PS 01825.019 Kansas

A. PS 03-193 ARCare Trust Medicaid Reimbursement Provision and the Supplemental Security Income Resource Pooled Trust Exception Insured: Tammy C~

DATE: September 24, 2003

1. SYLLABUS

This case concerns whether or not the ARCare Trust II is an excluded resource for SSI purposes. According to the Social Security Act, assets held in trust for individuals generally are countable resources, even if state property law might otherwise exclude them, if any portion of the trust property could be used for the benefit of an eligible individual or their spouse. However, there is an exception to this general rule which is commonly referred to as the "pooled trust exception." This exception states that a trust containing the assets of a disabled individual is not a countable resource when certain requirements are met. One of those requirements is that upon death, the trust must use any remaining funds in the account to reimburse the State for any medical assistance provided on behalf of the beneficiary. Before July 29, 2003, the ARCare Trust II was not compliant with this provision. However, the ARCare Trust II was subsequently amended to include all criteria necessary to qualify for the pooled trust exception, and is thus excluded from resources for SSI purposes.

2. OPINION

You asked that we review an ARCare Trust II to determine whether it is an excluded resource as a pooled trust with a qualifying Medicaid payback provision. As a pooled trust with individual sub-accounts, we looked at the date the insured entered into the Joinder Agreement, November 5, 2002, as the date this Trust was established. See SI BOS 01120.203; SI 01120.201-04. You also asked that we consider the effect of the July 29, 2003 amendment to the Declaration of Trust upon the Trust's status as a resource. We believe that, prior to the Amendment, the Trust did not meet the Medicaid reimbursement provision of the pooled trust exception to the resource rules applicable to trusts created after January 1, 2000. However, the Amendment appears to comply with the requirements of the exception.

BACKGROUND

ARCare, Inc., a Kansas not-for-profit corporation, established ARCare, Inc. Trust II on April 11, 1996. The Declaration of Trust establishes a pooled trust composed of individual trust accounts, called sub-accounts, that are maintained for individual disabled beneficiaries who enroll in and adopt the trust. While the sub-accounts are separately maintained, the funds from each sub-account are pooled for investment and management. ARCare, Inc. is the "Settlor" and the "Trustee" of the pooled trust.

An individual, or another on behalf of the individual, establishes a sub-account by entering into a "Joinder Agreement" whereby the individual enrolls in and adopts the ARCare Trust II and the ARCare Trust II Declaration of Trust, pays an enrollment fee, and agrees to administration and other expenses. "Beneficiary" is defined as a person with mental retardation or other developmental disabilities, or disabled as defined by 42 U.S.C. §§ 1382c(a)(3), for whose benefit a sub-account has been established by a Donor. "Donor" or "donors" is defined as the person or persons, entity or entities making contributions from time to time to the Trust for the benefit of a beneficiary pursuant to a properly executed Joinder Agreement.

The purpose of the trust is to provide for each beneficiary's supplemental needs, and not to provide for a beneficiary's basic support and maintenance. The Trustee has sole and absolute discretion to make or decline to make any payments or distributions to or for the benefit of a beneficiary. Neither the beneficiary nor any other person may compel a distribution from a sub-account. The trust documents state that the pooled trust and each sub-account are irrevocable, and a spendthrift provision provides that a beneficiary cannot dispose of, assign, or charge by way of anticipation or otherwise, either voluntarily or involuntarily, any interest in the trust. All sums payable to any beneficiary are free and clear of debts, creditors' claims, contracts, assignments, alienation, and anticipations of such beneficiary, and of all levies and attachments until such sums are actually received by the beneficiary or actually delivered to or for the benefit of the beneficiary. The ARCare Trust Board (Board) has the right and power to conform the Declaration of Trust to 42 U.S.C. §§ 1396p(d)(4)(C) as it is amended from time to time. The Trustee may terminate the trust if it becomes impossible or impracticable to carry out the trust's purposes. Joinder Agreement provisions may be amended upon written agreement by the donor and ARCare, Inc., so long as any such amendment is consistent with the ARCare Trust II Declaration of Trust.

The Declaration of Trust provides that each sub-account will terminate upon the death of the beneficiary. Any assets remaining in the sub-account will be distributed by the Trustee for funeral expenses (at the Trustee's discretion), other expenses (such as administration fees, legal fees, court costs, and taxes), and, upon receipt of a written claim for reimbursement, reimbursement of the State for any medical assistance the State provided to the beneficiary on or after the date of execution of the Joinder Agreement. The Declaration of Trust specifies that the State will be reimbursed after payment of funeral and other expenses. Any assets remaining will be distributed in accordance with the Joinder Agreement. If the Trustee determines that such distribution is not practicable, the Trustee may hold the assets until a court of competent jurisdiction directs their disposition. On July 29, 2003, the ARCare Trust board amended the Declaration of Trust and inserted a provision entitled "Priority of Distributions" that states, "Not withstanding anything to the contrary, Trustee shall reimburse the required state agencies . . . as required by the applicable federal and state laws, rules, and regulations, and such reimbursement shall have priority over all other claims, expenses, and distributions except for those items that are authorized by the applicable laws, rules, and regulations to be paid ahead of and prior to such reimbursement."

DISCUSSION

Effective January 1, 2000, the Social Security Act expressly directs how to count property held in trust as a resource for SSI purposes. According to the Act, assets held in trust for individuals generally are countable resources, even if state property law might otherwise exclude them, if any portion of the trust property could be used for the benefit of the eligible individual or his or her spouse. 42 U.S.C. §§ 1382(b)(e). However, Paragraph 5 of 42 U.S.C. §§ 1382(b)(e) states that "this subsection shall not apply to a trust described in subparagraph (A) or (C) of section 1917(d)(4)(A) or (C)." Section 1917(d)(4)(C) of the Act, 42 U.S.C. §§ 1396p(d)(4)(C), commonly referred to as the "pooled trust exception," states that a trust containing the assets of a disabled individual is not a countable resource for Medicaid purposes when certain requirements are met. The statute requires that the trust be established and managed by a nonprofit association. A separate account must be maintained for each beneficiary of the trust, although the sub-accounts may be pooled for purposes of investment and management of funds. Accounts in the trust must be established solely for the benefit of the disabled individual by the individual or a parent, grandparent, legal guardian or court. Finally, the trust must provide that to the extent that amounts remaining in the beneficiary's account upon the death of the beneficiary are not retained by the trust, the trust must pay to the State from such remaining amounts in the account an amount equal to the total amount of medical assistance paid on behalf of the beneficiary.

