CAN A SPECIAL NEEDS TRUST BE THE BENEFICIARY OF AN IRA? (Part I)

The accumulated assets in many families often include some form of a retirement account, such as an IRA, 401-k, or qualified pension plan (herein IRA).  Designating a disabled child as the direct beneficiary of an IRA is not advised for several fairly obvious reasons.  First, the entitlement to the IRA account by the disabled child will normally cause an immediate loss of SSI and/or Medicaid benefits unless spent down immediately or withdrawn from the IRA (income taxes being withheld) and transferred into one form or another of a Medicaid Payback Trust [(d)(4)(A) or (d)(4)(C)].  Secondly, if the child is mentally disabled, the mere availability of the funds to the disabled child may result in his/her misspending the funds or being exploited by others.

To solve or avoid these problems, it is possible to name a trust to be the recipient or beneficiary of the IRA.  There are two basic types of trusts that are used in conjunction with the IRA.  One is called a “conduit” trust and the other is an “accumulation” trust.  A conduit trust is designed to receive the “Minimum Required Distribution” (MRD) from the IRA which are yearly distributions of a fraction of the balance in the IRA based upon the child’s remaining life expectancy.  When the trust receives the yearly distribution from the IRA, the Trustee immediately distributes the funds received to the disabled beneficiary.  A conduit trust avoids the risk of a disabled person using the IRA all at once if he/she were named directly as the beneficiary.  However, the annual MRD coming into and then out of the Trust to the disabled beneficiary may harm the receipt of public benefits received by the disabled person depending on whether or not the beneficiary was receiving SSI and/or Medicaid.  One solution to this problem is the use of an “accumulation” trust to receive and hold onto the MRD received by the Trust from the IRA without being required to make a distribution of the MRD to the disabled beneficiary.  Holding on to the MRD avoids disqualifying the disabled beneficiary from receipt of SSI or Medicaid but may have negative income tax consequences.  There are usually ways to avoid the more negative tax consequences with a carefully drafted accumulation trust.  The ins and outs of an accumulation trust will be addressed in my next blog post. 

Curtis J. Shacklett, Esq.
Barber & Bartz, P.C.
525 S. Main St., Ste. 800
Tulsa, OK 74103-4511
Telephone: (918) 599-7755
Facsimile: (918) 599-7756
Email: cshacklett@barberbartz.com
Website: www.barberbartz.com

SSA IS SERIOUS ABOUT THE SOLE BENEFIT RULE

A “first party” (Medicaid payback trust) has a very important requirement for acceptance by SSA and Medicaid—it must exist and be managed by the trustee for the “sole benefit” of the beneficiary.  The SSA appears to have become increasingly strict in its interpretation of what “sole benefit” means.  For example, a trustee is not permitted to pay the transportation costs to bring (e.g., to fly in) relatives of the disabled person for a visit.  Even though bringing relatives for a visit (especially when travel for the disabled person is difficult if not nearly impossible) may seem like a wise and caring “benefit” to the disabled person, paying travel expenses for the relatives will violate the “sole benefit” rule.

Can the trust pay for the travel expenses of a “companion” to travel with the disabled person?  Most likely, yes, if the companion was the guardian or a required caregiver employed to assist and protect the disabled person so that the latter can travel safely.  Paying for additional family members, such as siblings, may be an enjoyable “benefit” but not a “sole benefit” for the disabled beneficiary.  Trustees must be careful to avoid violating the sole benefit rule.

Early Termination of Medicaid "Pay Back" Special Needs Trust Prior to the Death of the Beneficiary

The Social Security Administration has recently amended its “Program Operating Manual System” (POMS) to allow for the early termination of a (first party) special needs trust prior to the death of the beneficiary (a “first party” special needs trust is one established for a disabled person, funded with assets belonging to the disabled person). Prior rules only permitted the termination upon the death of the beneficiary. This change is a logical approach to handling situations where keeping the trust in place no longer makes sense. For example: (1) the trust has diminished in size to such an extent that keeping the trust active is not practical or is too expensive; (2) the beneficiary has overcome his/her disabling condition, and continued receipt of Medicaid benefits are no longer needed or desired; or (3) the trust is large enough and Medicaid benefits needed are minimal so that the strict rules of the trust along with Medicaid compliance creates too many constraints on the freedom of use of the trust assets. These types of situations might suggest the early termination of the SNT.

