CAN A TRADITIONAL SUPPORT TRUST BE REFORMED INTO A SPECIAL NEEDS TRUST?

This question arises with some regularity. Parents, grandparents, or other benefactors sometimes establish traditional support trusts for the benefit of a child/grandchild/etc. Sometimes when the trust was created the attorney/draftsman was not informed of the disabling condition of the beneficiary and, thus, did not know to prepare a Special Needs Trust ("SNT") in order to protect public benefits such as Medicaid and/or SSI ("Supplemental Security Income").

Unfortunately, on other occasions the attorney may not have known how to prepare a suitable special needs trust and instead prepared a more or less traditional support trust. In some cases, a traditional support trust established by a parent/grandparent or other "third party" may be suitable, even for a disabled person, if the trust is large enough to fully support the cost of care of the disabled person, or if the trust was established after August 10, 1993 (the effective date of OBRA – the Omnibus Budget Reconciliation Act), and the trust does not contain any compulsory distribution provisions.

In some cases, a traditional support trust works quite well for a non-disabled person until the beneficiary falls victim to an accident or disease resulting in a disabling condition triggering the need for Medicaid or other public benefits.

Sometimes a traditional support trust can be modified or reformed and changed from a support trust to a special needs trust. This may be accomplished in one of several ways. The document may contain a provision allowing the Trustee to convert the trust from a support trust to a special needs trust if any beneficiary is injured or otherwise would qualify for public benefits. Or the trust may authorize a Trustee Advisor or a Trust Protector to modify or amend the trust, thus converting it into an SNT. Finally, the Trustee may seek a reformation via judicial proceedings asking a judge to allow and order a modification of the trust based upon a change of condition of the beneficiary necessitating the creation of an SNT, or based upon an original error in drafting, or simply ignorance of new SNT options that have become available in more recent years.

Although it would be an overstatement to assume that any trust can be reformed, there is substantial precedent to allow a trust to be reformed under certain conditions. A careful review of the trust document and circumstances surrounding its creation (i.e., condition of the beneficiary) may lead to the conclusion that a successful reformation may be accomplished, thus preserving the trust assets for the long term benefit of the disabled beneficiary.

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

USING FAMILY MEMBERS OR FRIENDS AS TRUSTEES OF SPECIAL NEEDS TRUSTS

A major issue in the establishment of a Special Needs Trust is the question of who will serve as Trustee. If an individual is appointed, then it is necessary to name one or more successors since individuals die, resign, or become incapacitated and cannot continue serving.

In addition to the risks of an individual no longer being able to serve, there is a potential risk of loss of trust value due to embezzlement or foolish investments by an unscrupulous or ignorant/naïve individual serving as Trustee.

Because of these and other risks, some parents choose a professional/corporate Trustee, such as a bank or trust company, to avoid any risk of such losses. Corporate Trustees have the expertise to handle investments and tax issues, while offering a personal relationship (via a trust officer) so as to serve the disabled beneficiary on an ongoing basis. A corporate Trustee will avoid the personal biases that sometimes "infect" family members or friends.

If an individual is serving as Trustee and he/she is also a remainder beneficiary of the Trust after the disabled person dies, there is a potential conflict of interest for that individual, since any distribution for the benefit of the disabled person may, or will, affect the amount left in the Trust passing to the remainder beneficiary. A corporate Trustee faces no such conflict, since they are never named as a beneficiary.

In summary, corporate Trustees don't die, embezzle, or have obvious conflicts of interest, as do individual Trustees. Some parents will appoint a corporate Trustee to avoid those risks but name a family member or friend, or other trusted person, to act as a "Trustee Advisor" to provide some special wisdom or advice to the corporate Trustee. The two working together can provide (1) safety in management of the Trust by the corporate Trustee, with (2) some extra individual oversight of the needs of the person by the Trustee Advisor.

If the size of the Trust is too small to secure the services of a corporate Trustee, then either an individual Trustee must be name or a non-profit organization that offers "pooled trusts" may be a convenient option, since such organizations will normally accept very small trusts.

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 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/