Prior to the July 29, 2003 Amendment to the Declaration of Trust, the ARCare Trust II satisfied most of the foregoing criteria, but not all. The Declaration satisfied the statutory requirements in that the Trust was established and is managed by a nonprofit organization; provides for separate sub-accounts for each disabled beneficiary of the trust, but pools the accounts for purposes of investment and management of funds; provides that sub-accounts will be established by the beneficiary or a parent, grandparent, legal guardian or court; and was established solely for the benefit of the disabled individuals. However, the trust provides that funds remaining in the beneficiary's account at death may be used to pay the beneficiary's funeral expenses, at the Trustee's discretion, and that other expenses shall be paid prior to reimbursing the State for medical assistance provided to the beneficiary. Additionally, the State's reimbursement was limited to expenditures for medical assistance provided by the State after the effective date of the Joinder Agreement. The provisions directing the distribution of the trust's corpus upon the death of the beneficiary remove the trust from the scope of the pooled trust exception because 42 U.S.C. §§ 1396p(d)(4)(C) (iv) requires that the State's reimbursement be paid prior to funeral expenses or other expenses and that reimbursement be made to the State for the "total amount" of medical assistance paid by the State on the beneficiary's behalf under a State Medicaid plan. See SI 01120.203. Although payment of funeral expenses is discretionary, the Declaration permits payment of funeral expenses and other expenses prior to reimbursing the State, which is not permissible under the pooled trust exception. Additionally, if the beneficiary received any State medical assistance prior to execution of the Joinder Agreement, the trust does not provide for reimbursement of the "total amount" of medical assistance provided by the State. Therefore, it appears that the original ARCare Trust did not qualify as an excluded resource pursuant to 42 U.S.C. §§ 1382(b)(e), 1396p(d)(4)(C).

Although prior to July 29, 2003, the ARCare Trust II did not comply with the all of the requirements of 42 U.S.C. §§ 1396p(d)(4)(C), the July 29, 2003 amendment to the Declaration of Trust appears to bring the Trust into compliance with the requirements of the pooled trust exception. As required by the statute, the Amendment unequivocally requires the Trustee to reimburse the State prior to settling any other claim, expense, or distribution. The Amendment also requires the Trustee to reimburse the State "as required by the applicable federal and state laws, rules, and regulations." Although this provision potentially conflicts with the previous paragraph limiting the State to reimbursement for medical benefits bestowed after execution of the Joinder Agreement, we believe that the Amendment would control because it specifically states that the terms set forth in the Amendment are applicable "[n]ot withstanding anything to the contrary" and because it is consistent with the stated intent of the Settlor, which was to "conform to the requirements of 42 U.S.C. §§ 1396p(d)(4)(C) . . . and applicable state rules which create an exception to the treatment of trust assets of disabled individuals." Based on the express language of the Amendment and the stated intent of the Settlor, we believe that the July 29, 2003 Amendment to the Trust Agreement brings the Trust into compliance with the pooled trust exception.

CONCLUSION

It is our opinion that a trust with a provision permitting payment of funeral expenses and other expenses prior to reimbursing the State and limiting the State's reimbursement for medical assistance by the date of the establishment of the trust is outside the scope of the exception at 42 U.S.C. §§ 1396p(d)(4)(C). However, the July 29, 2003 amendment to the Agreement appears to cure the defective provisions. Therefore, as of July 29, 2003, the ARCare Trust II qualifies as an exception to the general rule that assets held in trust must be counted as a resource.

Frank V. S~ III
Chief Counsel

By_________
Jennifer L. F~
Assistant Regional Counsel

B. PS 04-169 (Kansas) Determination of Irrevocability of a Kansas Trust Elizabeth G~ Trust, SSN: ~

DATE: April 25, 2000

1. SYLLABUS

This opinion discusses whether a grantor trust is irrevocable under Kansas law. The trust was determined to be irrevocable because Kansas law holds that the primary consideration in the construction of trusts is the intention of the grantor based on an examination of the entire trust document. In this case, the Trust Agreement Introduction indicates that it was created for the benefit of the beneficiary and the beneficiary's descendants. Therefore, it s assumed that a Kansas court would conclude that in this case the use of the word "descendants" was sufficient to demonstrate the grantor's intent to create a residual beneficiary.

2. OPINION

You have asked for our assistance in determining the irrevocability of a trust designated as the "ELIZABETH R. G~ IRREVOCABLE TRUST." Bonnie L. O~ (also known as Bonnie T~), the mother of Elizabeth R. G~ (Elizabeth), has requested reconsideration of the Field Office decision that the G~ Trust Agreement is revocable. We believe that a Kansas court would find the G~ Trust is irrevocable.

I. TRUST PROVISIONS

The Trust Agreement indicates that Bonnie L. O~ is Conservator of Elizabeth's estate and, in addition, names Bonnie L. O~ as grantor of the trust. Bonnie L. O~ and Bonnie J. S~, Esquire, are named as co-trustees. The Trust Agreement, executed on May 21, 1999, and signed by the co-trustees, names Elizabeth R. G~ as the Trust Beneficiary. Elizabeth is described as the Grantor's child who is disabled as defined in 42 U.S.C. § 1382c(a)(3). Trust Agreement, Introduction and Article I.C. The Trust Agreement specifies that the trust is irrevocable and the Trustee agrees to hold and administer the Trust Estate for the sole benefit of the Beneficiary. Trust Agreement, Articles I and VI.

To establish the Trust, the "Grantor" provided the sum of ten dollars ($10) and "such other property, if any," as was described on an attached schedule (no schedule was attached to the copy we received). This property constituted the initial trust estate which was to be held by the Trustee "for the benefit of the Beneficiary and the Beneficiary's descendants." Trust Agreement, Introduction.

The Trust Agreement provides that,

"[u]pon the death of the Beneficiary, the Trustee shall be required to pay back to the State of Kansas Social Rehabilitation Services (SRS), pursuant to 42 U.S.C. § 1396p(d)(4)(A) and governing SRS regulations, all amounts remaining in the trust up to an amount equal to the total medical assistance paid on behalf of the Beneficiary. The remaining trust estate shall be distributed by the Trustee, in the Trustee's sole discretion, either to the Personal Representative of the Beneficiary's estate, or to the same persons or entities and in the same manner and proportions such distributions would have been made had such remaining trust estate been distributed to the Personal Representative of the Beneficiary's estate.

