PS 01815.025 Michigan
A. PS 06-093 SSI-Michigan-Review of the Life Insurance Funded Burial Trust for Mildred N~ -REPLY Our Ref: 06-0007 Your Ref: S2D5G6, SI 2-1-4 MI (N~)
DATE: March 14, 2006
This opinion addresses whether or not a life insurance funded burial contract is a resource for SSI purposes. As SI 01130.420(B) explains, a burial contract is not a resource if it cannot be revoked or sold without significant hardship. In this situation, the SSI claimant purchased a prepaid funeral agreement by irrevocably assigning ownership of her life insurance policies. This agreement was approved by the State of Michigan and is irrevocable. Because the funeral agreement is irrevocable and cannot be sold without significant hardship, it is not a resource for SSI purposes.
On May 2, 2005, Mildred N~ entered into a Prepaid Funeral and Escrow Agreement with Anderson Diehm Funeral Home, by assigning the proceeds of her preexisting life insurance policies in the amount of $4767.00. The Agreement stated that the purchase price of the merchandise and services to be furnished by the funeral director shall be the retail price for which the merchandise and services are customarily offered by the funeral director at the time of the beneficiary's death. The Agreement also contained Escrow and Investment Requirements which stated that all funds paid by the buyer to the funeral director before the death of the beneficiary shall be placed in one or more interest bearing accounts, and that the funeral director may serve as the escrow agent or may appoint an escrow agent. That same day, on May 2, 2005, Ms. N~ entered into a "REVOCABLE ASSIGNMENT OF INSURANCE PROCEEDS" in which she assigned ownership of the proceeds of her life insurance policies, upon her death, to Anderson Diehm Funeral Home. On May 24, 2005, Ms. N~ transferred ownership of her life insurance policies to Gary A~, funeral director. That same day, Mr. A~ revoked previous beneficiary designations on one insurance policy, and endorsed that death benefits be paid to him. On September 19, 2005, the Michigan Family Independence Agency certified Ms. N~'s funeral agreement irrevocable, pursuant to Section 19 of Public Act 255 of 1986, as amended.
Here, Ms. N~, through the funeral home, has created a life insurance funded burial trust. A trust "established" by an individual on or after January 1, 2000, generally will be considered a resource under federal law, even if it is irrevocable, to the extent that payments from the trust could be made to or for the benefit of the individual, unless the trust provides for Medicaid reimbursement. 42 U.S.C. § 1382b(e). This statutory rule applies if payments can be made for the benefit of the individual "under any circumstance, no matter how unlikely or distant in the future." POMS SI 01120.201(D)(2)(b). This is the case here, since the life insurance funded burial trust clearly benefits Ms. N~ by providing her with funeral services and goods, if she has a funeral.
However, these resource provisions do not apply to burial trusts where the individual irrevocably contracts with a provider of funeral good and/or services; the individual pre-pays for the goods and services; and the funeral provider subsequently places the funds in a trust. POMS SI 01120.201(H)(1). Under these circumstances, the funeral home is considered to have "established" the trust for purposes of 42 U.S.C. § 1382b(e). Exclusion of Certain Burial Trusts from Section 205 of Public Law Number (Pub. L. No. 106-169), Associate General Counsel Office of Program Law to Associate Commissioner for Legislative Development (August 29, 2000). In such a case, the Agency applies only the regular resource rules for prepaid burial contracts.
Here, the statutory trust resource provisions would not apply because Ms. N~ has irrevocably contracted with a provider of funeral goods and/or services, she pre-paid for the goods and services; and the funeral director, Gary A~, subsequently was required to place the funds in a trust. Specifically, Ms. N~ entered into a certified irrevocable contract with the funeral home, and in that escrow account the funeral home agreed to provide certain specified funeral goods and services in exchange for the death benefits of the life insurance policies. Under Michigan law, a prepaid funeral agreement may be made irrevocable if the Family Independence Agency or Department of Community Health determines that the contract is a fully paid guaranteed price contract, the proceeds of which have been assigned as payment for funeral goods or funeral services for the contract beneficiary that are not more than the amount allowed under section 2080(6)(g) of the insurance code of 1956, plus $2,000, exclusive of income. MI ST 328.229(1). A prepaid funeral agreement approved by the Family Independence Agency or Department of Community Health shall not be revoked or cancelled by the contract seller, contract provider, contract buyer, or their successors, or the estate of the contract beneficiary either before or after the contract beneficiary's death. MI ST 328.229(2). The Prepaid Funeral and Escrow Agreement indicated that Ms. N~ could cancel the Agreement and get a full refund. We assume, however, that these statutory provisions trump this inconsistent language. In addition, Ms. N~ pre-paid for the goods and services by irrevocably assigning ownership of her life insurance policies. We note that Ms. N~ also executed a Revocable Assignment of Insurance Proceeds. However, the subsequent irrevocable assignment of ownership of the policies supersedes the irrevocable assignment of proceeds. See POMS PS 01825.025 Michigan, S. PS-00-233 (Forethought Life Insurance Funded Burial Agreements). And lastly, the funeral home agreed to subsequently transfer ownership of the life insurance policy to an escrow account, or trust. Thus, per POMS SI 01120.201(H), the arrangement should be evaluated under the regular resource rules as a purchase of goods and services by Ms. N~.
Funds used to fund a prepaid funeral agreement are a resource if the individual can revoke the prepaid plan and recover the funds paid. See POMS SI 01130.420(B). However, funds paid to a prepaid funeral agreement are not a resource if the agreement is irrevocable and cannot be sold without significant hardship. Id. This prepaid funeral agreement cannot be sold without significant hardship because of the uncertainty of Ms. N~'s death. Because the funeral agreement is irrevocable and cannot be sold without significant hardship, it would not be a resource for SSI purposes. See POMS SI 01130.420(B).
