This Regional Chief Counsel opinion examines several issues: whether an SSI recipient had a vested ownership interest in her share of her grandmother's trust upon death of the grandmother; whether the SSI recipient's irrevocable special needs trust (established by a court after the grandmother's trust was modified to provide for distribution of the SSI recipient's share into the SNT) is a third-party or self-settled trust; and, whether the SNT is a countable resource for purposes of evaluating the individual's continued eligibility for SSI.

QUESTIONS PRESENTED

1. 1. 

   You asked whether SSI recipient J~ had a vested ownership interest in her share of the V~ Living Trust (V~ Trust), upon the death of the settlor, V~.

2. 2. 

   You asked whether the Irrevocable Special Needs Trust for J~ (SNT) is a third-party or self-settled trust, considering that, after V~'s death, a California court established the SNT and modified the V~ Trust to provide for distribution of J~’s share into the SNT.

3. 3. 

   You asked whether the SNT is a countable resource for purposes of evaluating J~’s eligibility for SSI.

SHORT ANSWERS

1. 1. 

   No. The successor trustee of the V~ Trust determined that J~ was a Handicapped Beneficiary under Section XIV of the V~ Trust. Because J~ was a Handicapped Beneficiary, her share remained in trust, and she had no vested ownership interest in the V~ Trust estate upon V~’s death.

2. 2. 

   The SNT is a third-party trust. As a Handicapped Beneficiary, J~ was not entitled to an outright distribution from the V~ Trust. Accordingly, the portion of the V~ Trust that funded her SNT constituted the assets of a third-party.

3. 3. 

   The SNT is not a countable resource for purposes of evaluating J~’s eligibility for SSI.

BACKGROUND

On January 30, 1999, J~’s grandmother, V~, executed the V~ Trust as settlor and trustee. Section X.A of the V~ Trust provides that, upon V~’s death, the trustee was to distribute one-third of the residual trust estate to J~.^[1] However, section XIV of the V~ Trust provides that any beneficiary diagnosed as incompetent or disabled for purposes of governmental benefits, and entitled to government support and benefits by reason of such incompetence or disability, shall cease to be a beneficiary of the V~ Trust if such aid is jeopardized by reason of the individual’s status as a beneficiary. Further, section XIV provides that, instead of outright distribution to the “handicapped” person, this portion of the V~ Trust will remain in trust. See V~ Trust, sec. XIV. The trustee will then have discretion to use such funds for the “handicapped” person’s support, education, and life enrichment. Id.

V~ died on November 16, 2007. Upon her death, G~ became the trustee of the V~ Trust. See V~ Trust, sec. II.C. On April 21, 2009, G~ filed a petition to modify the V~ Trust in the Superior Court of California, County of Napa. In the petition, G~ asserted that J~ suffered from a mental disability. See Petition to Modify Trust, ¶ 12. G~ also specifically referenced section XIV of the V~ Trust, pertaining to handicapped beneficiaries. See id. at ¶ 8. G~ explicitly recognized that J~ was entitled to government benefits, including SSI and Medi-Cal, and J~’s status as a beneficiary of the V~ Trust threatened her continued entitlement to such benefits. See id. at ¶¶ 17-19. Accordingly, G~ requested that the Court modify section X.A.3 of the V~ Trust to provide for distribution of J~’s share directly into the SNT. See id. at ¶ 21.

On June 30, 2009, the Court granted the petition, and ordered modification of the V~ Trust to provide that the SNT receive the share of the V~ Trust estate previously designated to J~. The Court also approved the terms of the SNT, as set forth in a trust agreement that G~ executed on June 30, 2009.

Section 1.3 of the SNT provides that J~ may not revoke the trust. Section 4.2 of the SNT provides that the trustee, G~, has discretion to determine the amount of trust principal and income to pay or apply for J~’s special needs. The SNT defines special needs as goods and services relating to J~’s health, protection, and welfare that are not available or adequately provided through public benefits. See SNT, sec. 4.2.

RELEVANT LAW

In order to be eligible for SSI, an applicant may not have countable resources exceeding $2,000.00 as a single individual or $3,000.00 as an individual with a spouse. See Program Operations Manual System ( POMS) SI 01110.003.A.2. The criteria the agency utilizes to determine whether a trust constitutes a countable resource will vary depending on the date and source of the trust’s funding.

For trusts established with the assets of a third party, or for self-settled trusts established and funded prior to January 1, 2000, the agency will count the trust as a resource if the beneficiary has authority to revoke or terminate the trust and then utilize the funds to meet his or her food or shelter needs. See POMS SI 01120.200.D. Likewise, the agency will count such a trust as a resource if the beneficiary has power to direct use of the trust property for his or her own support and maintenance. See id.

For trusts established on or after January 1, 2000, and funded with the assets of the beneficiary, section 1613(e) of the Social Security Act provides that such trusts are generally countable as resources. Social Security Act § 1613(e)(3)(B), 42 U.S.C. § 1382b(e)(3)(B); POMS SI 01120.201.A.^[2]

ANALYSIS

According to section X.A.3 of the V~ Trust, J~ was due an outright distribution from the residual trust estate upon V~’s death in November 2007. However, G~, as successor trustee, withheld the distribution in accordance with section XIV of the V~ Trust based on J~’s status as a “handicapped beneficiary.” See Petition to Modify Trust, ¶ 8, 17-19. Specifically, section XIV of the V~ Trust provides that a disabled beneficiary entitled to government benefits based on his or her disability shall cease to be a beneficiary if the government benefits are jeopardized by the disabled person’s status as a beneficiary. See V~ Trust, sec. XIV. G~, as trustee, alleged that J~ has a mental disability. See Petition to Modify Trust, ¶ 12. The Court appears to have credited this allegation, and indicated that J~ fell into the category of a “Handicapped Beneficiary” under section XIV of the V~ Trust. See Order to Modify Trust, ¶ 4.

