You asked us review the Joseph A. N~ Special Needs Trust and annuity to determine
(1) the trust is a resource for purposes of determining the claimant's eligibility
for Supplemental Security Income (SSI); and
(2) whether the annuity is irrevocably assigned to the trust. As explained below,
we advise that the trust should currently be considered a resource (and the annuity
payments should, therefore, be considered income).
However, the trust would not be a resource for SSI purposes if the trustee can show
that she received court the requisite court approval for a 2007 amendment to the trust,
governing payment of taxes. In that case, the annuity would no longer be considered
On June 13, 2005, the Probate Court of Cuyahoga County, Ohio approved a personal injury
case settlement for Joseph A. N~, a minor and SSI recipient ("Joseph Jr."). The court
approved a $1,700,000.00 settlement, which included $100,000 for medical expenses;
$668,960.79 to the attorney for suit expenses and attorney fees; $93,000 to Joseph
Jr.'s parents, Joseph A~ ("Joseph Sr.") and Audra, for the loss of service of the
minor; and the remaining $838,029.21 for Joseph Jr.'s benefit. See Entry Approving Settlement of a Minor's Claim, June 13, 2005 ("Settlement"). The
next day, June 14, 2005, the Probate Court entered a judgment authorizing the establishment
of the Joseph A. N~ Special Needs Trust (the "trust"). The order stated that the court
had determined that it was in Joseph Jr.'s best interest to hold the settlement funds
in trust that would allow him to receive government benefits, because he would require
continuing support, assistance and supervision for the rest of his life, and the funds
received from the settlement would be inadequate to care for his needs throughout
his lifetime. The trust was established by Joseph Sr. as Settlor, and with Janet L.
L~, an attorney, as Trustee. The trust establishes that if Ms. L~ is unable or unwilling
to continue to serve as trustee, she must apply to the court for leave to resign and
appointment of a successor. Trust, Art. IX.
Of the settlement money dedicated to Joseph Jr.'s benefit, the court authorized Joseph
Jr.'s guardian to hold $260,000 in escrow to purchase an accessible home for Joseph
Jr. Of the remaining money, $178,039.21 directly assigned and used to establish the
trust, and $400,000 was used to purchase an annuity. See Trust Art. I; Settlement. However, the trust allows the Trustee to accept additional
assets of any kind from any sources, and add those assets to the trust estate. See Trust, Art. I. The stated purpose of the trust is to be a special needs trust as described
in 42 U.S.C. § 1396(d)(4)(A). See Trust, Preamble.
The distribution of the income and principal of the trust is made by the Trustee.
See Trust, Art. III. The Trustee has the discretion to make distributions as she considers
necessary and advisable, but must obtain prior approval of the court before making
any such distributions. See Trust, Art. III(1). However, the Trustee is directed not
to make any expenditures which would cause Joseph Jr. to become ineligible for Medicaid
or other need-based benefits. Id. The Trustee is not obligated and may not be compelled to make any expenditures. See Trust, Art. III(6). To the maximum extent possible, the Trustee is directed to make
direct payments to persons or entities who supply goods or services to Joseph Jr.,
although the Trustee may also allow Joseph Jr. a periodic allowance for spending money,
"keeping in mind the effect on his eligibility for disability-related benefits." See
Trust, Art. III.
The trust includes a spendthrift provision that indicates that Joseph Jr. "shall have
no interest in either the principal or income of this Trust." Trust, Art. V. It provision
also states that no beneficial interest in the principle or income of the trust, including
any beneficial interest held by Joseph Jr., "shall be anticipated, assigned, or encumbered,
or shall be subject to any creditor's claim or legal process" until the property has
actually been distributed. See Trust, Art. V. The trust states that its terms are irrevocable, and may not be altered,
amended, revoked or terminated by the settlor or any other person. Trust, Art. II.
The only exception is that the Trustee and Joseph Jr.'s guardian may amend or revoke
the trust for to carry out the trust's purpose, or accommodate any changes in the
laws or regulations governing benefit programs. Trust, Art. II. However, the Trustee
and guardian may do so only with prior permission of the court. Id.
There are two ways for the trust to be terminated. First, the trust states that because
disability is a statutory prerequisite for the beneficiary of a special needs trust,
Joseph Jr. himself may terminate the trust if and only if the Social Security Administration
or an equivalent state agency determines that he no longer meets the statutory definition
of disability. See Trust, Art. IV(A). The trust states that if it is determined that Joseph Jr. is no
longer disabled, then the Trustee must inform him in writing of his right to terminate
the trust. Trust, Art. IV(A). This right to terminate is personal to Joseph Jr., and
may be exercised only by him. Id.