We note that the result above is inconsistent with POMS SI CHI 01130.425(B), which provides that life insurance funded burial trusts will always be a resource. We thus recommend that the POMS language be updated to reflect our current understanding of Michigan Law.
For these reasons, we conclude that the life insurance funded burial trust is not a resource.
B. PS 04-019 SSI-Michigan-Review of Michigan Life Insurance Funded Burial Contracts, OGC control number 03P054
DATE: October 20, 2003
The opinion below makes a recommendation that CHI TN 333 and 345 be revised to reflect current law in the state of Michigan regarding the irrevocability of life insurance funded burial contracts.
You asked for the current state of the law in Michigan regarding the irrevocability of life insurance funded burial contracts, and whether the current law changes the instructions in CHI TN 333 and 345. We advise that CHI TN 333 and 345 be changed to reflect the current state of Michigan law as set forth below.
You informed us that you received a fax of an internal Family Independence Agency (FIA) memo dated July 2, 2002, which indicated that the monetary limitation on irrevocable burial contracts had been changed under Michigan law. You also indicated that information in the memo was contrary to the amounts in TN 333. You further noted that some of the information discussed in the FIA memoranudm seemed inconsistent with TN 345. You expressed concern about these discrepancies and your ability to properly assess future life insurance funded burial contract issues arising out of Michigan.
A life insurance policy can be a resource for SSI purposes if the individual can surrender it for cash or recover the premiums paid. See 20 C.F.R. § 416.1230. Michigan law provides that all life insurance policies must contain notice that the policyholder may cancel the policy and receive prompt refund of any premiums paid during a period of not less than ten days after the date the policyholder receives the policy. Michigan Stat. Ann. (MI ST) 500.4015. Therefore, any life insurance policy is a resource during that initial period of time (at least ten days under Michigan law) because the individual has the unrestricted right to cancel the policy and recover the full premium paid.
The next determination is whether the trust to which the policy was assigned was a resource after the initial cancellation period. A trust established by an individual on or after January 1, 2000, generally will be considered a resource, under federal law, if it is revocable, or even if it is irrevocable, to the extent that payments from the trust could be made to or for the benefit of the individual. 42 U.S.C. § 1382b(e)(3)(B); POMS SI 01120.201(D)(1)-(2). This rule applies if payments can be made for the benefit of the individual "under any circumstance, no matter how unlikely or distant in the future." POMS SI 011020.201(D)(2)(b).
These provisions do not apply to burial trusts where the individual irrevocably contracts with a provider of funeral goods and services and either (1) the funeral provider subsequently places the funds in a trust, or (2) the individual establishes an irrevocable trust naming the funeral provider as the beneficiary. POMS SI 01120.201(H)(1). Under these circumstances, the funeral home is considered, for federal law purposes, to have established the trust. See Exclusion of Certain Burial Trusts from Section 205 of Public Law Number (Pub. L. No.) 106-169, Associate General Counsel Office of Program Law to Associate Commissioner for legislative Development (Aug. 29, 2000).
Regional Transmittal 333
Due to a change in the law, effective May 23, 2002, FIA can render irrevocable a prepaid funeral agreement if that agreement is a fully paid guaranteed price contract, for up the amount allowed under section 2080 of the insurance code, plus $2,000, exclusive of interest. The amount allowed under section 2080 of the insurance code is $5,000 adjusted annually since June 1987, in accordance with the consumer price index,. See Mich. Compiled Laws Ann. §§ 328.229(1), 500.2080(6)(g). The FIA has determined that the total amount that could be made irrevocable as of June 1, 2002 (and, presumably, as of May 23, 2002) is $10,050, apparently based on calculating the increase in the consumer price index from the statutory $5,000 up to $8,050. See Program Administrative Manual, State of Michigan Family Independence Agency 805 (Oct. 1, 2002); Memorandum from Jim N~ for Field Operations, FIA, to County Directors, Field Office Managers, Irrevocable Prepaid Funeral Contracts (July 2, 2002).
The amount that can be made irrevocable is reduced by the amount of a death benefit from an insurance policy or annuity contract, the proceeds of which have been assigned as payment for funeral goods or funeral services for the contract beneficiary. We recommend that language be added to Regional Transmittal 333 Part B to reflect that, effective May 23, 2002, the limit was raised to $8,050_11, plus $2,000, exclusive of interest. See Mich. Compiled Laws Ann. § 328.229(1).
When rendering a prepaid funeral agreement irrevocable, the FIA must also indicate that the state will not be liable for the funeral goods or services, excluding an outside receptacle when required by the chosen cemetery, of the applicant for or recipient of assistance. Id. According to MI ST 328.229(2), a prepaid funeral contract approved by the FIA or department of community health shall not be revoked or cancelled by the contract seller, contract provider, contract buyer, or their successors, or the estate of the contract beneficiary either before of after death of the contract beneficiary. Furthermore, an irrevocable contract under this section shall not be considered in determining the eligibility of an applicant or recipient for assistance under the social welfare act.
Regional Transmittal 345
Under Michigan law, any assignment of proceeds from a life insurance policy or annuity used to fund a funeral contract must be revocable. See Mich. Compiled Laws Ann. § 500.2080(6)(b). We therefore advise changing the wording in POMS SI CHI01130.425 (MI), section B to reflect that "Michigan law does not permit an irrevocable assignment of a life insurance policy or annuity to fund a burial contract." There are no requirements that can lead to an exception to this rule of law and section B should be revised accordingly.
We further note that the first paragraph of section C of POMS SI CHI01130.425 (MI) is duplicative of TN 333, and unnecessary in the context of this provision. Since the POMS already contains sections relating to the creation of irrevocable burial contracts, it may be confusing to address those issues here. Instead, we advise cross-referencing Regional Transmittal 333. In the third paragraph, both sentences should be modified to reflect that the amounts are "$5,000, adjusted annually since June 1987 in accordance with the consumer price index." It may be helpful to note that, as of 2002, this amount had increased to $8,050, based on changes in the consumer price index. It may also be helpful to point out that, as stated in TN 333, effective May 23, 2003, the amount of any funeral contract that can be made irrevocable will be reduced by the amount of any proceeds of a life insurance policy or annuity for payment of funeral goods and expenses.
