TN 48 (06-16)

PS 01825.004 Arizona

A. PS 16-110 OPINION: Amendments to the Jewish Family and Children’s Service of Southern Arizona, Inc. Pooled Supplemental Benefits Trust for SSI Recipient J~

Date: April 1, 2016

1. Syllabus

This Regional Chief Counsel (RCC) opinion examines the amendments to the Jewish Family and Children’s Service of Southern Arizona, Inc. Pooled Supplemental Benefits Trust (JFCS Trust) to determine whether the JFCS Trust may be excepted from resource counting under section 1917 (d)(4)(C) of the Social Security Act. The RCC had previously determined that the JFCS Trust met some but not all of the requirements for an exception (see previous opinions below). The JFCS Trust was amended on February 29, 2016. The amended JFCS Trust now requires reimbursement to all States that provided medical assistance under a State Medicaid plan. The amended JFCS Trust also now contains an early termination provision that is consistent with the requirement that the trust be for the sole benefit of the beneficiary. Accordingly, the Amended JFCS Trust now satisfies all the requirements to be excepted from resource counting.

2. Opinion

I. QUESTION

You asked whether Supplemental Security Income (SSI) recipient J~’s trust account may be excepted from resource counting under section 1917(d)(4)(C) of the Social Security Act (Act) after amendments to the Jewish Family and Children’s Service of Southern Arizona, Inc. Pooled Supplemental Benefits Trust (JFCS Trust).

II. SHORT ANSWER

With the February 29, 2016 amendments, the Amended JFCS Trust satisfies the requirements to be excepted from resource counting.

III. FACTUAL BACKGROUND

On November XX, 2012, J~ (J~) executed a Joinder Agreement establishing an account for himself in the JFCS Trust.

Jewish Family & Children’s Services of Southern Arizona (JFCS) and Secured Futures, Inc. (Secured Futures) entered into an agreement dated November XX, 2013 and amended effective September XX, 2015 that resulted in Secured Futures becoming the trustee of the JFCS Trust.

JFCS and Secured Futures, as trustee of the JFCS Trust, further amended the JFCS Trust on February XX, 2016 (Amended JFCS Trust).

IV. RELEVANT TRUST PROVISIONS

This discussion is limited to the provisions of the Amended JFCS Trust that are relevant to the legal analysis that follows.

The Amended JFCS Trust provides, in pertinent part:

Article IX, Distributions Upon the Death of a Beneficiary, addresses disposition of sub-account assets when a beneficiary dies. Upon the death of a beneficiary, any amounts remaining in his/her sub-account will be retained by the trust in a general account as “surplus trust property” to be used (1) for the benefit of other beneficiaries, or (2) to aid, provide housing, or provide supplemental support services to persons who are indigent and disabled as defined in the Social Security Act. Amended JFCS Trust, Art. IX(A). With the February 2016 amendments, the Amended JFCS Trust also provides that, to the extent the trust does not retain any amounts in the deceased beneficiary’s sub-account, the trustee will first repay the medical assistance paid by all State(s) on behalf of the beneficiary under State(s) plans under Title XIX of the Act. Amended JFCS Trust, Art. IX(B). Taxes and administrative fees and expenses in connection with the death of the beneficiary and termination of the sub-account may be paid from the trust sub-account before reimbursement of the State(s). Amended JFCS Trust, Art. IX(B). Under this provision, the Arizona State Medicaid agency and all other State(s) that paid medical assistance on behalf of the beneficiary are the primary beneficiaries of the trust sub-account upon the death of the beneficiary. Amended JFCS Trust, Art. IX(B).

Article XIII,[1] Transfer of Beneficiary Trust Shares, permits the trustee to transfer a beneficiary’s sub account to another nonprofit pooled trust organized under 42 U.S.C. § 1396p(d)(4)(C) if the trustee believes that a beneficiary’s sub-account may become liable for basic maintenance, support and care, or if the trustee believes he or she cannot fulfill his or her fiduciary duties to the beneficiary. Amended JFCS Trust, Art. XIII(A). A transfer under this article does not create any rights in the beneficiary to compel distributions and shall not result in any disbursement of funds other than to the second nonprofit pooled trust or for the payment of taxes, fees and expenses associated with termination of the sub-account, compensation to the trustee, and costs associated with investment, legal or other services on behalf of the beneficiary. Amended JFCS Trust, Art. XIII(A).

V. RELEVANT AUTHORITIES

A. Social Security Act

When determining eligibility for SSI, a trust established after January 1, 2000 with an individual’s assets for his or her own benefit is considered a resource under §§ 1613 and 1917 of the Act. Social Security Act §§ 1613(e), 1917(d). A trust established with the assets of a disabled individual that is part of a pooled trust may be excepted from resource counting under certain circumstances. Social Security Act §§ 1613(e)(5), 1917(d)(4)(C). To meet this exception: (1) the trust must be managed by a non-profit association; (2) a separate account must be maintained for each beneficiary of the trust; (3) accounts in the trust must be established for the sole benefit of the beneficiaries by a parent, grandparent, legal guardian, by the beneficiaries themselves, or by a court; and (4) upon the beneficiary’s death, the trust must pay the State from any remaining trust balance the total amount of medical assistance paid on behalf of the deceased beneficiary during his or her lifetime. Social Security Act § 1917(d)(4)(C).

B. Program Operations Manual System (POMS)

Additional guidance is provided in Program Operations Manual System (POMS) SI 01120.201 (Trusts Established with the Assets of an Individual on or after 1/1/00) and POMS SI 01120.203 (Exceptions to Counting Trusts Established on or after 1/1/00). As a general rule, a trust established after January 1, 2000, with the assets of an individual, for his or her own benefit – even if irrevocable – must be counted as a resource. POMS SI 01120.201. Consistent with the Act, however, POMS recognizes there are exceptions, including trusts established to meet the needs of disabled individuals under section 1917(d)(4)(C) of the Act. See POMS SI 01120.201, POMS SI 01120.203.

To satisfy the pooled trust exception, the trust must be established by an organization that has been established and certified under a State nonprofit statute. POMS SI 01120.203.B.2.c; see Social Security Act § 1917(d)(4)(C)(i). The trust also must maintain a separate account for each trust beneficiary, although the funds may be pooled for investment and management purposes. POMS SI 01120.203.B.2.d; see Social Security Act § 1917(d)(4)(C)(ii).

POMS also explains that “the trust must contain specific language that provides that, to the extent that amounts remaining in the individual’s account upon death of the individual are not retained by the trust, the trust pays to the State(s) from such remaining amounts in the account an amount equal to the total amount of medical assistance paid on behalf of the individual under the State Medicaid plan(s).” POMS SI 01120.203.B.2.g; see Social Security Act § 1917(d)(4)(C)(iv).

The agency has interpreted “the sole benefit” requirement of section 1917(d)(4)(C) of the Act to mean the trust cannot benefit anyone but that individual from the time of the trust’s establishment through the remainder of the individual’s life. POMS SI 001120.201.F.2.a; see Social Security Act § 1917(d)(4)(C)(iii). Therefore, aside from payments for goods or services for the trust beneficiary and reasonable administrative expenses, the trust must not (1) provide a benefit to any other individual or entity during the disabled individual’s lifetime, or (2) allow for termination of a trust account prior to the individual’s death and payment of the assets to another individual or entity. POMS SI 01120.203.B.2.e. Thus, if the trust contains an early termination clause, it might not be excepted as a resource. See POMS SI 01120.203.B.2.e.

POMS SI 01120.199.F (Early Termination Provisions and Trusts) provides additional guidance as to when an early termination clause renders a trust a countable resource. Trusts established with the resources of an individual that contain an early termination clause are not to be counted as a resource if: (1) the State is designated to receive all amounts remaining in the trust at the time of termination up to the total amount of medical services paid on behalf of the beneficiary by the State, (2) after reimbursement to the State, all remaining funds are to be distributed to the beneficiary with the exception of certain specified expenses, and (3) the beneficiary does not have the power to terminate the trust. POMS SI 01120.199.F.1. For a pooled trust established under section 1917(d)(4)(C) of the Act, the trust need not meet the above criteria to be excepted as a resource if the early termination clause (1) “solely allows for transfer of the beneficiary’s assets from one [pooled] trust to another [pooled] trust,” and (2) contains specific language precluding disbursements other than to the secondary trust or for the payment of certain taxes, fees and expenses. POMS SI 01120.199.F.2 (citing POMS SI 01120.201.F.2.c).

VI. ANALYSIS

The Amended JFCS Trust Satisfies the Requirements for an Exception to Resource Counting

We previously advised that J~ is a beneficiary of the JFCS Trust, which met some but not all of the requirements for an exception to resource counting under section 1917(d)(4)(C) of the Act. Specifically, we found that the JFCS Trust did not require reimbursement to all States for medical assistance paid on the beneficiary’s behalf during his or her lifetime. We also found that the JFCS Trust did not contain an early termination provision. With the February 29, 2016 amendments, the Amended JFCS Trust now requires reimbursement to all States that provided medical assistance under a State Medicaid plan. The Amended JFCS Trust also now contains an early termination provision that is consistent with the requirement that the trust be for the sole benefit of the beneficiary. Therefore, the Amended JFCS Trust satisfies the requirements to be excepted from resource counting.

1. The Amended JFCS Trust Requires Reimbursement to All States for Medical Assistance to the Beneficiary During His/Her Lifetime, to the Extent the Trust Does Not Retain Amounts in a Beneficiary’s Account upon his or her death

Upon the death of a beneficiary, Article IX of the Amended JFCS Trust provides that, to the extent the trust does not retain amounts remaining in the beneficiary’s sub-account, the trustee will repay the medical assistance paid by all State(s) on behalf of the beneficiary under a State plan under Title XIX of the Act. Amended JFCS Trust, Art. IX(B). Before reimbursing the State(s), the trustee may pay taxes and administrative fees and expenses in connection with the death of the beneficiary and termination of the sub-account, as permitted under POMS SI 01120.203.B.3. Amended JFCS Trust, Art. IX(B). This provision therefore satisfies the Act’s requirement that the trust contain specific language providing that, to the extent a trust does not retain amounts remaining in a deceased beneficiary’s sub-account, the trust reimburses all State(s) for medical assistance provided to the beneficiary. Social Security Act § 1917(d)(4)(C); POMS SI 01120.203.B.2.g.

2. The Amended JFCS Trust Is For the Sole Benefit of the Beneficiary

To be excepted from resource counting, a trust must be for the “sole benefit” of the beneficiary. Social Security Act § 1917(d)(4)(C)(iii). Although Article XIII of the Amended JFCS Trust permits the early termination of a beneficiary’s sub-account, the provision does not violate the “sole benefit” requirement.

Consistent with POMS SI 01120.199.F, Article XIII provides that the trustee may transfer a beneficiary’s sub-account to another non-profit pooled trust, and such transfer will not result in any disbursements other than to the successor trust or for payment of fees and expenses that are permissible under POMS SI 01120.199.F.3 and POMS SI 01120.201.F.2.c. Thus, Article XIII of the Amended JFCS Trust ensures that, after the payment of reasonable fees and expenses, no one other than the beneficiary will benefit from the early termination of a trust sub-account.

VII. CONCLUSION

We previously advised that the JFCS Trust, as amended and restated on November 7, 2007, satisfies the requirements set forth in section 1917(d)(4)(C)(i) of the Act and POMS SI 01120.203.B.2.c that the trust be established and managed by a non-profit association. We also previously advised that the JFCS Trust satisfies the separate account requirements set forth in section 1917(d)(4)(C)(ii) of the Act and POMS SI 01120.203.B.2.d.

After the February 29, 2016 amendments, the Amended JFCS Trust now satisfies the Medicaid payback requirement under section 1917(d)(4)(C) of the Act. Specifically, upon the beneficiary’s death, the trust requires reimbursement to all State(s) that provided medical assistance during the beneficiary’s lifetime. See Social Security Act § 1917(d)(4)(C)(iv). The Amended JFCS Trust also added an early termination provision that allows the trustee to transfer a beneficiary’s sub-account to another pooled trust, while specifically prohibiting other disbursements except for the payment of permissible taxes, fees, and expenses. This provision therefore satisfies the requirement that the trust be for the sole benefit of the beneficiary. Social Security Act § 1917(d)(4)(C)(iii); POMS SI 01120.199.F.3. Accordingly, the Amended JFCS Trust satisfies the requirements to be excepted from resource counting.

