficiary, and how your beneficiaries should be encouraged to “stretch out” their withdrawals as long as possible. We agree with all of that — but if one of your beneficiaries has a disability, and particularly if she is receiving Supplemental Security Income, Medicaid or other means-based public benefits, it is also important to create a special needs trust for that beneficiary. There is no reason her share of your IRA can not be made payable to that special needs trust.

The notion of naming a trust as beneficiary of a retirement account is fairly novel. Not too many years ago it was absolutely to be avoided, and many investment advisers, accountants, lawyers and financial companies retain that anti-trust bias deeply embedded in their collective and corporate psyches. But the rules are different now, and it is much easier to name a trust as beneficiary. You just need good advice from someone who is familiar with those rules and can explain how they affect your retirement account in your family situation.

In general terms, the primary effect of naming a trust as beneficiary will usually be that the age of the oldest person who might ever receive benefits from the trust will be used to calculate the withdrawal rate. But let’s see if we can make the explanation clearer. Let’s assume that your daughter, Diana, is 47. You also have two sons, Steven (age 54) and Scott (age 43). You have named Diana’s special needs trust as beneficiary of 1/3 of your IRA. Sadly, you die this year (we don’t mean anything personal — we have to let you die some time in order to ever figure out the effect of your beneficiary designations).

Next year Steven will have to withdraw at least 1/29.6 of his share of your IRA (we figure that as about 3.38%). Scott has to withdraw at least 1/39.8 of his share (that looks like about 2.51%). Diana would have to withdraw at least 1/36 (2.78%) if she had been named as beneficiary outright, but she wasn’t. So how much will her special needs trust have to withdraw?

It depends on who is named as remainder beneficiary. If upon Diana’s death the remaining money in the special needs trust goes to Scott and Steven, then we use Steven’s age for the calculation and the trust will have to withdraw the same 3.38% that he had to withdraw from his share. If Diana’s trust goes instead to her two sons (ages 15 and 17) then Diana herself is the oldest beneficiary and we can use her age — and the withdrawal will be 2.78%.

Clear as mud? Yes, but you should have seen the rules before they were simplified in 2002. While the numbers are daunting, the current rules are actually pretty easy to figure out,  and the ability to stretch out distributions from your IRA for another 36 years (or so) allows Diana’s share to continue to grow tax-deferred, despite the need to put her share in trust.

Want more information, or the numbers for your own children’s ages? Look at the IRS’s Publication 590. Appendix C is Table I, the Single Life Expectancy table to be used by IRA (and 401(k), 403(b) and other) beneficiaries.

Do alimony payments continue when someone goes on Medicaid long-term care assistance?

Short answer: yes. Now let’s parse the question a little bit more.

Assume husband and wife, married many years, were divorced five years ago. He was ordered to pay alimony of $1,000/month to her for the rest of her life. She has now gone into the nursing home, and has spent all of her own funds for her care. She has qualified for Arizona’s Long Term Care System (ALTCS — it’s Arizona’s version of the long-term care Medicaid program) payments toward her nursing home bills; she turns over her alimony payment and all but about $100/month of her Social Security, and ALTCS pays the balance of her nursing home bill.

If her ex-husband could legally stop paying the alimony payments, ALTCS would simply increase the payment to the nursing home by $1,000. She would be no worse off and he wouldn’t be subsidizing her nursing home care any more.

Because he is legally obligated to continue the alimony payments, however, ALTCS will continue to count them in its calculation of how much to pay to the nursing home. And if he went to court to argue “changed circumstances” and no continuing need to pay alimony, he might find that her attorney argues that the changed circumstances justify increasing the alimony payments so that she is not on ALTCS at all. Even if that didn’t happen, ALTCS might be inclined to view the proceeding as a sham just to get him out of paying the support payments. So it is far from certain that he would be better off by going back to the courts.

What about the reverse situation? Let’s imagine for a moment that it is the ex-husband who has gone into the nursing home. He has spent down all of his assets and applied for ALTCS. He receives $2,800/month in Social Security another $1,500 in private retirement; ALTCS says that he must turn over all but about $100/month of that income to the nursing home, and it will pick up the (small) difference.

Can he stop paying alimony? Well, no. The divorce court has ordered him to pay, and he needs to go back to argue “changed circumstances” as a way of getting out of having to make the payments. Will ALTCS, then, reduce his contribution requirement, recognizing that he is under a legal obligation to pay the alimony? Well, no. They say that his care comes first, and the entire income (minus his small personal needs allowance) has to go toward his care — and their payment to the nursing home will reflect that calculation.

What should he do? He needs to get legal help and get his support order modified. He should not simply ignore the outstanding alimony award.