Under section D, it may be helpful to cross-reference POMS provisions for determining whether a trust is a resource, especially POMS SI 01120.201(H)(1).
We advise revising CHI TN 333 and 345 to reflect the current state of Michigan law as set forth above.
_11In theory, this amount should change annually, consistent with any increases in the consumer price index.
C. PS 02-135 Review of a Resource Needed for SSI Claimant's Physical Condition Alicia W~, SSN ~
DATE: September 16, 2002
This opinion addresses whether a personal effect (in this case, a piano) owned by an SSI recipient, should be considered a countable resource for SSI purposes, or whether it can be excluded as a resource required by her physical condition under the household goods and personal effects exclusion. This is essentially an evidentiary issue; i.e., the key is whether the fact finder in the FO has sufficient evidence to determine that the piano is required by the individual's physical condition. Under 20 CFR 416.1216(c), certain household goods and personal effects are excluded from SSI resource counting if they are "required because of a person's physical condition." As long as there is sufficient evidence for the fact finder to determine that the piano (or similar item) is required as treatment or therapy for the individual's physical condition, then the item could be excluded as a resource. If the fact finder cannot determine that the piano (or similar item) is required, then the current market value of the piano (or similar item) is subject to the $2,000 maximum exclusion for household goods and personal effects [20 CFR 416.1216(a)-(b)]. It should be noted that the exclusions discussed above do not appear in the Social Security Act.
You asked whether a piano, owned by SSI claimant Alicia W~, should be considered a countable resource for SSI purposes, or whether it can be excluded as a resource required because of her physical condition. We conclude that, although there is no caselaw or other legal authority interpreting the applicable regulation, 20 C.F.R. § 416.1216(c), the Agency may consider the piano as an excludable resource, under 20 C.F.R. § 416.1216(c), provided Ms. W~ can show that playing the piano is required as treatment or therapy for her physical condition. If the Agency finds that the piano is not so required, further development and consideration may be warranted to determine the actual current market value of the piano.
Alicia W~ owns a baby grand piano that the Wausau Field Office reported is worth $7000. It is not clear how the valuation of $7000 was reached. For purposes of this memorandum, we assume that $7000 is likely the amount Ms. W~ paid for the piano. Ruth J~, a benefit specialist with the Aging and Disability Resource Center of Marathon County, has advised SSA that Ms. W~ tried to sell her piano by advertising it in a local newspaper and with the Wausau Conservatory of Music and by contacting several local churches. Two individuals expressed interest, but Ms. W~ received no offers to buy the piano. We do not know what price Ms. W~ asked or whether anyone would be willing to purchase the piano for less than her asking price. Ms. J~ stated, in April 2002, that a local music store sold only one comparable piano in the preceding year. The price that the music store charged was not reported. Although Ms. J~ indicated that she was providing the field office with a statement from the music store, no such statement was included in the materials forwarded to us. Ms. J~ also reported that Ms. W~ uses the piano daily and that she is the only member of her household.
Ms. W~ has a congestive heart condition and hypertension. On December 12, 2001, her physician, Arthur W~, M.D., wrote a letter stating that playing piano provided Ms. W~ with positive health benefits in terms of stress relief, which resulted in positive benefits for her hypertension. Dr. W~ further stated that being forced to sell her piano in order to receive SSI "would have a deleterious effect on her overall health."
The Social Security Act (the Act) provides that certain resources are excludable resources for SSI purposes. 42 U.S.C. § 1382b. Among the resources that may be excluded are household goods and personal effects, but only to the extent that their total value does not exceed the $2000 limit set by the Commissioner. 42 U.S.C. § 1382b(2)(A); 20 C.F.R. § 416.1216(b). The regulations define "personal effects" to include musical instruments. Thus, a portion of the value of Ms. W~'s piano could be excluded as a personal effect, provided the total value of her other personal effects and household goods is less than $2000. However, it appears that Ms. W~'s piano may be worth considerably more than that. We must determine, therefore, whether her piano may be excludable for some other reason, or whether the value of her piano can be considered less than previously assumed.
Exclusion for Items Required for Person's Physical Condition
The exclusion for household goods and personal effects that are required because of a person's physical condition does not appear in the Act. See 42 U.S.C. §1382b. The exclusion became a part of SSI regulations effective October 20, 1975. 40 Fed. Reg. 48911, 48916 (October 20, 1975). Neither the preamble to the final regulation published on that date nor the preamble to the proposed regulation states the rationale for the exclusion or gives any further clarification as to its application. See 39 Fed. Reg. 2487 (January 22, 1974); 40 Fed. Reg. at 48911. Thus, we cannot ascertain from those publications whether the Agency intended for the exclusion to apply to items such as a piano that provide "positive health benefits" in terms of an individual's physical condition. The POMS, likewise, provides no guidance in this situation. See POMS SI 01130.430. We were unable to find any caselaw interpreting the regulatory provision or any OGC precedential opinion on the subject. Similarly, we found no caselaw regarding other needs-based federal entitlement programs that might be helpful in interpreting 20 C.F.R. § 416.1216(c).