B. PS 16-056 Amendments to the Secured Futures Pooled Special Needs Trust and Related Trustee Agreement for SSI

DATE: January 6, 2016

1. Syllabus

This Regional Chief Counsel (RCC) opinion discusses whether recipient’s trust may be excepted from resource counting under section 1917(d)(4)(C) of the Social Security Act. The beneficiary opened an account under the Jewish Family & Children’s Services of Southern Arizona Trust (JFCS). The Secured Futures Pooled Special Needs Trust (SF Trust) became trustee of the JFCS Trust. It was first determined that the provisions of the JFCS trust were controlling and not the SF Trust because the beneficiary had not executed a joinder agreement with the SF Trust. Under the JFCS Trust, the Medicaid payback requirement does not satisfy section 1917(d)(4)(C) of the Act, because upon the beneficiary’s death, the trust does not require reimbursement to all State(s) that provided medical assistance during the beneficiary’s lifetime. Alternatives were provided to fix the deficiency in the JFCS trust, or execute a joinder agreement to become a beneficiary of the SF trust, which is fully compliant with section 1917(d)(4)(C) of the Act. The JFCS Trust is a countable resource for SSI purposes, however, the RCC noted the SF Trust, as amended in 2015, satisfies the Act’s requirement to be excepted from resource counting.

2. Opinion

QUESTION

You asked whether Supplemental Security Income (SSI) recipient J~’s trust account may be excepted from resource counting under section 1917(d)(4)(C) of the Social Security Act (Act) following amendments to the Secured Futures Pooled Special Needs Trust (SF Trust) and a related Trustee Agreement.

SHORT ANSWER

The J~ trust account is not excepted from resource counting under section 1917(d)(4)(C) of the Act. Specifically, the account is subject to the terms of the JFCS Trust, which does not provide for reimbursement to all states that provided medical assistance to trust beneficiaries during their lifetimes. Amendments to the SF Trust and a related Trustee Agreement do not modify the terms of the JFCS Trust.

FACTUAL BACKGROUND

On November XX, 2012, J~ (J~) executed a Joinder Agreement (Joinder) establishing an account for himself in the Jewish Family & Children’s Services of Southern Arizona Pooled Trust (JFCS Trust).

On November XX, 2013, Jewish Family & Children’s Services of Southern Arizona (JFCS) and Secured Futures, Inc. (Secured Futures) entered into an agreement (Trustee Agreement) that resulted in Secured Futures becoming the trustee of the JFCS Trust. Trustee Agreement, ¶¶ 1, 2. The Trustee Agreement states that JFCS Trust beneficiaries shall become beneficiaries of the SF Trust but does not require those beneficiaries to execute SF Trust Joinders. Trustee Agreement, ¶ 4.

JFCS and Secured Futures amended the Trustee Agreement effective September 23, 2015 (Amended Trustee Agreement) to provide that Secured Futures, as successor trustee, “shall operate the [JFCS Trust] in accordance with the provisions therein and in accordance with” the SF Trust. Amended Trustee Agreement, ¶ 3. In the event of a conflict between the JFCS Trust and the SF Trust, the SF Trust “shall govern and control.” Amended Trustee Agreement, ¶ 3. All other provisions of the Trustee Agreement remain in effect.

RELEVANT TRUST PROVISIONS

This discussion of trust provisions is limited to the provisions that are relevant to the legal analysis that follows.

a. JFCS Trust and Joinder

JFCS established the JFCS Trust on January XX, 2005, and amended and restated the trust on November XX, 2007. In pertinent part, the JFCS Trust provides:

1. Article II, Trustee, provides that JFCS, as trustee, may appoint another nonprofit association as co-trustee and/or successor trustee. Any co-trustee “shall be bound by all of the same terms” of the JFCS Trust. JFCS Trust, Art. II(B).

2. Article V, Irrevocability and Amendment, provides that the trust is irrevocable but may be amended by the trustee if necessary to carry out the purposes of the trust or to comply with the requirements of federal or state law to accomplish the purposes of the trust. JFCS Trust, Art. V.

Article IX, Distributions Upon the Death of a Beneficiary, addresses disposition of sub-account assets when a beneficiary dies. It provides that, upon the death of a beneficiary, any amounts remaining in his/her sub-account will be retained by the trust in a general account as “surplus trust property” to be used (1) for the benefit of other beneficiaries, or (2) to aid, provide housing, or provide supplemental support services to persons who are indigent and disabled as defined in the Social Security Act. JFCS Trust, Art. IX(A). To the extent the trust does not retain any amounts in the deceased beneficiary’s sub-account, the trustee will “pay to the State (AHCCCS)[2] from such remaining amounts in the account an amount equal to the total amount of medical assistance paid on behalf of the beneficiary under the State’s plan under 42 U.S.C. § 1396(a) et seq.” JFCS Trust, Art. IX(B).

3. Article XII, Construction and Interpretation, states that the trust shall be construed and interpreted in accordance with Arizona law. JFCS Trust, Art. XII(A). If a beneficiary moves from Arizona to another State and qualifies for SSI or Medicaid benefits in such other State, “references to Arizona or to State in this trust shall also apply to the other State, but the rights of the State of Arizona (AHCCCS) as a remainder beneficiary after the death of any individual beneficiary shall be retained.” JFCS Trust, Art. XII(B).

J~’s Joinder makes him a JFCS Trust beneficiary and further provides, among other things:

1. J~ “agrees to participate in and be legally bound by the terms of the [JFCS Trust], including any amendments, which may be made pursuant to the terms of the Trust.” Joinder, Intro.

2. When the beneficiary dies, amounts remaining in his trust account “shall be deemed to be surplus Trust property and shall be retained by the Trust in a general account, or otherwise distributed pursuant to federal or State law, in accordance with the terms of the Trust.” Joinder, ¶ 6.

3. The trust is the remainder beneficiary of the sub-account and “to the extent that amounts remaining in the sub-account of a deceased beneficiary are not retained by the Trust, the Trustee shall pay to AHCCCS an amount equal to the total amount of medical assistance paid on behalf of the beneficiary under the Title XIX State Plan.” Joinder, ¶ 9.

b. SF Trust

Secured Futures established the SF Trust on May XX, 2008, and amended and restated the SF Trust on August XX, 2015 to provide, in pertinent part:

1. Article Two, Purpose and Establishment of the Trust, states that the trust shall be effective as to any beneficiary upon execution of a Joinder, the trustee’s approval of the Joinder, and delivery to the trustee of assets. SF Trust, Art. Two, § 2.3.

2. Article Five, Irrevocable Trust, states that the trust shall be irrevocable, subject to the trustee’s right to amend the trust under limited circumstances. SF Trust, Art. Five.

3. Article Six, Establishment, Administration and Disposition of Beneficiary Trust Shares, states that upon the death of the beneficiary, any amounts that are not retained by the trust shall be used to repay the medical assistance provided by all States to the beneficiary pursuant to State plans under Title XIX of the Act. SF Trust, Art. Six, § 6.12. After the repayment of medical assistance to the States, and after payment of taxes and reasonable administrative fees, the balance of the beneficiary’s sub-account shall be paid to persons named in the beneficiary’s Joinder. SF Trust, Art. Six. § 6.12. If the Joinder does not identify persons to receive any amounts remaining in the beneficiary’s sub-account, such amounts shall be used, in the trustee’s discretion, (1) for the benefit of other beneficiaries of the SF Trust, or (2) to provide disabled persons with equipment, medication or services. SF Trust, Art. Six, § 6.13.

Article Seven, Trustee to Trustee Transfers, addresses the early termination of a beneficiary’s sub-account if the trustee believes either that it cannot fulfill its fiduciary duties to a beneficiary or that the sub-account may become liable for a beneficiary’s basic maintenance and support. SF Trust, Art. Seven, § 7.1. Under such circumstances, the trustee has discretion to transfer the sub-account to a comparable non-profit pooled trust organized under 42 U.S.C. § 1396p(d)(4)(C)[3] . SF Trust, Art. Seven, § 7.1. A transfer under this provision shall not result in any disbursement other than the transfer of funds to the successor trust and the payment of taxes and reasonable administrative fees and expenses. SF Trust, Art. Seven, § 7.2

4. Article Nine, Termination of the Trust during the Beneficiary’s Lifetime, permits the trustee to terminate the trust if it becomes impossible or impracticable to meet the trust’s objectives due to changes in the law or other unforeseen situations. SF Trust, Art. Nine, § 9.1. Under such circumstances, the trustee may terminate the trust agreement and transfer the sub-accounts to another pooled trust or individual special needs trust as provided in Article Seven. SF Trust, Art. Nine, § 9.1. Any sub-account funds not transferred to another trust will be used to repay the medical assistance paid by all States on behalf of the beneficiary and to pay taxes and reasonable administrative fees and expenses; any amounts remaining will be distributed to the beneficiary. SF Trust, Art. Nine, § 9.2.

c. Second Arizona Amendment to the SF Trust

On August XX, 2015, Secured Futures further amended the trust to conform with certain provisions of Arizona State law through the Second Arizona Amendment to Secured Futures Pooled Special Trust Agreement (Second Arizona Amendment).

Paragraph 1 provides that the Second Arizona Amendment is retroactive to August 24, 2014, and its terms supersede the terms of the prior Arizona Amendment. Second Ariz. Amend., ¶ 1.

Paragraph 2 states that the SF Trust shall comply with certain provisions of Arizona law. The Second Arizona Amendment controls if there are conflicts between Arizona law and the trust. Second Ariz. Amend., ¶ 2.

Paragraph 3 states that the “Arizona State Medicaid agency, and all other State(s) which have paid Medical Assistance on behalf of the Beneficiary,” shall be the primary beneficiary of the sub-account if the trust is terminated before or upon the death of the trust beneficiary. Second Ariz. Amend., ¶ 3.

The Second Arizona Amendment ratified and reaffirmed the SF Trust in all other respects.

RELEVANT AUTHORITIES

d. Social Security Act

When determining eligibility for SSI, a trust established after January 1, 2000 with an individual’s assets for his or her own benefit is considered a resource under §§ 1613 and 1917 of the Act. Social Security Act §§ 1613(e), 1917(d). A trust established with the assets of a disabled individual that is part of a pooled trust may be excepted from resource counting under certain circumstances. Social Security Act §§ 1613(e)(5), 1917(d)(4)(C). To meet this exception: (1) the trust must be managed by a non-profit association; (2) a separate account must be maintained for each beneficiary of the trust; (3) accounts in the trust must be established for the sole benefit of the beneficiaries by a parent, grandparent, legal guardian, by the beneficiaries themselves, or by a court; and (4) upon the beneficiary’s death, the trust must pay the State from any remaining trust balance the total amount of medical assistance paid on behalf of the deceased beneficiary during his or her lifetime. Social Security Act § 1917(d)(4)(C).

e. Program Operations Manual System (POMS)

Additional guidance is provided in Program Operations Manual System (POMS) SI 01120.201 (Trusts Established with the Assets of an Individual on or after 1/1/00) and POMS SI 01120.203 (Exceptions to Counting Trusts Established on or after 1/1/00). As a general rule, a trust established after January 1, 2000, with the assets of an individual, for his or her own benefit – even if irrevocable – must be counted as a resource. POMS SI 01120.201. Consistent with the Act, however, POMS recognizes there are exceptions, including trusts established to meet the needs of disabled individuals under section 1917(d)(4)(C) of the Act. See POMS SI 01120.201, SI 01120.203.

To satisfy the pooled trust exception, the trust must be established by an organization that has been established and certified under a State nonprofit statute. POMS SI 01120.203.B.2.c; see Social Security Act § 1917(d)(4)(C)(i). The trust also must maintain a separate account for each trust beneficiary, although the funds may be pooled for investment and management purposes. POMS SI 01120.203.B.2.d; see Social Security Act § 1917(d)(4)(C)(ii).

POMS also explains that “the trust must contain specific language that provides that, to the extent that amounts remaining in the individual’s account upon death of the individual are not retained by the trust, the trust pays to the State(s) from such remaining amounts in the account an amount equal to the total amount of medical assistance paid on behalf of the individual under the State Medicaid plan(s).” POMS SI 01120.203.B.2.g; see Social Security Act § 1917(d)(4)(C)(iv). Further, the trust must provide reimbursement to any State(s) that may have provided medical assistance under the State Medicaid plan(s) and payback may not be limited to any particular State(s) or period of time. POMS SI 01120.203.B.2.g.

