Must a Trustee Charge Rent to an SSI and/or Medicaid Recipient?

In my blog post of May 3, 2012, I addressed a related and basic question “Can a Special Needs Trust Own a House for the Benefit of a Disabled Person Receiving SSI and/or Medicaid?” 

 This post will address the issue of charging rent to the beneficiary to avoid the loss of SSI and/or Medicaid.  The Social Security POMS set forth at SI 1120.200F speak to this issue as follows:

F.   Policy – Home ownership/purchase of a home by a trust

1.   Home as a Resource

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 or her own home based on having an “equitable ownership under a trust.”

 

If the trust is a resource to the individual, the home is subject to exclusion under SI 01130.100.

 

2.   Rent-free shelter 

An eligible individual does not receive in-kind support and maintenance (ISM) in the form of rent-free shelter while living in a home in which he or she has an ownership interest.  Accordingly, an individual with “equitable home ownership under a trust” (see SI 01120.200F.1.) does not receive rent-free shelter.  Also, because we consider such an individual to have an ownership interest, payment of rent by the beneficiary to the trust has no effect on the SSI payment.  (Emphasis supplied.) 

In the past, the Oklahoma Medicaid program required the Trustee to charge rent to the Medicaid beneficiary in order to avoid the potential loss of Medicaid benefits due to the “receipt” of [phantom] income in the form of free rent.  The “phantom” income would be equal to the fair market rental rate of the dwelling.  However, this rule has been recently changed to follow the same rule as the POMS.  Thus, a Trustee will no longer be forced to charge rent to a disabled beneficiary living in a dwelling held by a trust that was established for the beneficiary.  However, payments by the trust of certain household expenses, will still be deemed “income” to the Medicaid and/or SSI recipient.  Examples of such “household costs” include mortgage payments, real property taxes, and utilities.  However, the Oklahoma Medicaid program does not consider phone, cable TV, internet access, satellite TV, etc., as utilities, and payment of those expenses by a trust for the benefit of a beneficiary will not be treated as “income” to the beneficiary. 

SI 1120.20F.3.C. of the POMS states:

If the trust pays for other shelter or household operating expenses, these payments would be income in the form of ISM (“In-Kind Support and Maintenance”) in the month the individual has use of the item (see SI 00835.350).  Countable shelter expenses are listed at SI 00835.465D (and include such expenses as mortgage payments, real property taxes, and utilities).  [emphasis added] 

If the trust pays for improvements or renovations to the home [owned by the trust], e.g., renovations to the bathroom to make it handicapped accessible or installation of a wheelchair ramp or assistance devises, 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.  (See SI 01120.200E.1.c.) [emphasis added]

In addition to the list of “household costs” recited in the POMS section cited above [SI 00835.465D], there is also this: 

NOTE:  Condominium fees in themselves are not household costs.  However, condominium fees may include charges which are household costs (e.g., garbage removal).  To the extent that such charges are identifiable, use them in the computation of inside and outside ISM.   

However, if the house is not owned by a trust for the benefit of the Medicaid beneficiary but instead by a third party (e.g., parent, sibling, or non-related party) payment of rent by the trustee will be deemed income to the SSI/Medicaid recipient and will likely affect and may cause a loss of those benefits.  Each case must be evaluated carefully so that interference with receipt of public benefits does not occur. 

 

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

 

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

CAN SUPPORT ALIMONY BE PAID TO A SPECIAL NEEDS (MEDICAID PAYBACK) TRUST IN ORDER TO PRESERVE OR OBTAIN MEDICAID BENEFITS?

Occasionally a married adult suffers a serious injury or develops a mental or physical disability resulting in the need for pursuit of Medicaid assistance, especially long-term care benefits. Sometimes the nondisabled spouse decides to opt-out of the marriage by means of divorce proceedings. In a longer term marriage, support alimony may be awarded to the disabled now ex-spouse. The receipt of income to the disabled ex-spouse may result in a failure to qualify (or remain qualified) for Medicaid benefits. However, if those support alimony payments are ordered by the court to be paid by the obligor/spouse to the trustee of a (d)(4)(A)* special needs (Medicaid pay back) trust, the payments of the support alimony will not be deemed income to the Medicaid applicant who is the beneficiary of the special needs (Medicaid payback) trust and, thus, will not interfere with the disabled ex-spouse obtaining or retaining Medicaid benefits.

One very important caveat, however, is that, pursuant to Oklahoma DHS rules, the divorce proceedings must be bona fide, that the property division and support alimony, etc., must be fair and not some agreed-upon attempt to leave the disabled spouse with less than his or her equitable share of the marital estate, and that any support alimony payments are, in fact, ordered by the court to be paid to the special needs trust.

 

* a (d)(4)(A) trust beneficiary must be less than 65 years of age at the time of establishment of the trust.

 

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

 

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

In my last blog post, I addressed the issue of naming a Special Needs Trust (SNT) as beneficiary of a retirement account (e.g., 401k, IRA, qualified plan, etc.).  Normally, as explained in Part I of my prior post, the use of a “conduit trust” is not usually wise and the compulsory distributions to the disabled beneficiary can have a potentially disastrous loss of public benefits. 