The Internal Revenue Code (IRC), however, includes a personal income tax deduction for medical care expenses. 26 U.S.C. § 213(a). The definition of "medical care" includes amounts paid "for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body. . .." 26 U.S.C. § 213(d)(1)(A). The Internal Revenue Service (IRS) addressed the issue of whether the cost of a piano could be deducted under the IRC medical care provision in two private letter opinions. In the first, parents bought a piano so that their child, who had polio, could strengthen her finger muscles and improve her posture. Priv. Ltr. Rul. 59-03205410A (March 20, 1959), 1959 WL 59702. The IRS determined that, if the use of the piano was prescribed by a physician to mitigate the effects of the child's illness, and if the child was the only one to use the piano, a portion of the cost could be deducted as a medical care expense. Id. The portion of the piano's cost that could be deducted was "the minimum cost of a piano of a quality sufficient for the therapeutic purposes" subject to the ceiling of 7.5% of adjusted gross income, as provided in 26 U.S.C. § 213(a). Priv. Ltr. Rul. 59-03205410A. Another private letter ruling states that, after suffering a nervous breakdown, a taxpayer's daughter "was induced by her doctors to resume piano lessons, in view of her particular aptitude in this area, as it was hoped that this would be good therapeutic treatment and would create a motivation toward recovery." Priv. Ltr. Rul. 63-02264710A (February 26, 1963), 1963 WL 14192. The taxpayer could not find a suitable used piano, so he bought a new piano for $800. The IRS held that the taxpayer could take a medical care deduction for "an amount which does not exceed the minimum cost of a piano of a quality sufficient to effect the prescribed therapy," subject to the limitations in 26 U.S.C. § 213. Priv. Ltr. Rul. 63-02264710A (February 26, 1963), 1963 WL 14192. To the extent, however, that the expenditure was "elaborate," i.e., beyond the need for the prescribed medical therapy, it was not deductible because it was not directly related to medical care. Id.
The IRC provision relied upon in these two private letter rulings is not identical to the resource exclusion provision in the Social Security Regulations. The IRC section would apply to expenditures for treatment of a mental condition as well as a physical condition, but the Social Security regulation would allow exclusion of an item only if it is required because of the SSI claimant's physical condition. Compare 26 U.S.C. § 213(d)(1)(A), 20 C.F.R. § 416.1216(c). While the Social Security regulation allows for exclusion of a resource "required because of a person's physical condition," 20 C.F.R. § 416.1216(c) (emphasis added), the IRC provision, 26 U.S.C. § 213(d)(1), allows a tax deduction for "amounts paid" for treatment (emphasis added). Although the IRC section does not address whether an expenditure is medically required, the private letter rulings provide some support for the conclusion that, in some cases, piano playing may be prescribed as part of an individual's medical treatment.
There is nothing in the Social Security Act or Social Security Regulations to direct a conclusion on this issue. We think it reasonable, however, to conclude, based on the private letter rulings, that there are situations in which a doctor may reasonably require a patient to play a piano as a necessary part of treatment or therapy for the patient's physical condition. Unlike the medical care deduction provision in the IRC, the SSI exclusion for items required for a person's physical condition does not place any limitation on the value of items which can be excluded, even though some of the items listed, such as an engagement ring or a dialysis machine, could have considerable monetary value. 20 C.F.R. § 416.1216(c); see also POMS SI 01130.430 ("Items Excluded Regardless of Value") (emphasis added).
The letter from Ms. W~'s physician states that it is important that she enjoy the benefits of her piano because it relieves her stress and, consequently, has a positive effect on her hypertension. The doctor further states that selling the piano to receive SSI benefits would be "deleterious" to her health. In the absence of evidence casting doubt on the doctor's credibility, we think this statement may be sufficient for a fact-finder to conclude that the piano is required for Ms. W~'s physical condition. You may want to obtain clarification from the doctor, however, that he considers playing the piano a required part of Ms. W~'s treatment or therapy for her hypertension or her congestive heart condition. You may also want to verify that the "deleterious" effect of selling the piano refers to her inability to receive the therapeutic benefit of playing the piano, rather than to other factors, such as a contemplated elevation of her blood pressure because selling the piano would upset her.
If you find that playing a piano is required for Ms. W~'s physical condition and she is the only person who will use the piano, the entire value of the piano should be considered an excludable resource. If, however, you find that playing piano is not required for Ms. W~'s physical condition, it will be necessary to determine the piano's value.
Determining the Current Market Value
If you determine that the piano is not an excludable resource under 20 C.F.R. § 416.1216(c), the current market value of the piano will be subject to the $2000 maximum exclusion for household goods and personal effects. 20 C.F.R. § 416.1216(a)-(b). Contrary to Ms. J~'s contention, the fact that Ms. W~ was unable to sell her piano does not necessarily mean that the value of the piano is zero. The piano likely has some value, even if it is not the $7000 purchase price. It is possible that the value of the piano is zero, however, if, for example, a buyer's expense to move the piano from Ms.W~'s home to a new location exceeds the price that a buyer would ordinarily pay for the piano.
The information provided to us did not indicate what price Ms. W~ was asking for the piano when she advertised it. It may be that she was simply asking a higher price than the current market value and, therefore, did not get an offer. We suggest further development to ascertain the current market value of the piano. For example, did Ms. W~ get any offers to buy the piano and, if so, what amount was offered? Ms. J~ indicated that the local music store sold one comparable piano over the past year. What was the sale price? Are there other music stores in the area that carry comparable pianos? If so, what price do they charge? Has Ms. W~'s piano been appraised? How much would a pawn shop pay for the piano, given that it could be difficult to sell quickly?
We note that POMS SI 01150.200 contains a provision that, under certain circumstances, allows for conditional SSI benefits for a limited period while an individual attempts to sell a non-liquid resource. The individual must agree to sell the resource at the current market value within a specified period and use the proceeds to refund the overpayment of conditional benefits. POMS SI 01150.200B.1. The period of conditional benefits where personal property is concerned would generally end after three months, except that there could be one three-month extension granted for good cause. SI 01150.201A. The individual must make reasonable efforts to sell the resource, taking all necessary steps to sell the resource through the local media. SI 01150.201B.1. The information provided to us does not indicate whether Ms. W~ was eligible for, or received, conditional benefits under these POMS provisions.