The agency has interpreted “the sole benefit” requirement of section 1917(d)(4)(C) of the Act to mean the trust cannot benefit anyone but that individual from the time of the trust’s establishment through the remainder of the individual’s life. POMS SI 001120.201.F.2.a; see Social Security Act § 1917(d)(4)(C)(iii). Therefore, aside from payments for goods or services for the trust beneficiary and reasonable administrative expenses, the trust must not (1) provide a benefit to any other individual or entity during the disabled individual’s lifetime, or (2) allow for termination of a trust account prior to the individual’s death and payment of the assets to another individual or entity. POMS SI 01120.203.B.2.e. Thus, if the trust contains an early termination clause, it might not be excepted as a resource. See POMS SI 01120.203.B.2.e.

POMS SI 01120.199.F (Early Termination Provisions and Trusts) provides additional guidance as to when an early termination clause renders a trust a countable resource. Trusts established with the resources of an individual that contain an early termination clause are not to be counted as a resource if: (1) the State is designated to receive all amounts remaining in the trust at the time of termination up to the total amount of medical services paid on behalf of the beneficiary by the State, (2) after reimbursement to the State, all remaining funds are to be distributed to the beneficiary with the exception of certain specified expenses, and (3) the beneficiary does not have the power to terminate the trust. POMS SI 01120.199.F.1. For a pooled trust established under section 1917(d)(4)(C) of the Act, the trust need not meet the above criteria to be excepted as a resource if the early termination clause (1) “solely allows for transfer of the beneficiary’s assets from one [pooled] trust to another [pooled] trust,” and (2) contains specific language precluding disbursements other than to the secondary trust (or for the payment of taxes or reasonable administrative expenses). POMS SI 01120.199.F.2.

f. Arizona Law

Under Arizona law, “[t]he ability to amend or revoke the trust is governed by its express terms.” In re Walter P. Herbst & Shirley A. Herbst Trust, 76 P.3d 888, 891 (Ariz. Ct. App. 2003), quoting In re Marital Trust Under the John W. Murphey & Helen G. Murphey Trust, 819 P.2d 1029, 1030 (Ariz. Ct. App. 1991); see also 76 Am. Jur. 2d Trusts § 68 (2015) (“When a settlor has reserved the power to modify the trust and specifies a particular method of modification or particular circumstances by which the trust can be modified, the trust can be modified only in that manner.”), citing In re Herbst, 676 P.2d 888.

ANALYSIS

g. The Terms of the JFCS Trust Control J~’s Account

Pursuant to the Joinder executed on November 15, 2012, J~ is a beneficiary of the JFCS Trust and legally bound by its terms. Joinder, Intro. The JFCS Trust similarly states that the Joinder is “to identify each individual beneficiary, and to bind such beneficiary to the terms and conditions of the [JFCS Trust].” JFCS Trust, Art. VII(A). J~ has not executed a Joinder to become a beneficiary of the SF Trust as required to make the trust’s terms effective as to him. SF Trust, Art. Two, § 2.3 (stating that the trust shall be effective as to any beneficiary upon execution of a Joinder, the trustee’s approval of the Joinder, and delivery to the trustee of assets).

 

Secured Futures became trustee of the JFCS Trust pursuant to the November XX, 2013 Trustee Agreement. As trustee, Secured Futures may amend the JFCS Trust if necessary to carry out the trust’s purposes or to comply with federal or state requirements. JFCS Trust, Art. V. Secured Futures has not amended the JFCS Trust. Instead, Secured Futures and JFCS amended the Trustee Agreement to provide, in pertinent part, that the SF Trust “shall govern and control” in the event of a conflict between the JFCS Trust and the SF Trust. Amended Trustee Agreement, ¶ 3. However, to change the terms of the JFCS Trust, the trust itself must be amended pursuant to Article V because, under Arizona law, a trust can only be modified in accordance with its express terms.[4] See In re Herbst, 76 P.3d at 891.

h. The JFCS Trust Does Not Meet the Requirements of Section 1917(d)(4)(C) of the Act.

As we previously advised, the JFCS Trust does not require reimbursement to all States for medical assistance paid on the beneficiary’s behalf during his or her lifetime. See Social Security Act § 1917(d)(4)(C)(iv); POMS SI 01120.203.B.2.g. Instead, to the extent the trust does not retain amounts remaining in a deceased beneficiary’s sub-account, the trustee will “pay to the State (AHCCCS) from such remaining amounts in the account an amount equal to the total amount of medical assistance paid on behalf of the beneficiary under the State’s plan.” JFCS Trust, Art. IX(B). This provision therefore provides reimbursement only to Arizona’s Medicaid agency, not all States that may have provided medical assistance under a State Medicaid plan. See POMS SI 01120.203.B.2.g.[5]

i. The SF Trust Satisfies the Requirements for an Exception to Resource Counting

We previously advised that the SF Trust, as restated on February 27, 2009, did not meet the requirements for an exception to resource counting under section 1917(d)(4)(C) of the Act. Specifically, we found that the SF Trust contained early termination provisions that may benefit someone other than the account beneficiary. Additionally, we found that the SF Trust contained an Arizona Amendment that provided for reimbursement only to Arizona’s Medicaid agency, as opposed to all states that provided medical assistance to a beneficiary under a State plan. However, the 2015 restatement of the SF Trust as well as the Second Arizona Amendment resolved these issues.

1. The SF Trust Is For the Sole Benefit of the Beneficiary

To be excepted from resource counting, a trust must be for the “sole benefit” of the beneficiary. Social Security Act § 1917(d)(4)(C)(iii). Although Articles Seven and Nine of the SF Trust permit early termination of individual sub-accounts and the trust itself, these provisions do not violate the “sole benefit” requirement.

Consistent with POMS SI 01120.199.F, Articles Seven and Nine of the SF Trust provide that upon termination of a beneficiary’s sub-account or the trust itself, the trustee may transfer the sub-account or all trust sub-acounts to another non-profit pooled trust, and such transfer will not result in any disbursements other than to the successor trust or for payment of reasonable administrative expenses. SF Trust, Art. Seven, § 7.2; Art. Nine, § 9.1. Alternatively, if sub-account funds are not transferred to another pooled trust as provided in Article Seven, such funds will be used to repay medical assistance provided by all States on behalf of the beneficiary and to pay taxes and reasonable administrative expenses; thereafter, any remaining amounts will be distributed to the beneficiary. SF Trust, Art. Nine, § 9.2. Thus, the SF Trust ensures that, after reimbursement to the State(s) and permissible administrative expenses, no one other than the beneficiary will benefit from early termination of a trust sub-account.

2. The SF Trust Requires Reimbursement to All States for Medical Assistance to the Beneficiary During His/Her Lifetime, to the Extent Amounts in the Beneficiary’s Account Are Not Retained by the Trust Upon the Death of the Beneficiary

The Second Arizona Amendment provides that the “Arizona State Medicaid agency, and all other State(s) which have paid Medical Assistance on behalf of the Beneficiary,” shall be the primary beneficiary of the sub-account if the trust is terminated before or upon the death of the trust beneficiary. Second Ariz. Amend., ¶ 3. Accordingly, the SF Trust as modified by the Second Arizona Amendment satisfies the Act’s requirement that the trust contain specific language providing that, to the extent that amounts remaining in the beneficiary’s account upon his/her death are not retained by the trust, the trust reimburses the State(s) for medical assistance provided to the beneficiary. Social Security Act § 1917(d)(4)(C)(iv); POMS SI 01120.203.B.2.g.

CONCLUSION

J~ is a beneficiary of the JFCS Trust, which does not satisfy the Medicaid payback requirement under section 1917(d)(4)(C) of the Act. Specifically, upon the beneficiary’s death, the trust does not require reimbursement to all State(s) that provided medical assistance during the beneficiary’s lifetime. See Social Security Act § 1917(d)(4)(C)(iv). Secured Futures could address this deficiency by amending Article IX of the JFCS Trust to state that, to the extent the JFCS Trust does not retain the amounts remaining in a deceased beneficiary’s sub-account, the trustee will pay to the State(s) an amount equal to the total amount of medical assistance paid on behalf of the individual under the State Medicaid plan(s). Alternatively, J~ could execute a Joinder to become a beneficiary of the SF Trust as required to make the trust’s terms effective as to him going forward. SF Trust, Art. Two, § 2.3. However, because the JFCS Trust is irrevocable and does not contain an early termination provision, J~ could not terminate his JFCS Trust sub-account and transfer the assets to the SF Trust.

While not controlling for J~, we note the SF Trust as amended in 2015 (and modified by the Second Arizona Amendment) satisfies the Act’s requirement to be excepted from resource counting. See Social Security Act § 1917(d)(4)(C)(i)-(iv).

Deborah Lee Stachel

Acting Regional Chief Counsel, San Francisco

C. PS 15-114 OPINION: Secured Futures Pooled Special Needs Trust, formerly the Jewish Family and Children’s Services of Southern Arizona Pooled Trust, for SSI Recipients D~ and J~

DATE: April 22, 2015

1. Syllabus

This RCC opinion discusses the implications of a Trustee Agreement entered by Jewish Family & Children’s Services of Southern Arizona Pooled Trust (JFCS Trust) and Secured Futures, Inc. for two JFCS trust subaccounts established prior to the Trustee Agreement. Under the Trustee Agreement, Secured Futures became the co-trustee of the JFCS Trust and JFCS resigned as co-trustee. As trustee, Secured Futures operates the JFCS Trust in accordance with the provisions of both the JFCS Trust and the Secured Futures Pooled Special Needs Trust (SF Trust); however, in the event conflicts arise between the terms of the two trusts, the JFCS Trust shall govern and control. Therefore, the two JFCS subaccounts in question do not meet the requirements for exception of Section 1917(d)(4)(C) of the Act. The JFCS Trust does not provide Medicaid payback to all the states that provided medical assistance. The SF Trust also fails to meet the requirements for exception because it has a problematic early termination provision.

2. Opinion

I. INTRODUCTION

On April 6, 2007, claimant D~’s (D~) legal guardian executed a J~ Agreement (P~) establishing an account for P~ in the Jewish Family & Children’s Services of Southern Arizona Pooled Trust (JFCS Trust). On November 15, 2012, claimant J~ (J~) also executed a Joinder Agreement (L~) establishing an account for himself in the JFCS Trust.

On November 25, 2013, JFCS and Secured Futures, Inc. (Secured Futures) entered into an Agreement (Trustee Agreement) under which Secured Futures became a co-trustee of the JFCS Trust effective January 31, 2014 and JFCS resigned as co-trustee effective February 1, 2014. Trustee Agreement, ¶¶ 1, 2.

Under the Trustee Agreement, Secured Futures, as successor trustee, “shall operate the [the JFCS Trust] in accordance with the provisions therein and in accordance with” the Secured Futures Pooled Special Needs Trust (SF Trust). Trustee Agreement, ¶ 3. In the event of a conflict between the JFCS Trust and the SF Trust, the JFCS Trust “shall govern and control.” Trustee Agreement, ¶ 3. The Trustee Agreement states that “[u]pon JFCS’s resignation as Co-Trustee, the Beneficiaries shall become beneficiaries of the [SF Trust]” but does not require those beneficiaries to execute Joinder Agreements for the SF Trust. Trustee Agreement, ¶ 4.

P~ and L~ did not execute Joinder Agreements for the SF Trust.

II. QUESTION

The P~ and L~ trust accounts are not excepted from resource counting under § 1917(d)(4)(C) of the Act. Specifically, the accounts are subject to the terms of the JFCS Trust, which does not provide for reimbursement to all states that provided medical assistance to the respective beneficiaries during their lifetimes.

III. SHORT ANSWER

The P~ and J~ trust accounts are not excepted from resource counting under § 1917(d)(4)(C) of the Act. Specifically, the accounts are subject to the terms of the JFCS Trust, which does not provide for reimbursement to all states that provided medical assistance to the respective beneficiaries during their lifetimes.

IV. RELEVANT TRUST PROVISIONS

A. JFCS Trust

The Jewish Family & Children’s Services of Southern Arizona, Inc. (JFCS) established the JFCS Trust on January XX, 2005. On November XX, 2007, JFCS amended and restated the trust.

Article II, Trustee, states that JFCS, a non-profit association, is the trustee of the JFCS Trust. JFCS Trust, Art. II.

Article III, Beneficiary, provides that beneficiaries are disabled individuals who have accounts with the trust; an individual is eligible to participate in the trust if the Social Security Administration (SSA) has determined he or she is disabled or if the Trustee finds that the individual is disabled as defined in the Social Security Act. JFCS Trust, Art. III.

