Lawyers With Purpose

Person-First Terminology In Special Needs Planning

For those estate planning attorneys and allied professionals who have little experience advising families with special needs issues, one of the biggest challenges is learning, appreciating and using “person-first” terminology when referencing the beneficiary with a disability and his consequent special needs. It does not matter how technically proficient an advisor may be if he or she alienates the client by utilizing outdated and disparaging terminology to refer to the person with the disabling condition.

Just as the “N-word” offends most people of good will, so too does the “R-word” (“retard” or “retarded”), which has only recently gained a similarly offensive status. State and federal statutes are increasingly amended to replace all forms of the “R-word” with more respectful terminology. A client of mine with the patience of Job illustrated the concept of person-first terminology as follows: “I don’t have a disabled daughter; I have a daughter with a disability. She isn’t “wheelchair-bound;” she uses a wheelchair to get around. She is not a “Downs child;” she’s a child who has Down Syndrome. She’s not “mentally retarded;” she “has a cognitive disability.” Her siblings without disabilities aren’t “normal;” they are “typical.” Using person-first terminology may seem cumbersome and unnatural at first.

Clients, however do take notice of those who successfully integrate this concept into normal speech. In time, the old terms that emphasized the disability first, instead of the person first, will become as offensive to the attorney, and to the other allied professionals with whom they work, as they have been to these families.

Overcoming this challenge will completely transform the way a family relates to, and communicates with, their professional advisors.

For a handy “cheat sheet” on the proper terminology to use when referring to individuals with disabilities, visit www.tcdd.texas.gov and download a wonderful “People First Language” handout (in English and Spanish) developed by the Texas Council for Developmental Disabilities. See also John Folkins, American Speech-Language-Hearing Association, The Language Used to Describe Individuals with Disabilities (Dec. 1992), available at http://www.asha.org/publications/journals/submissions/person_first.htm.

Kristen M. Lewis, Esq., Member of the Special Needs Alliance and Fellow of the American Academy of Trust and Estate Counsel

Inherited IRA Retitled For SNT

A 40-year old client of mine, who is disabled and receiving means-tested government benefits, was designated as the direct beneficiary of his deceased mother’s IRA. This arrangement, of course, threatened his ongoing eligibility for those government benefits. The client’s father was still living, and able to serve as the Settlor of a (d)(4)(A) (i.e. first-party) SNT for the sole benefit of the client.

I prepared the SNT so that it qualified as a “grantor trust” with respect to the client for income tax purposes. We used the client’s Social Security Number as the taxpayer identification number for the SNT, in lieu of applying for a separate Employer Identification Number (which is also an option), to emphasize to the IRA custodian that the client and the SNT were deemed to be one and the same taxpayer. I then approached the in-house legal department of the IRA custodian and requested that my client’s inherited IRA be re-titled in the name of his first-party SNT, relying upon the analysis and holdings of Private Letter Ruling 200620025 (which we all know is not binding precedent on the IRS for taxpayers other than the one who requested the Private Letter Ruling).

In that PLR, an adult child with a disability, who was receiving means-tested government benefits, was designated as the direct beneficiary of a share of his deceased father’s IRA. In order to preserve his means-tested government benefits, the son’s legal guardian petitioned a court of competent jurisdiction for authority:

(i) to create a first-party SNT, and
(ii) to fund it with the beneficiary’s share of the inherited IRA.

The IRS held that the first-party SNT was a “grantor trust” for federal income tax purposes under IRC Section 677(a). Thus, since a grantor trust is disregarded for income tax purposes, the IRS held that the funding of the SNT with the beneficiary’s share of the inherited IRA was not a transfer for purposes of IRC Section 691(a)(2). This conclusion remained the same even after the beneficiary’s share of the inherited IRA was transferred, by means of a trustee-to-trustee transfer, to a new IRA account set up and maintained in the name of the deceased IRA owner to benefit the son through his first-party SNT. Finally, the IRS held that the Required Minimum Distributions from the new IRA to the SNT could be calculated using the son’s life expectancy.

In my client’s situation, it was not necessary to secure the appointment of a legal guardian or conservator, because although he was “disabled” within the meaning of the Social Security Act, he was mentally competent and had not been declared to be an incapacitated adult. Our real challenge was the insistence of the IRA custodian that we obtain a court order directing the “reformation” of the decedent’s beneficiary designation from my client individually to his first-party SNT. The custodian of the IRA account stipulated that it did not object to the entry of a court order reforming the beneficiary designation of the IRA from my client individually to his first-party SNT.