Otherwise, as long as Joseph Jr. continues to be disabled, the trust terminates upon
his death. See Trust, Art. IV(B). Upon termination, the Trustee is directed to pay any "properly
allowable" costs of administering and wrapping up the trust, but expressly excluding
any payments for funeral expenses or debts owed to third parties. See Trust, Art. IV(B)(1).
As originally constituted in 2005, the trust stated that "[u]nless [Joseph Jr.] has
made adequate alternative provisions, the Trustee shall pay out of the principal included
in the gross estate of [Joseph Sr.] for estate tax purposes, any federal or state
estate taxes or other inheritance tax (including interest or penalties thereon) arising
by reason of [Joseph Jr.'s] death and attributable to the trust property included
in the gross estate of [Joseph Sr.] for purposes of such tax." Trust, Art. IV(B)(2).
However, on January 1, 2007, the Trustee signed an amendment specifically deleting
the original language of Article IV(B)(2) and replacing it with language that directed
the Trustee to pay any state or federal taxes due from the trust because of Joseph
Jr.'s death. See First Amendment to Trust Agreement, January 1, 2007. The Trustee is also directed
to "comply with all state and/or federal regulations in effect at the time of [Joseph
Jr.'s] death regarding notification and disbursement to the state(s)," including claims
from any agency or agencies from which Joseph Jr. received Medicaid or other medical
assistance pursuant to 42 U.S.C. § 1396. See Trust, Art. IV(B)(3). Such claims are to be paid "from the assets remaining in Trust,
up to and including all amounts remaining herein if necessary[.]" Trust, Art. IV(B)(3).
If the trust assets are insufficient to pay all such claims in full, the claims are
to be reimbursed on a pro rata basis. See Trust, Art. IV(B)(3). If there are any assets remaining in the trust after the repayment
of Medicaid expenses, they are to be distributed by the Trustee to Joseph Jr.'s estate.
Trust, Art. IV(B)(4). The trust is governed by Ohio law. See
Trust, Art. VIII.
The remaining $400,000 of the settlement was used to purchase an annuity contract
from Metropolitan Life Insurance Company ("MetLife'). MetLife Tower Resources Group
is named as the owner of the annuity, and Joseph Jr. is named as the "measuring life."
See Annuity certificate. Under a Qualified Assignment, Release and Pledge Agreement under
the Internal Revenue Code, MetLife agreed to make periodic payments under the annuity
contract on behalf of the defendant in the lawsuit. The trust is named as sole payee,
with no successor payee other than Joseph Jr.'s estate following his death. See Qualified Assignment, 8. The Qualified Assignment accepts the terms of the settlement
as irrevocable. Id.
Other than the Qualified Assignment, the annuity contract provides that it is not
assignable, and may not be transferred, assigned or pledged as collateral for a loan.
Annuity, page 2 and endorsement. The annuity contract specifies also that "[Joseph
Jr.] is not the owner of, and has no ownership rights in, this contract and may not
anticipate, sell, assign, pledge, encumber, or otherwise use this contract as any
form of collateral." Annuity, page 1. According to the annuity contract, the scheduled
payments to the trust are as follows: a monthly payment of $1,200 from July 1, 2005,
until December 1, 2016. Annuity, Page 3. If Joseph Jr. is still living on December
8, 2016, the trust will received monthly payments of $1,695.00 for life, increasing
by 2% every December. Annuity, page 3. MetLife may make a lump-sum payment only if
ordered to do so by the court. Annuity, Endorsement.
I. The Trust
The trust is subject to the statutory provisions of Section 1613(e) of the Social
Security Act for trusts established on or after January 1, 2000. See 42 U.S.C. § 1382(b)(e); POMS SI 01120.201. Generally, under these provisions, trusts established with the assets of the individual
or the individual's spouse are considered resources for SSI purposes even if they
are irrevocable. However, there is an exception for certain trusts that are established
under 42 U.S.C. § 1396p(d)(4)(A), commonly known as the special needs trust exception.
See POMS SI 01120.203. For this exception to apply, the trust must be:
(1) Established with the assets of a disabled individual under age 65, or the disabled
(2) Established for the benefit of the individual by a parent, grandparent, legal
guardian, or court; and
(3) Provide that the state will receive all amounts remaining in trust upon the death
of the individual up to an amount equal to the total medical assistance paid on behalf
of the individual under a state Medicaid plan.