We also note that, even if Ms. W~ purchased the piano for $7000, and if the Agency determines that the current market value of her piano is less than $7000, it does not necessarily mean that her purchase was a transfer for less than fair market value. See POMS SI 01150.005A. (transfers of resources for less than fair market value after December 14, 1999 may result in a period of SSI ineligibility). Nor does the fact that Ms. W~ may not be able to sell her piano for the same price she paid mean that she paid more than the fair market value. Fair market value is the current market value of a resource at the time the resource is transferred, i.e., the going price for which it could reasonably be expected to sell at the time, on the open market in the geographic area involved. POMS SI 01150.005. If Ms. W~ bought her piano on the open market, e.g., from a merchant, the $7000 purchase price is assumed to be the fair market value at the time of the transfer. POMS SI 01140.005C.4.a. It may be that the value of the piano has depreciated since its purchase, or simply that the going price for a comparable piano was $7000 at the time of the purchase but is less now due to economic conditions. A prospective buyer might be willing to pay more for a piano bought from a merchant whose reputation is known than he would pay in a private sale by a stranger. A merchant might also be in a position to charge more because he could offer a factory guarantee or a store guarantee that a private seller like Ms. W~ cannot offer. Finally, a merchant might be in a position to wait until a buyer came along who was willing to pay a higher price. Thus, the current market value of the piano, in Ms. W~'s hands, may be less than the amount she paid for the piano, even though the original purchase was not a transfer for less than fair market value.
In summary, we conclude that, if the Agency fact-finder concludes that Ms. W~ has shown that playing piano is required as part of her treatment or therapy for her physical condition, the piano's entire value may be excluded under 20 C.F.R. § 416.1216(c). If the fact-finder concludes that playing piano is not required for Ms. W~'s physical condition, the current market value of the piano should be considered a household good or personal effect subject to the $2000 maximum exclusion for all household goods and personal effects. However, the Agency may want to give further consideration to the current market value of the piano in Ms. W~'s hands.
Thomas W. C~
Regional Chief Counsel
Nancy L. B~
Assistant Regional Counsel
D. PS 02-121 SSI Regional Supplement on Prepaid Burial Contracts Under Michigan Law Your Reference: S2D5G6
DATE: August 13, 2002
This opinion examines regional transmittal SI R01130.420 (MI), which addresses prepaid burial contracts in the state of Michigan. The opinion states that all of the information contained in the regional transmittal regarding Michigan State law is accurate. However, a recommendation is made to amend paragraph A to reflect the fact that the Department of Mental Health also approves prepaid burial agreements if the agreement is made when the individual is a patient in a mental health facility.
You requested a legal review and update of regional transmittal SI R01130.420 (MI), formerly SI R01130.420 (MI) (RTN 126). We have reviewed the state law, and conclude that the information contained in the regional transmittal regarding Michigan State law remains accurate. However, we note that the Department of Mental Health also approves prepaid burial agreements if the agreement is made when the individual is a patient in a mental health facility. Therefore, for clarity, we recommend amending Paragraph A to read as follows:
Burial contracts in Michigan entered into by Aid to the Aged, Blind, or Disabled recipients (conversion cases) prior to January 1, 1974, which were approved by the Michigan Family Independence Agency (FIA), are irrevocable. Prepaid burial agreements entered into January 6, 1979 or later, which are approved by FIA or the Department of Mental Health, are irrevocable. FIA does not consider these irrevocable burial contracts in determining eligibility for its services. Verification of FIA's or the Department of Mental Health's approval is required prior to excluding these contracts from SSI resource computation.
Burial contracts, which do not meet the provisions in this supplement, are considered revocable. If the agreement is irrevocable, it remains so, regardless of whether the applicant/recipient continues to receive FIA services.
To have an irrevocable agreement, the funeral home must be located in Michigan, and the financial institution must be authorized to do business in the State of Michigan. The irrevocable burial agreement can be transferred between the funeral home and a financial institution, if both the individual and the funeral home agree.
The information contained in Paragraphs B, C, and D remain accurate.
Thomas W. C~
Regional Chief Counsel, Region V
Assistant Regional Counsel
E. PS 00-343 Review of Michigan Trust for Neal P~
DATE: December 1, 1999
Because the SSI claimant is both the grantor of the trust and the sole beneficiary, under Michigan law the trust is revocable and, therefore, a countable resource.
NOTE: Because of a change in the Social Security Act, this precedent may only be applicable to trusts established before 1/1/00.
You asked whether the trust established for Neal P~ is a countable resource for SSI purposes. Mr. P~ 's attorney has requested a reconsideration of SSA's prior determination that the trust is a countable resource, arguing that an individual without capacity has no ability to revoke a trust, and citing three recent Michigan ALJ decisions as support. For the following reasons, it is our opinion that the trust agreement is a revocable grantor trust and that the trust property can be considered a countable resource.
According to the trust, Mr. P~ has multiple special needs arising from circumstances surrounding his birth in 1980, and Shailesh B. P~ and Kalpana S. P~ have been appointed by the Oakland County Probate Court as co-conservators of Mr. P~'s estate. See Trust, Introduction. In April 1999, a trust was established for Mr. P~, using the proceeds from the revoked "Neal P~ Revocable Living Trust" which had been established with proceeds received from a medical malpractice action filed on behalf of Mr. P~. See Protective Order, items 1 and 2. The trust was approved by the Probate Court of Oakland County, Michigan. Id.