Since my client did not have or need a court-appointed guardian or conservator, we could not get the requested court order from the Probate Court. Since all interested parties were in agreement as to the retitling of my client’s inherited IRA, we initially struggled to find a basis upon which to file a civil action in Superior Court that would not be dismissed for lack of a controversy. In the end, we decided to file a Complaint for Declaratory Judgment in the Superior Court, seeking the reformation of the decedent’s beneficiary designation form and an order directing the custodian to retitle the inherited IRA in the name of his SNT.

We were thus able to secure an order and final judgment of the Superior Court holding that the decedent’s IRA beneficiary designation form was “reformed” to substitute the client’s first-party SNT for the client individually, and the IRA custodian was directed to honor the reformation by substituting the SNT for the client individually. When the dust settled, the client’s inherited IRA was retitled as follows: “Jane Doe, Deceased IRA for the Benefit of John Doe through the John Doe Irrevocable Supplemental Care Trust.” (This designation language was taken straight from Private Letter Ruling 200620025.) It is important to note that the success of this approach requires that the first-party SNT be a grantor trust with respect to both income and principal vis à vis the beneficiary in order to avoid a taxable recognition event. The balance in the newly retitled inherited IRA is now being distributed directly to the first-party SNT based on the client’s life expectancy, and the client’s eligibility for means-tested government benefits has been preserved.

Kristen M. Lewis, Esq., Member of the Special Needs Alliance and Fellow of the American Academy of Trust and Estate Counsel.

Special Needs Trusts In The Context of Divorce

Many divorce attorneys are clueless about the impact on a client’s SSI and Medicaid eligibility of a marital property settlement, spousal support payments or child support payments. The incidence of divorce in families where a spouse or child has a disabling condition is almost twice that of families without such disabilities. Thus, it is imperative that we reach out to our Family Law brethren to advise them of Special Needs Trust planning in the context of divorce – well in advance of the negotiations that will yield the divorce settlement.

For purposes of SSI and Medicaid eligibility, direct receipt by the person with a disability of the following items constitutes “unearned income” which will reduce his SSI payment:

(i) non-exempt marital assets set aside as part of a property division;
(ii) spousal alimony or support payment in cash;
(iii) child support payments in cash.

In general, unearned income reduces the recipient’s SSI payment dollar for dollar after the first $20. In the case of a minor child, cash support payments by an “absent parent” (i.e. one not living in the same household as the minor child) are subject to a special rule: one-third of such payments are excluded from the calculation of the child’s unearned income. Similarly, one-third of any non-cash child support for a minor child’s food or shelter provided by an absent parent will be disregarded for purposes of calculating the child’s unearned income. The other two-thirds will still count as “In-Kind Support and Maintenance” (“ISM”) subject to the “Presumed Maximum Valuation Rule” (“PMV”), i.e. a reduction in the child’s SSI payment of no more than one-third of the maximum federal SSI benefit (in 2013, $234, which is one-third of $710). Child support payments for an adult child do not qualify for the one-third disregard available for child support for a minor child, regardless of whether the parent payor lives with that adult child.

Use of a first-party SNT can mitigate the adverse impact on the SSI benefits of a client who is entitled to receive Court-ordered spousal support or child support. There is no SSA restriction on the assignability of such payments. See POMS SI 01120.201J.1.c and 01120.201G.1.d. However, such payments must be irrevocably assigned and paid to the first-party SNT, preferably pursuant to the express terms of the court order dissolving the marriage and reciting the award of support. Furthermore, the court order should ideally direct and require the establishment of the first-party SNT to which the support payments are irrevocably assigned.

While the payment of the support to the SNT must be irrevocable, the court order should not preclude a future modification of the amount or timing of the payments (unless that is a negotiated element of the parties’ settlement). The usual statutory rules regarding the establishment of a first-party SNT will still apply, as set forth in 42 U.S.C. Section 1396p(d)(4)(A) and numerous POMS provisions interpreting same, including limitations on the identity of the Settlor and the age of the SNT beneficiary at the time the SNT is established and funded. If the SNT beneficiary is a minor or an incapacitated adult, a conservator may need to be appointed as a procedural first step in the process of establishing and funding the first-party SNT with the stream of support payments and any non-exempt assets set aside for the beneficiary as part of the settlement.