Trust Agreement, Article I.C.

The Trust Agreement provides that to the extent that the Trustee has discretion to distribute income or principal for the Beneficiary's health, education, support, or maintenance,such trust income or principal shall be supplemental to any resources available for such needs from any local, regional, state or federal government or agency or from private agencies, it being the Grantor's express purpose and intent that such trust income or principal not be utilized for such purposes to the extent such needs are otherwise provided for from such other resources.

Trust Agreement, Article IV.F.

II. TRUSTS AS RESOURCES

Generally, if trust principal is available to the trust beneficiary, it will be considered a resource to him for purposes of determining his eligibility to SSI benefits. Regulations define resources for SSI eligibility as follows:

(a) Resources; defined. For purposes of this subpart L, resources means cash or other liquid assets or any real or personal property that an individual . . . owns and could convert to cash to be used for his or her support and maintenance.(1) If the individual has the right, authority or power to liquidate the property or his or her share of the property, it is considered a resource. If a property right cannot be liquidated, the property will not be considered a resource of the individual[.]

20 C.F.R. § 416.1201(a)(1). Regulations further define resources as liquid or nonliquid. Liquid resources are resources in the form of-

cash or other property which can be converted to cash within 20 days . . . . Examples of resources that are ordinarily liquid are stocks, bonds, mutual fund shares, promissory notes, mortgages, life insurance policies, financial institution accounts (including savings, checking, and time deposits, also known as of deposit) and similar items. Liquid resources, other than cash, are evaluated according to the individual's equity in the resources[.]

Id. at § 416.1201(b).

The Commissioner has further construed the meaning of "resource," by issuing interpretive guidelines in the Program Operation Manual System (POMS). With respect to trust instruments, the POMS provides that-

if an individual (claimant, recipient or deemor) has the legal authority to revoke the trust and then use the funds to meet his food, clothing or shelter needs, or if the individual can direct the use of the trust principal for his/her support and maintenance under the terms of the trust, the trust principal is a resource for SSI purposes.

POMS SI 01120.200D.1.a (emphasis in original). However,

[i]f an individual does not have the legal authority to revoke the trust or direct the use of the trust assets for his/her own support and maintenance, the trust principal is not the individual's resource for SSI purposes.

      [t]his Trust is established pursuant to the 1993 Omnibus Reconciliation Act[,] 469 NAC 2.009.07A5B (4) and Neb. Rev. Stat. 68-1047. This trust is not for the support of Kyle D. S~. It is the intent of the Grantor to make provisions in this Trust Agreement to provide funds necessary to Kyle D. S~'s happiness over and above the essential, primary support and services otherwise available to him. This Trust is not to replace or make unnecessary any public or private assistance that Kyle D. S~ may now or in the future qualify to receive. It is the intent to provide resources for non-support purposes including comfort over and above the essentials provided by any state or federal government agency or program. The supplemental resources provided through this Trust may include, but shall not be limited to education, personal care needs, attendants, entertainment, and other goods and services not otherwise provided by public aid or private sources, but which are reasonable and necessary for the rehabilitation and special non-support needs of the Beneficiary.

Trust Agreement, Article 2. In addition, the Trust Agreement provides that-

      [w]hile it is the intention that the Trustee have broad and effective powers to carry out the provisions of this Trust Agreement, no power conferred upon any Trustee by this article, shall be exercised in such a manner that it deprives the Trust of an otherwise available tax exemption, deduction, exclusion or credit, nor to deprive the Beneficiary of any public or private assistance as described above. This Trust is intended to qualify under 42 U.S.C. § 1396p(d)(4)(A) and the Trustee shall have no power which is inconsistent with such law and its regulations, and all provisions of this Trust shall be interpreted in a manner consistent with such law.

Trust Agreement, Article 2.

Concerning the Trustee's powers, the Trust Agreement provides that—

      [t]he Trustee may distribute income or principal or both, . . . [and] in its sole and absolute discretion, shall apply and distribute such part, all or none of the net income and principal of the Trust estate in such amounts and proportions as the Trustee, in the Trustee's absolute discretion, deems necessary or appropriate for Kyle D. S~'s best interest, [but only after exhausting] all other resources available . . . from all sources other that his trust including, without limitation, payments, services and programs administered, provided or sponsored by any governmental (federal, state or other), private or institutional agency, authority or provider, any rule or regulation of such agency, authority or provider to the contrary notwithstanding.

Trust Agreement, Article 2. The Trust Agreement also includes a spendthrift clause intended to prohibits creditors from attaching the assets of a trust. Trust Agreement, Article 8.

The Trust Agreement provides that the trust terminates upon Kyle's death and "any remaining undistributed income or principal . . . shall be first paid to the State of Nebraska, and to any other state who has made payments under Title XIX" on Kyle's behalf. "In the event that either principal or income remain [after the State is reimbursed], it shall be paid over and distributed pursuant to the intestacy laws of the State of Nebraska." Trust Agreement, Article 11.

II. TRUSTS AS RESOURCES

Generally, if trust principal is available to the trust beneficiary, it will be considered a resource to him for purposes of determining his eligibility to SSI benefits. Regulations define resources for SSI eligibility as follows:

(a) Resources; defined. For purposes of this subpart L, resources means cash or other liquid assets or any real or personal property that an individual . . . owns and could convert to cash to be used for his or her support and maintenance. (1) If the individual has the right, authority or power to liquidate the property or his or her share of the property, it is considered a resource. If a property right cannot be liquidated, the property will not be considered a resource of the individual[.]

20 C.F.R. § 416.1201(a)(1). Regulations further define resources as liquid or nonliquid. Liquid resources are resources in the form of-

     cash or other property which can be converted to cash within 20 days . . . . Examples of resources that are ordinarily liquid are stocks, bonds, mutual fund shares, promissory notes, mortgages, life insurance policies, financial institution accounts (including savings, checking, and time deposits, also known as of deposit) and similar items. Liquid resources, other than cash, are evaluated according to the individual's equity in the resources[.]

Id. at § 416.1201(b).