Article V, Irrevocability and Amendment, provides that the trust is irrevocable, although it may be amended by the trustee if necessary to carry out the purposes of the trust or to comply with the requirements of federal or state law to accomplish the purposes of the trust. JFCS Trust, Art. V.

Article VI, Trust Property, states that each beneficiary shall have a separate sub-account solely for his/her benefit. JFCS Trust, Art. VI.A, C & D. To join the trust, a beneficiary (or parent, grandparent or legal guardian) must sign a Joinder Agreement (Joinder). JFCS Trust, Art. VI.B. The Trustee may pool individual sub-accounts for investment and management purposes. JFCS Trust, Art. VI.C. Trust property may not be refunded or withdrawn by the beneficiary or donor once accepted by the trustee and deposited into the trust. JFCS Trust, Art. VI.E (stating “such property transferred shall become irrevocably part of the trust”).

Article VIII, Distributions, addresses how sub-account assets may be used. It provides that the trustee may, in its sole discretion, distribute sub-account income or principal for the beneficiary’s supplemental needs but not for his/her primary support or to supplant or replace public assistance benefits. JFCS Trust, Art. VIII.A-D. Sub-account distributions are to be made to or for the benefit of the beneficiary – and no other persons – during his/her lifetime. JFCS Trust, Art. VIII.E. Distributions may also be made to pay trustee compensation, expenses, and taxes. JFCS Trust, Art. VIII.F.1-3.

Article IX, Distributions Upon the Death of a Beneficiary, addresses disposition of sub-account assets when a beneficiary dies. It provides that, upon the death of a beneficiary, any amounts remaining in his/her sub-account will be retained by the trust in a general account as “surplus trust property” to be used (1) for the benefit of other beneficiaries, or (2) to aid, provide housing, or provide supplemental support services to persons who are indigent and disabled as defined in the Social Security Act. JFCS Trust, Art. IX.A. To the extent the trust does not retain any amounts in the deceased beneficiary’s sub-account, the trustee will “pay to the State (AHCCCS) from such remaining amounts in the account an amount equal to the total amount of medical assistance paid on behalf of the beneficiary under the State’s plan under 42 U.S.C. § 1396(a) et seq.” JFCS Trust, Art. IX.B.

Article XI, Spendthrift Provision, prevents beneficiaries from demanding or directing payment of trust principal or income. It also provides that beneficiaries’ interests shall not be subject to transfer, assignment, or creditors’ claims. JFCS Trust, Art. XI.

Article XII, Construction and Interpretation, states that the trust shall be construed and interpreted in accordance with Arizona State law. JFCS Trust, Art. XII.A. If a beneficiary moves from Arizona to another State and qualifies for SSI or Medicaid benefits in such other State, “references to Arizona or to State in this trust shall also apply to the other State, but the rights of the State of Arizona (AHCCCS) as a remainder beneficiary after the death of any individual beneficiary shall be retained.” JFCS Trust, Art. XII.B.

B. SF Trust

Secured Futures established the SF Trust on May 30, 2008. Secured Futures amended and restated the SF Trust on February 27, 2009.

Article One defines “beneficiary” as a disabled person within the meaning of 42 U.S.C. § 1382c(a)(3) (Social Security Act § 1614(a)(4)) who has a “Beneficiary Trust Share” account, which is defined as the share or portion of the trust held for the individual beneficiary. [6]

Article Two, Purpose and Establishment of the Trust, states that the trust’s purpose is to hold the funds of disabled persons for their supplemental needs. SF Trust, Art. Two, § 2.1. Beneficiaries’ funds may be combined for investment and administration purposes, but are deemed to be the share of, and for the benefit of, each individual beneficiary. SF Trust, Art. Two, § 2.2. The trust shall be effective as to any beneficiary upon execution of a Joinder by the beneficiary or other grantor, approval of the Joinder by the trustee, and delivery to the trustee of assets. SF Trust, Art. Two, § 2.3.

Article Five, Irrevocable Trust, states that the trust shall be irrevocable, subject to the trustee’s right to amend the trust under limited circumstances. SF Trust, Art. Five.

Article Six, Establishment, Administration and Disposition of Beneficiary Trust Shares, covers the creation of an individual sub-account, its administration, and its disposition upon the death of the beneficiary, as follows:

Establishment: A beneficiary trust share is created upon the execution of a Joinder by the beneficiary (or other grantor), the trustee’s acceptance of the Joinder, and delivery to the trustee of assets for the sub-account. SF Trust, Art. Six, § 6.1.

Administration: The sub-account is to be used for the beneficiary’s supplemental needs during his/her lifetime and shall not supplant or replace government benefits. SF Trust, Art. Six, § 6.2. All sub-account deposits are irrevocable and non-refundable. SF Trust, Art. Six, § 6.4. The trustee has discretion in making distributions for the beneficiary’s benefit; disbursements may not be assigned or compelled by a beneficiary and sub-account assets may not be made available to his/her creditors. SF Trust, Art. Six, §§ 6.2, 6.6, 6.7.

Disposition upon the death of the beneficiary: Upon the death of the beneficiary, any amounts remaining in his/her sub-account shall be used, in the trustee’s discretion, (1) for the benefit of other beneficiaries of the SF Trust, or (2) to provide disabled persons with equipment, medication or services. SF Trust, Art. Six, § 6.12. To the extent sub-account funds are not retained by the trust, such funds shall be used to “repay the Medical Assistance paid by all states on behalf of the Beneficiary under the State Plan under Title XIX of the Social Security Act after allowable administrative expenses and taxes are paid.” SF Trust, Art. Six, § 6.13. After repayment of the medical expenses and payment of expenses and taxes, any funds remaining will be paid to beneficiaries named in the Joinder.

Article Seven, Trustee to Trustee Transfers, addresses the early termination of a beneficiary’s sub-account if the trustee believes either that it cannot fulfill its fiduciary duties to a beneficiary or that the sub-account may become liable for a beneficiary’s basic maintenance and support. SF Trust, Art. Seven, § 7.1. Under such circumstances, the trustee has discretion to transfer the subaccount to (1) a comparable non-profit pooled trust organized under 42 U.S.C. § 1396p(d)(4)(C), [7] or (2) a private special needs trust organized under 42 U.S.C. § 1396p(d)(4)(A). SF Trust, Art. Seven, § 7.1(a) & (b).

Article Nine, Termination of the Trust during the Beneficiary’s Lifetime, permits the trustee to terminate the trust if it becomes impossible or impracticable to meet the trust’s objectives due to changes in the law or other unforeseen situations. SF Trust, Art. Nine, § 9.1. Under such circumstances, the trustee may terminate the trust agreement and transfer the sub-accounts to another pooled trust or individual special needs trust as provided in Article Seven. SF Trust, Art. Nine, § 9.1. Any funds not transferred to another trust will be used to repay the medical assistance paid by all States on behalf of the beneficiary and any amounts remaining will be distributed to the beneficiary. SF Trust, Art. Nine, § 9.2.

C. Arizona Amendment to the SF Trust

On August 24, 2012, Secured Futures further amended the trust to conform with certain provisions of Arizona State law through the Arizona Amended Secured Futures Pooled Special Trust Agreement (Arizona Amendment).

Paragraph 2 states that the SF Trust shall comply with certain provisions of Arizona law. The Arizona Amendment controls if there are conflicts between Arizona law and the trust. Ariz. Amend., ¶ 2.

Paragraph 3 states that the Arizona State Medicaid agency shall be the primary beneficiary of the sub-account if the trust is terminated before or upon the death of the trust beneficiary. Ariz. Amend., ¶ 3.

Paragraph 7 states that the trust share account established for a beneficiary “shall be for the benefit of the trust beneficiary.” Ariz. Amend., ¶ 7.

The Arizona Amendment ratified and reaffirmed the SF Trust in all other respects and stated it shall remain in full force and effect.

V. RELEVANT AUTHORITIES

A. Social Security Act

When determining eligibility for SSI, a trust established after January 1, 2000 with an individual’s assets for his or her own benefit is considered a resource under §§ 1613 and 1917 of the Act. Social Security Act §§ 1613(e), 1917(d). A trust established with the assets of a disabled individual that is part of a pooled trust may be exempted and not counted as a resource under certain circumstances. Social Security Act §§ 1613(e)(5), 1917(d)(4)(C). To meet this exception: (1) the trust must be managed by a non-profit association; (2) a separate account must be maintained for each beneficiary of the trust; (3) accounts in the trust must be established for the sole benefit of the beneficiaries by a parent, grandparent, legal guardian, by the beneficiaries themselves, or by a court; and (4) upon the beneficiary’s death, the trust must pay the State from any remaining trust balance the total amount of medical assistance paid on behalf of the deceased beneficiary during his or her lifetime. Social Security Act § 1917(d)(4)(C).

B. Program Operations Manual System (POMS)

Additional guidance is provided in Program Operations Manual System (POMS) SI 01120.201 (Trusts Established with the Assets of an Individual on or after 1/1/00) and POMS SI 01120.203 (Exceptions to Counting Trusts Established on or after 1/1/00). As a general rule, a trust established after January 1, 2000, with the assets of an individual, for his or her own benefit – even if irrevocable – must be counted as a resource. POMS SI 01120.201. Consistent with the Act, however, POMS recognizes there are exceptions, including trusts established to meet the needs of disabled individuals under § 1917(d)(4)(C) of the Act. See POMS SI 01120.201, SI 01120.203.

To satisfy the pooled trust exception, the trust must be established by an organization that has been established and certified under a State nonprofit statute. POMS SI 01120.203.B.2.c; see Social Security Act § 1917(d)(4)(C)(i). The trust also must maintain a separate account for each trust beneficiary, although the funds may be pooled for investment and management purposes. POMS SI 01120.203.B.2.d; see Social Security Act § 1917(d)(4)(C)(ii).

POMS also explains that “the trust must contain specific language that provides that, to the extent that amounts remaining in the individual’s account upon death of the individual are not retained by the trust, the trust pays to the State(s) from such remaining amounts in the account an amount equal to the total amount of medical assistance paid on behalf of the individual under the State Medicaid plan(s).” POMS SI 01120.203.B.2.g; see Social Security Act § 1917(d)(4)(C)(iv). Further, the trust must provide reimbursement to any State(s) that may have provided medical assistance under the State Medicaid plan(s) and payback may not be limited to any particular State(s) or period of time, such as after establishment of the trust. POMS SI 01120.203.B.2.g.

The agency has interpreted “the sole benefit” requirement of § 1917(d)(4)(C) of the Act to mean the trust cannot benefit anyone but that individual from the time of the trust’s establishment through the remainder of the individual’s life. POMS SI 001120.201.F.2.a; see Social Security Act § 1917(d)(4)(C)(iii). Therefore, aside from payments for goods or services for the trust beneficiary and reasonable administrative expenses, the trust must not (1) provide a benefit to any other individual or entity during the disabled individual’s lifetime, or (2) allow for termination of a trust account prior to the individual’s death and payment of the assets to another individual or entity. POMS SI 01120.203.B.2.e. Thus, if the trust contains an early termination clause, it might not be excepted as a resource. See POMS SI 01120.203.B.2.e.

POMS SI 01120.199.F (Early Termination Provisions and Trusts) provides additional guidance as to when an early termination clause renders a trust a countable resource. Trusts established with the resources of an individual that contain an early termination clause are not to be counted as a resource if: (1) the State is designated to receive all amounts remaining in the trust at the time of termination up to the total amount of medical services paid on behalf of the beneficiary by the State, (2) after reimbursement to the State, all remaining funds are to be distributed to the beneficiary with the exception of certain specified expenses, and (3) the beneficiary does not have the power to terminate the trust. POMS SI 01120.199.F. 1. For a pooled trust established under § 1917(d)(4)(C) of the Act, the trust need not meet the above criteria to be excepted as a resource if the early termination clause (1) “solely allows for transfer of the beneficiary’s assets from one [pooled] trust to another [pooled] trust,” and (2) contains specific language precluding disbursements other than to the secondary trust (or for the payment of taxes or reasonable administrative expenses). POMS SI 01120.199.F.2.

VI. ANALYSIS

As discussed in part A below, it appears that the JFCS Trust is the operative trust for P~ and L~, with Secured Futures serving as trustee; the provisions of the JFCS Trust are discussed in part B of this section.