While a first-party SNT must be used as the receptacle for any court-ordered support payments or non-exempt assets awarded as a property settlement, a third-party SNT may also play a role in securing the future of a divorced client (or a child of the dissolved marriage). If the parties agree on “voluntary” payments by one of the ex-spouses for the benefit of a former spouse or a child of the marriage, a third-party SNT can be the receptacle. Such voluntary payments should be completely separate and apart from any court-ordered payments irrevocably assigned and paid to a first-party SNT. Caution is advised, however, in relying too heavily on this approach. Since the payments are purely voluntary, there is no legal remedy if the payor decides to discontinue such payments to the detriment of the SNT beneficiary.

Kristen M. Lewis, Esq., Member of the Special Needs Alliance and Fellow of the American Academy of Trust and Estate Counsel.

It's Tax Season ... Here's a Lesson On SNT's And Deductible Medical Expenses

While I was away at the Annual Meeting of the American College of Trust & Estate Counsel (“ACTEC”) in Maui (tough duty, I know!), we have switched over to Daylight Savings Time and inched ever-closer to April 15, the date on which many of our clients will wait to file their federal and state income tax returns.

With income tax season upon us, you may receive inquiries from your clients regarding the deductibility of expenses incurred for the benefit of a person with special needs. Many such expenses may constitute deductible “medical expenses” under I.R.C. Section 213(d)(1)(A) (and the regulations thereunder) if they relate to the “diagnosis, cure, mitigation, treatment or prevention of disease,” or the costs of treatments “affecting any structure or function of the body.” This definition would include the following:

(1) Premiums for health and medical insurance, amounts paid for qualified long-term care services, and limited amounts paid for a qualified long-term care insurance contract.

(2) Prescribed medicine and drugs.

(3) The costs of transportation to obtain medical care, and the travel costs of a companion for a person who cannot travel alone.

(4) The cost of rendering a vehicle wheelchair accessible.

(5) Medically necessary caregiver services, even if not rendered by a licensed medical professional, as long as the services are of a type generally performed by a nurse.

(6) Certain long-term care services for the “chronically ill,” as defined in IRC § 7702B(c)(2). Payments to family members for long-term care services are not deductible unless the person is a “licensed professional with respect to such service.”

(7) Meals and lodging for a caregiver rendering nursing or long-term care services.

(8) The cost of care in an assisted living facility, nursing home or other institution (including meals and lodging), if the principal reason for the placement is to obtain medical care.

(9) The entire cost of a skilled nursing home facility.

(10) The costs of living in a transitional group residence pursuant to the recommendation of a psychiatrist.

(11) The costs of a special education school that trains a child to overcome learning disabilities, including tuition, meals and lodging, if recommended by a doctor and if the principal reason for attending the school is to overcome the child’s learning disabilities.

(12) Doctor recommended tutoring by a teacher who is specially trained and qualified to work with children who have learning disabilities caused by mental or physical impairments.

(13) Admission and travel to medical conferences that address the illness or condition of the patient.

(14) The costs of maintaining medically necessary special equipment.

(15) The cost of special equipment installed in a home, or improvements made for medical purposes (deductible only to the extent that the reasonable cost exceeds the increased value of the property, if any, that results from the improvement), including entrance and exit ramps; widening doorways; installing railings or support bars; installing lifts; modifying stairways; grading the property to provide ready wheelchair access to the residence.

If a first-party Special Needs Trust is a “grantor trust” with respect to the beneficiary (usually under I.R.C. Section 677(a)(1) and (2), or sometimes one of the other grantor trust “strings,” e.g. I.R.C. Sections 674 or 675(4)(C)) and the Trustee uses SNT assets to pay the beneficiary’s medical expenses, then the taxable income reportable by the beneficiary on his personal income tax return may be offset by those SNT-funded medical expenses if they exceed 7.5% of the beneficiary’s Adjusted Gross Income (10% of AGI for 2013 and subsequent tax years).

In contrast, if the Trustee of a non-grantor SNT (i.e. most inter vivos third-party SNTs) makes such disbursements for the beneficiary’s medical expenses, the SNT may not deduct them as medical expenses. However, the SNT may be entitled to a distribution deduction under I.R.C. Sections 651 and 661 (and a corresponding amount would constitute income to the beneficiary reportable on his individual income tax return).