As a Handicapped Beneficiary, J~ was not entitled to an outright distribution from the V~ Trust, nor did she have a vested ownership interest in the trust estate. Rather, pursuant to section XIV, G~ was to continue to hold her previously designated share in trust, with discretion to use such funds for her support, education, and life enrichment. See V~ Trust, sec. XIV. As J~ was not entitled to a distribution from the V~ Trust, property held in the V~ Trust did not constitute her “assets.” See POMS SI 01120.201.B.1 (the term “asset” includes payment or property to which the individual “is entitled” but does not receive or have access to because of an action by the individual, or a person or entity acting on behalf of the individual); see also POMS PS 01825.006 (PS 16-146) (agency determined that a trust beneficiary was not entitled to his share upon the trustee’s death because the successor trustee continued to hold the share in trust and had sole discretion to decide if, and when, to make distributions for the beneficiary’s support and maintenance). Therefore, when the Court ordered that G~ fund the SNT with a portion of the V~ Trust, the Court effectively established a third-party trust. See POMS PS 01825.006 (15-078) (“at no point was Claimant entitled to an outright distribution of her trust share; thus, she did not have access to the trust assets and could not use them to fund a new trust”); cf. POMS PR 01825.006 (PR 15-004) (a beneficiary was entitled an outright distribution of trust assets under the terms of a third-party trust; thus, when a court ordered that a new special needs trust be established and funded with his assets, it effectively created a self-settled trust).

As a third-party trust, the SNT is only countable as a resource if J~ has power to revoke or terminate the trust or direct use of trust property for her own support and maintenance. See POMS SI 01120.200.D. Pursuant to section 1.3 of the SNT, J~ does not have power to revoke the trust. Additionally, the SNT provides for termination only upon J~’s death. See SNT, sec. 5.1. Accordingly, J~ has no power to revoke or terminate the SNT.

Moreover, J~ has no power to direct use of trust property for her own support and maintenance. According to section 7.2 of the SNT, J~ may not anticipate, assign, or encumber trust principal or income. Further, section 4.2 provides that the trustee has discretion to determine the amount of trust income and principal paid or applied on J~’s behalf.

Therefore, because J~ has no power to revoke or terminate the SNT, or to direct use of trust property for her own support and maintenance, the SNT is not a countable resource for purposes of evaluating her eligibility for SSI.

CONCLUSION

As the trustee determined that J~ was a “handicapped beneficiary” under section XIV of the V~ Trust, J~ was not entitled to an outright distribution of the residual trust estate. Accordingly, when the Court ordered that the trustee transfer these funds held in the V~ Trust to the SNT, the funds did not constitute J~’s “assets,” and resulted in the establishment of a third-party trust. Further, as J~ does not have power to revoke the SNT or direct use of trust property for her own support and maintenance, the SNT is not a countable resource for purposes of evaluating J~’s eligibility for SSI.

This Regional Chief Counsel (RCC) opinion discusses whether a self-funded and irrevocable trust has any income or resources implications for Supplemental Security Income (SSI) purposes. The RCC noted that although the funding of the trust constituted a transfer for less than fair market value, any period of ineligibility arising from the transfer did not apply. An individual that transfers resources for less than fair market value may be ineligible for SSI for up to 36 months. In this case, the transfer of the real property to the trust took place in October 2012 and the claimants did not apply for SSI until January 2017, more than 36 months later. Therefore, the RCC focused its analysis on whether the trust principal, trust income, and an interest in real property constitute resources and/or income for SSI purposes. The RCC concluded that neither the trust principal nor the interest in real property were resources, but any trust income paid or payable to claimants would constitute income in the month received or payable.

Y~ and T~ (“Claimants”) are a married couple. On October XX, 2012, they created the “Y~ and T~ Irrevocable Trust” (the “C~ Trust”). On January XX, 2017, they filed separate Supplemental Security Income (SSI) applications as aged individuals under the Social Security Act (the “Act”). On February XX, 2017, Claimants, both of whom have dementia, moved from their residential home to a board and care home. Their son J~ acts as their representative payee.

You asked if there are any income or resource considerations relating to the C~ Trust for purposes of evaluating whether Claimants are eligible for SSI.

There are three income or resource considerations relating to the C~ Trust. They are whether trust principal, trust income, and an interest in real property constitute resources and/or income for purposes of determining Claimants’ eligibility for SSI. Under federal law, neither the trust principal nor the interest in real property are resources because Claimants do not have the legal right to convert the trust principal or real property into funds for their support and maintenance . Any trust income paid or payable to Claimants, however, constitutes income in the month received or payable because Claimants have the right to use any such funds for their food and shelter.

On October XX, 2012, Claimants executed a trust instrument (the “trust agreement” or “Agrmt.”) establishing the C~ Trust. They appointed their son, J~, as trustee (Agrmt., Art. 1, § 1.01). The trust agreement specifies that the C~ Trust, “is irrevocable, and neither of [Claimants] may alter, amend, revoke, or terminate it in any way” (Agrmt., Art. 1, § 1.03). The trust agreement also contains a spendthrift provision precluding beneficiaries from voluntarily or involuntarily transferring trust principal or income (Agrmt., Art. 10, § 10.02).

Claimants transferred real property located in San Francisco, California, to the C~ Trust via a Quitclaim Deed attached to the trust agreement (Agrmt., Art. 1, § 1.04, Schedule A). ^[3]

Claimants retained “no right, title or interest in the principal of [the C~ Trust] or any other incident of ownership in any trust property” (Agrmt., Art., 1 § 1.04). The trust agreement precludes the trustee from distributing trust principal or making loans to Claimants or for Claimants’ benefit (Agrmt., Art. 1, § 1.04(c), Art. 9, § 9.04).

