CAN A TRUSTEE PURCHASE OR PAY FOR COLLECTIBLES, HOBBY ITEMS, OR PET-CARE EXPENSES FROM A FIRST PARTY [(d)(4)(A)] TRUST?

I occasionally receive inquiries from parents serving as Trustee, as well as from professional (corporate) Trustees, about the legitimacy of expending trust funds for various items that one might consider mere “toys.”

The Social Security rules (“POMS”) [also followed by the Oklahoma Department of Human Services (OKDHS)], require that all funds held in a First Party Trust [a (d)(4)(A) trust] must be used “solely for the benefit of” the disabled beneficiary.  This “sole benefit rule” continues to be a source of confusion and a trip-wire for the unaware.  There are a few specific examples in the POMS addressing such things as hobby expenses, pet acquisition costs, or expenditures for collectibles [e.g., baseball cards, doll collections, etc.]  Clearly, such things (including pets) may have a significant benefit to the disabled person in providing hours of companionship (e.g., pet animal), or entertainment (doll collection).  One would be hard-pressed to say such things are “medically necessary,” but that is not required in the POMS as to permitted expenditures.  If a flat-screen television (an item of entertainment) can be purchased for the beneficiary then why not other “items of entertainment,” e.g., doll collections, baseball cards, latch-hook rugs (my son’s preference), puzzles, crafts, pet expenses, etc.?

Actually, the POMS do provide some guidance as to what types of items are considered “household goods” or “personal property.”  Although the list of permitted and exempted items (exempt from being considered as part of the $2,000 limit on resources) is not spelled out in great detail, we are given the following definition and examples:

SI 01130.430 (“Household Goods, Personal Effects, and Other Personal Property”)

C.  Definition of Household goods and personal effects

1.  Household goods

Household goods are items of personal property, found in or near the home, the householder uses on a regular basis.  The householder needs household goods for maintenance, use, and occupancy of the premises as a home.

a.         Examples of household goods

• Furniture;
• Appliances;
• Electronic equipment, for instance computers and televisions;
• Carpets;
• Cooking and eating utensils; and
• Dishes.

b.         Items held because of their value or as an investment

Items that an individual acquires or holds because of their value or investment are not household goods, even if they otherwise meet the definition of household goods in SI 01130.430C.1.

2.  Personal Effects

Personal effects are items of personal property ordinarily worn or carried by the individual, or items that have an intimate relation to the individual.

a.  Examples of personal effects

Personal effects may consist of the following:

• Personal jewelry, including wedding and engagement rings;
• Personal care items and clothing;
• Pets, such as a cat, dog, hamster, horse, monkey, or snake;
• Educational or recreational items, such as books, musical instruments, or hobby materials; or
• Items of cultural or religious significance to an individual, such as ceremonial attire.

b.  Items required because of an individual’s physical or mental impairment

Items required because of an individual’s physical or mental impairment, such as prosthetic devices or wheelchairs, are also personal effects.

c.  Items held because of their value or investment

Items that an individual acquires or holds because of their value, or as an investment, are not personal effects; even if they otherwise meet the definition of personal effects in SI 01130.430C.2.

Section D of the referenced POMS, however, makes clear that not all items of personal property will be treated as exempt:

1.  Other personal property may be a countable resource

Property that an individual acquires or holds because of its value or as an investment:  is a countable resource and is not considered a household good or personal effect for the purposes of this exclusion.

 Examples of other personal property that would not be exempt are given in paragraph 2, of Section D:

• Gems;
• Jewelry that one does not wear or does not hold family significance;
• Animals for investment purposes, such as a horse or dog for breeding, for resale, or investment; and
• Collectibles.

Purchasing items by the Trustee of a “First Party Trust” may cause an “excess resource” problem if the purchased personal property would be classified as collectibles; for example, or items purchased for their value (jewelry), even if such items are purchased from the disabled persons own funds (e.g., funds from Social Security benefits or accumulated wages) to avoid a problem with expending funds from the First Party Trust.  Doing so may still result in the acquired items not being treated as exempt and, therefore, their value being a part of the resource cap of $2,000.00.

CONCLUSION:  The POMS authorize the acquisition of "pets" and "hobby materials." It would seem permissible, therefore, for a Trustee to expend trust funds (within some degree of reasonableness) to acquire or maintain these types of personal property.  Items viewed as "investments" or "collectibles" will likely create problems for the beneficiary, however.  Purchasing or receiving as gifts of non-excluded household goods or "other personal property" may result in a problems of excess resources, thus hindering continued receipt of SSI and/or Medicaid.

Purchasing of “other personal property” by the Trustee, and holding title in the Trust for the benefit of the disabled person may be permitted by state trust law, but a loss in value may expose the Trustee to a claim of breach of fiduciary duty to either the beneficiary or to the remainder persons (possibly including the state Medicaid agency).

Thus, avoiding the purchase by the Trustee or purchase from the disabled person’s own personal funds, of “other personal property” (items/non-exempt resources) should generally be avoided.

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.

WILL THE AFFORDABLE CARE ACT (“OBAMACARE”) AFFECT THE NEED FOR SPECIAL NEEDS TRUSTS?

In June, the U.S. Supreme Court upheld most of the provisions of the Affordable Care Act, originally signed into law in 2010, considered by some to be the most significant piece of health related legislation since the implementation of Medicare and Medicaid put in place during the Johnson administration in the 1960’s.