Please note that “alimony” is not called that any more, and “divorce” is also an old-fashioned word. They are common in the vernacular, but the legal terms — at least in Arizona — are now “spousal maintenance” and “dissolution,” respectively. We know that, but we fear that it makes the explanation so much harder to read.

Lawyer Suspended for Bad Special Needs Trust Advice

MAY 16, 2011 VOLUME 18 NUMBER 18
Sometimes in our zeal to help solve problems we lawyers can get carried away. We are constrained by ethical rules to avoid conflicts of interest. We also have to act competently. In a case involving an injured young man, a special needs trust and the state’s Medicaid claim against the trust, New Hampshire lawyer Paul Bruzga fell short.

Mr. Bruzga’s problems started with a tragedy that had nothing to do with him. George Doherty was injured, and in a coma. His brother Steven started a guardianship action. George and Steven’s sister didn’t think Steven was the right person to be appointed, and she objected. The court appointed Mr. Bruzga as attorney for George Doherty, to protect his interests in the contested guardianship.

Mr. Bruzga learned that Steven Doherty had applied for Medicaid coverage for his brother’s substantial medical bills. He pointed out to Mr. Doherty that his brother would not be eligible for Medicaid unless a special needs trust was established to handle all of George Doherty’s money. To this point, it appears that Mr. Bruzga’s advice — and his behavior as a lawyer — was fine. But then he took the first of several wrong steps.

When Steven Doherty asked for help setting up a special needs trust for his brother, Mr. Bruzga went ahead and drafted the document and filed it with the court for approval. Later he insisted that he was doing this as attorney for George Doherty, the injured client. He also negotiated a settlement between George Doherty’s brother Steven and their sister, and he insisted that this, too, was done as lawyer for George Doherty — but his behavior was easy to challenge when he signed the court pleadings as Steven Doherty’s attorney.

George Doherty, the injured brother and beneficiary of a newly-minted special needs trust, unfortunately died a few months later. Under the terms of the special needs trust his funds would first have to be used to pay back the New Hampshire Medicaid program for care he had received. But up to that point, neither Mr. Bruzga nor Mr. Doherty had even told the Medicaid agency about the special needs trust.

Several months later, when Medicaid had not requested repayment from the trust, Mr. Bruzga advised Mr. Doherty that he could just write checks from the trust to himself and his sister. Of course, the reason Medicaid had not sent a bill might have been related to the fact that no one had ever told them the trust existed — or, indeed, even that George Doherty had died.

Coincidentally or not, the state Medicaid agency had just begun to ask questions as the final trust checks were being written. A few days before advising Mr. Doherty to distribute the remaining trust assets to himself and his sister, Mr. Bruzga had heard from a Medicaid fraud investigator, who left a message expressing his concern that there was a special needs trust they had never heard about. Mr. Bruzga left a voice message for the investigator, and shortly thereafter counseled Mr. Doherty to close out the trust.

Within a two-month period, Mr. Bruzga exchanged messages with the Medicaid investigator, filed a final accounting with the court on behalf of Mr. Doherty, and advised Mr. Doherty to tell the court that Medicaid had not filed a request for repayment and that his final distributions should be approved. Then the Medicaid investigator sent a demand for repayment to Steven Doherty and his sister, noting that the distributions should never have been made. Then the sister filed a complaint with the New Hampshire Attorney Discipline Office, which investigated Mr. Bruzga’s behavior.

Throughout all of these periods, Mr. Bruzga spoke with Steven Doherty regularly and billed him monthly for his work. He signed some pleadings indicating he represented Mr. Doherty, even though he had originally been appointed by the court as the attorney for George Doherty, the injured brother. Though he sometimes indicated that he did not think he represented Steven Doherty, he gave him specific and direct advice at each turn in the case.

The Attorney Discipline Office decided that Mr. Bruzga had a serious conflict of interest in trying to represent Steven Doherty as his brother’s guardian and as trustee, while he was really supposed to be the brother’s lawyer. The Office also decided that Mr. Bruzga had simply given bad advice — legal advice that was clearly wrong — to Mr. Doherty.

The New Hampshire Supreme Court agreed. Lawyers are supposed to avoid conflicts of interest. They are also supposed to be competent. The Court decided that Mr. Bruzga had failed on both counts. Because he “knowingly rendered incompetent advice,” his license to practice law was suspended for six months. Bruzga’s Case, May 12, 2011.

Interestingly, the court never did get around to deciding what the appropriate sanction might be for Mr. Bruzga’s failure to recognize or avoid the conflict of interest. Though failure to act competently might ordinarily result in just a public reprimand, said the justices, his failure was so much worse that the suspension was appropriate — and so they did not need to decide what (presumably lesser) sanction might have been in order for the conflict of interest. It didn’t help Mr. Bruzga’s case that he had been in trouble with the attorney discipline process twice before in his 33-year legal career.