A. The JFCS Trust Is the Operative Trust for P~ and L~

The Trustee Agreement made Secured Futures the successor trustee of the JFCS Trust through a two-step process: Secured Futures became a co-trustee with JFCS, and JFCS then resigned. Trustee Agreement, ¶¶ 1, 2. The Trustee Agreement directs Secured Futures to operate the JFCS Trust in accordance with the provisions of both the JFCS Trust and the SF Trust; in the event conflicts arise between the terms of the two trusts, the JFCS Trust “shall govern and control.” Trustee Agreement, ¶ 3.

Although the Trustee Agreement states that the beneficiaries of the JFCS Trust “shall become beneficiaries of the [SF Trust]” (Trustee Agreement, ¶ 4), the agreement does not terminate the JFCS Trust. [8] Instead, it provides that Secured Futures, as successor trustee, will operate the JFCS Trust in accordance with its terms as well as the terms of the SF Trust. Trustee Agreement, ¶ 3. Paragraph 3 therefore appears to impose additional obligations on Secured Futures in how it operates the JFCS Trust (i.e., by requiring compliance with any terms of the SF Trust that are not in the JFCS Trust), but provides that the JFCS Trust controls and any conflicts between the two trusts are resolved in favor of the JFCS Trust. Trustee Agreement, ¶ 3.

Further, the Trustee Agreement does not provide any mechanism for transitioning the beneficiaries of the JFCS Trust into the SF Trust. See Trustee Agreement, ¶ 4 (stating “the Beneficiaries shall become beneficiaries of the [SF Trust]”). For example, the SF Trust requires beneficiaries to sign a Joinder and the trustee to accept the Joinder before an individual may participate in the trust, but the Trustee Agreement does not require beneficiaries of the JFCS Trust to execute Joinders for the SF Trust. [9] See SF Trust, Art. Six, § 6.1.

Accordingly, under the Trustee Agreement, the JFCS Trust is the operative trust for P~ and L~: the JFCS Trust was not terminated, Secured Futures was named its successor trustee, the terms of the JFCS Trust are controlling, and P~ and L~ have not executed Joinders for the SF Trust.

B. The JFCS Trust Meets Some, But Not All, of the Requirements to Be Excepted from Resource Counting

As discussed above in part A of this section, the JFCS Trust is the operative trust for P~ and L~. The trust, however, does not satisfy all of the requirements to be excepted from resource counting. [10]

1. The JFCS Trust Is for the Sole Benefit of the Beneficiaries.

Sub-accounts within the JFCS Trust are for the sole benefit of the beneficiaries as required under the Act, POMS SI 01120.201.F, and POMS SI 01120.203.B.2.e. Article VI of the JFCS Trust states that “a sub-account shall be established solely for the benefit of each qualified individual beneficiary.” JFCS Trust, Art. VI.B. Further, distributions from trust sub-accounts are to be made only to or for the benefit of that beneficiary during his/her lifetime and may not be made to any other persons, such as family or dependents. JFCS Trust Art. VIII.C & E. [11] Finally, a beneficiary may not demand or direct payment from the trust and, further, beneficiaries’ interests are not subject to transfer, assignment, or creditors’ claims. JFCS Trust, Art. XI. Moerover, the JFCS Trust does not contain any provisions permitting the early termination of the trust and, therefore, POMS SI 001120.199.F is inapplicable. Under these provisions, the trust will not benefit anyone but the beneficiary during his/her lifetime. See POMS SI 01120.201.F.2.

2. Upon the Death of the Beneficiary, the JFCS Trust Does Not Require Reimbursement to All States for Medical Assistance to the Beneficiary During His/Her Lifetime, to the Extent Amounts in the Beneficiary’s Account Are Not Retained by the Trust.

Article IX of the JFCS Trust provides that, upon the death of a beneficiary, any amounts remaining in his/her sub-account will be retained by the trust in a general account to be used for the benefit of other trust beneficiaries or persons who are indigent and disabled. JFCS Trust, Art. IX.A. However, to the extent the trust does not retain amounts remaining in a deceased beneficiary’s sub-account, the trustee will “pay to the State (AHCCCS) from such remaining amounts in the account an amount equal to the total amount of medical assistance paid on behalf of the beneficiary under the State’s plan.” JFCS Trust, Art. IX.B. This provision therefore provides reimbursement only to Arizona’s Medicaid agency, AHCCCS, and not all States that may have provided medical assistance under a State Medicaid plan. See POMS SI 01120.203.B.2.g.

The JFCS Trust does provide, in Article XII, that if a beneficiary moves from Arizona to another State and qualifies for benefits in such other State, “references to Arizona or to State in this trust shall also apply to the other State, but the rights of the State of Arizona (AHCCCS) as a remainder beneficiary after the death of any individual beneficiary shall be retained.” JFCS Trust, Art. XII.B. However, this provision would only result in reimbursement of States to which the beneficiary moved after he/she left Arizona; it does not ensure that States which provided medical assistance before the beneficiary enrolled in the JFCS Trust in Arizona are paid back. See JFCS Trust, Art. XII.B; POMS SI 01120.203.B.2.g (providing that reimbursement for medical assistance cannot be limited to particular State(s) or periods of time, such as after establishment of the trust).

The JFCS Trust therefore does not satisfy § 1917(d)(4)(C)(iv) of the Act and POMS SI 01120.203.B.2.g since it does not ensure that, to the extent the trust does not retain amounts remaining in a beneficiary’s sub-account upon his/her death, all States are reimbursed from any trust balance for the total amount of medical assistance paid on behalf of the beneficiary during his or her lifetime. Instead, it effectively limits Medicaid reimbursement to Arizona and those States to which the beneficiary moves after residing in Arizona. See JFCS Trust, Arts. IX.B & XII.B.

C. The SF Trust Meets Some, But Not All, of the Requirements to Be Excepted from Resource Counting

Even if the SF Trust (as amended by the Arizona Amendment) were deemed applicable here, it similarly meets some, but not all, of the requirements to be excepted from resource counting. [12] 1. The SF Trust Does Not Satisfy the Requirement that the Trust be for the Sole Benefit of the Beneficiaries.

The early termination provisions of the SF Trust do not fully comply with the requirements of POMS SI 001120.199.F and, therefore, the trust is not for the sole benefit of the beneficiary as required under the Act.

(a) Early Termination Provisions – Article Seven

Article Seven permits early termination of a beneficiary’s sub-account if the trustee believes that it cannot fulfill its fiduciary duties to a beneficiary or that the sub-account may become liable for a beneficiary’s basic maintenance and support. SF Trust, Art. Seven, § 7.1. This provision allows the trustee to transfer the beneficiary’s sub-account to either (1) a comparable non-profit pooled trust organized under 42 U.S.C. § 1396p(d)(4)(C), or (2) a private special needs trust organized under 42 U.S.C. § 1396p(d)(4)(A). SF Trust, Art. Seven, § 7.1(a) & (b).

This early termination provision is problematic for two reasons. First, under § 7.1(a), the subaccount may be transferred to another pooled trust but there is no limiting language as required under POMS SI 01120.199.F.2. See Article Seven, § 7.1(a). Second, under § 7.1(b), the subaccount may be transferred to a private trust established under § 1917(d)(4)(A), which does not comply with the requirement that the sub-account be transferred to a pooled trust established under § 1917(d)(4)(C). [13] [14] SF Trust, Art. Nine, § 9.1. This section of Article Nine therefore does not satisfy the requirements of POMS SI 01120.199.F.2 for the same reasons discussed above in connection with Article Seven’s early termination provisions.

2. Upon the Death of the Beneficiary, the SF Trust Does Not Require Reimbursement to All States for Medical Assistance to the Beneficiary During His/Her Lifetime, to the Extent Amounts in the Beneficiary’s Account Are Not Retained by the Trust.

The Arizona Amendment controls over any conflicting provisions of the SF Trust (Ariz. Amend., ¶ 2). Under its terms, “the Arizona State Medicaid agency shall be the primary beneficiary” of the sub-account if the trust is terminated before or upon the death of the trust beneficiary; it does not ensure that all States which provided medical assistance to the beneficiary are repaid. See Ariz. Amend., ¶ 3; POMS SI 01120.199.F.1. The Arizona Amendment only provides reimbursement to Arizona’s Medicaid agency, not all States that may have provided medical assistance under a State Medicaid plan. See Ariz. Amend., ¶ 3; POMS SI 01120.203.B.2.g. Accordingly, the SF Trust as modified by the Arizona Amendment does not satisfy the requirements set forth in § 1917(d)(4)(C)(iv) of the Act and POMS SI 01120.203.B.2.g.

VII. CONCLUSION

The JFCS Trust is the operative trust for P~ and L~. As currently drafted, it does not meet all of the requirements to be excepted from resource counting under the Act with respect to the Medicaid payback requirement. Specifically, upon the beneficiary’s death, the trust does not require reimbursement to all State(s) that provided medical assistance during the beneficiary’s lifetime. See Social Security Act § 1917(d)(4)(C)(iv). This deficiency could be addressed by amending Article IX of the JFCS trust to provide language that, to the extent the JFCS Trust does not retain the amounts remaining in a deceased beneficiary’s sub-account, the trustee will pay to the State(s) an amount equal to the total amount of medical assistance paid on behalf of the individual under the State Medicaid plan(s). In other words, if the JFCS Trust chooses to amend, the amended language should clearly provide for reimbursement to all states that paid medical assistance on behalf of the beneficiary during his or her lifetime and not limit reimbursement to any state. In addition, while not controlling for P~ or L~, we note that the SF Trust (as modified by the Arizona Amendment) also fails to meet the Medicaid payback or “sole benefit” requirements of § 1917(d)(4)(C). These deficiencies could be addressed by revisions to the Arizona Amendment. With respect to Medicaid payback, the trust could revise paragraph 3 of the Arizona Amendment to provide for reimbursement to all states that provided medical assistance during the beneficiary’s lifetime, rather than solely providing for reimbursement to the Arizona State Medicaid agency. See POMS SI 01120.203.B.2.g. With respect to “sole benefit,” Article Seven, § 7.1(a) could be revised to include specific limiting language ensuring that early termination does not result in disbursements to any individual or entity other than to the second pooled trust or to pay for allowable administrative expenses. See POMS SI 01120.199.F.2. Likewise, Article Seven, § 7.1(b) should be deleted so that sub-accounts may only be transferred to pooled trusts pursuant to Article Seven, § 7.1(a), and not private trusts. See POMS SI 01120.199.F.2. With respect to the early termination provision of Article Nine, § 9.2, the language could be revised to provide for distribution solely to the beneficiary after reimbursement to the State(s) and payment of administrative expenses. See POMS SI 01120.199.F.1.

D. PS 15-023 Regional Survey – Spendthrift Clauses in Trusts in the Region IX states

DATE: June 27, 2014

1. SYLLABUS

This opinion provides a summary of the law pertaining to spendthrift provisions in the states in Region IX. It gives guidance on distinguishing between third party and self-settled trusts as well as the difference between limitations on the beneficiary and creditors.

2. OPINION

QUESTIONS

You asked whether the Region IX states recognize spendthrift clauses in trusts. [15]

SHORT ANSWERS

Arizona, California, Hawaii, and Nevada all recognize the validity of spendthrift provisions with respect to third party beneficiaries. With respect to self-settled trusts (where the settlor is also the beneficiary), Arizona does not recognize spendthrift provisions unless it is in an irrevocable special needs trust where discretionary payments are made to a disabled settlor.

California provides that spendthrift clauses in self-settled trusts are invalid. Hawaii and Nevada recognize the validity of spendthrift provisions in self-settled trusts if certain requirements are met. Guam appears to follow California law with respect to spendthrift provisions.

OVERVIEW:

A spendthrift clause or spendthrift trust prohibits voluntary and involuntary transfers of a trust beneficiary’s interest in the trust income or principal. See Program Operations Manual System (POMS) SI 01120.200.B.16. The spendthrift clause is a way to protect the beneficiary’s interest from creditors because they cannot reach any funds held in trust. Instead, creditors must wait until the money is paid out from the trust to the beneficiary before they can attempt to claim it to satisfy any debts. Id. Similarly, spendthrift clauses prevent the beneficiary from selling his or her right to receive future trust distributions to a third party for a lump sum. Id. Under these principles, if a trust has a valid spendthrift clause, the value of the trust beneficiary’s right to receive payments from the trust is not countable as a resource for SSI purposes. Id.; see also POMS SI 01120.200.D.1.a & D.2.