There are many unanswered questions that arise due to the passage of this very significant law.  Since the Supreme Court upheld a majority of the reforms of the new law, the planned result will be that most citizens will be able to obtain some form of health coverage, with premium subsidies to make private coverage deemed to be more affordable.  Since some individuals who are currently or may in the future need to obtain medical coverage and only Medicaid would otherwise be their option, will the availability of coverage under the ACA cause them to avoid seeking Medicaid benefits, and thus eliminate the need for self settled special needs trusts?  Some commentators think it is too early to tell. 

It appears that under the ACA, individuals with pre-existing conditions will still be able to obtain health insurance.  This factor alone may cause some to opt for private coverage than be bound by the Medicaid rules. 

There are other components to Medicaid such as long term living arrangements that private insurance may or may not cover which may cause the need for special needs trusts to continue to be needed.  It will probably take months or even a year or two before some of the details work themselves out into exactly how this new law will work for individuals.  Even if private insurance becomes available, it still may be too expensive to cover an individual with substantial “pre-existing” conditions thus leaving Medicaid as the only serious option still available as a practical matter. 

Until the fog clears as to the rules and implementation of the new law, special needs trusts will still be an appropriate option for individuals who may now or in the future require the assistance of long term health care and supports or medical care.

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

Trust Advisor: Pros and Cons

In my June, 7, 2012 blog post, I mentioned the new Oklahoma Statute authorizing the creation of a "Trust Advisor" within a trust instrument. (The language of the new Oklahoma Statute can be found here.) I personally believe this person (the "Trust Advisor," hereafter "TA") can play a positive role in the administration of a Special Needs Trust (SNT) and may also be helpful in dealing with beneficiaries whose lives and changing circumstances suggest a person other than the trustee might be aware of facts and information about the beneficiary, family dynamics, etc., that can be useful if such person were to "advise" or inform the trustee of those facts. Such information or advice can assist the trustee in making wiser decisions in making or withholding a distribution from the trust.


In the case of an SNT, a TA (or his/her legal counsel) knowledgeable in Medicaid and Social Security rules can be of critical importance in enabling the trustee to avoid managing the trust or making fatal or impermissible distributions from an SNT which would negatively affect the protected status of the SNT and its assets, or negatively affect the beneficiary's right to continued receipt of public benefits.


An experienced trustee, such as a professional/corporate trustee, may or may not welcome the appointment of a TA. The acceptance of a TA may depend on how the TA views his/her role and what powers are granted to the TA in the document, and how the TA actually exercises those powers.


Asset management is usually best left in the hands of the professional trust officer since that is one of the many things they are trained to do, and granting power to a TA to direct the trustee as to asset management may backfire or even result in the trustee declining to accept the role of trustee out of increased apprehension of liability for a "bad" investment outcome.


A TA could be given power to remove and replace a corporate trustee with another trustee closer to the beneficiary's city or state of residence. If acceptable to the trustee, the TA could be given the following examples of powers:

• Power to modify the trust within certain described limitations;


• Power to determine which state law should apply to the trust and power to "relocate" the situs of the trust to a sister state;


• Power to direct distributions to an individual or to and among a class of beneficiaries;


• Power to terminate a trust.

None of the above examples of powers of a TA are set forth in our new statute and whether or not any of them are contemplated by the statute is uncertain. The statute provides that the powers given to the TA seem to involve those related to the property of the trust. What specific powers granted to a TA relate to "property" and what relate to something else is not clear. The statute also indicates that the terms of the trust instrument may contain powers granted to the TA (as well as to the trustee) which may be different from the role of the TA as described in the statute.

Although there are many unknowns as to how the new statute will be implemented by estate planning and trust attorneys, or how well the role of the TA will be accepted by professional trustees, I believe the role of a Trust Advisor is a welcome tool in our desire to provide flexibility to our trusts to better handle future uncertainties. We suggest you discuss the benefits and the role of the Trust Advisor with your attorney when designing your estate planning documents, and especially in a SNT for your special needs family member. If you comtemplate designating a corporate trustee, seeking their input and consent to the appointment of a TA may be wise.

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

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

The Trustee Advisor - A Benefit or a Burden?

Recently (April 2012), the Oklahoma Governor signed a new law, effective November 1, 2012, amending the Oklahoma Trust Act authorizing the creator of a Trust to appoint a "Trustee Advisor." This brief statutory amendment reads as follows:

"Trustee advisor" means a person appointed by the terms of the trust
instrument to act as an advisor to the trustee with regard to all or some of the
matters relating to the property of the trust. Unless otherwise provided by the
terms of the trust instrument, if a trustee advisor is appointed, the property
and management of the trust and the exercise of all powers and discretionary
acts exercisable by the trustee remain vested in the trustee as fully and
effectively as if an advisor were not appointed, the trustee is not required to
follow the advice of the trustee advisor, and the trustee advisor is not liable
as or considered to be a trustee of the trust or a fiduciary when acting as an
advisor to the trust.

Unlike some sister states' laws authorizing the use of a Trustee Advisor which set forth very specific powers which can be granted in the trust document to the Trustee Advisor, our new statute grants no specific powers to a Trustee Advisor. Instead, the Trustee Advisor is truly an "advisor" only to the Trustee, and the Trustee is not required to follow the advice of the Trustee Advisor. The statute does state, however, that this outcome (i.e., the Trustee Advisor is truly only an advisor not a director to the Trustee and, thus, the Trustee Advisor cannot direct the Trustee to take certain actions) can be modified by the written terms of the trust document. This means that apparently there is a right that the person creating the trust may appoint someone (i.e., the Trustee Advisor) who is not the Trustee and grant that person power to direct the Trustee in certain areas of management of the trust. Some of these areas may include investments; amount and frequency of distributions to a beneficiary; modification of, or even amendment to, the trust. In a future post, I will address some of the pros and cons of naming a Trustee Advisor in a trust document.

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

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