How much money was at issue? Not much. The total value of the special needs trust was about $50,000 and the Medicaid claim was about $74,000. It is hard to figure out what motivated Mr. Bruzga to give such breathtakingly bad legal advice.

Benefits Eligibility Irrelevant in Lawsuit Over Trust Terms

FEBRUARY 6, 2011 VOLUME 18 NUMBER 5
What can a parent do to ensure continuing care for his or her adult child with a disability? That was the dilemma facing Californian Earl Blacksher in the late 1980s. His daughter Ida McQueen lived with him in the family home in Oakland. She was developmentally disabled, and she received Supplemental Security Income (SSI) payments; she had no other resources and Mr. Blacksher’s own assets were largely limited to the home.

Mr. Blacksher signed a will. He directed that Ms. McQueen be allowed to live in the house for the rest of her life, and that the rest of his small estate be placed in trust to help her pay for the care and services that would be required to let her stay at home. He left his two brothers in charge of the estate and the testamentary trust he created.

After the brothers restructured the mortgage on the house, Ms. McQueen could live there on her SSI payments — just barely. When she became ill a decade later she moved temporarily to a nursing facility. With no resources to help pay for in-home care, and with escalating needs, she could not return to the home.

The attorney who had handled the probate in the first place had never been paid, since there was not enough money to take care of her bill. Neither had the brothers been paid for their work in handling the estate. Nor had the real property taxes on the home been kept current. It appeared that there was no choice but to sell the house, pay bills, and distribute any proceeds. The attorney assisted the trustee in listing and selling the house.

After all the bills were caught up there was $90,000 left to distribute. The attorney, apparently reasoning that Ms. McQueen had effectively abandoned her life estate interest in the home by failing to pay taxes and keep payments current, decided that nothing needed to be retained in Mr. Blacksher’s trust, and she arranged distribution of the proceeds to the remaining family members.

Almost immediately a conservatorship was begun to investigate the transaction, and a lawsuit was filed against several family members and the attorney who had arranged the sale and distribution. The lawsuit argued that the net proceeds should have been retained in trust for the benefit of Ms. McQueen. In response, the defendants insisted that it was reasonable to treat Ms. McQueen’s right to use of the house (or proceeds from its sale) as terminated, and that in any event any money she would have received would have simply interrupted her eligibility to receive SSI payments and subsidized care from California’s Medicaid program.

At trial two attorneys testified about the possibility of treating Mr. Blacksher’s trust as a “special needs” trust, which might have allowed Ms. McQueen to have the benefit of the sale proceeds without losing her eligibility for SSI and Medicaid. One expert opined that the option should have been discussed; the other pointed out that Mr. Blacksher’s trust did not qualify as written, and that California law would not have permitted a revision. Ultimately, however, the language of Mr. Blacksher’s testamentary trust was irrelevant — the trial judge precluded testimony about SSI benefits, and the jury found that most of the defendants had participated in taking money from Ms. McQueen. They were ordered to return $99,900 to Ms. McQueen.

One defendant — the attorney — was singled out by the jury for additional penalties. She was the only one the jury found liable for elder abuse, a separate claim under California law (and, incidentally, under the law of Arizona and most, if not all, other states). That did not directly increase the jury’s award against her, but it did have a significant additional effect. California law permits an award of attorneys fees against a party found liable for elder abuse. The attorney was ordered to pay Ms. McQueen’s lawyer’s fees, which totaled another $320,748.25.

The California Court of Appeal considered several arguments but ultimately upheld the judgment, including the effectively quadrupled award against the attorney. Key to the appellate court’s ruling was a finding that it was irrelevant whether Ms. McQueen received SSI or Medicaid benefits, or whether she would have lost those benefits if the terms of her father’s trust had been carried out as written. The judges were also unimpressed by an argument that the attorney acted reasonably in deciding, albeit wrongly, that failure to pay taxes or upkeep on the house effectively ended Ms. McQueen’s interest in the trust. McQueen v. Drumgoole, January 14, 2011.

The litigation involving Mr. Blacksher’s testamentary trust proves what every parent of a child with disabilities already knows: it can be very difficult to come up with a plan that adequately protects your child after your death. Mr. Blacksher’s trust may have been inadequate to the task, but it may be that the basic inadequacy was in the plan itself — there does not seem to have been enough money available to let Ms. McQueen stay in the family home after his death.