The Commissioner has further construed the meaning of "resource," by issuing interpretive guidelines in the Program Operation Manual System (POMS). With respect to trust instruments, the POMS provides that-

     if an individual (claimant, recipient or deemor) has the legal authority to revoke the trust and then use the funds to meet his food, clothing or shelter needs, or if the individual can direct the use of the trust principal for his/her support and maintenance under the terms of the trust, the trust principal is a resource for SSI purposes.

POMS SI 01120.200D.1.a (emphasis in original). However,

      [i]f an individual does not have the legal authority to revoke the trust or direct the use of the trust assets for his/her own support and maintenance, the trust principal is not the individual's resource for SSI purposes.

POMS SI 01120.200D.2 (emphasis in original). The revocability of a trust and the ability to use the trust principal is determined by the terms of the trust and/or by State law. POMS SI 01120.200D.1.a and SI 01120.200D.2. "Most States follow the general principle of trust law that if a grantor is also the sole beneficiary of a trust, the trust is revocable regardless of language in the trust document to the contrary." POMS SI 01120.200D.3 (emphasis in original).

A trust is generally irrevocable if the grantor fails to reserve the power to revoke or modify it. Restatement (Second) of Trusts §§ 330 and 331 (1957). Nevertheless, the general law of trusts recognizes an exception to this rule when the grantor is the sole beneficiary of the trust agreement. Where the grantor is the sole beneficiary of a trust, he may amend or terminate the trust, even without having reserved the power to do so. Id. at § 339.

Although the laws of Nebraska have not specifically addressed this issue, we believe that Nebraska would follow the general rule. While the Trust Agreement at issue here names the Court as Grantor, the consideration funding the trust belonged to Kyle. Thus, Kyle is the grantor and, if Kyle is the sole beneficiary of the trust, it is revocable notwithstanding the Trust Agreement language to the contrary. However, if the grantor is not the sole beneficiary, the trust would not be revocable.

The trust herein appears to be a "Medicaid Special Needs Trust," a trust created by means other than a will, and which includes a Medicaid payback provision upon termination of the trust or the death of the individual. SSA's policy is that the Medicaid trust "affects the individual's eligibility for Medicaid only, and has no effect on the SSI income and resource determinations." POMS SI 01120.200H.1.a (emphasis in original). In addition, the POMS provide that-

     [a]ccording to the law in most States, the State is not considered a residual or contingent beneficiary, but is a creditor and the reimbursement is payment of a debt. This law may or may not apply in your State . . . .

POMS SI 01120.200H.1.b. .

Our research indicates that the purpose of including the State reimbursement provision in the special needs trust (SNT) is to qualify the beneficiary for medical assistance from the State. If the SNT meets the exception set out in 42 U.S.C. § 1396p(d)(4)(A) and State requirements, the State does not consider the trust to be a resource and the grantor/beneficiary is eligible for medical assistance. Previously we indicated that a trust provision for repayment of Medicaid funds to a Region VII state represents repayment of a debt and does not make the State a trust beneficiary. G.C. Opinion, Iowa, Kansas, Missouri, and Nebraska State Law on Grantor Trusts; SSI Resource Issue, dated June 16, 1999. Our advice is consistent with the definition of a beneficiary in the Restatement (Second) of Trusts (1959) § 127 (Restatement Second) as "[t]he person for whose benefit property is held in trust." None of the property in a Medicaid-qualifying trust is held for the "benefit" of the State.

You ask whether the language in Article I.C of the Trust Agreement, see supra at page 2, makes the trust irrevocable. We previously discussed this issue at length in G.C. Opinion, Determination of Irrevocability of a Nebraska Trust, dated February 23, 2000. We also reviewed our prior advice about the revocability of grantor trusts in Region VII states. Id. We believe it will be helpful to the Kansas Field Office to repeat part of our prior opinion.

The Restatement (Second) provides that at common law there was a rule of the law of real property that the owner of land could not, by a conveyance inter vivos (between living parties), create a remainder interest in his heirs. An attempt to do so created a reversionary interest in the owner, rather than a remainder interest in his heirs. However, there is no longer any such rule of law. There is only a question of construction. Restatement (Second) § 127 cmt. b (1957).

If the owner manifests an intention to create a contingent interest in remainder, legal or equitable, in the persons who on his death may become his heirs, he can do so. In the absence of evidence of a contrary intent, however, the inference is that he does not intend to create a remainder interest in his heirs. The Restatement (Second) provides that if the beneficial interest is limited to the grantor for life and on his or her death the property is to be conveyed to his or her "children, or issue, or descendants" then he or she is not the sole beneficiary of the trust and a remainder interest is created in his or her children, issue, or descendants. Id. at § 127 cmt. b. Where the owner of property, however, transfers it in trust to pay the income to himself or herself for life and upon his or her death to pay the principal to "his heirs or next of kin," in the absence of a manifestation of a contrary intention, "the inference is that he is the sole beneficiary of the trust, and that he does not intend to create any interest in the persons who may become his or her 'heirs or next of kin.'" Id.

Likewise, the inference is that the grantor is the sole beneficiary where the income is to be paid to the grantor for life and upon his or her death the principal is to be paid "as he may by deed or will appoint, and in default of appointment to his heirs or next of kin." If he or she reserves power to appoint by will alone, and in default of appointment the property is to be conveyed to his or her heirs or next of kin, the Restatement (Second) indicates that this is some indication that the grantor intended to confer an interest on his or her heirs or next of kin of which they could be deprived only by a testamentary appointment, "but this is not of itself sufficient to overcome the inference that he intended to give them no such interest but intended to be the sole beneficiary of the trust." Id.

If the grantor "manifests an intention to create a vested or contingent interest in others, as for example, his children, or the persons who may be his heirs or next of kin on his death, he is not the sole beneficiary unless such intended interests are invalid. . . ." Id.at § 339 cmt. b. Thus, the question is whether the language of a trust creates a valid remainder interest. If no valid remainder interest is created, the grantor is the sole beneficiary of the trust, the trust is revocable, and the trust principal is a resource.