A resource, for SSI purposes, is any property that an individual owns and could convert to cash to be used for his support or maintenance. See 20 C.F.R. § 416.1201(a). If the individual has the right, authority, or power to liquidate the property or his share of the property, it is considered a resource. See 20 C.F.R. § 416.1201(a)(1). Trust assets are considered to be resources if the individual can revoke the trust and obtain unrestricted access to the trust assets. See Program Operations Manual System (POMS) SI 01120.200 (D). We apply state trust law to determine whether trust property is a resource. See POMS SI 01120.200(A). There are two questions at issue in Mr. P~'s case. First, is his trust a grantor trust and second, does his incapacity, if any, result in an inability to terminate the trust.
Mr. P~'s Trust is a Revocable Grantor Trust
Under general trust law, a grantor trust is revocable, even when, as in this case, the trust states that it is irrevocable. See Trust, Articles 3 and 5(A); see also Restatement (Second) of Trusts § 339, comment a. Michigan law appears to follow this principle, just as it follows other sections of the Restatement. In Ronney v. Department of Social Services, 532 N.W.2d 910 (Mich. Ct. App. 1995), a claimant inherited assets which her guardian placed in an "irrevocable" Michigan trust with the claimant as beneficiary. Because the claimant was both the settlor and the sole beneficiary, the trust was revocable under Michigan law. Id. at 913. Again, in Hein v. Hein 543 N.W. 2d 19, 21 (Mich. Ct. App. 1995), the court held that even an "irrevocable" trust may be terminated with consent of the settlor and all beneficiaries. More recently, the Michigan Supreme Court has held that where an individual provides the assets for the trust, that individual is the settlor. See In re Hertsberg Intervivos Trust, 578 N.W.2d 289 (1998).
The trust is a grantor trust because Mr. P~ is both the grantor and the sole beneficiary. Where a beneficiary acting through his guardian establishes a trust with funds that actually belong to the beneficiary, the beneficiary can legally be considered the grantor of the trust. See POMS SI 01120.200(J)(3). Here, Mr. P~ acted through his guardians to establish a trust with his own funds. Michigan courts have ruled that if the beneficiary of a trust held legal title to the assets of the trust (or the trust beneficiary's guardian held legal title on behalf of the trust beneficiary) immediately prior to the transfer of the assets, the trust beneficiary was the settlor of the trust, even though the declaration of the trust might state otherwise. See Hertsberg, 578 N.W. 2d at 289; In re Johannes Trust, 479 N.W. 2d 25, 29 (Mich. Ct. App. 1991). As a result, although Shailesh B. P~ and Kalpana S. P~ are named as grantors, it is Neal P~ who is, in fact, the grantor of the trust agreement since the funds for the trust actually belong to him. See Trust, signatures; see also Protective Order, item 4.
Mr. P~ is also the sole beneficiary of the trust, notwithstanding the trust provision that, upon his death, the assets are to be distributed to the State of Michigan for reimbursement of medical assistance benefits; taxes, expenses of his last illness and funeral, and reasonable administrative expenses; and the residue in accordance with his last will and testament; or failing probate of a will, to his heirs-at-law as determined by the intestate laws in effect at the time of his death. See Trust, Article 6. That the trust agreement directs the trustee to repay any medical assistance state claims does not mean that there is a named beneficiary. Instead, the medical assistance claims must be repaid because of statutorily-imposed reimbursement requirements. See 42 U.S.C. 1396p(4)(B); see also Michigan Compiled Laws Annotated (West 199) (M.C.L.A.) § 400.77.
Mr. P~'s trust merely requires that the trust reimburse the appropriate state agencies for benefits already conferred on him during his lifetime. The money repaid is for Mr. P~'s benefit, and not the State's benefit. Nor does the trust establish additional beneficiaries by a provision that allows payments to be made to cover taxes and expenses of his last illness and funeral costs, and reasonable administrative expenses. These payments relate either to trust administration or providing goods or services for Mr. P~ benefits. The trust does provide distribution to a class of beneficiaries designated by Mr. P~ though a will, or by Michigan intestate law. However, this description does not create additional beneficiaries because there are no identifiable residual beneficiaries, either by name or by class. See Restatement (Second) of Trusts, § 127, comment b. We have discovered no Michigan cases that run contrary to these general trust rules and, therefore, at least on the face of the document, Mr. P~'s trust is a grantor trust.
Although Mr. P~ is "incompetent" his trust can be revoked
SSA defines the term "legal incompetency" as "a decision by a court of law that a claimant is unable to manage his/her affairs." See POMS GN 00501.010. For all practical purposes, the term is interchangeable with "legal incapacity." See Black's Law Dictionary at 764, 768 ( 17th ed. 1990). The trust document states that Mr. P~ has been determined to be "a person in need of protection" but does not state that he has been judged legally incapacitated or incompetent. See Trust, Introduction. The appointment of a conservator for a claimant does not necessarily mean that the claimant is legally incapacitated or incompetent. See POMS GN 00502.139. In fact, Michigan law specifies that the appointment of a conservator does not constitute a finding of legal incapacity or incompetency. See .M.C.L.A. § 400.468(2). However, the Michigan Probate Code provides for appointment of a conservator where the individual is unable to manage his property and affairs. See M.C.L.A. § 700.461(b). When we compare Michigan's definition of "legally incapacitated person" with the grounds for appointment of a conservator, we see a great deal of overlap. Compare M.C.L.A. § 700.8(3) with M.C.L.A. § 700.461(b).
The issue in Mr. P~'s case is whether the court order of protection demonstrates, on its face, that the court made a finding equivalent to "legal incompetency", i.e., whether the court has found that he is unable to manage his own affairs. Since we do not have a copy of the original court order of protection, we cannot know if the court specified any of the grounds to be the same as those that define a legally incapacitated person. However, since M.C.L.A. § 700.21(c) gives Probate Courts exclusive legal and equitable jurisdiction over protected individuals, and the Probate Court has continued its protection of Mr. P~, it is reasonable to assume that the Probate Court considers him to be legally incompetent. See Thornell v. Chesapeake & Ohio Railway Co., 166 F.Supp. 61 (W.D.Mich 1958). For purposes of this opinion, we assume that Mr. P~ has been judged incompetent as contemplated by 20 C.F.R. § 416.615(a).