What might Mr. Blacksher have done differently? It is hard to be certain on the sparse record in the Court of Appeal, but there are a number of planning questions we might have asked Mr. Blacksher if we had a chance to speak with him before he signed his will, including:

  1. Does the testamentary trust language in your will adequately protect your daughter’s interest in the family home if it has to be sold? It appears that Mr. Blacksher’s will may not have done so — the trust he established may not have been a “special needs” trust.
  2. Do you have a realistic plan about how your daughter’s care can be provided? It appears from the outcome that there were not sufficient assets available to provide in-home care, even if health problems had not intervened to send Ms. McQueen to a care facility.
  3. If a move from the home is inevitable after your death, have you given adequate consideration to alternatives now? Might it be best to look into transitioning your daughter into a suitable placement while you are still able to participate in the selection and oversight of the care home?
  4. How involved — both in terms of time and in financial and other support — will the rest of the family be in caring for your daughter? Most parents recognize the high personal cost of providing full-time care. Did Mr. Blacksher’s family members realize that they would need to provide some of that care after he was unavailable, or did they realize it but lack the resources to do what he had done for years?

For lawyers, the key messages from the McQueen v. Drumgoole case are probably:

  • The “collateral source” rule, which prevents jury consideration of other payments available to the plaintiff in most civil lawsuits, applies in a case like this to prevent discussion of the SSI and Medicaid benefits a plaintiff might be entitled to receive — even if a successful verdict might eliminate those benefits.
  • The attorneys fees generated in complex litigation might all be chargeable against an unsuccessful defendant, even if not all of the claims (and all of the defendants) are found liable for any attorneys fee award.

For family members, though, the takeaway message is simpler:

  • Failure to plan realistically for your child’s care may result in a failed care plan.

Uniform Transfers to Minors Act Accounts in Arizona: A Primer

JANUARY 31, 2011 VOLUME 18 NUMBER 4
One question we are frequently asked: isn’t it a good idea to set aside money for a child or grandchild, and isn’t a UTMA (Uniform Transfers to Minors Act) account a simple way to do that? OK — that’s really two questions. Our answers: Yes, it is a good idea to set aside money. Yes, the UTMA account is a simple way to do it. Don’t set up a UTMA account, however, until you understand the consequences.

There are confusing issues about UTMA accounts. Sometimes the confusion is heightened by the fact that each of the 48 states which have adopted versions of the UTMA Act has changed it a little bit — so what is true in Arizona may not be true in another state (and vice versa). Rather than indulge in all that confusion, however, we are going to tell you in straightforward language what to watch for in Arizona. Be careful about applying these principles to other states’ UTMA acts.

First, the good news. Here are the positive things about Arizona UTMA accounts:

  1. They are inexpensive to set up and to administer. They do not require a lawyer, and avoid courts and formal accounting requirements altogether. All you have to do to create an Arizona UTMA account is to include the name of a custodian, the name of the beneficiary, and the letters UTMA in the title. This will work: “John Jones as custodian pursuant to the Arizona UTMA for the benefit of Marie Smith.”
  2. A UTMA account can simplify the gifting of substantial amounts of money by multiple family members. Set up an account for your 2-year-old, and all four grandparents can put $13,000 each into the account each year (using 2011 numbers — the maximum non-taxable gift may go up next year or in future years).
  3. They automatically end at 21, so the money will not be tied up indefinitely. One of the points of confusion: sometimes UTMA accounts end at 18 in other states, and in some circumstances in Arizona. But if you are putting your money into an account for a minor in Arizona, the end date is age 21.
  4. They encourage regular savings by simplifying the process. Open an account with, say, $1,000, and put $50/month into the account. You won’t save a fortune in 15 years, but you will have $10,000 that you wouldn’t otherwise have saved without this discipline. Plus the earnings and growth on the investment, as a bonus.
  5. If the minor receives public benefits like SSI or Medicaid, the money will usually not be treated as “available” (and therefore reduce or eliminate benefits) until age 21.

Of course it’s not all good news. Here are some problems or limitations:

  1. The money in the UTMA account will need to be reported on the minor’s FAFSA (Free Application for Federal Student Aid) form when applying for student aid — and it will be treated as completely available to the student. In other words, the very existence of a UTMA account may prevent receipt of needs-based student aid.
  2. The income in the UTMA will be taxed at the minor’s parents’ income tax rates. Unless, of course, there is so much money in the minor’s name that his or her rate is higher — then the UTMA account will be taxed at that higher rate.
  3. The minor may have to file an income tax return if the UTMA money produces significant income. The UTMA account may be used to pay any income tax due, and the tax preparation costs, but it will require that a return be prepared.
  4. At age 21 the (former) minor is entitled to receive all the money. Period. It doesn’t matter if he or she has become a drug addict, a spendthrift or a cult member.
  5. If the (former) minor receives public benefits like SSI or Medicaid, at age 21 the UTMA account becomes an “available” resource and may compromise those benefits.
  6. If the UTMA custodian is the parent of the minor (which is by far the most common arrangement), then there may be additional complications in how the money can be used and/or what tax effect the money might have. Since a parent has an obligation to support his or her minor children, the UTMA account generally can not be used by a parent/custodian in ways that reduce or satisfy that support obligation. If, on the other hand, the donor of the money acts as custodian, he or she may not have gotten the money out of his or her estate (which is usually one intention on the donor’s part).
  7. Although UTMA accounts are usually seen as simple mechanisms avoiding lawyers and conflict, the custodian still has an obligation to give the minor (or his or her guardian) account information. Thinking of giving a divorced and non-custodial parent money for the benefit of his or her minor child? Know that you are inviting a dispute between the custodial parent and the UTMA custodian over how the money is invested and spent (or not spent).
  8. What happens if the custodian dies or becomes incapacitated? There is no easy mechanism to select a successor custodian; it may require a court proceeding to name a successor. A fourteen-year-old minor may be able to select his or her own custodian, which could raise concerns for a thoughtful donor. (Note: Arizona law does allow the current custodian to name his or her own successor custodian, but few do. If you are planning on setting up a UTMA account, insist that the custodian select a successor.)
  9. What happens if the beneficiary dies before reaching age 21? The money goes to his or her estate — which may require a probate proceeding (if the total is over $50,000 in Arizona) and usually means that the money will be split between the child’s parents. That may be fine, but it may not be what the donor intends or wants.
  10. The effect of interstate proceedings is unclear. If you live in New Mexico and set up a UTMA account in an Arizona bank with an Arizona custodian for a minor who lives in Iowa, what happens when your custodian moves to Wisconsin? What courts might the custodian have to answer to, and whose law applies in the case of a disagreement? Fortunately, this problem seldom arises — there are few legal proceedings involving UTMA disputes. But they do happen, and increasingly so in an increasingly mobile society.

What are your alternatives to a UTMA account? Consider 529 plans for educational purposes, and separate trusts if the money is intended to be for more general use. For a child who earns income an IRA might even be an appropriate choice — if the child earns $3,000 in a given year, he or she can contribute up that amount to an IRA (and the source of the money does not have to be the earnings). Talk to your financial adviser and your lawyer about the cost of the various options, the problems they raise, and the best alternative in your circumstances.

Attorney Disciplined for Advice to Ignore POA Limitations

JANUARY 3, 2011 VOLUME 18 NUMBER 1
Lawyers, of course, grapple with ethical issues constantly. Elder law attorneys see particular ethical issues recur frequently. Sometimes the lawyer’s eagerness to accomplish the client’s wishes can cloud the lawyer’s ethical judgment. Sometimes the lawyer’s fascination with what might be done can even gallop ahead of the client’s wishes.

None of that is terribly profound or original. Last month, however, we were reminded of how easy it is to get enamored of a particular legal stratagem even though it may not be appropriate in a given case. The notion surfaced in the form of a Minnesota disciplinary proceeding involving attorney Donald W. Fett.

Mr. Fett was consulted by a man (we’ll call him Richard here, just to give him a name) whose brother (let’s call him Martin) was failing. Martin had moved into a nursing home, where he was likely to spend the rest of his life. Martin was unmarried, had no children, and was worth a little more than $600,000.

Martin had already signed a power of attorney naming Richard as his agent. Minnesota law provides a simplified form for powers of attorney, and it has a space where the signer can indicate whether his agent will have the authority to make gifts, including to himself. Martin had checked the line to give Richard the power to make gifts of Martin’s property, but not to Richard himself.

Mr. Fett knew that Martin’s money would be used up in relatively short order if it had to be spent on his nursing home care. Richard had told him that Martin would not want that to happen if it could be avoided, and Mr. Fett could see a way to allow at least a portion of Martin’s money to be protected. In a letter to Richard, and in several follow-up communications, he outlined his plan.

Basically, Mr. Fett suggested that Richard could make a gift of nearly all of Martin’s money, leaving him less than $3,000 (the asset limit in Minnesota for Medicaid assistance with long-term care — note that the limit is even lower in most states). That would make Martin ineligible for Medicaid assistance, but only for a limited time. The money that Richard had given away could be given back over the next couple of years, and then the ineligibility period would expire and Richard could keep the remaining money aside until after Martin’s death. That way at least a portion of his assets could go to the people he had named in his will — including Richard, his other siblings, and some charities.

The fly in the ointment for Mr. Fett’s advice: Martin’s power of attorney had expressly prohibited gifts to Richard himself. In order for the plan to work, though, Richard would have to be confident that Martin’s money would be used to benefit Martin during the ineligibility period. It was a conundrum.

Mr. Fett’s proposed solution was to have Richard liquidate all of Martin’s investments, transfer them to a bank account in Richard’s and Martin’s names as joint owners, and then withdraw them from the bank into his own name. That way, he apparently reasoned, Richard wouldn’t be using the power of attorney in a way that was prohibited — he would instead be using general rules governing joint accounts.