In summary, we concluded that you would be justified in finding that the words "child," "children," "issue," "descendants," or "words of similar import" create a residual beneficiary and make a grantor trust irrevocable. If the grantor uses the words "heirs," "heirs-at-law," "next-of-kin," or "by intestate succession,"we concluded that you would be justified, in most cases, in finding that a residual beneficiary was not created and a grantor trust is revocable. Accord G.C. Opinion, Accessability of Discretionary Support Trust Fund as a Resource for Supplemental Security Income Purposes in Nebraska Where Grantor Is also the Sole Beneficiary, dated March 17, 1997. However, if considering the document as whole indicates that the grantor had a different intention, the trust may be irrevocable despite use of the words "heirs," "heirs-at-law," or "next-of-kin." Our research reveals that words such as "heirs" do not have a precise meaning and are interpreted inconsistently by the courts, depending upon how the court perceives the grantor's intent. We are not able to provide a general rule that will apply to all trusts.

Where State law is silent, Kansas courts "have often turned to the guidance of the Restatement of Trusts[.]" In the Matter of the Estate of Sanders, 929 P.2d 153 (Kan. 1996). Accord Neeley v. Neeley, ___ P.2d ___, 2000 W.L. 45835 at *1 (Kan. App.). Although it was not dispositive in the case, in Daughters of the American Revolution of Kansas, Topeka Chapter v. Washburn College, 164 P.2d 128, 132 (Kan. 1945), the Kansas Supreme Court acknowledged the Restatement rule that a trust is revocable when the grantor is the sole beneficiary. The court did not indicate that the rule was improper or would not be followed in Kansas. Although we found no Kansas statute or case applying the grantor trust rule in Kansas, Kansas law does provide that all gifts and conveyances of goods and chattels (but not land) to a trust made for the use of the person making the trust are valid and effective except as to all past, present or future creditors and a nonconsenting wife's statutory rights. See Kan. Stat. Ann. § 33-101 (1993). See also Newman v. George, 755 P.2d 18, 20 (Kan. 1988); Ackers v. First National Bank of Topeka, 192 Kan. 319(1963), as modified at rehearing, 192 Kan. 471 (1964). A trust is irrevocable unless the power to amend or revoke is reserved in the trust agreement. Kan. Stat. Ann. § 58-2417 (1994).

In considering only Article I.C of the G~ trust, it includes no named heir and, initially, one could conclude that the trust was revocable. However, consistent with the Restatement (Second), Kansas law holds that the primary consideration in the construction of trusts is the intention of the grantor as evidenced by an examination of the entire document. See In the Matter of the Estate of Sam Saroff, 625 P.2d 458, 465 (Kan. 1981). We believe that, because the Trust Agreement Introduction indicates that it was created for the benefit of the Beneficiary and the Beneficiary's "descendants," a Kansas court would conclude the use of the word "descendants" was sufficient to demonstrate the grantor's intent to create a residual beneficiary. For example, in the case of In re Watts, 162 P.2d 82, 87 (Kan. 1945), in interpreting whether the corpus of a discretionary spendthrift trust created by will could be reached by a judgment for alimony due the beneficiary's ex-spouse, a county district court made the testator's "unknown heirs" parties to the litigation. The trustee argued that, if the beneficiary never showed himself capable of handling the trust property, upon his death any remaining property would go to the testator's heirs. Upon appeal, the Kansas Supreme Court held that, in order to determine the meaning and effect of the trust provisions, the unknown heirs were properly made parties to the litigation. However, because it found that the beneficiary had no current vested interest in the trust which could be reached by the ex-spouse's judgment, the court did not have to decide at that time who might receive any remaining trust property upon the beneficiary's death. 162 P.2d at 86-87. The Kansas Supreme Court also has found that "'the same rules that apply to [the] construction [of wills] apply to trusts and most other written documents.'" In the Matter of the Estate of Sanders, 929 P.2d at 158, quoting In re Estate of Hauck, 223 P.2d 707 (Kan. 1950).

For the reasons set out above, we believe a Kansas court would find that the G~ Trust is irrevocable.

Frank V. S~ III
Chief Counsel

By_________
C. Geraldine U~
Assistant Regional Counsel

C. PS 00-468 Determination of Irrevocability of a Nebraska Trust Kyle D. S~, SSN: ~

DATE: February 23, 2000

1. SYLLABUS

The issue concerns what language is sufficient to establish that a grantor trust is irrevocable in Iowa, Kansas, Missouri, and Nebraska.

Although the laws of Nebraska have not specifically addressed it, it appears that Nebraska would follow the general rule that a trust is revocable if the grantor is the sole beneficiary, even if there is a provision making the trust irrevocable.

There does not appear to be any Kansas statute or case applying the grantor trust rule in Kansas. Generally, a trust is revocable when the grantor is the sole beneficiary.

Missouri has explicitly adopted the rule that a trust is revocable if the grantor is the sole beneficiary.

There does not appear to be any Iowa statute or case applying the grantor trust rule in Iowa. It appears Iowa would follow general trust law regarding revocability of a trust when the grantor is the trust's sole beneficiary.

Thus, in all Region VII States, the words "child," "children," "issue," "descedents," or "words of similar import" create a residual beneficiary and make a grantor trust irrevocable. If the grantor uses the words "heirs," "heirs-at-law," "next of kin," or "by intestate succession," in most cases it would justify a finding that a residual beneficiary was not created and a grantor trust is revocable.

2. OPINION

You have asked for our assistance in determining the irrevocability of a trust designated as the Kyle D. S~ Special Needs Trust, ~. You also asked us revisit the question of what language is sufficient to establish that a grantor trust is irrevocable in Iowa, Kansas, Missouri, and Nebraska.

I. TRUST PROVISIONS

The Kyle D. S~ Special Needs Trust (SNT) was funded with an insurance settlement in the amount of $26,129.20, the result of litigation involving personal injury suffered by Kyle. The Trust Agreement names the County Court of Buffalo County, Nebraska, as the grantor and Kyle's aunt, Catherine L. K~, as the trustee. The Trust Agreement, executed on August 13, 1999, and signed by the County Judge and by the Trustee, describes Kyle, born October 15, 1993, as the Beneficiary who is "a disabled person within the meaning of 42 U.S.C. § 1382c(a)(3)." Trust Agreement, Article 1.