POMS SI 01120.203(B)(1)(a). These rules apply whether the trust is established with the individual's
own assets, or with the assets of the individual's spouse. 42 U.S.C. § 1382(e)(2)(A);
POMS 01120.201(B)(7). If the trust meets an exception to counting it as a resource
under Section 1613(e) of the Act, if must still be evaluated under the regular resource
rules. POMS SI 01120.203(B)(1)(a).
A. Special Needs Trust Exception
Assuming Joseph Jr. is found disabled, the trust meets the first two requirements
for the special needs trust exception to counting it as a resource under Section 1613(e).
Joseph Jr. was born in 1998, and thus is under the age of 65. The trust was established
for Joseph Jr.'s benefit by his legal guardian, and was funded with proceeds from
the settlement of his lawsuit. Whether the trust meets the third requirement of the
special needs trust exception is more problematic.
1. The Original 2005 Trust
Under the original language of Article IV(B)(2), the trust would not meet the third
requirement for the special needs trust exception. POMS SI 01120.203(B)(3)(b) explains that inheritance taxes are not permitted prior to reimbursing states
for medical assistance. Because the original language of Article IV(B)(2) of the trust
allowed the payment of inheritance taxes before reimbursing the state or states for
Medicaid expenses, the original 2005 trust would not meet the requirements of a Medicaid
2. The 2007 Amendment
The Trustee attempted to correct the problem in 2007 by amending the trust to delete
Article IV(B)(2). If the amendment were effective, the language of the amended trust
would also meet the third requirement for the special needs trust exception. Although
the trust's termination clause lists fees for administering the trust estate, and
also taxes due to the state or federal government because of Joseph Jr.'s death, before
reimbursement of expenses for Medicaid services, the Agency permits such expenses
to be paid prior to reimbursement of the state. POMS SI 01120.203(B)(3)(a). Aside from these allowable expenses, the trust's termination clause provides
that the entire amount remaining in the trust may be paid to reimburse all the states
that provided medical services to Joseph Jr. Expenses that are prohibited for purposes
of meeting the Medicaid payback trust exception, such as funeral expenses, see POMS SI 01120.203(B)(3)(a)-(b), are expressly excluded until after all Medicaid services have been
It is not clear, however, that the amendment is effective. First, the Trustee stated
that she was amending the trust pursuant to her authority under Article II of the
trust. Article II, however, states that the Trustee may amend the trust only with
prior approval of the court. There is nothing that indicates that the Trustee obtained
the requisite approval to amend the trust. Second, the amendment purports to be retroactive.
Generally, an amendment or modification of a trust's terms has only a prospective
effect. See RESTATEMENT (THIRD) OF PROPERTY, § 12.1, Reporter's Notes 7 on cmt. f (contrasting
modification and reformation); RESTATEMENT (THIRD) OF TRUSTS, § 62, Reporter's Notes.
However, under Ohio law, a court can reform a trust retroactively to conform the terms
to the settlor's intention even if the original terms of the trust appear unambiguous,
but only if the court finds clear and convincing evidence that both the settlor's
intent and the terms of the trust were affected by a mistake of law or fact. OHIO
REV. CODE ANN. § 5804.15. Also, a court may modify the terms of a trust, and may give
that modification retroactive effect "[t]o achieve the settlor's tax objectives."
OHIO REV. CODE ANN. § 5804.16. Therefore, if the court approves the amendment, as
required by Article II, the amendment should be effective. The court may rule that
the amendment may be applied retroactively if it finds:
(1) clear and convincing evidence of a mistake of law or fact, or
(2) that retroactive modification is appropriate to achieve Joseph Jr.'s tax needs.
OHIO REV. CODE ANN. § 5804.15-16. Therefore, if Trustee can show that she obtained
court approval for the 2007 amendment, the trust would meet the requirements for the
special needs trust exception.
B. Regular Resource Rules
If a court amends, modifies or reforms the trust so that it meets the special needs
trust exception to counting it as a resource under Section 1613(e) of the Act, the
regular resource rules would apply. See POMS SI 01120.200, SI 01120.203(B)(1)(a). Under the regular resource rules, a trust will be a resource if it is revocable,
or if the individual can direct the use of the trust principal for his support. Also,
if the individual can sell his beneficial interest in the trust, that interest is
a resource. POMS SI 01120.203(D)(1)(A). The trust would not be a resource under these rules.