ARIZONA:

Arizona recognizes the validity of spendthrift provisions that restrain voluntary or involuntary transfer of a beneficiary’s interest. Ariz. Rev. Stat. Ann. § 14-10502(A). Language stating that a beneficiary’s interest is held subject to a spendthrift trust, or similar terms, are sufficient to create a spendthrift trust. Ariz. Rev. Stat. § 14-10502(B). A beneficiary may not transfer an interest in a trust in violation of a valid spendthrift provision, and neither creditors nor assignees of the beneficiary may reach the interest or a distribution by the trustee before the beneficiary receives it. [16] Ariz. Rev. Stat. § 14-10502(C); see also Ariz. Rev. Stat. § 1410501(B); In re Indenture of Trust Dated January 13, 1964, 2014 WL 2041881, *5 (Ariz. App. Ct. May 16, 2014) (finding that a spendthrift beneficiary does not have the power to “thwart” the purpose of the provision and cannot consent to or ratify the alienation of his beneficial interest in the trust).

The spendthrift provisions do not, however, protect the settlor in the same way that they protect the trust beneficiary. Even if a revocable trust contains a spendthrift provision, the property of the trust is subject to the claims of a settlor’s creditors during the settlor’s lifetime. See Ariz. Rev. Stat. § 14-10505(A)(1). Similarly, for irrevocable trusts with a spendthrift provision, a settlor’s assignees or creditors may reach the maximum amount that can be distributed to or for the settlor’s benefit. [17] See Ariz. Rev. Stat. § 14-10505(A)(2); Arizona Bank v. Morris, 6 Ariz. App. 566, 568, 435 P.2d 73, 75 (Ariz. App. Ct. 1967) (holding that a person cannot insulate his property from creditors by temporarily placing it in a spendthrift trust so that the income and principal of the trust remain payable to him).

However, during the lifetime of the settlor, a settlor’s creditors may not reach or compel distributions to or for the benefit of the beneficiary of a special needs trust. See Ariz. Rev. Stat. § 14-10505(A)(2)(c). Thus, spendthrift provisions in self-settled irrevocable special needs trusts are effective, and discretionary distributions for the benefit of the disabled individual would not be transferable. However, spendthrift provisions in self-settled revocable trusts are invalid.

Finally, creditors of beneficiaries to discretionary trusts (which may include special needs trusts), may not compel a distribution whether or not the trust contains a spendthrift provision. Ariz. Rev. Stat. § 14-10504(A); see Ariz. Rev. Stat. § 14-10506 (distinguishing mandatory distributions). Thus, discretionary trusts are not countable as resources although the distribution may be countable as income. See POMS SI 01120.200.D.2.

CALIFORNIA:

California recognizes the validity of spendthrift trusts on a third party beneficiary; that is, a beneficiary other than the settlor.[18] If the trust provides that a beneficiary’s interest in trust income or principal is not subject to voluntary or involuntary transfers, it may not be transferred and is not subject to enforcement of a money judgment until paid to the beneficiary. Cal. Prob. Code §§ 15300, 15301(a). Similarly, if the trust provides that the trustee shall pay income and/or principal for the beneficiary’s education or support, the income and/or principal necessary for the beneficiary’s education or support may not be transferred and is not subject to the enforcement of a money judgment until paid to the beneficiary. Cal. Prob. Code § 15302. Furthermore, if the creator’s intent is reasonably plain, no specific language is required to create a spendthrift trust. See In re De L~’s Estate, 62 Cal. App. 2d 808, 813 (Cal. App. Ct. 1944). The beneficiary’s creditors or transferees may not compel the trustee to pay any amount that is in the trustee’s discretion to pay, regardless of whether there is a standard provided for the trustee’s discretion. See Cal. Prob. Code §§ 15303(a), 15303(c).

A settlor may validly create a self-settled trust; however, the spendthrift clause in a self-settled trust is invalid against transferees or creditors. Cal. Prob. Code § 15304(a). Even if trust distributions to the settlor/beneficiary are at the discretion of a trustee, a transferee or creditor may reach the maximum amount the trustee could pay the settlor; except this amount cannot exceed the settlor’s contribution to the trust. Cal. Prob. Code § 15304(b); see also In re Brooks-Hamilton, 348 B.R. 512, 521 (N.D. Cal. 2006).

HAWAII:

Hawaii recognizes spendthrift provisions in all trusts, including those that are self-settled, and those that name third party beneficiaries as well as the settlor as beneficiary. Haw. Rev. Stat. § 554G-5(d) [19] (trusts may provide that the beneficiary’s interest, including a beneficiary who is the transferor of the trust, may not be transferred, assigned, pledged, or mortgaged, whether voluntarily or involuntarily, before the trustee distributes the property or income to the beneficiary); see also Haw. Rev. Stat. § 554G-2 (defining “transferor” to mean the same as settlor or grantor); Welsh v. Campbell, 41 Haw. 106 (Haw. Terr. 1955) (adopting spendthrift trust rule for Hawaii). All trusts are irrevocable. See Haw. Rev. Stat. § 554G-5(a). However, a self-settled trust with a spendthrift provision is not beyond the reach of the settlor’s creditors. [20] See Cooke Trust Co. v. Lord, 41 Haw. 198 (Haw. Terr. 1955) (cited with approval in Holualoa Aloha, LLC v. Anekona Aloha, LLC, 129 Hawaii 106, 2013 WL 709670 at *1 (Haw. App. 2013) (unpublished order) (upholding garnishment of self-settled trust with spendthrift clause)).

NEVADA:

Nevada recognizes spendthrift provisions in trusts for third party beneficiaries as well as self-settled trusts. [21] Nev. Rev. Stat. § 166.040(1); see also Nev. Rev. Stat. § 166.020 (defining a spendthrift trust as a trust that contains a valid restraint on the voluntary and involuntary transfer of the beneficiary’s interest), § 166.120 (providing for restraints on beneficiary’s voluntary and involuntary transfer or assignment of trust corpus and right to future payments). However, a spendthrift trust created for the benefit of the settlor must (1) be irrevocable, (2) not require any distributions of the trust income or principal to the settlor, and (3) not be created with the intent to hinder, delay or defraud known creditors. Nev. Rev. Stat. § 166.040(1)(b). The settlor has only those powers set out in the trust instrument. Nev. Rev. Stat. § 166.045.

Although no specific language is required to create a valid spendthrift trust, so long as the creator’s intent is clear, a spendthrift trust must be in writing and clearly identify the beneficiaries in that writing. Nev. Rev. Stat. §§ 166.040(1), 166.050, 166.080. The trustee’s discretion regarding the application or payments of sums to the beneficiary as set forth in the trust is absolute. Nev. Rev. Stat. § 166.110. The beneficiary has no power or capacity to make any disposition of the income, and the beneficiary’s interest is not subject to any process of attachment nor can it be taken in execution under any form of legal process. Nev. Rev. Stat. § 166.120(3). The trustee shall apply the trust estate and income solely for the beneficiary’s benefit, discharged from all of the beneficiary’s obligations. Id.[22]

GUAM:

Guam law mentions spendthrift trusts when discussing both wills and testamentary trusts and therefore appears to recognize at least third party spendthrift provisions. See Guam Code Ann. Tit. 15, §§ 763, 3309(d). However, every transfer of property, obligation incurred, or judicial proceeding taken with the intent to delay or defraud a creditor or other person is void against all creditors of the debtor, their successors in interest, and any person whom the debtor’s estate passes in trust for the benefit of others than the debtor. See Guam Code Ann. Tit. 20, § 6101.

Guam also appears to follow California law. See Guam Code Ann. Tit. 15, Refs. & Annos. (Title 15 of the Guam Code Annotated, effective March 16, 1982, was enacted to replace the former Probate Code of Guam, and the basis for the substantive changes was California law as of the date of drafting in 1980). Accordingly, Guam likely follows California law with respect to the treatment of spendthrift trusts. See Guam Code Ann. Tit. 15, §§ 763, 3309(d) (indicating the source of law is now-repealed sections of the California Probate Code).

E. PS 14-142 Regional Survey – Revocability of Grantor Trusts and Validity of Oral Trusts in the Region IX states

DATE: July 30, 2014

1. SYLLABUS

This opinion addresses whether states in Region IX consider oral trusts valid under state law and whether grantor trusts (trusts where the individual who provides the trust principle is also the sole beneficiary of the trust) are revocable. Each of the states in Region IX recognizes oral trusts for personal property as valid under state law, but requires a written document for a trust conveying real property. Under Arizona, Hawaii, and California laws, grantor trusts are generally revocable even if the trust terms state it is irrevocable. Under Nevada law, grantor trusts are generally irrevocable unless the grantor expressly retains the power to revoke it. Arizona, California, Hawaii, and Nevada all recognize that the grantor’s conveyance of trust property to his or her “heirs” creates a remainder interest in a third-party beneficiary, as opposed to merely creating a reversionary interest to the grantor.

2. OPINION

QUESTIONS

You asked for guidance on the following questions with respect to states in Region IX: [23]

1. Whether grantor trusts are revocable, and whether the grantor must use specific terms to establish a remainder interest in a trust beneficiary?

2. Whether oral trusts are valid under state law?

SHORT ANSWERS

1. Under Arizona, Hawaii, and California laws, grantor trusts are generally revocable even if the trust terms state it is irrevocable. Under Nevada law, grantor trusts are generally irrevocable unless the grantor expressly retains the power to revoke it. Arizona, California, Hawaii, and Nevada all recognize that the grantor’s conveyance of trust property to his or her “heirs” creates a remainder interest in a third-party beneficiary, as opposed to merely creating a reversionary interest to the grantor.

2. Each of the states recognize oral trusts for personal property but require a written document for a trust conveying real property.

I. REVOCABILITY OF GRANTOR TRUSTS

OVERVIEW

In general, the assets of an individual are counted as a resource to that individual for purposes of Supplemental Security Income (SSI) eligibility. See generally Social Security Act § 1611(a); Program Operations Manual System (POMS) SI 01110.001. However, assets held in certain types of trusts may be exempted from counting as a resource for SSI eligibility purposes.

A grantor trust is a trust in which the individual who provides the trust principle is also the sole beneficiary of the trust. POMS SI 01120.200(B)(8). If the grantor has the legal authority to revoke or terminate the trust and use trust funds for his or her support and maintenance, the trust principle is a resource for SSI purposes. POMS SI 01120.200.D.1.a; see also POMS SI 01120.200.D.1.b. Conversely, if a trust is irrevocable, it might be excluded from resource counting (if all other necessary conditions are met).

Regarding revocability, some states follow the general rule that when a grantor is also the sole beneficiary of a trust, that trust is revocable regardless of any contrary language it contains. See POMS SI 01120.200.D.3. By the same token, many states recognize that if the trust document creates residual beneficiaries, the trust is generally considered irrevocable. POMS SI 01120.200.D.3.

Under the common law doctrine of worthier title, an inter vivos (lifetime) conveyance of property to the grantor’s “heirs” or “next of kin” was invalid because there was no designated beneficiary. See Rest. of Prop. § 314. Normally, such an invalid conveyance would mean that the grantor retained the beneficial interest. Id. at comment (d). However, a majority of states have abolished this common law rule, preferring instead to interpret a conveyance to a grantor’s heirs as a valid conveyance without reversion to the grantor. See Rest. (3d) of Prop. §§ 16.1, 16.3.

Each Region IX state’s laws regarding revocability and residual beneficiaries is discussed below.

ARIZONA

Under Arizona law, a trust is generally revocable unless the trust explicitly states it is irrevocable. See Ariz. Rev. Stat. § 14-10602 (“Unless the terms of a trust expressly provide that the trust is irrevocable, a settlor may revoke or amend the trust subject to any limitations prescribed in the terms of the trust”). However, if the grantor is the sole beneficiary of a trust, it is revocable even when the trust says it is irrevocable. See, e.g., Dreyer v. Lange, 74 Ariz. 39, 41 (Ariz. 1952).

Arizona has enacted a statute abolishing the doctrine of worthier title. See Ariz. Rev. Stat. § 14-2710. Accordingly, a conveyance to to a grantor’s “heirs, heirs at law, next of kin,” or similar language are valid and does not create a reversionary interest in the grantor. Id.