Under the trust agreement, Claimants are the sole beneficiaries of any trust income while either of them are alive (Agrmt., Art. 1, § 1.07). The trust agreement requires that the trustee “must pay, at least annually, all of the net income from the trust property, after deducting all expenses associated with the trust property, to or for [Claimants’] benefit” (Agrmt., Art. 3, § 3.01(b)). The trustee must provide an accounting to the income beneficiaries upon request (Agrmt., Art. 8, § 8.07). In addition to their right to trust income, the trust agreement also grants Claimants the right to possess, occupy, and use any real property held by the C~ Trust for residential purposes without the payment of rent (Agrmt., Art. 3, § 3.01(a)(1)).

The trust agreement identifies California law as the law governing the validity and interpretation of the C~ Trust (Agrmt., Art. 8, § 8.06, Art. 9, § 9.01, Art 10, § 10.03).

The trust agreement identifies California law as the law governing the validity and interpretation of the C~ Trust (Agrmt., Art. 8, § 8.06, Art. 9, § 9.01, Art 10, § 10.03).

In 1974, Congress enacted the Supplemental Security Income (SSI) program to provide a “subsistence allowance, under federal standards, to the nation’s needy, blind, and disabled.” Social Security Ruling 81-34c, citing Schweiker v. Wilson et. al., 101 S. Ct. 1074 (1981); Social Security Act §§ 1601–1634 (Title XVI); 42 U.S.C. §§ 1381–1383c; 20 C.F.R. § 416.110. Because SSI is a need-based program, an individual must meet strict resource and income limits to qualify. See Social Security Act §§ 1602, 1612; 42 U.S.C. §§ 1381a, 1382a; 20 C.F.R. §§ 416.1100, 416.1201. Specifically, resources cannot exceed $2,000.00 per month for an individual and $3,000.00 per month for an individual with a spouse. POMS SI 01110.003.A.2. Federal law governs the calculation of an individual’s resources and income.^[4]

The regulations define resources as, “cash or other liquid assets or any real or personal property that an individual (or spouse, if any) owns and could convert to cash to be used for his or her support and maintenance.” 20 C.F.R. § 416.1201(a). Income is “anything you receive in cash or in kind^[5] that you can use to meet your needs for food and shelter.” 20 C.F.R. § 416.1102; Social Security Act § 1612(a)(2)(A); 42 U.S.C. § 1382a(a)(2)(A). Income can be earned (e.g., wages and net earnings) or unearned (e.g., annuities, pensions, alimony, dividends, rents, death benefits, gifts, inheritances). See Social Security Act §§ 1612(a)(1)-(2); 42 U.S.C. §§ 1382a(a)(1)–(2); 20 C.F.R. §§ 416.1110, 416.1120, 416.1121.

Trusts can count as resources for the purposes of SSI. See Social Security Act § 1613(e); 42 U.S.C. § 1382b(e). A trust is, “a property interest, whereby, property is held by an individual or entity (such as a bank) called the trustee, subject to a fiduciary duty, to use the property for the benefit of another (the beneficiary).” POMS SI 01120.200.B.1. Generally, a trust established by an individual with his or her own assets on or after January 1, 2000 is a resource if it is revocable. Social Security Act § 1613(e)(3)(A); 42 U.S.C. § 1382b(e)(3)(A); POMS SI 01120.201.D.1. In the case of an irrevocable trust established by an individual, if there are any circumstances under which payment from the trust could be made to or for the benefit of the individual (or of the individual’s spouse), the portion of the corpus from which payment to or for the benefit of the individual (or of the individual’s spouse) could be made shall be considered a resource available to the individual. Social Security Act § 1613(e)(3)(B); 42 U.S.C. § 1382b(e)(3)(B); POMS SI 01120.201.D.2.

There are three components of the C~ Trust to consider when evaluating whether Claimants meet the SSI-resource requirements: (1) the trust principal (property placed in trust and held by the trustee subject to a beneficiary’s rights); (2) the trust income (amounts earned by the trust principal); and (3) the equitable ownership interest in real property held by the trust. See POMS SI 01120.200.B.1–2.

The trust principal is not a resource for purposes of determining Claimants’ SSI eligibility because the C~ Trust is irrevocable and precludes Claimants from converting any trust principal into cash for their support and maintenance. See 20 C.F.R. § 416.1201(a). Under the trust agreement, Claimants specify that the trust is irrevocable, and they do not retain any authority to alter, amend, revoke, or terminate the C~ Trust in any way (Agrmt., Art. 1 § 1.03). They transferred their assets to the C~ Trust and retain no right, title, or interest in the trust principal or other incidents of ownership (Agrmt., Art., § 1.04, Schedule A). The trust agreement also prohibits distributions or loans from the trust principal to Claimants or for their benefit (Agrmt., Art. 1, § 1.04(c), Art. 9, § 9.04).

The trust income (if any), however, is income for SSI eligibility purposes.^[6]

Claimants’ interest in real property held by the C~ Trust is not a resource for SSI purposes because the trust agreement precludes any voluntary transfer of trust property (Agrmt., Art. 10, § 10.02). The trust agreement grants Claimants the right to possess, occupy, and use for residential purposes any real property held by the C~ Trust without the payment of rent (Agrmt., Art. 3, § 3.01(a)(1)). Under certain circumstances, limited rights to real property can be a resource, regardless of whether or not the individual actually occupies the real property or otherwise exercises his or her rights. See, e.g., POMS SI 01140.110.A.6, SI 01140.100 (a life estate interest in real property may have value as a resource). However, such interest is not a resource where the individual does not have the right to convert the interest into cash for support and maintenance. See 20 C.F.R. § 416.1201(a). Here, the spendthrift provision in the trust agreement prohibits Claimants from assigning, anticipating, encumbering, alienating, or otherwise voluntarily transferring their interest in real property held by the C~ Trust.^[7]

Accordingly, Claimants’ interest in the real property under the trust agreement does not count as a resource.