For more examples of deductible medical expenses, consult IRS Publication 502, “Medical and Dental Expenses” - available at www.IRS.gov/pub/irs-pdf/p502.pdf

Kristen M. Lewis, Esq., Member of the Special Needs Alliance and Fellow of the American Academy of Trust and Estate Counsel.

March Madness Is Heating Up!

I love it when March rolls around. You can guarantee great basketball, green beer and a month before taxes are due from last year’s profits. Also, my children (twins) celebrate their birthday each March. This year the Final Four is being hosted in Atlanta, Georgia, where I live. The energy of the city really ratchets up and it feels vibrant just to be in the buzz of it all.

There is a different kind of buzz in March for our Veterans who are receiving a pension with Aid and Attendance benefit -- tax free income to help offset the high cost of medical care. To receive Improved Pension with either Housebound or Aid and Attendance, Veterans must meet financial criteria ensuring their income and assets are below certain limitations. Due to this, historically, the VA required an annual review of income, assets, and medical expenses to be filed no later than March 1st.

This year the VA decided to eliminate the formal review process and no longer requires beneficiaries of the pension to send in a review. Instead, the VA is cross-referencing reported income with the Internal Revenue Service (IRS) and Social Security databases. This sounds very efficient for the VA. However, it will create madness for Veterans who are receiving the pension when their benefits are terminated because they followed what they believed the VA to mean in their letters that an annual review is no longer necessary.

A claimant or beneficiary of the VA pension must still report, every year, the amount of out-of-pocket medical expenses he paid that was not reimbursed by any other source. Since the pension is awarded based on a reduction of income due to medical expenses, then the medical expenses must be reported. Otherwise, when the VA cross-checks income with the IRS and Social Security, it will appear the Veteran has too much income (because the medical expenses are not cross-referenced). It is up to the Veteran to ensure the VA receives verification of all medical expenses each year.

The deadline to submit medical expenses is no longer March 1st of each year. Instead, it is December 31st of the year after the medical expenses were incurred. Plenty of time to gather the information needed. Also, plenty of time for the Veteran to delay and forget to file them.

I foresee a March madness of a different kind beginning in 2014, the year after the VA eliminated the annual review, when Veterans’ benefits begin to be terminated for lack of proper notice of medical expenses. For lawyers who are practicing in this area, I recommend you make room on your calendar beginning in March 2014 for the calls you will receive asking for help to reinstate benefits. To be proactive, putting an advertisement in a local newspaper in February 2014 informing Veterans of your available assistance would likely prove to be fruitful. The client, who has come to rely on the monthly income, will be in distress and will need to know who can help.

For more information, or to become a member of Lawyers With Purpose, LLC, an organization with a mission of “Creating a world where people can protect what’s important to them and where client-centered lawyers can be valued for the peace of mind they help provide,” go to www.lawyerswithpurpose.com.

Victoria L. Collier, Certified Elder Law Attorney, Fellow of the National Academy of Elder Law Attorneys, Co-Founder, Lawyers with Purpose, LLC, and author of 47 Secret Veterans’ Benefits for Seniors…Benefits You Have Earned but Don’t Know About.

What To Do With "Excess" SSI Benefits

Every once in awhile, a client who receives monthly Supplemental Security Income (“SSI”) cash benefits (in 2013, a maximum of $710/month) may find that he cannot spend the full amount on his needs (and wants). This failure to fully expend the SSI benefits may, in due time, result in the client accumulating more than $2,000 in his bank account, thus jeopardizing his ongoing eligibility for SSI and, in a majority of states, Medicaid as well.

We all know that SSI benefits are not assignable in advance of receipt to a first-party Special Needs Trust. See POMS Section GN 02410.001 and Sections SI 01120.200G.1.c and 01120.201J.1.c. However, is it permissible for an SSI recipient or his Representative Payee to transfer unused SSI benefits to a first-party SNT? The answer is “yes.”