The Trust Agreement specifies that the trust is irrevocable and that "the beneficiary, his guardians or conservator, shall have no right whatsoever to alter, revoke or terminate this Trust, in whole or in part." However, "[t]he Trust may be amended by the Court with notice to the State of Nebraska, Department of Health and Human Services Finance and Support, if amendment would benefit the disabled's [sic] beneficiary." Trust Agreement, Article 4. The Trust Agreement also provides that-

      [t]his Trust is established pursuant to the 1993 Omnibus Reconciliation Act[,] 469 NAC 2.009.07A5B (4) and Neb. Rev. Stat. 68-1047. This trust is not for the support of Kyle D. S~. It is the intent of the Grantor to make provisions in this Trust Agreement to provide funds necessary to Kyle D. S~'s happiness over and above the essential, primary support and services otherwise available to him. This Trust is not to replace or make unnecessary any public or private assistance that Kyle D. S~ may now or in the future qualify to receive. It is the intent to provide resources for non-support purposes including comfort over and above the essentials provided by any state or federal government agency or program. The supplemental resources provided through this Trust may include, but shall not be limited to education, personal care needs, attendants, entertainment, and other goods and services not otherwise provided by public aid or private sources, but which are reasonable and necessary for the rehabilitation and special non-support needs of the Beneficiary.

Trust Agreement, Article 2. In addition, the Trust Agreement provides that-

      [w]hile it is the intention that the Trustee have broad and effective powers to carry out the provisions of this Trust Agreement, no power conferred upon any Trustee by this article, shall be exercised in such a manner that it deprives the Trust of an otherwise available tax exemption, deduction, exclusion or credit, nor to deprive the Beneficiary of any public or private assistance as described above. This Trust is intended to qualify under 42 U.S.C. § 1396p(d)(4)(A) and the Trustee shall have no power which is inconsistent with such law and its regulations, and all provisions of this Trust shall be interpreted in a manner consistent with such law.

Trust Agreement, Article 2.

Concerning the Trustee's powers, the Trust Agreement provides that—

      [t]he Trustee may distribute income or principal or both, . . . [and] in its sole and absolute discretion, shall apply and distribute such part, all or none of the net income and principal of the Trust estate in such amounts and proportions as the Trustee, in the Trustee's absolute discretion, deems necessary or appropriate for Kyle D. S~'s best interest, [but only after exhausting] all other resources available . . . from all sources other that his trust including, without limitation, payments, services and programs administered, provided or sponsored by any governmental (federal, state or other), private or institutional agency, authority or provider, any rule or regulation of such agency, authority or provider to the contrary notwithstanding.

Trust Agreement, Article 2. The Trust Agreement also includes a spendthrift clause intended to prohibits creditors from attaching the assets of a trust. Trust Agreement, Article 8.

The Trust Agreement provides that the trust terminates upon Kyle's death and "any remaining undistributed income or principal . . . shall be first paid to the State of Nebraska, and to any other state who has made payments under Title XIX" on Kyle's behalf. "In the event that either principal or income remain [after the State is reimbursed], it shall be paid over and distributed pursuant to the intestacy laws of the State of Nebraska." Trust Agreement, Article 11.

II. TRUSTS AS RESOURCES

Generally, if trust principal is available to the trust beneficiary, it will be considered a resource to him for purposes of determining his eligibility to SSI benefits. Regulations define resources for SSI eligibility as follows:

(a) Resources; defined. For purposes of this subpart L, resources means cash or other liquid assets or any real or personal property that an individual . . . owns and could convert to cash to be used for his or her support and maintenance. (1) If the individual has the right, authority or power to liquidate the property or his or her share of the property, it is considered a resource. If a property right cannot be liquidated, the property will not be considered a resource of the individual[.]

20 C.F.R. § 416.1201(a)(1). Regulations further define resources as liquid or nonliquid. Liquid resources are resources in the form of-

     cash or other property which can be converted to cash within 20 days . . . . Examples of resources that are ordinarily liquid are stocks, bonds, mutual fund shares, promissory notes, mortgages, life insurance policies, financial institution accounts (including savings, checking, and time deposits, also known as of deposit) and similar items. Liquid resources, other than cash, are evaluated according to the individual's equity in the resources[.]

Id. at § 416.1201(b).

The Commissioner has further construed the meaning of "resource," by issuing interpretive guidelines in the Program Operation Manual System (POMS). With respect to trust instruments, the POMS provides that-

     if an individual (claimant, recipient or deemor) has the legal authority to revoke the trust and then use the funds to meet his food, clothing or shelter needs, or if the individual can direct the use of the trust principal for his/her support and maintenance under the terms of the trust, the trust principal is a resource for SSI purposes.

POMS SI 01120.200D.1.a (emphasis in original). However,

      [i]f an individual does not have the legal authority to revoke the trust or direct the use of the trust assets for his/her own support and maintenance, the trust principal is not the individual's resource for SSI purposes.

POMS SI 01120.200D.2 (emphasis in original). The revocability of a trust and the ability to use the trust principal is determined by the terms of the trust and/or by State law. POMS SI 01120.200D.1.a and SI 01120.200D.2. "Most States follow the general principle of trust law that if a grantor is also the sole beneficiary of a trust, the trust is revocable regardless of language in the trust document to the contrary." POMS SI 01120.200D.3 (emphasis in original).

A trust is generally irrevocable if the grantor fails to reserve the power to revoke or modify it. Restatement (Second) of Trusts §§ 330 and 331 (1957). Nevertheless, the general law of trusts recognizes an exception to this rule when the grantor is the sole beneficiary of the trust agreement. Where the grantor is the sole beneficiary of a trust, he may amend or terminate the trust, even without having reserved the power to do so. Id. at § 339.

Although the laws of Nebraska have not specifically addressed this issue, we believe that Nebraska would follow the general rule. While the Trust Agreement at issue here names the Court as Grantor, the consideration funding the trust belonged to Kyle. Thus, Kyle is the grantor and, if Kyle is the sole beneficiary of the trust, it is revocable notwithstanding the Trust Agreement language to the contrary. However, if the grantor is not the sole beneficiary, the trust would not be revocable.

The trust herein appears to be a "Medicaid Special Needs Trust," a trust created by means other than a will, and which includes a Medicaid payback provision upon termination of the trust or the death of the individual. SSA's policy is that the Medicaid trust "affects the individual's eligibility for Medicaid only, and has no effect on the SSI income and resource determinations." POMS SI 01120.200H.1.a (emphasis in original). In addition, the POMS provide that-

     [a]ccording to the law in most States, the State is not considered a residual or contingent beneficiary, but is a creditor and the reimbursement is payment of a debt. This law may or may not apply in your State . . . .

POMS SI 01120.200H.1.b. .

