The Importance of Flexible Trust Provisions to Accommodate a Beneficiary’s Uncertain Future

SCENARIO:

A grandparent’s trust for a grandchild contains a discretionary distribution provision as to the principal of the trust, but also contains a compulsory distribution provision of a fixed sum each month, to be distributed directly to the beneficiary.

PROBLEM:

As it turns out, the grandchild reached young adulthood with a disability that hinders the grandchild from being gainfully employed or obtaining additional education.  The grandchild is able to qualify for Social Security Disability benefits (based upon a deceased parents’ work record) and receives Medicaid benefits.  However, as a result of the grandparent’s death and implementation of the funding of the disabled grandchild’s trust, due to a combination of the Social Security payments when added to the compulsory trust distribution each month, the disabled person will now lose valuable Medicaid benefits due to too much income being received by the disabled grandchild.  Although receipt of Social Security Disability payments are not affected by the compulsory cash payments from a Trust, Supplemental Security Income (SSI), as well as Medicaid, are impacted by the compulsory distributions and would likely be lost if the compulsory payments from the trust were large enough to affect those benefit programs.  While some courts might entertain a request that the trust be reformed or modified so as to remove the compulsory distribution requirement, other judges may be philosophically opposed to doing so, seeing such efforts by lawyers as “Medicaid planning at the taxpayers’ expense.”

SOLUTION:

Thus, now more than ever, because a beneficiary may become disabled after a trust was drafted, which may have contained compulsory distribution provisions, and if the creator of the trust is deceased and cannot modify his/her trust document, trusts should be written with flexible provisions, preferably with no compulsory distribution provisions at all but only discretionary distribution provisions.  This will protect the beneficiary from loss due to creditors (in many or most cases) as well as avoid causing the loss of currently received, or future receipt of, public benefits, such as SSI (Supplemental Security Income) and/or Medicaid, or other forms of public benefits.

 

Sometimes a trust may contain provisions for internal modifications or amendment to be performed by the trustee, or someone such as a trust protector.  Such after-the-fact power to modify is becoming increasingly important to enable a trust document to be adjusted to meet a change of circumstances among beneficiaries or simply to correct an oversight or unwise provision.  It is impossible to foresee every beneficiary’s circumstance, so document flexibility is ever more critical to avoid expensive judicial reformation--which might not always be achieved, even if sought.

 

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

WILL AN INHERITANCE AFFECT SSI AND/OR MEDICAID?

This question arises frequently, and I often receive calls from parents of disabled children or professional Trustees as to the impact of an inheritance received from a grandparent or other relative, and whether or not that inheritance will affect “social security benefits.”

The short answer to this question is YES–if the disabled person is receiving either or both SSI and/or Medicaid.  Under both SSI and Medicaid rules, the disabled person cannot possess more than $2,000 in non-exempt resources.  (Exempt resources include things like clothing, household goods, personal effects, etc.) 

Thus, if a disabled individual inherited or received a gift of money or property that increased his/her bank account or list of assets/resources above $2,000 in value, the recipient would lose his/her SSI and Medicaid benefits unless the excess funds were immediately: (1) spent down below $2,000 for the benefit of the disabled person; (2) used to acquire exempt resources; (3) used to purchase a prepaid irrevocable burial contract up to $10,000; or (4) transferred into one form or another of a Medicaid pay-back trust [called a (d)(4)(A) trust, or a (d)(4)(C) trust, the later also known as “pooled” trust.]

If a disabled person is receiving SSDI (or “SSD”) which is an earned benefit program called “Social Security Disability Income,” an inheritance will not affect the continued receipt of that benefit.  SSDI is not a welfare program like SSI, and thus is not affected by receipt of an inheritance.  But if a person was receiving SSDI and Medicaid, he or she could still lose their Medicaid benefits unless one or more of the four strategies described above was implemented.

CONCLUSION:  A parent, guardian, or other caregiver should rarely discourage gifts be given to a disabled person from other family members, grandparents, etc., since there are ways to salvage these gifts via proper spend-down strategies or setting up a Medicaid payback trust, as described above. 

Curtis J. Shacklett, Esq.

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

CAN A SPECIAL NEEDS TRUST OWN A HOUSE FOR THE BENEFIT OF A DISABLED PERSON RECEIVING SSI AND/OR MEDICAID?

Sometimes a disabled adult (or guardian of a disabled adult) who has received a personal injury settlement (or large inheritance) which was placed into a special needs trust (SNT) containing a Medicaid payback provision, will inquire about the trustee purchasing a home for the disabled person. This post will address an issue of the trustee purchasing a home for a disabled adult person for his/her own use/benefit.

The Social Security POMS provide considerable guidance regarding home ownership by a trust for a disabled person. Section SI 01120.200 F.1., provides:

If the trustee of a trust which is not a resource for SSI purposes purchases and holds title to a house as a home for the beneficiary, the house would not be a resource to the beneficiary. It would also not be a resource if the beneficiary moved from the house. The trust holds legal title to the house, therefore, the eligible individual would be considered to be living in his/her own home based on having an “equitable ownership under a trust.”

Thus, the mere ownership of a home by the trust is not problematic to the disabled beneficiary. However, as recited below, the POMS provide that payment by the trust of mortgage payments, and other household expenses will be deemed to be income to the disabled person, thus impacting (reducing, most likely) such person’s SSI check each month:

(section F. 3. b) If the trust, which is not a resource, purchases the home with a mortgage and the individual lives in the home in the month of purchase, the home would be ISM [In-kind Support and Maintenance--a form of income] in the month of purchase. Each of the subsequent monthly mortgage payments would result in the receipt of income in the form of ISM to the beneficiary living in the house, each payment [i.e., of the monthly mortgage note] valued at no more than the PMV [presumed maximum value] (see SI 01120.200 E.1.b).

In addition, the POMS provide that certain household expenses paid for by the trustee can be deemed to be income to the disabled individual:

(section F. 3. c): “If the trust pays for other shelter or household operating expenses, these payments would be income in the form of ISM in the month the individual has use of the item. …If the trust pays for improvements or renovations to the home, e.g., renovations to the bathroom to make it handicapped accessible or installation of a wheelchair ramp or assistance devices, etc., the individual does not receive income. Disbursements from the trust for improvements increase the value of the resource and, unlike household operating expenses, do not provide ISM.”

Thus, an outright purchase without an ongoing mortgage is one way to reduce the “income” problem to the beneficiary. However, payment by the trust of normal household operating expenses (e.g., utilities, ad valorem taxes, water/sewer, garbage removal, etc) will be deemed to constitute additional “income” to the disabled beneficiary, which may affect either or both such person’s receipt of SSI and/or Medicaid benefits.


Curtis J. Shacklett
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