POMS Section GN 00602.075 (“Transfer of Benefits to a Trust”) provides that a Representative Payee (or, presumably, the benefits recipient himself) is permitted to transfer Title XVI benefits (i.e. SSI) to establish and fund a trust, or to fund an existing trust, if the following prerequisites are met:

(i) establishing the trust is in the beneficiary’s best interest;
(ii) the trust is established exclusively for the use and benefit of the beneficiary to meet the beneficiary’s current and reasonably foreseeable needs; and
(iii) the SSI recipient is the sole trust beneficiary during his lifetime. See POMS Section GN 00602.075C.1. The POMS then incorporate by reference the familiar SNT requirements set forth in POMS Sections SI 01120.201, 01120.202 and 01120.203 for “guidance on trusts and how trusts established with an individual’s assets affect SSI eligibility.” See POMS GN 00602.075C.4.

POMS Section GN 00602.075D.3 then enumerates examples of trust provisions that “meet use of benefits policies,” including expenditures for “food, clothing, housing, medical care, recreation and education,” as well as reasonable compensation for trustee and other professional services. Also permissible are trust provisions which limit disbursements to “the beneficiary’s current maintenance needs that are not covered by public assistance.”

An example of impermissible trust provisions include prohibitions on disbursements for “the beneficiary’s current needs for food, clothing, housing and medical care,” while allowing disbursements only “to enhance the quality of life for the trust beneficiary in the broadest sense, including but not limited to vacation travel and transportation expenses.” Caveat: many early versions of first-party SNTs utilize just this type of impermissibly limiting language!

Thus, a first-party SNT that otherwise complies with the relevant provisions of POMS Sections SI 01120.201, 01120.202 and 01120.203 would be a permissible receptacle of excess SSI benefits paid to the (recipient or his Representative Payee) but not currently expended.

Kristen Lewis

Lewis v. Alexander (3d Cir. 2012) Sets the Stage for Possible Review of SNT's by Supreme Court

OBRA ’93 authorized the concept of a “pooled” Special Needs Trust, separate accounts in which may be established for the sole benefit of a beneficiary with a disability. 42 U.S.C. § 1396p(d)(4)(C), and related POMS provisions, set forth the following requirements.

a. A pooled Special Needs Trust must be “established and managed by a non-profit association.” POMS SI 01120.203.B.2.c defines a non-profit association as “an organization established and certified under a State nonprofit statute.” As of January 2011, tax-exempt status is no longer required of the non-profit association.

b. A pooled Special Needs Trust must contain the assets of individuals who are “disabled,” as defined by 42 U.S.C. § 1382c(a)(3).

c. The pooled Special Needs Trust must maintain a separate account for the sole benefit of each beneficiary with a disability, but may pool the assets of the separate accounts for purposes of investment and management. See POMS SI 01120.203.B.2.d and POMS SI 01120.203.B.2.e.

d. A separate account with the pooled Special Needs Trust must be established by (i) the beneficiary’s legal Guardian of the Property or Conservator; (ii) the beneficiary’s parent or grandparent; (iii) a court; or (iv) the beneficiary himself. (In contrast, the beneficiary of a (d)(4)(A) Special Needs Trust may not serve as the Settlor to establish a first-party Special Needs Trust for himself.)

e. To the extent that the pooled Special Needs Trust does not retain any amounts remaining in a separate account upon the beneficiary’s death, such assets must be used to reimburse Medicaid (but not the Social Security Administration) up to the total amount of medical assistance benefits paid on behalf of the beneficiary during his lifetime. See also POMS SI 01120.203.B.2.g.

(1) POMS SI 01120.199.F.2 sets forth modified requirements for an acceptable “early termination” provision applicable to a beneficiary’s account with a pooled Special Needs Trust. The requirements described in POMS SI 01120.199.F.1 (for first-party Special Needs Trusts), need not be satisfied in the context of a pooled Special Needs Trust if the early termination provision only allows for the transfer of an account from one pooled Special Needs Trust to another. However, no funds may be retained by the first pooled Special Needs Trust if the termination of the beneficiary’s account occurs during his life rather than by virtue of his death.

f. There is no express statutory limitation on the age of a beneficiary of an account with a pooled Special Needs Trust, i.e. the statute on its face permits the establishment of an account even if the beneficiary is 65 or older. However, if the beneficiary is 65 or older, many States choose to impose a penalty for the uncompensated transfer of the beneficiary’s assets to the pooled Special Needs Trust if the beneficiary wishes to qualify for Medicaid long-term care (i.e. nursing home) coverage, or for certain long-term care services rendered in the community. See 42 U.S.C. § 1396p(c)(1)(B)(i)-(ii), (c)(1)(G), (e)(1), (f), and POMS SI 01150.121.A.3. Some States take the position that an account with a pooled Special Needs Trust cannot be established for a person who is 65 years or older even if the person were willing to accept a transfer penalty.