Our research indicates that the purpose of including the State reimbursement provision in the SNT is to qualify the beneficiary for medical assistance from the State. If the SNT meets the exception set out in 42 U.S.C. § 1396p(d)(4)(A) and State requirements, the State does not consider the trust to be a resource and the grantor/beneficiary is eligible for medical assistance. Where there is a pre-existing Medicaid lien, several courts have held that the State may require satisfaction of the lien before any third-party settlement can be put into a SNT. In Nebraska, a Medicaid grantor SNT is considered to be void and revocable by operation of law upon filing for or receiving State public assistance unless the SNT is ordered by a court of competent jurisdiction, for good cause shown. Neb. Rev. Stat. § 68-1047. Although no court order was included in the material received, we are assuming that this requirement was met.

You ask whether the words "pursuant to the intestacy laws of the State of Nebraska" created a residual beneficiary. The Restatement (Second) of Trusts provides that at common law there was a rule of the law of real property that the owner of land could not, by a conveyance inter vivos, create a remainder interest in his heirs. An attempt to do so created a reversionary interest in himself, rather than a remainder interest in his heirs. However, there is no longer any such rule of law. There is only a question of construction. Restatement (Second) of Trusts § 127 cmt. b (1957).

If the owner manifests an intention to create a contingent interest in remainder, legal or equitable, in the persons who on his death may become his heirs, he can do so. In the absence of evidence of a contrary intent, however, the inference is that he does not intend to create a remainder interest in his heirs. The Restatement (Second) provides that if the beneficial interest is limited to the grantor for life and on his or her death the property is to be conveyed to his or her "children, or issue, or descendants" then he or she is not the sole beneficiary of the trust and a remainder interest is created in his or her children, issue, or descendants. Id. at § 127 cmt. b. Where the owner of property, however, transfers it in trust to pay the income to himself or herself for life and upon his or her death to pay the principal to "his heirs or next of kin," in the absence of a manifestation of a contrary intention, "the inference is that he is the sole beneficiary of the trust, and that he does not intend to create any interest in the persons who may become his or her 'heirs or next of kin.'" Id.

Likewise, the inference is that the grantor is the sole beneficiary where the income is to be paid to the grantor for life and upon his or her death the principal is to be paid "as he may by deed or will appoint, and in default of appointment to his heirs or next of kin." If he or she reserves power to appoint by will alone, and in default of appointment the property is to be conveyed to his or her heirs or next of kin, the Restatement (Second) indicates that this is some indication that the grantor intended to confer an interest on his or her heirs or next of kin of which they could be deprived only by a testamentary appointment, "but this is not of itself sufficient to overcome the inference that he intended to give them no such interest but intended to be the sole beneficiary of the trust." Id.

Restatement (Second) presents an example similar to the trust herein. The illustration provides: "A transfers property to B in trust to pay the income to A for life and on A's death to pay the principal as A may by deed or by will appoint and in default of appointment to A's heirs or next of kin. A is the sole beneficiary of the trust." Restatement (Second) § 127 cmt. b, illus. 2. In addition, the Nebraska Supreme Court has held that an inter vivos trust which purports to convey an interest in property only after the death of the grantor is testamentary in character and passes no present interest in the property. Such a purported conveyance was found to be void because it was in effect a will, and the statutory requirements for the execution of a will had not been met. Thus, it had no validity. Young et al. v. McCoy et al., 40 N.W.2d 540, 542 (Neb. 1950). The court stated that these words were expressly limited to take effect only after the death of the grantor; thus, they were necessarily revocable words. Id.

The primary objective of the Kyle S~ trust appears to be to provide for the grantor/life beneficiary, and not to preserve the trust principal for the grantor's heirs. Examination of the trust agreement does not reveal any manifestation of intent to convey a remainder interest to the grantor's heirs. For the reasons given above, if there is no named residual beneficiary, absent additional language manifesting a contrary intent, we believe you would be justified in finding that the words "distributed pursuant to the intestacy laws of the State of Nebraska" in a grantor trust make the trust revocable despite trust language to the contrary. However, we believe a residual beneficiary would be created by words that any remainder should go to a named beneficiary or to the individual's children, issue, or descendants. In Ellengrod v. Trombla, 95 N.W.2d 635, 638 (Neb. 1959), in interpreting a will devise and the Uniform Property Act, the court said that conveyance of property to a person and his "children," "issue," "descendants" and "words of similar import" create a life interest in the person and a remainder in the life beneficiary's descendants unless a contrary intent is manifested. If no children, issue, or descendants exist presently, the remainder is contingent. Id. at 640. In Wilkins v. Rowan, 185 N.W. 437, 438-39 (Neb. 1921), the court defined "issue," "lawful issue," or "issue of the body" to include children and lineal descendants of every degree in the absence of qualifying words showing a contrary intent.

III. REVIEW OF PRIOR ADVICE

As you requested, we have reviewed our prior advice concerning the revocability of grantor trusts in Region VII. On this issue, although the laws of Nebraska have not specifically addressed it, we believe that Nebraska would follow the general rule that a trust is revocable if the grantor is the sole beneficiary, even if there is a provision making the trust irrevocable. Restatement (Second) of Trusts § 339 (1957). The grantor is the sole beneficiary of a trust if he or she does not "manifest an intention to give a beneficial interest to anyone else." If the grantor "manifests an intention to create a vested or contingent interest in others, as for example, his children, or the persons who may be his heirs or next of kin on his death, he is not the sole beneficiary unless such intended interests are invalid. . . ." Id. at § 339 cmt. b. Thus, the question is whether the language of a trust creates a valid remainder interest. If no valid remainder interest is created, the grantor is the sole beneficiary of the trust, the trust is revocable, and the trust principal is a resource (see discussion above).