Neither the trust principal nor Claimants’ interest in real property held by the C~ Trust are resources for the purposes of evaluating Claimants’ SSI eligibility. Under the trust agreement, Claimants did not have legal rights to convert the trust principal or their interest in real property into funds to be used for their support and maintenance. However, because the trust agreement grants Claimants exclusive rights to any income earned by the C~ Trust during their lifetimes, any trust income paid or payable to Claimants would constitute income for the purposes of SSI because they could use such funds for food and shelter.

 

This Regional Chief Counsel (RCC) opinion supersedes PS 18-105 dated June 28, 2018, which concluded that a subaccount in the SMB Special Needs Pooled Trust (SMB Trust) does not meet the pooled trust exception under section 1917(d)(4)(C) of the Act. This was due to an early termination provision that violates the “sole benefit” requirement and a problematic Medicaid payback provision. The current opinion examines the Master Trust and Joinder as amended on September 24, 2018, and concludes that the trust now meets the criteria for an exception to resource counting under section 1917(d)(4)(C) of the Act. The Master Trust and Joinder, as amended, removed the impermissible early termination provision and resolved the conflicting language pertaining to Medicaid reimbursement.

INTRODUCTION

On June 28, 2018, we issued an opinion advising that NH C~’s account in the SMB Trust did not meet the criteria for an exception to resource counting under section 1917(d)(4)(C) of the Social Security Act (Act). Specifically, we noted that the trust contained an impermissible early termination provision and conflicting language pertaining to Medicaid reimbursement, indicating that only the state of California would receive reimbursement.

In September 2018, Senior Medi-Benefits, Inc. amended its master trust and joinder agreement.

QUESTION

You asked whether the amended master trust (Master Trust) and joinder agreement (Joinder) meet the criteria for an exception to resource counting under section 1917(d)(4)(C) of the Act.

SHORT ANSWER

Yes, the Master Trust and Joinder meet the criteria for an exception to resource counting under section 1917(d)(4)(C) of the Act. The Master Trust and Joinder, as amended, removed the impermissible early termination provision and resolved the conflicting language pertaining to Medicaid reimbursement.

RELEVANT TRUST PROVISIONS

SMB Trust – Master Trust Agreement as amended on September 12, 2018

Senior Medi-Benefits, Inc., a California non-profit organization, amended the Master Trust on September 12, 2018.

Articles 1.1 and 2.2 of the Master Trust provide that the SMB Trust is established and managed by Senior Medi-Benefits, Inc. as the trustee. Article 7.1 provides that the SMB Trust shall establish and maintain a separate sub-account for the sole benefit of each beneficiary, though the trust may pool the sub-accounts for investment and management purposes.

Article 5.1 of the Master Trust provides that any amount remaining in the beneficiary’s sub-account upon his death shall be distributed to the State of California up to an amount equal to the total amount of medical assistance paid on behalf of the beneficiary. However, if the beneficiary has resided in more than one state, Article 5.2 provides that the remaining funds must be distributed to each state in which the beneficiary received Medicaid, based on the states’ proportionate share of the total amount of Medicaid benefits paid.

Article 5.3 prohibits retaining of funds from the beneficiary’s sub-account upon his death for any purpose other than the cost of the beneficiary’s remaining management and investment fees and outstanding bills for the benefit of the beneficiary that would not otherwise violate Progam Operations Manual System (POMS) SI 01120.203.B.3.b.^[8]

The Master Trust no longer contains any early termination provisions.

Joinder Agreement as amended on September 24, 2018

On September 24, 2018, Mr. C~ executed the amended Joinder. Specifically, Article 4, section B of the Joinder provides that any amount remaining in the beneficiary’s sub-account upon his death shall be distributed to the state of California up to an amount equal to the total amount of medical assistance paid on behalf of the beneficiary. However, if the beneficiary has resided in more than one state, the Joinder provides that the remaining funds must be distributed to each state in which the beneficiary received Medicaid, based on the states’ proportionate share of the total amount of Medicaid benefits paid.

Article 4, section C prohibits the trustee from retaining funds from the beneficiary’s sub-account upon his death for any purpose other than reimbursing the state(s) up to an amount equal to the total amount of medical assistance paid on behalf of the beneficiary on a pro-rata or proportional basis. The Joinder also specifies that the state(s) will have priority over payment of other debts and administrative expenses except taxes due from the trust because of the beneficiary’s death and reasonable fees for administration of the trust estate. The Joinder also provides that Medicaid payback cannot be limited to any particular period of time.

The Joinder no longer contains any early termination provisions.

ANALYSIS

Generally, a trust established after January 1, 2000, with the assets of an individual will be a resource countable to that individual for purposes of determining SSI eligibility. See Social Security Act §§ 1613(e), 1917(d); 42 U.S.C. §§ 1382b(e), 1396p(d); POMS SI 01120.201.A. However, a trust established with the assets of a disabled individual that is part of a pooled trust may be excepted under certain circumstances. Social Security Act §§ 1613(e)(5), 1917(d)(4)(C); 42 U.S.C. §§ 1382b(e)(5), 1396p(d)(4)(C); POMS SI 01120.203.B.2. 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) the beneficiary’s account must be established for his or her sole benefit by a parent, grandparent, legal guardian, by the beneficiary, or by a court; and (4) upon the beneficiary’s death, to the extent that amounts reaminining in the beneficiary’s account are not retained by the trust, the trust must pay the State(s) the amount remaining in the account up to the total amount of medical assistance paid on behalf of the beneficary under State Medicaid plan(s). Social Security Act § 1917(d)(4)(C), 42 U.S.C. § 1396p(d)(4)(C); POMS SI 01120.203.B.2.a.