g. Separate accounts for a pooled Special Needs Trust may be established as first-party or as third-party, i.e. with reference to the source of the assets with which the account will be funded.

h. Pooled Special Needs Trusts are typically governed by a “Master Trust Agreement” that applies to all of the separate accounts. A separate account is established by completing a “Joinder Agreement,” which usually does not require the involvement of an attorney (one of the most popular aspects of this option). This is also a very cost-effective option for a beneficiary who has too many assets to maintain his eligibility for means-tested government benefits, but not enough to warrant the expense of creating or maintaining a (d)(4)(A) Special Needs Trust.

i. An account with a pooled Special Needs Trust is often the only option for a beneficiary who (i) has no living parents or grandparents, (ii) may be “disabled” but who is mentally competent and thus cannot qualify for a legal Guardian or Conservator, (iii) cannot convince a court to serve as the Settlor of a (d)(4)(A) Special Needs Trust, and/or (iv) is age 65 or older.

On June 12, 2012, the United States Court of Appeals for the Third Circuit held that the Medicaid program administered in the Commonwealth of Pennsylvania could not impose additional criteria for the exemption of pooled Special Needs Trusts authorized by 42 U.S.C. § 1396p(d)(4)(C), over and above those criteria specifically enumerated in the statute. See Lewis v. Alexander, 685 F.3d 325 (3d Cir. 2012).

Pursuant to the federal preemption doctrine, the Court struck down the following elements of a Pennsylvania statute that purported to impose additional qualification criteria over and above those set forth in the federal statute: (i) a restriction on the amount of funds in a deceased beneficiary’s account that can be retained by the pooled Special Needs Trust; (ii) a requirement that expenditures from a beneficiary’s account must be “reasonably related” to the beneficiary’s needs; (iii) a requirement that the beneficiary’s special needs could not be met without the funds in the beneficiary’s account; (iv) a definition of “special needs” that limits permissible disbursements to “items, products or services . . . related to the treatment of the beneficiary’s disability;” and (iv) a restriction limiting beneficiaries of a pooled Special Needs Trust to those under 65 years of age.

The Court held that “Congress intended that special needs trusts be defined by a specific set of criteria that it set forth and no others. We base this upon Congress’ choice to provide a list of requirements to be met by special needs trusts. The venerable canon of statutory construction— expressio unius est exclusio alterius—essentially says that where a specific list is set forth, it is presumed that items not on the list have been excluded. . . . Absent an explicit statement or a clear impression that States are free to expand the list, expressio unius leads us to conclude they are not.” Id. at 347. Earlier in its decision, the Court concluded that “in determining Medicaid eligibility, States are required to exempt any trust meeting the provisions of 42 U.S.C. § 1396p(d)(4).” Id. at 344. The Third Circuit’s holding that “42 U.S.C. § 1396p(d)(4) imposes mandatory obligations upon the States” is contrary to the position of the Second Circuit in Wong v. Doar, 571 F.3d 247 (2d Cir. 2009), and the Tenth Circuit in Keith v. Rizzuto, 212 F.3d 1190 (10th Cir. 2000), which held that 42 U.S.C. § 1396p(d)(4) does not mandate that the States exempt special needs trusts meeting the statutory criteria. Id. at 343.

On January 14, 2013, the United States Supreme Court denied the request by the Commonwealth of Pennsylvania to grant a writ of certiorari in the Lewis v. Alexander case, thus leaving in place the decision of the Third Circuit, and the conflict thus created with the Second and Tenth Circuits. Accordingly, the issue of whether a Medicaid program can impose additional criteria for exemption of Special Needs Trusts is ripe for a review by the United States Supreme Court.