While a competent person could establish and/or revoke a trust without court approval, it is our opinion that approval of the court would be necessary for Mr. P~ to establish or to revoke a trust agreement. See M.C.L. § 700.21. The question is whether the Probate Court would allow Mr. P~, through his conservator, to establish a trust and to revoke that same trust and, further, whether the Michigan Supreme Court would uphold the Probate Court's decisions. It is our opinion that the Probate Court would allow both actions and that the Michigan Supreme Court would uphold the decisions.
Mr. P~, through his conservator, could create a trust, albeit with Probate Court approval. The Michigan statute that confers powers and duties of a conservator states that a conservator may acquire or dispose of an estate asset, manage, develop, improve, exchange, partition, change the character of, or abandon an estate asset. See M.C.L.A. § 700.484(3)(g). The Probate Court has certain powers which may be exercised directly, or through a conservator, with respect to the estate and affairs of protected persons. See M.C.L.A. § 700.468 (1). These powers include, but are not limited to, creation of revocable or irrevocable trusts of property of the protected person's estate. See M.C.L.A. § 700.468(1)(c). A reasonable reading of this statute is that a conservator could establish a trust with the permission of the Probate Court. The fact that the Probate Court has already allowed Mr. P~ to establish two different trusts supports our contention that he has the power to establish a trust. See Protective Order, item 3. Then, the fact that Mr. P~'s first trust was revoked supports our contention that Mr. P~, through his conservator, and with the permission of the Probate Court, can revoke a trust. Id. Although the current trust claims to be irrevocable, the Court has the power to revoke Mr. P~'s trust because it is a grantor trust.
It is our opinion that, if asked, the Probate Court would likely allow the current trust to be revoked if the assets were used for Mr. P~'s support and maintenance. Mr. P~'s guardian might argue that revocation is not in his best interest because, under the current trust, SSA meets his basic needs, and the Trust meets his supplemental needs and, if revoked, he would lose his eligibility for SSI. This argument is unavailing. The appropriate resource question is whether the individual has the right, power or authority to obtain the assets and use them for his support and maintenance. Michigan statutes contemplate that basic needs of a protected person will be met by his own assets. M.C.L.A. § 5425(b) states that a protected person's assets are to be used for his "support, education, care, or benefit." There is no reason to assume that the Probate Court would deny access to Mr. P~'s funds for his own support, education, care or benefit. While there are no Michigan Supreme Court cases on point, it is clear that the Probate Court has jurisdiction in matters of both protective persons and trust instruments. See M.C.L.A. § 555.82. There is no reason to assume that the Michigan Supreme Court would overturn a reasoned decision by the Probate Court.
Other ALJ decisions do not impact this opinion
Mr. P~ argues, through his attorney, that his trust cannot be revoked because an individual without capacity has no ability to revoke a trust, and cites three recent Michigan ALJ decisions as support. He argues that his trust agreement is similar to those described in the ALJ decisions, and should thus be construed in the same manner, that is, as not a countable resource. We believe that the three ALJ decisions have no impact on our opinion in Mr. P~'s case because (1) the three ALJ decisions are not precedential, and (2) in our opinion, are incorrectly decided.
Under general principles of administrative law, an agency can choose to proceed either "by general rule or by individual ad hoc litigation." See SEC v. Chenery Corp., 332 U.S. 194, 203 (1947).
The SSA has been given broad rule-making authority. 42 U.S.C. § 405(a). Further, its regulations establish no binding precedent for ALJ decisions. See 20 C.F.R. § 402.45 (1997) (records that will be used as precedent must be published). Individual ALJ adjudications, therefore, are not binding beyond the parties to the hearing. See 20 C.F.R. § 416.1455. Therefore, individual ALJ decisions are not binding in adjudicating other claims. See Kenneth Culp Davis, Administrative Law Treatise, § 11.5 (1994); see also Mashaw et al., Social Security Hearings and Appeals, 90 (1978). In only one instance is a decision in an individual case precedential. That instance is when SSA adopts the decision as a Social Security Ruling and publishes it in the Federal Register. 20 C.F.R. § 402.35. That exception does not apply here.
Moreover, in our opinion, the three ALJ decisions were incorrectly decided. On April 27, 1999, ALJ William E. D~ found claimant's trust was irrevocable because she was not the grantor. See ALJ D~ decision at 6-7. However, as discussed above, if the trust was established with funds that actually belong to the claimant, then the claimant is the grantor of the trust. See POMS SI 01120.200(J)(3). The Michigan Supreme Court has expressly held that a settlor is one who provides the consideration. Hertsberg, 578 N.W. 2d at 292. On November 18, 1998, ALJ Edward P. G~ found that claimant's trust was irrevocable because the State of Michigan was a beneficiary. See ALJ G~ decision at 3. However, as discussed above, repayment of any medical assistance state claims does not mean that there is a named beneficiary. Instead, the medical assistance claims must be repaid because of statutorily-imposed reimbursement requirements, and, ultimately, the reason for the repayment is for claimant's benefit and not the State's benefit. Indeed, the Hertsberg decision held that the state was a creditor that could attack the trust. See Hertsberg, 578 N.W. 2d at 291. On December 22, 1998, ALJ John A. R~ found that claimant's trust was irrevocable because it was under the jurisdiction of Probate Court with no provision for the claimant to liquidate the trust or have access to the funds. See ALJ R~ decision at 3. Further, ALJ R~ found that this jurisdiction, since there was no Michigan law to the contrary, had precedence over general trust laws. Id. However, Mr. P~'s history directly contradicts this finding. In Mr. P~'s case, the Probate Court did dissolve a trust, and, although that trust was revocable, the Probate Court action demonstrated that it had the power to revoke a trust as well as establish one. In our opinion, the decisions in these three cases were not correctly decided and do not create a precedent for Mr. P~.