As we have previously advised, Mr. C~s account in the SMB Trust constitutes a countable resource unless excepted under section 1917(d)(4)(C) of the Act because he established his account on October 10, 2016 with his assets.

As amended, the Master Trust and Joinder meet the criteria for an exception to resource counting under section 1917(d)(4)(C) of the Act. Specifically, Senior Medi-Benefits, Inc., a non-profit organization, established and manages the SMB Trust as the trustee. Master Trust §§ 1.1, 2.2. Furthermore, the Master Trust provides that the trustee will maintain a separate account for each beneficiary, though the trust may pool the accounts for purposes of investment and management of funds. Master Trust § 7.1.

The Master Trust and Joinder also now meet the “sole benefit” requirement of section 1917(d)(4)(C)(iii) of the Act. The Master Trust and Joinder removed the impermissible early termination provision and they do not have any other provision triggering termination of the trust other than the beneficiary’s death. Thus, we find that Mr. C~ established his account in the SMB Trust for his sole benefit.

In addition, the Master Trust and Joinder contain acceptable Medicaid reimbursement language. To satisfy the pooled trust exception, a trust must ensure that upon a beneficiary’s death, to the extent the trust does not retain amounts remaining in the beneficiary’s account, the State(s) are reimbursed from “such remaining amounts in the account” equal to 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)(iv), 42 U.S.C. § 1917(d)(4)(c)(iv); POMS SI 01120.203.D.8. The State(s) must be listed as the first payee(s) and have priority over payment of other debts and administrative expenses. Id. The trust must provide payback for any State(s) that provided medical assistance under the State Medicaid plan(s) and not be limited to any particular State(s). Id.

The Master Trust and Joinder provide that the state(s) will receive reimbursement for medical assistance paid on behalf of the beneficiary during his lifetime after payment of allowable expenses. See Master Trust §§ 5.1-5.3; Joinder § 4. Although the applicable trust provisions initially appear to limit reimbursement to the State of California, subsequent language clarifies that each state that provided Medicaid to the beneficiary would receive reimbursement based on that states’ proportionate share of the total Medicaid benefits paid. Id. Additionally, the Joinder specifies that the state(s) will have priority over payment of other debts and administrative expenses except taxes due from the trust because of the beneficiary’s death and reasonable fees for administration of the trust estate, which are permissible under POMS SI 01120.203.E.1.

Thus, the Master Trust and Joinder contain acceptable Medicaid reimbursement language, compliant with POMS SI 01120.203.D.8. The provisions provide that the state(s) will be the first payee after allowable taxes and administrative expenses. Additionally, the provisions make clear that all states providing medical assistance should receive reimbursement; and do not limit repayment to any particular state(s).

CONCLUSION

The Master Trust and Joinder, as amended, meet the requirements for an exception to resource counting under section 1917(d)(4)(C) of the Act. Specifically, Mr. C~ established the account for his sole benefit, and the Master Trust and Joinder ensure that the state(s) will receive reimbursement for medical assistance paid on behalf of the beneficiary during his lifetime.

This Regional Chief Counsel (RCC) opinion discusses whether G~’s subaccount in the SMB Special Needs Pooled Trust (SMB Trust) meets the criteria for an exception to resource counting under section 1917(d)(4)(C) of the Social Security Act (Act). The RCC concluded that the Master Trust and Joinder Agreement contain an early termination provision that violates the “sole benefit” requirement of the pooled trust exception. Additionally, the Joinder contains a problematic Medicaid payback provision that does not comply with POMS SI 01120.203.D.8. Therefore, G~’s subaccount in the SMB Trust does not meet the pooled trust exception under section 1917(d)(4)(C) of the Act.

QUESTION

You asked whether G~’s account in the SMB Special Needs Pooled Trust (SMB Trust) meets the criteria for an exception to resource counting under section 1917(d)(4)(C) of the Social Security Act (Act).

SHORT ANSWER

No. G~’s account in the SMB Trust does not meet the criteria for an exception to resource counting under section 1917(d)(4)(C) of the Act. The SMB Trust’s termination clause contains early termination provision that violates the “sole benefit” requirement of section 1917(d)(4)(C)(iii). The SMB Trust also contains conflicting language pertaining to Medicaid reimbursement, indicating that only the State of California is entitled to reimbursement for medical assistance paid after G~ attained the age of fifty-five.

BACKGROUND

RELEVANT TRUST PROVISIONS

SMB Trust – Master Trust Agreement

Senior Medi-Benefits, Inc., a California non-profit organization, executed a special needs pooled master trust agreement (Master Trust) on May 3, 2007.

The Master Trust provides that the SMB Trust is established and managed by Senior Medi-Benefits, Inc., as the trustee. Master Trust §§ 1.1, 2.1, 2.2. Each sub-account shall become “irrevocable” upon execution and approval of the beneficiary’s Joinder and receipt of the trust property. Master Trust § 4.2. The Master Trust further provides that the SMB Trust shall maintain a separate sub-account for each beneficiary, though the trust may pool the sub-accounts for investment and management purposes. Master Trust § 8.1.

The Master Trust provides that the trust is established and managed for the beneficiary’s sole benefit. Master Trust §§ 2.6-2.7. Subject to the trustee’s “sole and absolute” discretion, the trustee makes all distributions and such distributions are intended to be in addition to, not in lieu of, government benefits received by the beneficiary. Master Trust §§ 5.1, 5.3. Examples of appropriate distributions include “expenditures for travel, companionship, and other expenditures that will improve the quality of a Beneficiary’s physical, emotional, psychological, and/or spiritual life”. Master Trust § 5.4f.