Kristen Lewis

Defensive Drafting of SNT ' s In Ongoing Battle With SSA

Last week, we discussed a surprising development in the ongoing battle with the Social Security Administration (“SSA”) over various POMS provisions addressing the “sole benefit” rule for first-party SNTs. The decision of the SSA to remove a controversial illustration of a purported violation of the sole benefit rule in POMS SI 01120.201F.2 has been met by SNT drafters with both elation and dismay. Although the now infamous “Example 1” (characterizing SNT-funded travel expenses of the beneficiary’s family members as a violation of the sole benefit rule) has been deleted, SNT planners and drafters remain in limbo as to the best response to this unexpected move by the SSA. Is this deletion merely a temporary position? Does it represent a “kinder, gentler” forecast for dealings with the SSA and state Medicaid programs? Without clarity on these questions, and whether the SSA may change its mind about other types of previously “safe” disbursements, how should practitioners be drafting their first-party SNTs?

Many well-respected SNT practitioners are recommending that the commonly encountered “laundry list” of suggested permissible expenditures be eliminated from SNT agreements entirely. This approach would avoid the need to amend or modify the SNT each time the SSA changes its position in the POMS on the permissibility of a given disbursement. However, many professional Trustees insist on detailed authorizations in the trust agreement for specific items or services, and in the absence of such express authority will insist on obtaining an order of a court of competent jurisdiction directing the disbursement (at great expense to the SNT). However, having a court order does not immunize the disbursement from attack by the SSA or a state Medicaid program, as recent and pending cases attest.

Some practitioners have suggested reliance upon a provision in the SNT agreement that disbursements be limited to those “permitted by the POMS.” However, it is arguable that many provisions in the POMS exceed the legal authority of the SSA to regulate the establishment and administration of SNTs. The recent decision of the United States Supreme Court denying certiorari in Lewis v. Alexander let stand the 2012 decision of the United States Court of Appeals for the Third Circuit (685 F.3d 325) that the Medicaid program administered in the Commonwealth of Pennsylvania could not impose additional criteria for exemption of pooled SNTs authorized by 42 U.S.C. § 1396p(d)(4)(C). The denial of cert in that case effectively creates a conflict in the Circuits which may well come before the United States Supreme Court in the years ahead. (Note: this conflict in the Circuits will be the topic of a future blog entry.) Including a provision in a SNT agreement that limits disbursements to those “permitted by the POMS” begs the question as to whether the POMS are valid and enforceable, and may preclude the SNT from challenging any suspect POMS provisions.

As noted in last week’s blog entry for 1/25/13, POMS Section SI 01120.227D takes the position that so-called “Null and Void Clauses” are, well, null and void! “For SSI resource purposes, a null and void clause does not cure an otherwise defective trust instrument . . . . and cannot nullify provisions that would otherwise make the trust a countable resource. Null and void clauses cannot overcome missing or conflicting trust provisions.” (This drafter nevertheless includes such a clause in her SNT agreements.)

Unfortunately, there is no generally accepted best practice for the defensive drafting of SNTs in this unsettled environment. In those jurisdictions where it is permissible, a SNT agreement should include a limited power of amendment to ensure continued compliance with relevant law and regulations (without any court involvement, if permissible under state law). Such a power should be vested in the Trustee (or possibly a “Trust Protector,” which this drafter does not use). However, even a limited power to amend is reportedly a fatal flaw in some SSA Regions, and the Trustee must proceed with a judicial modification under state law to effectuate any necessary amendments to a non-compliant SNT agreement.

The SSA is currently engaged in active and productive conversations with SNT advocates (including private practitioners, disability support and advocacy groups, and SNT trustees and administrators) to address these, and other, pressing concerns of the SNT community, the first such meeting having been held on January 16, 2013 at SSA headquarters in Baltimore. While these discussions unfold, practitioners and drafters should be prepared to advocate for more clarity in the evolving area of SNTs and means-tested government benefits, which are the cornerstone of securing the future of our clients with disabling conditions. In appropriate cases, practitioners should embrace the opportunity to litigate on behalf of clients whose means-tested benefits are adversely impacted by unsupported SSA or Medicaid decisions characterizing their SNTs as countable resources.

– Kristen Lewis

Recent Developments In Ongoing Battle With SSA Over "Sole Benefit" Rule

In April of 2012, the Social Security Administration (“SSA”) stunned those of us who draft first-party Special Needs Trusts (“SNTs”) by adding to POMS Section SI 01120.201F.2. an example of a SNT provision that purportedly violates the “Sole Benefit Rule.” Under cloak of darkness, and without any opportunity for public comment, “Example 1” appeared as follows:

“Example 1 – Trust provision that is not for the sole benefit of the trust beneficiary.