Richard was apparently suspicious of Mr. Fett’s advice, and eventually he consulted another attorney. That resulted in a complaint to the Minnesota disciplinary commission, the Office of Lawyers Professional Responsibility. After hearings the Office recommended that Mr. Fett be publicly reprimanded and placed on probation for a year.

The Minnesota Supreme Court agreed, and upheld both the discipline and the sanction. The Court’s opinion takes a dim view of Mr. Fett’s argument that he was not really recommending a course of action in violation of the limitation in the power of attorney. The Court notes that even if Richard could have used the joint tenancy account to circumvent the limitations of his brother’s power of attorney, Mr. Fett’s correspondence with his client failed to explain the distinction in sufficient detail to allow Richard to make an informed decision about how to act.

The Court notes that Mr. Fett’s failure to give his client complete information could have subjected Richard to serious problems. He might be held liable to return all of Martin’s money, and perhaps even triple the amount transferred. He could even be criminally charged. Mr. Fett gave him none of that information. His failure to fully inform his client was also a failure to provide competent representation, and a violation of the ethics rules for lawyers.

Mr. Fett had been a lawyer for over thirty years, and had limited his practice to estate planning and elder law matters for about six years prior to his contact with Richard. Because of that experience in the practice, and particularly in elder law, the Court determined that the sanction could be higher than would otherwise be implemented. Mr. Fett also had a history of disciplinary actions, having appeared before the Office of Lawyers Professional Responsibility five times over two decades.

The Court also considered mitigating factors such as lack of harm to either Richard or Martin (Mr. Fett’s advice was not followed) and lack of improper motive or harmful intent on Mr. Fett’s behalf. Those were not sufficient to offset the recommendation for a public reprimand, however. In Re Petition for Disciplinary Action Against Fett, November 24, 2010.

Is there a larger message in Mr. Fett’s disciplinary proceeding? We think there is, and it is this: just because a legal strategy might work, it does not follow that it must be implemented, or even that it is a good strategy. Careful consideration of all the negatives is important, and complete information should be shared with the client.

How To Leave An IRA To A Child Who Has a Disability

SEPTEMBER 27, 2010 VOLUME 17 NUMBER 30
This is so confusing to clients, but it needn’t be. The rules are actually simpler than they seem. Stay with us, and we’ll walk you through it.

OK, here’s the set-up: You have three children, one of whom (the youngest) has a disability. We’ve decided to name her Cindy (sorry if we got that part wrong). Your estate plan is to leave everything equally to your three children, but you know that (1) Cindy can’t manage money, and (2) even if she could, leaving her money directly would knock her off of her public benefits. Just to make things more complicated, nearly half of your net worth is held in an IRA.

Before we roll up our sleeves, let us make a few observations about your situation:

  1. If instead of an IRA you have a 401k, a 403b, Keogh or other retirement plan, the rules are pretty much the same. They’re somewhat different if you have a Roth IRA; we may tackle that issue in a future newsletter.
  2. If Cindy’s disability entitles her to public benefits but she is able to manage money just fine then some of the trust issues might be different from what we describe here.
  3. We’ve decided that your estate (your combined estate, if you are married) is just under the estate tax limits, whatever they might be. That’s so we don’t have to complicate this explanation with an estate tax element. But the truth is, that wouldn’t complicate things all that much — we just don’t want to have to throw those oranges into our apple basket. Not today, anyway.

Ready? Here we go. We’ll start by asking you some questions:

First question: What benefits does Cindy get? Is she on Supplemental Security Income (SSI)? Does she also get Social Security benefits, either on her own work history or on yours? Is she receiving Medicare coverage? How about Medicaid (or, in Arizona, AHCCCS)? Does she also get a housing subsidy, benefits through the Division of Developmental Disabilities, or therapy and care from the school district?

This question is important, because first we need to figure out whether her benefits will be affected by any trust you might set up for her. Here’s a surprise: it’s not enough to figure out what benefits she is on now, particularly if she was disabled before age 22. She might be eligible to receive benefits on your work history (or your spouse’s), and those benefits could go up when you retire and again when you die. Since your estate plan is all about what happens to your money when you die, the benefits Cindy gets then will be more important than the benefits she receives now.

Second question: How important is it to you to give your children the chance to “stretch-out” your IRA? We’re sorry — we didn’t explain what that means.

You already know that you have to withdraw money at a set pace, calculated based on your life expectancy, once you reach age 71 (we know — it’s really 70.5; it’s actually the year after you turn 70.5, so let’s just call it 71, okay?). You probably also realize that your beneficiaries get to use their own life expectancies after they inherit your IRA. Or at least they do most of the time.