The POMS specific rules which must be included in the language of the trust in order to allow for early termination are as follows:

1. Upon early termination, (i.e., termination prior to the death of the beneficiary), the State(s), as primary assignee, receive all amounts remaining in the trust at the time of termination up to an amount equal to the total amount of medical assistance paid on behalf of the beneficiary under the State Medicaid plan(s); and



2. Other than payment for those expenses listed in SI 01120.199F.3. [specifically, (i) taxes due from the trust to the State(s) or Federal government due to the termination of the trust and (ii) reasonable fees and administrative expenses associated with the termination of the trust], no entity other than the trust beneficiary may benefit from the early termination (i.e., after reimbursement to the State(s), all remaining funds are disbursed to the trust beneficiary; and
   


3. The early termination clause gives the power to terminate to someone other than the trust beneficiary.

Existing trusts might be amended with the consent of the Oklahoma Department of Human Services to include “early termination” language, if deemed appropriate.

Curtis J. Shacklett, Esq.
Barber & Bartz, P.C.
525 S. Main St., Ste. 800
Tulsa, OK 74103-4511
Telephone: (918) 599-7755
Facsimile: (918) 599-7756
Email: cshacklett@barberbartz.com
Website: www.barberbartz.com

ARE RETIREMENT ACCOUNTS OF A SPECIAL NEEDS PERSON IGNORED BY SSA AND MEDICAID?

On several occasions I have been consulted by parents of adult disabled children who have worked and accumulated a retirement account via a 401k or 403b (provided by a non-profit employer) and have run afoul of SSA (Social Security Administration) or OKDHS (Oklahoma Department of Human Services-the state agency that determines Medicaid qualification) rules resulting in a disqualification of the receipt of continued benefits.

This is a trap for the unwary, since the rules allow for a person receiving SSI or Medicaid, to have a retirement account provided by his/her employer without the account’s existence, or the funds held therein (regardless of the amount), being deemed a “resource” to the worker. If deemed a “resource,” the retirement account might otherwise disqualify the worker from continued receipt of public benefits such as SSI and/or Medicaid. Parents, or guardians, or trustees assume that since the account was allowed and not deemed a resource for those years of employment, then such retirement accounts will always be deemed not a resource. Though this sounds logical, unfortunately, that is not the rule. There is some guidance (not as clear as we would like, sometimes) in the POMS (“Program Operating Manual System,” the SSA policy/rules providing guidance to the Social Security worker) as well as in the Oklahoma Administrative Code (“OAC”), the latter being promulgated by the Oklahoma Health Care Authority (the state’s Medicaid paying agency), dealing with retirement accounts and how they should be treated by those agencies when seeking to determine whether or not such retirement funds are no longer protected, i.e., no longer deemed a non-resource. The SSA rules (POMS) provide the following instructions:

“A retirement fund is not a resource if an individual must terminate employment in order to obtain any payment” (POMS-SI-01120.210 subsection C-1). However the same section in the POMS makes clear that if the individual worker could withdraw funds from the retirement account, that the value of the retirement fund is the amount of money that an individual can currently withdraw from the fund. This value is the amount left after the penalty deduction if any, but is not further reduced by any taxes that are then due based upon the withdrawal.

Similarly, the OAC contains the following “policy” provisions relevant to this issue:

“A retirement fund is not a countable resource if the applicant is currently working and must terminate employment in order to receive benefits” (OAC 317:35-5-41.7) [Emphasis added]

The policy for Medicaid benefits is worded very similarly to the SSI rule in the POMS. Thus the key appears to be that the retirement funds ARE treated as a resource for both SSI and Medicaid IF the individual, while working, has the right to withdraw funds from the retirement account for any reason permitted by the plan. Since many retirement plans do grant the employee the right to withdraw funds for certain reasons while remaining employed, it might go unnoticed to the employee or guardian, or trustee that such funds might be an excess “resource” to the individual thus hindering the continued receipt of either or both SSI and/or Medicaid.

CONCLUSION: It is thus important to remember for the benefit of a disabled worker who is receiving either or both, SSI and Medicaid, that upon termination of employment, steps should immediately be taken to withdraw and/or transfer the retirement account into a d4A special needs trust (sometimes called a Medicaid payback trust) OR withdraw the funds and find appropriate ways to spend down the funds to keep the child’s total funds and non-exempt assets at $2,000 or below. There may of course be income taxes due upon the withdrawal that will need to be taken into consideration, although frequently any tax withheld will be later received as a tax refund, depending of course on the worker’s tax circumstances. A guardian or trustee should inquire of the employer as to what exactly are the rights of withdrawal of the employee while the employee is still working. If the employee has a present right to withdraw from the retirement account, then it appears that the retirement fund would be treated as a resource thus creating the likelihood of disqualification of the employee from receipt of Medicaid and/or SSI.

If you find yourself facing this type of problem, please contact us as soon as possible so that appropriate steps can be taken in an attempt to preserve any SSI and/or Medicaid benefits.


Curtis J. Shacklett, OBA # 8101
Barber & Bartz
525 S. Main Street, Suite 800
Tulsa, Oklahoma 74103-4511
Telephone: (918) 599-7755
Facsimile: (918) 599-7756
E-mail: cshacklett@barberbartz.com