Because Mr. P~ is both the grantor and the sole beneficiary of the trust, he can compel termination of the trust through permission of the Probate Court and use the trust assets for his support and maintenance, thus making the current trust a countable resource for SSI purposes.
F. PS 00-304 SSI Regional Transmittal Concerning Michigan Life Insurance Funded Burial Contracts
DATE: January 30, 1996
Life insurance funded burial contracts are valid in Michigan. The only dollar limits placed on assignment of ownership of life insurance funded burial contracts occur when dealing with minors, legally incapacitated persons or recipients of public aid. There is no prohibition on placing revocably assigned life insurance policies to fund burial contracts irrevocably in trust.
You have asked for advice about three specific matters of Michigan law:
1. Are Life Insurance funded burial contracts valid in the State of Michigan?
2. Does Michigan have a law that places a dollar limit on the irrevocability assignment of ownership of insurance policies funding burial contracts?
3. Does Michigan law permit a revocably assigned life insurance policy that funds a funeral contract to be placed in an irrevocable trust?
1. Chapter 328 of the Michigan Compiled Laws (Annotated) discusses "Dead Human Bodies." Section 328.211 through Section 328.235 is known as the "prepaid funeral contract funding act."
Such contracts are valid in Michigan. As noted, Michigan Law 328.211 is known as the Prepaid Funeral Contract Funding Act and § 328.213(6) defines a "contract" as a written prepaid funeral contract and all documents pertinent to the terms of the contract under which, for consideration paid, the seller promises to make available or provide funeral services or funeral goods after the death of a contract beneficiary.
There are two types of funeral contracts in Michigan. A "Guaranteed price contract" fixes the price for which the specified funeral goods and/or services are sold. Under a "Guaranteed price contract" the price cannot change regardless of the cost or value of the goods and services at the time of the death of the contract beneficiary.
A "Non guaranteed price contract" does not obligate the contract beneficiary's estate to purchase specific goods and services, or to expend a specific amount on the funeral goods and services.
2. Is there a Michigan law that places a dollar limit on the irrevocable assignment of ownership of insurance policies funding burial contracts?
In general the answer to this question is no. Section 328.228, for example, lists "Prohibited practices," but does not place any limits on the irrevocable assignment of ownership of insurance policies funding burial contracts. Similarly, section 328.223 discusses cancellations and transfers, but says nothing about amounts. However, there are some possible exceptions most of which deal with recipients of public aid, incompetents, or children.
Section 328.201 Refers to Dead Human Body; final disposition; funeral plan account, deposit... This section anticipates section 328.202 (discussed below) and states that once the funds are paid in advance they can be released upon the request of the person making the deposit, unless an irrevocable agreement has been made under Section 328.202.
Section 328.202 discusses "Social welfare aid agreements; rules, prearranged funeral plan account, conversion to an irrevocable agreement." This provision allows, upon the request of the applicant or the recipient, for the Michigan Department of Social Services to convert a prearranged funeral plan account to an irrevocable agreement so long as the amount of money in the account does not exceed $2,000. The funds in such an account can only be used to provide for the final disposition of the (public aid recipient's) body under Section 328.201.
In addition, section 328.229 is similar to section 328.202 because it discusses prepaid funeral contracts approved by the Michigan Department of Social Services. Such contracts cannot be revoked or cancelled by the contract seller, contract provider, or contract buyer. Like section 328.202, section 328.229 discusses prepaid funeral contracts that may be made with applicants for assistance under the Social Welfare Act. This section talks about fully paid guaranteed price contracts of not more than $2,000.
Only one other law addresses a specific dollar amount. A different dollar amount is discussed in the statute dealing with guardianship and protective proceeding(s) in terms of Michigan's Revised Probate Code. There, section 700.408 "Proceeds of Life Insurance; payment of funeral and burial costs," states that a conservator of the estate of a minor or legally incapacitated person may receive as beneficiary the proceeds of a life insurance policy (upon the life of a decedent). However, if the decedent has no estate or if there is not enough money in the estate to pay the decedent's reasonable funeral and burial expenses, then the conservator may petition the court and ask it to direct payment out of the proceeds. The amount applied to the cost of the funeral and burial here, should not exceed $1,000.
Other than these provisions which mention the $2,000 amount, and the single instance of the $1,000 amount, there seem to be no other mentions of specific dollar amounts in the Michigan laws dealing with prepaid funeral contract funding.
However, section 328.224 (2) states that an escrow agent (the person who holds, invests, and disburses principal and income from funds received under a prepaid burial contract) cannot invest the funds by purchasing life insurance or annuities which are not payable in full until the happening of an event, especially if the event is the death of the contract beneficiary.
3. There is no prohibition against the practice of permitting a revocably assigned life insurance policy that funds a funeral contract to be placed irrevocably in a trust. There are a number of sections that discuss revocability of prepaid burial contracts.
Section 328.225(3) provides that prepaid funeral contracts can be cancelled within 10 business days after entering into the contract. Subpart (4) states that prepaid funeral contracts shall disclose the buyer's right to cancel and the amount of refund that he/she is entitled to on cancellation. Whereas subpart (6) allows the contract buyer to designate a new contract beneficiary at any time prior to the death of the beneficiary originally specified in the prepaid funeral contract. Thus, there is quite a bit of latitude under Michigan law in terms of revocability.
In summary, life insurance funded burial contracts are valid in the state of Michigan. The only time a dollar limit is placed upon assignment of ownership occurs when dealing with minors, legally incapacitated persons, or recipients of public aid. Moreover, after consulting the section dealing with prohibited practices, it appears that there is no prohibition under Michigan law against placing these revocably assigned life insurance policies to fund burial or funeral contracts irrevocably in trust.