First, the trust specifically states that it is irrevocable. Trust, Art. III. However,
there is an exception under which the Trustee, or Joseph's guardian (acting on Joseph's
behalf), may amend or revoke the trust, although only to carry out the trust's purpose.
Under Ohio law, an Ohio trust that otherwise meets the Medicaid payback trust provisions
is considered irrevocable if it says it is irrevocable and the terms of the trust
prohibit the settlor from revoking it, whether or not the settlor's estate or the
settlor's heirs are name as the remainder beneficiary or beneficiaries of the trust
upon the settlor's death. OHIO REV. CODE ANN. § 5804.18. The trust specifies that
it is governed by Ohio law.
Here, Joseph Jr. is the settlor, to the extent his assets were used to fund the trust.
See OHIO REV. CODE ANN. § 5801.01(5). And, under the terms of the trust, Joseph Jr.'s
guardian, acting on Joseph Jr.'s behalf, can revoke the trust. See Trust, Art. II-III. Because the provisions at Ohio Revised Code § 5804.18 may not
apply, the general rule may apply, and the court would be required to approve the
termination of the trust if Joseph Jr. is both the settlor and the sole beneficiary.
Ohio Rev. Code Ann. § 5604.4. However, the State of Ohio would likely be considered
a trust beneficiary, whose consent would be required to revoke the trust. See Quinchett v. Massanari, 185 F. Supp. 845 (S.D. Ohio 2001) (finding state to be an intended beneficiary of
trust where trust stated that it was "irrevocable," and state law did not require
Medicaid payback trusts to be irrevocable). Therefore, it appears that Joseph Jr.
lacks the authority to revoke the trust unilaterally.
The trust also allows Joseph Jr. to terminate the trust if he is found not to meet
the statutory definition of disability. Under this provision, the trust will become
a resource to Joseph only if and when he is found to be no longer disabled, which
is beyond his control. And, in any event, if the Social Security Administration finds
he is no longer disabled, he would only potentially be eligible for SSI for two months,
regardless of any available resources. See 42 U.S.C. § 1383(a)(5).
Therefore, Joseph Jr. cannot unilaterally revoke the trust at will and obtain the
assets. In addition, Joseph Jr. cannot compel the Trustee to use the trust funds for
his support and maintenance. See Trust, Art. III(6). And finally, the trust also expressly bars Joseph Jr. from assigning
any beneficial interest he may have in the trust. See Trust, Art. V. Therefore, the trust is not a resource under the regular resource
However, certain payments from the trust may constitute income to Joseph Jr. Although
it is disfavored, and the Trustee is directed to keep Joseph Jr.'s eligibility for
disability benefits in mind when making distributions, the Trustee has the discretion
to make payments to Joseph Jr., including a periodic allowance for spending money.
See Trust, Art. III. Such payments would constitute unearned income to Joseph Jr. See POMS SI 01120.200(E)(1)(a). And if the Trustee contracts with third-party vendors for food or shelter
for Joseph Jr., that would constitute income in the form of in-kind support and maintenance.
See POMS SI 01120.200(E)(1)(b).
II. The annuity contract
Because the trust is currently a resource under Section 1613(e) of the Act, any payments
to the trust are income. POMS SI 01120.200(G)(2)(b). However, if the trust were properly amended, modified, or reformed so that
it was not a resource, the annuity payments made to the trust would not be income.
Under the resource rules, a legally assignable payment that is assigned to a trust
that is not a resource is income unless the assignment is irrevocable. See POMS SI 01120.200(G)(1)(d). Under the annuity, the trust is the only payee entitled to receive periodic
payments under the annuity contract. See Annuity, Qualified Assignment. For all practical purposes, this constitutes an irrevocable
assignment of periodic payments to the trust, because there is no provision for naming
any successor payee while Joseph Jr. is living. The annuity certificate otherwise
specifies that the annuity cannot be assigned. Therefore, only the trust has the right
to receive payments, and Joseph Jr. cannot demand payment or sell his right to receive
payments. Consequently, the annuity payments have been irrevocably assigned to the
trust. For that reason, the annuity payments would not be income to Joseph Jr. if
the trust were not a resource.
In sum, until the Trustee can show that a Court has approved the 2007 amendment, the
trust is a resource for SSI purposes, and the annuity payments are income to Joseph
Jr. However, if the court were to approve the amendment, and thus modify or reform
the trust consistent with the language in the proposed amendment, the trust would
no longer be a resource, and the annuity payments would not be income.