Upon the death of the beneficiary, the Master Trust provides that any amounts remaining in the sub-account shall be administered to conform with the requirements of 42 U.S.C. § 1396p and/or related statutes. Master Trust § 6.1. Specifically, any amount remaining in the beneficiary’s sub-account upon his death shall be distributed to each state based on it’s proportionate share of the total government assistance paid by all of the states on the beneficiary’s behalf. Master Trust § 6.2. If there are any amount remaining in the beneficiary’s sub-account after the reimbursement to all states, the remaining balance shall be distributed in accordance with the beneficiary’s last will, provided that the beneficiary shall not have power to appoint such property to the beneficiary, the beneficiary’s estate, the beneficiary’s creditors, or the creditors of the beneficiary’s estate. Id. If the beneficiary does not exercise this special power of appointment, the unappointed balance of the beneficiary’s sub-account shall continue to be held by the trustee as an asset of the trust and any such funds maybe be used by the trustee for the following purposes: (a) for the direct or indirect benefit of other beneficiaries; (b) to add disabled persons to the trust as beneficiaries; or (b) to provide disabled persons with equipment, medication, or services deemed suitable for such persons by the trustees. Id.

The trustee may, in its sole and absolute discretion, terminate the beneficiary’s account during the lifetime of the beneficiary if the trustee has reasonable cause to believe that it is necessary to use the principal and/or income in the beneficiary’s sub-account for the beneficiary’s care, which would otherwise be provided through government assistance. Master Trust § 7.1. Under such circumstance, the trustee may terminate the beneficiary’s sub-account as though that beneficiary had died and distribute the property in the sub-account according to the provisions in Article 6. Id.

Joinder Agreement

On October 10, 2016, executed a joinder agreement (Joinder), establishing his sub-account in the SMB Trust. G~ funded his sub-account with his own assets.^[9]

The introduction of the Joinder provides that the Joinder is irrevocable upon acceptance by the grantor and trustee.

The Joinder provides that if the account terminates prior to the beneficiary’s death, “the California Department of Health Services” receives reimbursement for “the total medical expense paid on the Beneficiary’s behalf after the Beneficiary attained age of fifty-five (55) or is institutionalized.” Joinder § 2.01. The Joinder further provides that, upon the death of the beneficiary, the California Department of Health Services is “the primary beneficiary” and is entitled to an amount “equal to the total medical expenses paid on the Beneficiary’s behalf after the Beneficiary attained the age of fifty-five (55).” Joinder § 2.02.

The Joinder also provides that the trustee “shall be entitled to a $1,500 initial set-up fee and 1% annual fee for compensation of administrative services” as well as to “reimbursement for any reasonable costs that may normally occur from time to time in the fulfillment of its administrative duties.” Joinder §§ 3.01-3.02.

ANALYSIS

Generally, a trust established after January 1, 2000, with the assets of an individual will be a resource countable to that individual for purposes of determining SSI eligibility. See Social Security Act §§ 1613(e), 1917(d); 42 U.S.C. §§ 1382b(e), 1396p(d); POMS SI 01120.201.A. However, a trust established with the assets of a disabled individual that is part of a pooled trust may be excepted under certain circumstances. Social Security Act §§ 1613(e)(5), 1917(d)(4)(C); 42 U.S.C. §§ 1382b(e)(5), 1396p(d)(4)(C); POMS SI 01120.203.B.2. 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) the beneficiary’s account must be established for his or her sole benefit by a parent, grandparent, legal guardian, by the beneficiary, or by a court; and (4) upon the beneficiary’s death, to the extent that amounts reaminining in the beneficiary’s account are not retained by the trust, the trust must pay the State(s) the amount remaining in the account up to the total amount of medical assistance paid on behalf of the beneficary under State Medicaid plan(s). Social Security Act § 1917(d)(4)(C), 42 U.S.C. § 1396p(d)(4)(C); POMS SI 01120.203.B.2.a.

Here, G~ established his account in the SMB Trust on October XX, 2016 with his assets. Accordingly, his account constitutes a countable resource unless excepted under section 1917(d)(4)(C) of the Act.

G~’s account appears to satisfy the first two requirements for an exception to resource counting. First, Senior Medi-Benefits, Inc., a non-profit organization, established and manages the SMB Trust as the trustee. See Master Trust §§ 1.1, 2.1, 2.2. Furthermore, the Master Trust provides that the trustee will maintain a separate account for each beneficiary, though the trust may pool the accounts for purposes of investment and management of funds. Master Trust § 8.1. As for the final two requirements, we provide the following analysis.

1. The trust sub-account is not for the beneficiary’s sole benefit.

A trust subaccount will not meet the “sole benefit” requirement of section 1917(d)(4)(C)(iii) of the Act if the trustee has power to terminate the trust prior to the beneficiary’s death, unless:

The early termination clause solely allows for transfer of the beneficiary’s assets from one pooled trust to another pooled trust and contains specific language precluding disbursements other than to the secondary trust or for allowable administrative expenses, POMS SI 01120.199.F.2; or

The early termination clause provides that, upon termination of the trust: (1) the State receives all amounts remaining in the trust up to an amount equal to the amount of medical assistance paid on behalf of the individual, and (2) after payment of allowable administrative expenses and reimbursement to the State, all remaining funds are distributed to the beneficiary, and (3) the beneficiary does not have power to terminate the trust. POMS SI 01120.199.F.1; see also POMS SI 01120.203.D.5 (the pooled trust exception does not apply if the trust account “allows for termination of the trust account prior to the individual's death and payment of the corpus to another individual or entity”).

Here, Article 7 of the Master Trust gives the trustee, not the beneficiary, sole and absolute discretion to terminate the trust prior to the beneficiary’s death. In the event of such early termination, section 7.1 provides that the trustee has an option to treat the sub-account as if the beneficiary had died and distribute the sub-account in accordance with the provisions in Article 6 of the Master Trust.

However, section 6.2 of the Master Trust and section 4.03 of the Joinder allow the beneficiary to distribute the remaining funds in his sub-account after reimbursing the state(s) to person(s) other than himself through his last will. To the extent that the beneficiary does not effectively exercise his special power of appointment, the foregoing provisions also allow the trustee to use the remaining funds in the beneficiary’s sub-account for the benefit of other beneficiaries and disabled persons.