We found no Kansas statute or case applying the grantor trust rule in Kansas. However, Kansas law does provide that all gifts and conveyances of goods and chattels (but not land) to a trust made for the use of the person making the trust are valid and effective except as to all past, present or future creditors and a nonconsenting wife's statutory rights. Newman v. George, 755 P.2d 18, 20 (Kan. 1988). A trust is irrevocable unless the power to amend or revoke is reserved in the trust agreement. Kan. Stat. Ann. § 58-2417 (1994). Where State law is silent, Kansas courts "have often turned to the guidance of the Restatement of Trusts[.]" In the Matter of the Estate of S~, 929 P.2d 153 (Kan. 1996). Accord Neeley v. Neeley, §§§ P.2d §§§, 2000 W.L. 45835 at *1 (Kan. App.). Although it was not dispositive in the case, in Daughters of the American Revolution of Kansas, Topeka Chapter v. Washburn College, 164 P.2d 128, 132 (Kan. 1945), the Kansas Supreme Court acknowledged the Restatement rule that a trust is revocable when the grantor is the sole beneficiary. The court did not indicate that the rule was improper or would not be followed in Kansas. We believe Kansas would follow this rule in the appropriate case. Kansas law is consistent with the Restatement (Second) in holding that the primary consideration in the construction of trusts is the intention of the grantor as evidenced by an examination of the document. In the Matter of the Estate of Sam Saroff, 625 P.2d 458, 465 (Kan. 1981). In the case of In re Watts, 162 P.2d 82, 87 (Kan. 1945), in interpreting a will, the court made "unknown heirs" parties to the litigation. "'[T]he same rules that apply to [the] construction [of wills] apply to trusts and most other written documents." In the Matter of the Estate of S~, 929 P.2d at 158, quoting In re Estate of H~, 223 P.2d 707 (Kan. 1950).

In Missouri, rights to trust income and property are determined by the trust agreement. Hillyard v. Leonard, 391 S.W.2d 211 (Mo. 1965). Missouri has explicitly adopted the rule that a trust is revocable if the grantor is the sole beneficiary. Couch v. Director, Missouri State Division of Family Services, 795 S.W.2d 91, 94 (Mo. App. 1990); Pilgrim Evangelical v. Lutheran Church-Missouri Synod Foundation, 661 S.W.2d 833, 838 (Mo. App. 1983). The intention of the settlor is the key to the construction of a trust. Tidrow v. Director, Missouri State Division of Family Services, 688 S.W.2d 9 (Mo. App. 1985). The term "bodily heirs" is a technical term which should be accorded its technical meaning unless a contrary meaning clearly appears from the context of the will. Central Trust Bank v. Stout, 579 S.W.2d 825 (Mo. App. 1979). "Nearest blood kin" has no settled meaning but where the testator does not indicate otherwise, the definition in the Restatement of Property will be used. Graves v. Hyer, 626 S.W.2d 661 (Mo. App. 1981). It has been held in Missouri that where one transfers property inter vivos in trust to pay the income to himself for life and on his death it is to be conveyed to his "heirs or next of kin," that he is the sole beneficiary. Stephens v. Moore, 249 S.W. 601 (Mo. 1923).

We found no Iowa statute or case applying the grantor trust rule in Iowa. We believe that Iowa would follow general trust law regarding the revocability of a trust when the grantor is the trust's sole beneficiary. Iowa's probate code defines the word "issue," for purposes of intestate succession, as including "all lawful lineal descendants of a person, whether biological or adopted, except those who are the lineal descendants of the person's living descendants." I.C.A. § 633.3.24 (Supp. 1992). The Iowa Supreme Court has indicated that "heir" is given the popular meaning of issue, children, or descendants when language of the entire will and circumstances in which the will was executed indicated that intention. Cook v. Underwood, 228 N.W. 629 (Iowa 1930). The court subsequently stated that the word "heirs" is a flexible term to which the technical meaning of the word is frequently not applied. The meaning to be given to "heirs" is a question of the testator's intent. In re Austin's Estate, 20 N.W.2d 445 (Iowa 1945). The court also stated that the word "heirs" used by a testator does not have a fixed meaning and meaning must be determined from the instrument read as a whole and in light of all relevant facts and circumstances under which the instruments were executed. Schaefer v. Merchants Nat. Bank of Cedar Rapids, Iowa, 160 N.W.2d 318, 320-21 (Iowa 1968). In a will devising the remainder of a trust estate to an old folks' home if a son died without leaving heirs, the word "heirs" meant "descendants." In re Clifton's Estate, 218 N.W. 926 (Iowa 1928).

CONCLUSION

In summary, we believe that you would be justified in finding that, in all Region VII states, the words "child," "children," "issue," "descendants," or "words of similar import" create a residual beneficiary and make a grantor trust irrevocable. If the grantor uses the words "heirs," "heirs-at-law," "next-of-kin," or "by intestate succession, "we believe you would be justified, in most cases, in finding that a residual beneficiary was not created and a grantor trust is revocable. Accord G.C. Opinion, Accessibility of Discretionary Support Trust Fund as a Resource for Supplemental Security Income Purposes in Nebraska Where Grantor Is also the Sole Beneficiary, dated March 17, 1997. However, if considering the document as whole indicates that the grantor had a different intention, the words "heirs," "heirs-at-law," or "next-of-kin" may make the trust irrevocable. For example, you attached a previous legal opinion concerning the Felicia Ann Bribiesca trust. See G.C. Opinion, Determination of Irrevocability of a Grantor Trust, dated June 21, 1994. You asked whether the naming of heirs in general constituted naming another beneficiary making the trust irrevocable. We affirmed that it did. We cannot conclude, however, that our response was inconsistent with the advice herein. The Bribriesca trust reveals that it was the grantor's intention that any undistributed principal and income should be distributed to Felicia's "descendants who survive." Therefore, we believe the advice given was correct.

As illustrated by the cases cited above, words such as "heirs" do not have a precise meaning and are defined inconsistently by the courts. We are not able to provide a general rule that will apply to all trusts. If the grantor's intent is not clear from a trust document, we suggest you submit the trust document for review by this office.

D. PS 00-466 Request for Iowa, Kansas, Missouri, and Nebraska State Law on Grantor Trusts; SSI Resource Issue

DATE: June 16, 1999

1. SYLLABUS

The regional attorney was asked if a State reimbursement provision in a Medicaid Trust creates a residual beneficiary or creditor status for the States of Missouri, Kansas, Iowa and Nebraska.

All four states are considered creditors and not beneficiaries. Even if a trust contains a State reimbursement provision, it would be revocable if the SSI recipient was the grantor and the sole beneficiary since the state is a creditor and not a beneficiary.

CAUTION: Because of a change in the Social Security Act, this opinion may only be applicable to trusts established before 1/1/00.

2. OPINION

You have asked whether in Missouri, Kansas, Nebraska, and Iowa, a State reimbursement provision in a Medicaid Trust creates a residual beneficiary or creditor status for the state. We are of the opinion that in all four states, the state would be considered a creditor. None of the states specifically address a trust which con