CALIFORNIA

In California, a trust is generally revocable unless it explicitly states that it is irrevocable. See Cal. Prob. Code § 15400 (“Unless a trust is expressly made irrevocable by the trust instrument, the trust is revocable by the settler.”); see also In re Brooks-Hamilton, 348 B.R. 512, 519 (2006) (“Under California law, a trust is revocable unless it is expressly stated to be irrevocable.”). Further, even if the trust explicitly states that it is irrevocable, the trust is revocable if the grantor is the sole beneficiary of the trust. See Levy v. Crocker-Citizens Nat. Bank, 14 Cal. App. 3d 102, 105, 94 Cal.Rptr. 1, 3 (Cal. App. Ct. 1971) (“It is conceded that if a trustor is the sole beneficiary of a trust, he may revoke it even though by its terms the trust is irrevocable”); Bixby v. California Trust, 33 Cal. 2d 495, 497 (1949) (“Where the trustor is the sole beneficiary no problem arises of defeating the trust against the trustor's wishes”) (citing Rest. (2d) of Trusts § 339 (“If the settlor is the sole beneficiary of a trust and is not under an incapacity, he can compel the termination of the trust;” commenting that this rule stands “even though it is provided in specific words by the terms of the trust that the trust shall be irrevocable”)); Cal. Prob. Code § 15404 (if the settlor and all beneficiaries of a trust consent, they may compel modification or termination of the trust).

California enacted law abolishing the doctrine of worthier title. [24] See Cal. Prob. Code § 21108. Thus, a trust provision conveying a remainder interest to the grantor’s “heirs” or “next of kin” is valid and does not result in a reversionary interest to the grantor. Id.; Cal. Prob. Code § 15205 (a trust requires a beneficiary; this requirement is met if there is a beneficiary or class of reasonably ascertainable beneficiaries or the class is sufficiently described so as to determine that some person meets the class description); POMS PS 01825.006.E (PS 12-122, California Trust Law: “Heirs” or “Heirs at Law”as Residual Beneficiary). Likewise, the identification of an individual or category of people (for instance, a “spouse” or “living issue”) would also establish a remainder interest. See C.I.R. v. Goodan, 195 F.2d 498, 499 n.1 (9th Cir. 1952).

HAWAII

Under Hawaii law, a trust is irrevocable unless the grantor explicitly retains the power to revoke the trust. Miller v. First Hawaiian Bank, 61 Haw. 346, 349 n.5 (1979) (citing Restatement (2d) of Trusts § 331 (generally, a settlor cannot modify the trust if he did not expressly reserve a power of modification)). But where the grantor is the sole beneficiary of a trust, it is revocable even if the trust says it is irrevocable. See Cooke Trust Co. v. Lord, 41 Haw. 198 (1955) (citing Weymouth v. Deleware Trust Co., 45 A.2d 427, 428 (Del. Ch. 1946) (Generally, “where the settlor is the sole beneficiary and is not under an incapacity, he may compel the termination of the trust”)); Security Pacific Bank Washington v. Chang, 80 F.3d 1412, 1415 (9th Cir. 1996) (Hawaii follows the majority rule on self-settled spendthrift trusts); Rest. (2d) of Trusts § 339 (“If the settlor is the sole beneficiary of a trust and is not under an incapacity, he can compel the termination of the trust”).

Hawaii enacted a statute abolishing the doctrine of worthier title. See Haw. Rev. Stat. § 560:2710. Language in a trust describing the beneficiaries of a disposition as the grantor’s “heirs,” “heirs at law,” “next of kin” or similar language does not create a reversionary interest in the grantor. Id.; see also In re Kanoa’s Trust Estate, 47 Haw. 610, 620 (1964) (recognizing the term “heirs of the body” as establishing a remainder interest).

NEVADA

In Nevada, a trust is irrevocable unless the grantor expressly retains the power to revoke it. See Nev. Rev. Stat. § 163.560 (2013); Nicosia v. Turzin, 97 Nev. 93, 94 (1981) (per curiam) (“unless a power of revocation is specifically provided for in the trust, revocation will not be permitted”). “Such a trust shall, under no circumstances, be construed to be revocable for the reason that the settlor and the beneficiary is the same person.” Nev. Rev. Stat. § 163.560.2.

Nevada does not require any specific language for creating a remainder interest; however, the trust must have a reasonably ascertainable beneficiary or class of beneficiaries. [25] Nev. Rev. Stat. § 163.006; see also Hannam v. Brown, 114 Nev. 350, 356 (Nev. 1998) (construing trusts in a manner effecting the apparent intent of settlors).

II. VALIDITY OF ORAL TRUSTS

Generally, a writing is not necessary to create an enforceable inter vivos trust. See Rest (3d) of Trusts § 20. However, pursuant to the Statute of Frauds, a writing is necessary for the a trust involving real property. Id. This rule is followed by all states in Region IX, as detailed below.

ARIZONA

Arizona recognizes oral trusts for personal property, but requires a written trust for real property. See O’Brien v. Bank of Douglas, 17 Ariz. 203, 207 (Ariz. 1915) (recognizing oral trust for personal property); Ariz. Rev. Stat. § 14-10407 (“a trust need not be evidenced by a trust instrument, but the creation of an oral trust shall be established only by clear and convincing evidence and the terms of the oral trust shall be established by a preponderance of the evidence); Hall v. World Sav. and Loan Ass’n, 189 Ariz. 495, 504 (Ariz. 1977) (an oral trust for land falls “within the statute of frauds,” i.e., it requires written document(s) setting forth with reasonable definiteness the trust property, beneficiaries, and purpose).

CALIFORNIA

California recognizes oral trusts for personal property, but requires a written trust for real property. See Cal. Prob. Code § 15207 (recognizing oral trusts for personal property; stating that an oral declaration is not sufficient to create a trust of real property); Cal. Prob. Code § 15206 (a trust in relation to real property must be evidenced by a written instrument signed by either the trustee or the settlor).

HAWAII

Hawaii recognizes oral trusts for personal property, but requires a written trust for real property. See Wery v. Pacific Trust Co., 33 Haw. 701 (1936) (recognizing oral trust for personal property); Teixeira v. Teixeira, 37 Haw. 64 (1945) (a trust for land falls within the “statute of frauds,” i.e., it requires a writing of its terms).

NEVADA

Nevada recognizes oral trusts for personal property, but requires a written document for trusts including real property. See Nev. Rev. Stat. § 163.009 (recognizing oral trust for personal property); § 163.008 (requiring trust for real property to be created by written instrument or operation of law; such a trust may be recorded in the county where the real property is located); Hardy v. U.S., 918 F.Supp. 312, 317 (D.Nev. 1996) (under Nevada law, a trust for real property is not valid unless “created by operation of law or evidenced by a written instrument[.]”) (citing Nev. Rev. Stat. § 163.008). A written trust may be in electronic form. See Nev. Rev. Stat. § 163.0095 (effective 2001).

F. PS 10-005 Arizona State Law on Empty Trusts

DATE: August 5, 2009

1. SYLLABUS

This guide from the San Francisco Regional Chief Counsel informs us that the establishment of an "empty" or "dry" trust is not valid in Arizona where SSI excluded trusts are concerned.

2. OPINION

OVERVIEW

You asked whether an unfunded, or “empty,” Arizona trust established under Section 1917(d)(4)(A) of the Social Security Act (the Act) is a valid trust for the purpose of determining Supplemental Security Income (SSI) eligibility. As discussed below, we conclude that an empty trust is not a valid trust under Arizona law.

BACKGROUND

In general, when determining an individual’s eligibility for SSI, all assets in a revocable trust established by the individual, as well as those assets in an irrevocable trust which could be paid to the individual, will be considered a resource. See Act § 1613, 42 U.S.C. § 1382b(e)(3); POMS SI 01120.201(D). Assets in a trust may be excluded as a resource, however, if a statutory exception applies.

Section 1917(d)(4)(A), 42 U.S.C. § 1396p(d)(4)(A), provides for one such exception, commonly known as the Medicaid payback trust or “special needs trust.” To qualify for the exception, a trust must:

1. be established with the property of an individual under age 65 who is disabled;

2. be established for the benefit of such individual by a parent, grandparent, legal guardian, or court; and

3. provide that, on the death of the individual, any funds remaining in the trust will be used to reimburse the state for Medicaid payments made for the benefit of the individual during his lifetime.

Act § 1917(d)(4)(A); POMS SI 01120.203(B)(1).

Where a parent or grandparent creates such a trust, the parent or grandparent must either (1) create a “seed” trust, i.e., establish a trust using a nominal amount of his or her own funds, after which the disabled individual may transfer his or her own funds to the trust, or (2) create an empty or dry trust, if state law permits, into which the competent disabled adult’s funds can be placed. POMS SI 01120.203(B)(1)(f).

Thus, if Arizona law recognizes the validity of an empty trust, trusts created in this manner may be eligible for the Medicaid payback trust exception. Conversely, if Arizona law does not recognize the validity of an empty trust, such trusts will not qualify for the exception.

DISCUSSION

Arizona has not directly addressed whether it would recognize an empty Section 1917(d)(4)(A) trust. Arizona law embraces special needs trusts and Section 1917(d)(4)(A) trusts, but does not specify whether such trusts may be unfunded. See, e.g., Ariz.Rev.Stat. §§ 14-10103(16) (defining “special needs trust”), 36-2934.01 (setting forth rules govering “trusts that are created pursuant to section 1917(d)(4)(A)” of the Act); Romo v. Kirschner, 889 P.2d 32, 34 n.2 (Ariz. Ct. App. 1995) (acknowledging creation of exemption under 42 U.S.C. § 1396p(d)(4)(A)).

As a general rule, however, Arizona does not recognize empty trusts as valid. Arizona common law uniformly requires trust property for the creation of a trust. See Lane Title and Trust Co. v. Brannan, 440 P.2d 105, 109-110 (Ariz. 1968) (listing “ascertainable trust res” as an essential element of a trust); accord Haines v. Goldfield Property Owners Ass’n, 121 P.3d 1276, 1279 (Ariz. Ct. App. 2005); In re Estate of Moore, 97 P.3d 103, 108 (Ariz. Ct. App. 2004); Golleher v. Horton, 715 P.2d 1225, 1231 (Ariz. Ct. App. 1985); Jabczenski v. Southern Pac. Memorial Hosp. Inc., 579 P.2d 53, 57 (Ariz. Ct. App.1978); see also Restatement (Second) of Trusts § 74 (requiring tangible trust property for creation of trust).

Consistent with this general principle, Arizona case law has rejected empty trusts as invalid. See, e.g., Matter of S~, 717 P.2d 913, 914 (Ariz. Ct. App. 1985 (observing that testamentary trust that was never funded never came into existence), vacated on another issue by Matter of St~, 717 P.2d 892 (Ariz. 1986); see also In re Estate of F~, 2008 WL 2916812, at *8 (Ariz. Ct. App. Jul. 24, 2008) (finding trust did not exist where trust was unfunded, among other deficiencies).

CONCLUSION

Arizona law does not recognize empty trusts as valid. Consequently, such trusts would not qualify for the exception to counting set forth in Section 1917(d)(4)(A).

G. PS 08-172 The M~ Special Needs Trust

DATE: August 15, 2008

1. SYLLABUS

This opinion address two primary issues: 1) Whether or not the trust in question satisfies the establishment requirement found in 1917(d)(4)(A) of the Act, and 2) whether the abolishment of the doctrine of worthier title in the State of Arizona makes the trust irrevocable. To qualify as a special needs trust under 1917(d)(4)(A) of the Act, the trust must be established by a parent, grandparent, legal guardian, or a court. In this case, a special conservator, appointed by the court, established the trust. Under Arizona law, a conservator is not considered the legal equivalent of a legal guardian. Moreover, the trust cannot be considered established by the court as the court merely approved the trust. Regarding the second issue, the trust would not be considered irrevocable under the doctrine of worthier title because the state of Arizona does not recognize this doctrine.

2. OPINION

You asked about the construction of the M~ Special Needs Trust (Special Needs Trust) with respect to the Trust's beneficiary, M~. Specifically, you asked whether (1) the Special Needs Trust is a valid trust document if the Superior Court of Arizona appointed a special conservator for the sole purpose of establishing a trust for M~'s benefit; and (2) whether the abolishment of the doctrine of worthier title in the State of Arizona makes the Special Needs Trust irrevocable.

FACTUAL BACKGROUND

M~ has been receiving Supplemental Security Income (SSI) payments since 1989. His parents, A~ and A~ established the "A~ and A~ Family Trust" (Family Trust) on August XX, 2000. A~ died on May XX, 2003, and A~ died on June XX, 2006. M~ was a named beneficiary of the Family Trust. However, the Family Trust did not direct the establishment of a trust for M~.