A better choice is the use of an accumulation trust which is designed to receive the MRD (Minimum Required Distributions) from the tax deferred retirement account and then to retain them to be used or expended, from time to time, for special needs for the disabled beneficiary.  The most tax-wise way of using the IRA is to withdraw the balance over the life expectancy of the disabled beneficiary.  This slows the consumption of the IRA and also slows the income tax consequences to the accumulation trust.  One would think you could simply choose to use the beneficiary’s life expectancy under the “see through” (the Trust) IRS rules.  However, the see through rules require that all persons who might receive benefits from the trust must be natural persons and determinable as of the date of the death of the IRA owner, or no later than the “Beneficiary Determination Date.”  Thus, an accumulation trust must be drafted carefully to avoid naming a charity (for example) or the estate of the beneficiary as a final remainder beneficiary after the death of the disabled beneficiary, since neither a charity nor an “estate” is a natural person.  If natural persons only are properly named, the trust must eventually distribute outright to “now living person(s).”

The IRS rules require that the person among all named beneficiaries (i.e., the disabled beneficiary, along with all remainderpersons) with the shortest life expectancy (according to the IRS tables) is the “measuring life” to determine the “Applicable Distribution Period” (ADP), which basically means the number of years over which that the minimum required distributions are spread.

The IRS rules are complex when distributions are made to an accumulation trust, but it rarely is advisable to name the disabled child directly or a conduit trust when the source of funds is a tax deferred retirement account.  Funding of a Special Needs Trust accumulation trust via a tax deferred retirement accounts is a hazardous venture and requires very careful document provisions and coordination with IRA beneficiary designation forms.

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

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

SOCIAL SECURITY WEATHER (POMS) REPORT: Partly Clear, Partly Cloudy

The SSA has issued a new POM section attempting to clarify the application of the “sole benefit” rule to first person trusts (Medicaid payback trusts established for the benefit of a disabled person receiving SSI and/or Medicaid benefits). 

In a prior post, I commented on SSA becoming very serious in its interpretation of the “sole benefit” rule.  This “rule” is, basically, an interpretation of the meaning of Congress’s use of the term “sole benefit,” found in the original 1993 enabling statute which authorized the creation of so-called “first party” special needs trusts [found at 42 USC §1396(p)(d)(4)(A) and (C)].  Congress has never defined “sole benefit,” and it is used in the (d)(4)(C) section of the statute.  Confusion [and in some cases, apparently, abuse (“Steffan Hobbs vs. Marsha Zenderman, [et al], Secretary of the Department of Human Services”)] has resulted in Trustees and parents using trust funds that sometimes benefit other persons or family members as much (or possibly more so) than the disabled person.  Thus, the SSA has tightened the interpretation of “sole benefit,” especially in the travel expense area.  Effective May 15, 2013, the newly issued POMS 1120.201(F)(b) and (c) read as follows:

“b. Exceptions to the sole benefit rule for third party payments

Consider the following disbursements or distributions to be for the sole benefit of the trust beneficiary:

·        Payments to a third party that result in the receipt of goods or services by the trust beneficiary;

·        Payment of third party travel expenses which are necessary in order for the trust beneficiary to obtain medical treatment; and

·        Payment of third party travel expenses to visit a trust beneficiary who resides in an institution, nursing home, or other long-term care facility (e.g., group homes and assisted living facilities) or other supported living arrangement in which a non-family member or entity is being paid to provide or oversee the individual’s living arrangement. The travel must be for the purpose of ensuring the safety and/or medical well-being of the individual.

c. Exceptions to the sole benefit rule for administrative expenses

The trust may also provide for reasonable compensation for a trustee(s) to manage the trust, as well as reasonable costs associated with investment, legal or other services rendered on behalf of the individual with regard to the trust. In defining what is reasonable compensation, consider the time and effort involved in providing the services involved, as well as the prevailing rate of compensation for similar services considering the size and complexity of the trust.

NOTE: You should not routinely question the reasonableness of a trustee’s compensation. However, you should consider whether compensation is being provided to a family member or if there is some other reason to question the reasonableness of the compensation.”  (Emphasis added.)

Part of the language in part “b” seems fairly clear.  However, we will have to assume that “medical” would include (for example) “dental,” or “mental health” since, for whatever reason, SSA did not define “medical” in this section, leaving the meaning of “medical” partly cloudy.

Section F.b. seems to severely limit travel expenses paid for the benefit of persons other than the disabled person.  Those limitations appear to be (presumably) for care givers to assist in travel expenses for the obtaining of medical treatment (however defined), or for persons to visit the disabled person to audit his/her caregiving. 

The sole benefit rule exception also includes expenditures or payments made to a third party for “goods or services” received by the disabled person.  Could the trust pay for the travel expenses of a family member or other caregiver to take the disabled beneficiary to Disney World or to Chicago to watch a Cubs game?  Sorry, it just became even cloudier—with no sun in the immediate forecast.

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/

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