Accordingly, because section 6.2 of the Master Trust and section 4.03 of the Joinder permit early termination of a beneficiary’s sub-account and distribution of the remaining funds to person(s) other than the beneficiary, the provisions violate the “sole benefit” requirement of the pooled trust exception.

You also asked whether section 5.4f of the Master Trust violates the “sole benefit” requirement. In particular, this subsection permits the trustee to pay for travel, companionship, and other expenditures that will improve the beneficiary’s quality of life. Agency policy specifically allows payments for companion services. See POMS SI 01120.201.F.3.a. Accordingly, such payments do not violate the “sole benefit” requirement of section 1917(d)(4)(C)(iii) of the Act.

In addition, you asked whether Article 3 of the Joinder violates the “sole benefit” requirement. Article 3 entitles the trustee to a $1,500 initial set-up fee and 1% annual fee as well as reimbursement for any reasonable administrative expenses. Again, agency policy makes an exception to the “sole benefit” rule for administrative expenses associated with investment, legal, or other services rendered on behalf of the beneficiary as long as the compensation is reasonable.See POMS SI 01120.201.F.4. The administrative fees set out in Article 3 do not appear unreasonable.

In sum, although section 5.4f of the Master Trust and Article 3 of the Joinder do not violate the “sole benefit” requirement, the foregoing early termination provisions violate the “sole benefit” requirement of section 1917(d)(4)(C)(iii) of the Act. Therefore, G~’s sub-account in the SMB Trust does not meet section 1917(d)(4)(C)(iii) of the Act.

2. The Joinder does not contain an acceptable Medicaid reimbursement provision.

To satisfy the pooled trust exception, a trust must ensure that upon a beneficiary’s death, to the extent the trust does not retain amounts remaining in the beneficiary’s account, the State(s) are reimbursed from “such remaining amounts in the account” equal to 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)(iv), 42 U.S.C. § 1917(d)(4)(c)(iv); POMS SI 01120.203.D.8. The State(s) must be listed as the first payee(s) and have priority over payment of other debts and administrative expenses. Id. The trust must provide payback for any State(s) that provided medical assistance under the State Medicaid plan(s) and not be limited to any particular State(s). Id.

The Master Trust provides that upon the beneficiary’s death, any amount remaining in the beneficiary’s sub-account shall be distributed to each state’s proportionate share of the total government assistance^[10] paid by all of the states on the beneficiary’s behalf. Master Trust § 6.2. Although the Master Trust does not specifically list the states as the first payees, the language of the section 6.2 indicate that the states will be the first payees as the second half of section 6.2 provides that the trustee cannot distribute the remaining property in the beneficiary’s sub-account until after the states have been reimbursed. Id. (“Any remaining property shall be distributed pursuant to such one or more persons or entities as the Beneficiary shall direct in the Beneficiary’s last will”.).

The Joinder, however, provides that the California Department of Health Services is “the primary beneficiary” upon the beneficiary’s death and is entitled to an amount “equal to the total medical expenses paid on the Beneficiary’s behalf after the Beneficiary attained the age of fifty-five (55).” Joinder § 2.02.^[11] The Joinder impermissibly limits the reimbursement to “the California Department of Health Services” and to the period after the beneficiary attained the age of fifty-five. Accordingly, the Joinder does not contain an acceptable Medicaid reimbursement language, compliant with POMS SI 01120.203.D.8.

CONCLUSION

G~’s sub-account in the SMB Trust does not meet the requirements for an exception to resource counting under section 1917(d)(4)(C) of the Act. Specifically, although section 5.4f of the Master Trust and Article 3 of the Joinder do not violate the “sole benefit” requirement, section 6.2 of the Master Trust improperly permits early termination of the beneficiary’s sub-account with distribution of the trust property to someone other than the beneficiary. Moreover, section 2.02 of the Joinder improperly limits reimbursement to the State of California and to the period after the beneficiary attained the age of fifty-five.

This Regional Chief Counsel (RCC) opinion discusses whether the J~ Special Needs Trust (Trust) was validly established by the “conservator of the person” for the Trust beneficiary and whether the Trust meets the requirements for exception under section 1917(d)(4)(A) of the Social Security Act (Act). Under California’s Probate Code, a conservator of the person is responsible for the care, custody, control, and education of the conservatee, and a conservator of the estate is responsible for management and control of the conservatee’s personal property and real property. The RCC concluded that the conservator of the person for the Claimant did not have the legal authority to establish the Trust using the Claimant’s assets. Therefore, the trust is invalid and void. Additionally, the Trust did not meet all the requirements for exception under section 1917(d)(4)(A) of the Act.

You asked whether the J~ Special Needs Trust (Trust) was validly established by G~ (G~), the “conservator of the person” for the Trust beneficiary, J~ (Claimant). You also asked whether the Trust, as originally drafted or as amended, meets the requirements to be excepted from resource counting under section 1917(d)(4)(A) of the Social Security Act (Act).

SHORT ANSWER

As conservator of the person for the Claimant, G~ did not have the legal authority to establish the Trust using Claimant’s assets, rendering the Trust invalid and void. Even if the Trust were valid, it may not be excepted from Claimant’s resources (either as originally drafted or as amended) because it does not satisfy all of the requirements of section 1917(d)(4)(A) of the Act. Specifically, the Trust is not for the sole benefit of the Claimant, its early termination provisions are unacceptable, and, upon the Claimant’s death, the Trust does not ensure that State(s) are reimbursed for medical assistance paid on Claimant’s behalf.