If that is important to you, your beneficiary designation should make it easy for your children to use the longest stretch-out period possible. Since they are probably all different ages that means there is a benefit — maybe a slight one, but a benefit — to the youngest children to be able to use their own age rather than being stuck with an older sibling’s age.

Note: this assumes your children share your interest in stretching out the IRA withdrawals. Take the simple case, with Cindy not involved: if you make the other two children (let’s call them Amelia and Barbara) beneficiaries of the IRA, Barbara (the younger) will be able to take a little less out each year than Amelia is required to do. But if either of them decides to just withdraw all the money and use it for an extended European vacation, then they can choose to make a decision that is not tax-wise. If you want to prevent them from doing that, you have raised the complication factor — but it can be done. We’re just not going to try to explain it here. But we do — here.

Third question: Do you want to try to give Cindy some non-IRA assets rather than an interest in the IRA, just to make this simple? Let’s say you left your IRA to Amelia and Barbara, and increased Cindy’s share of the non-IRA assets to make the shares equal. Would that work?

Well, yes — but it’s not quite that easy. Say you leave $100,000 in an IRA to Amelia — is that worth $100,000 to her? No, because she will have to pay taxes on it when she takes it out. How much? It depends on her state, her marginal tax rate and how long she leaves it in the IRA, so it’s very hard to figure out the “real” value to Amelia. Plus we know that the real value of the same amount of IRA will be different for Barbara, making the calculation that much more difficult.

Maybe we can use a rule of thumb, though. Let’s guess that Amelia and Barbara will delay taking out their inherited IRA money as long as possible, and that when they do they’ll both be retired and not making a lot of income. Perhaps the “real” value (to them) of your IRA will be 65% to 80% of its balance when you die. Is that close enough for you to figure out what would be “fair” if you gave Cindy more cash and less IRA? We can’t tell you — this one is a judgment call for you.

Fourth question: Who will manage Cindy’s money after your death? Amelia, the banker (and classic first-born)? Barbara, who has some financial challenges of her own but has always been close to Cindy, and still lives in the same community with her? Your local bank? A family friend, or a professional you have worked with?

Enough questions for a moment. Let us tell you what we think, based on your answers.

First, you can create a trust and name it as beneficiary of your IRA. Don’t listen to your banker or your accountant if they tell you that you can not do that — they are reciting old rules that no longer apply.

But if you do name a trust as beneficiary, you are likely to force everyone to use a shorter stretch-out date — probably all three daughters will be stuck with Amelia’s life expectancy. If there are only a few years’ difference between the girls, that may not be a big deal. If this issue is important, then we probably can work around it — we can name Amelia and Barbara as beneficiaries directly, and a stand-alone “special needs” trust for Cindy’s benefit to receive her share of the IRA. If we do that, though, you have to make us a promise: you can’t let anyone else tell you to change your beneficiary designations after we get them set up. At least you have to promise not to make any changes until after you have met with us and gone back over the beneficiary form.

In fact, you will find that you have to help educate lots of folks about IRA beneficiary designations. Over time you will be told that you have a mistake in your designation, that you have unnecessarily caused tax increases for your daughters, that your lawyer obviously doesn’t know how to do this. We do, and we can help you respond to those bankers, accountants and others who tell you that you need to make changes. Keep us in the loop, please.

We also need to make sure you realize Cindy’s share can’t go to charity after her death. None of it. Even though the non-profit which provides a sheltered workshop for her would be the logical beneficiary of a share of “her” IRA portion, it mucks everything else up.

So how do we get Cindy’s portion of the IRA — and for that matter the rest of her inheritance — set up to benefit her without knocking her off of her SSI, Medicaid, AHCCCS and other government benefits? That’s what a special needs trust is all about.

We have important advice for you: Be careful as you look for information about special needs trusts, though: much of what you read will be about the rules (and limitations) on so-called “self-settled” special needs trusts, and Cindy’s trust will not be one of those. You will be establishing a “third-party” special needs trust, and the rules will be much different, and much more liberal. You can leave IRA and non-IRA assets in a special needs trust for Cindy’s benefit, and you will actually improve the quality of her life without jeopardizing the programs and benefits she receives.

We hope this helps sort through some of the finer points of IRA beneficiary designations. If you want more, we can recommend a really thorough article by our friend Ed Wilcenski, a New York lawyer. He wrote for Forbes.com, and he’s a smart guy who writes well.

Incidentally, we’d love to hear from you. Maybe you have a question about IRAs and special needs trusts, or you just want to tell us whether this helped you out. Maybe you want to quibble with some of our advice. We love to hear from readers.