On M~'s behalf, the Law Office of Bridget , P.L.L.C. (Law Office), petitioned the Superior Court of the State of Arizona, County of Maricopa, to appoint a special conservator and to authorize the establishment of a special needs trust. On October XX, 2006, the Superior Court issued an Order appointing Southwest Fiduciary, Inc. (Southwest Fiduciary) as the Special Conservator "for the sole purpose of establishing a special needs trust for the benefit of the protected person." Southwest Fiduciary also serves as M~ 's representative payee for his SSI payments. M~ does not have a legal guardian.

The Law Office prepared the M~ Special Needs Trust. Southwest Fiduciary is named the special conservator and the trustee. The trust was funded with a one-third share of monthly annuity payment in the amount of $1,364.24, payable on the 31st day of each month; a one-third share of monthly annuity payment in the amount of $1,195.79, payable on the 1st day of each month; a one-third share of monthly annuity payment in the amount of $505.95, payable on the 26th day of each month; and one-third beneficiary interest in the Family Trust in the estimated amount of $70,000.

DISCUSSION

Federal Law

To qualify as a special needs trust established under the statutory exception in section 1917(d)(4)(A) of the Social Security Act, the trust must be established for the benefit of the disabled individual by a parent, grandparent, legal guardian of the individual, or a court. 42 U.S.C. § 1396p(d)(4)(A); Program Operations Manual System (POMS) SI 01120.203(B)(1)(a).

We examined whether, under Arizona law, a conservator might be considered the legal equivalent of a legal guardian for the purposes of section 1917(d)(4)(A) of the Act. This does not appear to be the case for two main reasons: 1) an Arizona guardian is authorized to establish a trust, see Ariz. Rev. Stat. Ann. § 14-5312 (i.e., it is not necessary for a conservator to do so); and 2) the requirements for appointment of a guardian are more burdensome than those for appointment of a conservator. For example, the procedure for legal guardian appointment involves a hearing on the issue of incapacity; appointment of an investigator to interview the alleged incapacitated individual, as well as the prospective guardian; visits to the homes of both parties; and an examination of the alleged incompetent person by physician, psychologist or registered nurse appointed by the court. See Ariz. Rev. Stat. Ann. § 14-5303. The procedure for appointment of a conservator requires much less. Ariz. Rev. Stat. Ann. § 14-5401. For those reasons, we do not view the two as being equivalent for the purposes of section 1917(d)(4)(A) of the Act.

We also note that the trust was not established by the court. First, the Superior Court's order states that "a special conservator [was] appointed for the sole purpose of establishing a special needs trust for the benefit of the protected person." See Order Appointing Special Conservator and Authorizing Establishment of Special Needs Trust at page 1, paragraph 4. In addition, in the accompanying Letters and Acceptance of Special Conservatorship, the Superior Court states that "the Special Conservator's authority is limited to executing and establishing The M~ Special Needs Trust." See Letters and Acceptance of Special Conservatorship at page 1, lines 16 and 17. Thus, it appears that the conservator is actually establishing the trust and the Superior Court is approving that establishment, as evidenced further by a statement in the order, which reads: "it is further ordered approving the M~ Special Needs Trust . . ." See Order Appointing Special Conservator and Authorizing Establishment of Special Needs Trust at page 2, paragraph 2. The trust must actually be established by the court, not merely approved by the court. See, e.g., Memorandum from Regional Chief Counsel, San Francisco, to Center for Programs Support, San Francisco, Request for Opinion - [ ] C~ Trust Document (June 4, 2008) (the court merely approved a trust that was established by the disabled individual's sister via a power of attorney).

Finally, you also asked whether Arizona's abolishment of the doctrine of worthier title makes the M~ Special Needs Trust irrevocable. If a special needs trust were established under the statutory exception in section 1917(d)(4)(A) of the Act, the abolishment of the doctrine of worthier title would make such a trust irrevocable. The doctrine of worthier title is a legal doctrine that essentially gives preference of title through intestate succession over title by an instrument and therefore, a reversionary interest to the grantor. See Black's Law Dictionary, 1440 (5th ed. 1979). Since Arizona does not recognize this doctrine, there would be no reversionary interest to the grantor. Ariz. Rev. Stat. Ann. § 14-2710.


Footnotes:

[1]

. The JFCS Trust, as amended and restated on November 7, 2007, already contained a provision titled Article XIII, Severability, which was not expressly revoked or amended through the February 2016 amendments. However, the February 2016 amendments added a provision titled Article XIII, Transfer of Beneficiary Trust Shares, as well as Article XIV, Miscellaneous Provisions. Amended JFCS Trust, Arts. XIII, XIV. It appears that the duplication of Article XIII in the Amended JFCS Trust is a typographical error and does not effect this analysis.

[2]

. . 1. AHCCCS, or Arizona Health Care Cost Containment System, is Arizona’s Medicaid Agency.

[3]

. 1. Article Seven, § 7.1 refers to “[a] comparable nonprofit pooled trust organization, organized under 42 U.S.C. § 1382p(d)(4)(C)” but there is no such section in the United States Code and this appears to be a typographical error. This Opinion assumes the trust intended to cite 42 U.S.C. § 1396p(d)(4)(C) concerning pooled trusts since the provision refers to a “comparable nonprofit pooled trust.” SF Trust, Art. Seven, § 7.1.

[4]

. The JFCS Trust is construed and interpreted in accordance with Arizona law. JFCS Trust, Art. XII(A).

[5]

. The JFCS Trust provides, in Article XII, that if a beneficiary moves from Arizona to another State and qualifies for benefits in such other State, “references to Arizona or to State in this trust shall also apply to the other State, but the rights of the State of Arizona (AHCCCS) as a remainder beneficiary after the death of any individual beneficiary shall be retained.” JFCS Trust, Art. XII(B). However, this provision only results in reimbursement of States to which the beneficiary moves after he/she leaves Arizona; it does not ensure States that provided medical assistance before the beneficiary enrolled in the JFCS Trust in Arizona are paid back. See JFCS Trust, Art. XII(B); POMS SI 01120.203.B.2.g.

[6]

. . . For consistency, this analysis will use the terms “sub-account” and “beneficiary trust share” interchangeably.

[7]

. Article Seven, § 7.1(a) refers to “[a] comparable nonprofit pooled trust organization, organized under 42 U.S.C. § 1382p(d)(4)(C)” but there is no such section in the United States Code and this appears to be a typographical error. This Opinion assumes the trust intended to cite 42 U.S.C. § 1396p(d)(4)(C) concerning pooled trusts since the provision refers to a “comparable nonprofit pooled trust.” SF Trust, Art. Seven, § 7.1(a).

[8]

. . . Indeed, the JFCS Trust does not have an early termination provision that would permit the trust to be terminated in its entirety.

[9]

. Additionally, the Joinders previously executed by the JFCS Trust beneficiaries do not appear to contain all of the terms found in the SF Trust Joinders, such as identification of final or contingent beneficiaries in the event the trust beneficiary dies. Compare P~ Joinder (omitting any mention of final or contingent beneficiaries) and L~ Joinder (same) with SF Trust, Art. Six, §§ 6.13, 6.14 (describing circumstances where sub-account assets could be distributed to beneficiaries named in the Joinder).

[10]

. The JFCS Trust satisfies the requirements set forth in § 1917(d)(4)(C)(i) of the Act and POMS SI 01120.203.B.2.c that the trust be established and managed by a non-profit association. See JFCS Trust, Arts. I & II; Trustee Agreement ¶¶ 1-2. The JFCS Trust also satisfies the separate account requirements set forth in § 1917(d)(4)(C)(ii) of the Act and POMS SI 01120.203.B.2.d. See JFCS Trust, Art. VI.

[11]

. Article VIII.F permits distributions from a sub-account for trustee compensation and administrative expenses, which are permissible under POMS SI 01120.201.F.2.c.

[12]

. The SF Trust satisfies the requirements set forth in § 1917(d)(4)(C)(i) of the Act and POMS SI 01120.203.B.2.c that the trust be established and managed by a non-profit association. See SF Trust, Art. Three, § 3.1. The SF Trust also satisfies the separate account requirements set forth in § 1917(d)(4)(C)(ii) of the Act and POMS SI 01120.203.B.2.d. See SF Trust, Art. Two, § 2.2.

[13]

. In addition, transfer of the sub-account to a private special needs trust does not meet the requirements of POMS SI 01120.199.F.1, which permits early termination if all amounts remaining in the account, after reimbursement to the State(s), are distributed to the beneficiary. In addition, transfer of the sub-account to a private special needs trust does not meet the requirements of POMS SI 01120.199.F.1, which permits early termination if all amounts remaining in the account, after reimbursement to the State(s), are distributed to the beneficiary. Under § 7.2, a transfer of the sub-account to a private special needs trust does not trigger “the state Medicaid reimbursement provisions.”

[14]

. Under Article Nine, § 9.2, any funds not transferred to another trust as contemplated in Article Seven would be used to repay the medical assistance paid by all States on behalf of the beneficiary and any amounts remaining would be distributed to the beneficiary. SF Trust, Art. Nine, § 9.2.

[15]

. You advised that we need not include Region IX territories in this survey. We have included Guam but not American Samoa or the Commonwealth of Northern Mariana Islands.

[16]

. . Arizona law also permits the creditors or assignees of a trust beneficiary to reach the trust corpus before the beneficiary receives a distribution, despite a spendthrift clause. See Ariz. Rev. Stat. §§ 14-10502(C), 14-10503. Even if one of these limited circumstances might apply to a spendthrift trust, it does not change the general spendthrift rule that the beneficiary cannot transfer his or her interest in the trust income or principal or sell his or her beneficial interest in the trust. Therefore, Arizona’s spendthrift exceptions, if applicable, do not change the rule that funds held in a spendthrift trust do not constitute a resource for SSI purposes. See POMS SI 01120.200.B.16 & SI 01120.200.D.2.

[17]

. . If a trust has more than one settlor or contributor, a creditor or assignee of a particular settlor may only reach an amount that does not exceed that settlor’s interest in the portion of the trust attributable to his contribution. See Ariz. Rev. Stat. §§ 1410505(A)(1), 14-10505(A)(2).

[18]

. . Although California recognizes spendthrift trusts, it has numerous exceptions, including: self-settled trusts; spousal, child support, or restitution judgments; reimbursement to the state or a local public entity for public support provided to the beneficiary or the beneficiary’s spouse or child; orders for payment to judgment creditors; and amounts paid out in excess of the amount that is or will be necessary for the beneficiary’s education and support. See Cal. Prob. Code §§ 15304 to 15307. These exceptions do not change the general rule that the trust does constitute a resource for SSI purposes. See POMS SI 01120.200.B.16 & SI 01120.200.D.2.

[19]

. . The Permitted Transfers in Trust Act is codified in Chapter 554G, Division 3 (Property; Family), Title 30 (Guardians and Trustees) of Hawaii’s Revised Statutes. See Haw. Rev. Stat. §§ 554G, 554G-1. This act applies to permitted transfers made after the effective date, July 1, 2010. See Haw. Sess. Laws 2010, ch. 182, § 2.

[20]

. . Creditors may reach property in a spendthrift trust if the transfer was done with the intent to defraud, hinder, or delay the creditor. Haw. Rev. Stat. § 554G-8(a). Other exceptions to spendthrift trusts include obligations due to child or spousal support; tort claims; claims of lenders who extended credit in reliance on the availability of trust assets; tax claims of the state of Hawaii; and the transferor-beneficiary’s interest with respect to assets transferred to the trust that are subject to division following a divorce or dissolution of a marriage or civil union. See Haw. Rev. Stat. § 554G-9. These exceptions do not change the general rule that the trust does not constitute a resource for SSI purposes. See POMS SI 01120.200.B.16 & SI 01120.200.D.2.

[21]

. . The Spendthrift Trust Act of Nevada is codified in Chapter 166 (Spendthrift Trusts) of Title 13 (Guardianships; Conservatorships; Trusts) of Nevada’s Revised Annotated Statutes. See Nev. Rev. Stat. Ann. §§ 166.010-166.180.

[22]

. . A creator of a spendthrift trust may make different provisions than set forth in sections 166.080 to 166.150 by using express and specific written terms. See Nev. Rev. Stat. § 166.170.

[23]

. . . . You advised that we need not include Region IX territories in this survey.

[24]

. . . . See POMS PS 01825.006.E (12-122) (use of the terms “heirs” or “heirs at law” is sufficient to identify residual beneficiaries).

[25]

. A review of Nevada case law did not reveal any court decisions that adopt the doctrine of worthier title.


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http://policy.ssa.gov/poms.nsf/lnx/1601825004
PS 01825.004 - Arizona - 03/10/2016
Batch run: 06/16/2016
Rev:03/10/2016