An SSI recipient is awarded a court-ordered settlement that is placed in an irrevocable trust of which he is the beneficiary. The trust document includes a provision permitting the trustee to use the trust funds in order to pay for the SSI recipient’s family to fly from Idaho and visit him in Nebraska. The trust is not established for the sole benefit of the trust beneficiary, since it permits the trustee to use trust funds in a manner that will financially benefit the SSI recipient’s family.”

Up until this addition, prior versions of POMS Section SI 01120.201F.2 had specifically permitted a first-party SNT to pay for such travel expenses. In reliance on those POMS, many drafting attorneys (including this author) have for many years authorized this type of disbursement in our first-party SNTs, including it in the “laundry list” of suggested permissible SNT expenditures. Starting in April 2012, the SSA took the position that the mere presence of this authority in the SNT document was sufficient to disqualify the SNT as an exempt trust under 42 U.S.C. Section 1396p(d)(4)(A), whether or not the trustee ever made such disbursements.

Panic and chaos in the SNT world quickly ensued! Previously approved SNTs were disqualified as part of annual reviews. Petitions for judicial modifications of newly non-compliant SNTs were filed across the country, seeking to purge the affected SNTs of the newly offensive provisions. Trust Protectors leaped into action to amend SNTs where authorized to do so without court involvement. (Note: the SSA also takes the position in POMS Section SI 01120.227 that it will not respect a “savings clause” provision in a SNT, e.g. “No provision of this Trust Agreement shall be recognized or given effect to the extent that such provision would render the Trust non-compliant with relevant federal or state law. . . .”) Meanwhile, practitioners and other disability advocates were contacting their elected representatives and “insiders” at the SSA with a veritable firestorm of outrage and protest.

Then during the first week of January 2013, the infamous “Example 1” disappeared under cloak of darkness as mysteriously as it had appeared back in April 2012. Thousands of SNTs have already been amended, or are still in the process of being amended, to comply with a POMS provision that is suddenly no longer in the POMS! What is a practitioner to do? Stay tuned for next week’s blog entry. – Kristen Lewis

Meet Kristen M. Lewis our Resident SNT Expert

Greetings and Happy New Year from the Lawyers with Purpose Special Needs Trust consultant, Kristen M. Lewis, a private practice attorney based in Atlanta, Georgia. As we start 2013 together, I wanted to introduce myself to all of you brave practitioners making your way in the SNT world.

I graduated from Cornell Law School in 1984, and proceeded to develop a traditional estate planning private practice. In the late ‘80s, I prepared my first SNT in the context of a personal injury settlement for a baby who was severely injured at birth. The vast majority of my early SNTs were in the context of personal injury settlements, while a very few were in the context of traditional estate planning where the beneficiary’s disability was no one’s fault.

25 years later, those percentages are reversed: 80% of my SNTs are in the context of traditional estate planning, and 20% are in the context of personal injury settlements. Furthermore, a full 75% of my estate planning clients have special needs issues that must be addressed, whether for themselves, their children or extended family members. Special Needs Estate Planning is an area in which many, if not most, traditional estate planning attorneys know just enough to be dangerous.

Instead of becoming proficient in SNT planning, many traditional estate planning attorneys simply recommend that the intended beneficiary with special needs should be disinherited, and his or her share left to another family member who will “do the right thing” and utilize those funds for the benefit of the person with a disability. This is outdated advice, and probably grounds for a legal malpractice claim. The good news is that Lawyers with Purpose helps its members to tackle the complex issues presented by Special Needs Estate Planning, and equips them to ably represent their clients in this evolving area of the law.

It will be my honor and privilege in the weeks ahead to share with you my thoughts and other “pearls of wisdom” gleaned from many years of Special Needs Estate Planning work, as well as to keep you updated on current and cutting-edge developments in the SNT arena. As we spend virtual time together each week, it is certainly my hope that my blog entries will assist you in your practice, and perhaps even with your own family members or friends who may be challenged by a disability or other special needs. In my 25 years of speaking about SNTs to attorneys and other allied professionals, it has never ceased to amaze me how many of the seminar attendees approach me after the presentation with questions that pertain to their personal situations rather than those of their clients. 2013 promises to be a year of major developments in the SNT world, and I look forward to our journey together in the weeks ahead. - Kristen Lewis