We will not, however, undertake to represent you based on a simple e-mail or internet inquiry — we need much more information (starting with where you live — we don’t practice outside Arizona) before undertaking a lawyer/client relationship. We won’t be able to answer your specific questions about your own legal situation, either. What good are we, then? Well, we’ll try to demystify some of the general rules and answer general questions about these topics. Contact us if you’d like us to try, or simply Leave a Reply below. We’ll read your comments and let you know, even if we can’t help you with individual legal problems.

Distinguishing Two Kinds of Special Needs Trusts

AUGUST 23, 2010 VOLUME 17 NUMBER 27
It really is unfortunate that we didn’t see this problem coming. Those of us who pioneered special needs trust planning back in the 1980s should have realized that we were setting up everyone (including ourselves) for confusion. We should have just given the two main kinds of special needs trusts different names. But we didn’t, and now we have to keep explaining.

There are two different kinds of special needs trusts, and the treatment and effect of any given trust will be very different depending on which kind of trust is involved in each case. Even that statement is misleading: there are actually about six or seven (depending on your definitions) kinds of special needs trusts — but they generally fall into one of two categories. Most (but not all) practitioners use the same language to describe the distinction: a given special needs trust is either a “self-settled” or a “third-party” trust.

Why is the distinction important? Because the rules surrounding the two kinds of trusts are very different. For example, a “self-settled” special needs trust:

  • Must include a provision repaying the state Medicaid agency for the cost of Title XIX (Medicaid) benefits received by the beneficiary upon the death of the beneficiary.
  • May have significant limitations on the kinds of payments the trustee can make; these limitations will vary significantly from state to state.
  • Will likely require some kind of annual accounting to the state Medicaid agency of trust expenditures.
  • May, if the rules are not followed precisely, result in the beneficiary being deemed to have access to trust assets and/or income, and thereby cost the beneficiary his or her Supplemental Security Income and Medicaid eligibility.
  • Will be taxed as if its contents still belonged to the beneficiary — in other words, as what the tax law calls a “grantor” trust.

By contrast, a “third-party” special needs trust usually:

  • May pay for food and shelter for the beneficiary — though such expenditures may result in a reduction in the beneficiary’s Supplemental Security Income payments for one or more months.
  • Can be distributed to other family members, or even charities, upon the death of the primary beneficiary.
  • May be terminated if the beneficiary improves and no longer requires Supplemental Security Income payments or Medicaid eligibility — with the remaining balance being distributed to the beneficiary.
  • Will not have to account (or at least not have to account so closely) to the state Medicaid agency in order to keep the beneficiary eligible.
  • Will be taxed on its own, and at a higher rate than a self-settled trust — though sometimes it will be taxed to the original grantor, and sometimes it will be entitled to slightly favorable treatment as a “Qualified Disability” trust (what is sometimes called a QDisT).

So what is the difference? It is actually easy to distinguish the two kinds of trusts, though even the names can make it seem more complicated. A self-settled trust is established with money or property that once belonged to the beneficiary. That might include a personal injury settlement, an inheritance, or just accumulated wealth. If the beneficiary had the legal right to the unrestrained use of the money — directly or though a conservator (or guardian of the estate) — then the trust is probably a self-settled trust.

It may be clearer to describe a third-party trust. If the money belonged to someone else, and that person established the trust for the benefit of the person with a disability, then the trust will be a third-party trust. Of course, it also has to qualify as a special needs trust; not all third-party trusts include language that is sufficient to gain such treatment (and there is a little variation by state in this regard, too).

So an inheritance might be a third-party special needs trust — if the person leaving the inheritance set it up in an appropriate manner. If not, and the inheritance was left outright to the beneficiary, then the trust set up by a court, conservator (or guardian of the estate) or family member will probably be a self-settled trust.

That leads to an important point: if the trust is established by a court, by a conservator or guardian, or even by the defendant in a personal injury action, it is still a self-settled trust for Social Security and Medicaid purposes. Each of those entities is acting on behalf of the beneficiary, and so their actions are interpreted as if the beneficiary himself (or herself) established the trust.

Since the rules governing these two kinds of trusts are so different, why didn’t we just use different names for them to start with? Good question. Some did: in some states and laws offices, self-settled special needs trusts are called “supplemental benefits” trusts. Unfortunately, the idea didn’t catch on, and sometimes the same term is used to describe third-party trusts instead. Oops.

We collectively apologize for the confusion. In the meantime, note that the literature about special needs trusts sometimes assumes that you know which kind is being described and discussed, and sometimes even mixes up the two types without clearly distinguishing. Pay close attention to anything you read about special needs trusts to make sure you’re getting the right information.

Want to know more? You might want to sign up for our upcoming “Special Needs Trust School” program. We are offering our next session (to live attendees only) on September 15, 2010. You can call Yvette at our offices (520-622-0400) to reserve a seat.

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