FACTUAL BACKGROUND

Claimant was born in 1953 and found eligible for SSI in November 1991. In 2007, the Superior Court of California for the County of L~ appointed Claimant’s sister, G~, as “conservator of the PERSON ONLY” (emphasis in original) for the Claimant. See Order (Re)Appointing Conservator, filed June XX, 2007 (Conservator Order); see also Letters of Conservatorship, filed June XX, 2007.^[12]

The Conservator Order authorized G~ to determine Claimant’s place of residence in the least restrictive setting appropriate for Claimant’s needs and to transport Claimant as needed for intensive treatment. The Conservator Order also gave G~ the power to place Claimant in a residential care facility, medical or psychiatric nursing facility, or state or private psychiatric hospital.

The court reappointed G~ as Claimant’s conservator of the person every year thereafter.^[13] In later Conservator Orders, G~ received the powers described above and also received the power to require Claimant to accept treatment and medication.

G~ purported to establish the Trust through a trust agreement executed on July XX, 2009. SSA suspended Claimant’s SSI benefits in October 2013 after determining that the Trust was a countable resource. Claimant requested reconsideration in January 2016.

RELEVANT TRUST PROVISIONS

This Regional Chief Counsel (RCC) opinion examines whether an individual’s subaccount in a pooled trust meets the criteria for an exception to resource counting under section 1917(d)(4)(C) of the Social Security Act. The RCC concludes that the subaccount satisfies all the criteria and that its early termination clause does not violate the “sole benefit” rule. Therefore, the subaccount is excepted from Supplemental Security Income (SSI) resource counting.

QUESTION

You asked whether K~’s account in the Jewish Los Angeles Pooled Special Needs Trust (JLA Trust) meets the criteria for an exception to resource counting under section 1917(d)(4)(C) of the Social Security Act (Act).

SHORT ANSWER

Yes. K’s account in the JLA Trust meets the criteria for an exception to resource counting under section 1917(d)(4)(C) of the Act.

RELEVANT TRUST PROVISIONS

Joinder Agreement

On July XX, 2017, K~ executed a joinder agreement (Joinder), establishing her account in the JLA Trust. According to the Joinder, K~ funded her account with $17,000.00 she received from Social Security in past due disability benefits.

The Joinder provides that the beneficiary’s trust account terminates upon her death, as stated in section 6.02 of the JLA Trust. The beneficiary does not have power to terminate the account. The trustee can terminate the account prior to the beneficiary’s death, but, in such circumstance, “the state receives the reimbursement for Medi-Cal services provided.”

The Joinder further provides that, upon the death of the beneficiary, the trustee shall comply with all state and federal law pertaining to the disposition of remaining assets in the beneficiary’s account, including repayment of costs for medical assistance by the state Medi-Cal program during the lifetime of the beneficiary. After repayment to Medi-Cal “or other state Medicaid agencies from whom the beneficiary received medical services,” 50% of the remaining account funds will be distributed to the JLA Operating Account as the Trust Remainder Share, with the remaining 50% distributed to the designated remainder beneficiaries. K~ designated A~, R~, P~, and B~ as equal remainder beneficiaries.

JLA Trust – Master Trust Agreement

Jewish Los Angeles Special Needs Financial Services, Inc., a California not-for-profit corporation, executed a pooled master trust agreement (Master Trust) on July 1, 2016.

The Master Trust provides that the JLA Trust is established and managed by Jewish Los Angeles Special Needs Financial Services, Inc. See Master Trust § 1.04. Jewish Los Angeles Special Needs Financial Services, Inc. has the authority to remove and replace any trustee at any time and may elect to serve as a trustee. See Master Trust § 1.07. The Master Trust further provides that the JLA Trust shall maintain a separate account for each beneficiary, though the trust may pool the accounts for purposes of investment and management of funds. See Master Trust §§ 2.03, 4.01. Each account shall become “irrevocable” upon execution and approval of the beneficiary’s Joinder and receipt of the trust property. See Master Trust § 4.02.

The Master Trust provides that all distributions made by the trustee shall be for the beneficiary’s sole benefit. See Master Trust §§ 1.04, 2.03, 3.01. All such distributions shall be made in “sole and absolute” discretion of the trustee, and such distributions are intended to be in addition to, not in lieu of, government benefits received by the beneficiary. See Master Trust §§ 3.01, 3.02.

In accordance with the Program Operations Manual System (POMS) SI 01120.199.F.1, the Master Trust provides that under no circumstances may the beneficiary have the power to terminate her individual account. See Master Trust § 6.03. The trustee may, in its sole and absolute discretion, terminate the beneficiary’s account during the lifetime of the beneficiary. See id. Upon such early termination, the State(s) shall receive all amounts remaining in the trust up to an amount equal to the amount of medical assistance paid on behalf of the individual. See id. Other than the payment of allowable administrative expenses and reimbursement to the State(s), no entity or person other than the beneficiary may benefit from the early termination of the individual account. See Master Trust § 6.03(a).

Upon the death of the beneficiary, the Master Trust provides that the trustee shall terminate the beneficiary’s account in accordance with section 1917(d)(4)(C) of the Act. See Master Trust §§ 6.01, 6.04. Specifically, any amount remaining in the beneficiary’s account upon her death that are not retained by the trust shall first be used to repay the medical assistance paid by all states on behalf of the beneficiary, after allowable taxes and administrative expenses (as permitted in POMS SI 01120.203.B.3.a). See Master Trust § 1.04, 6.04(a). If there are any amount remaining in the beneficiary’s account after the reimbursement of medical assistance paid by all states, and the payment of taxes, fees and administrative expenses, the remaining balance of the account shall be disbursed to the remainder beneficiaries named in the beneficiary’s Joinder. See Master Trust § 6.04(b), 6.05. Unless the Joinder provides otherwise, one-half of the remaining balance shall be added to the Trust Operating Account to be used for the JLA Trust’s exempt activities in accordance with its bylaws. See Master Trust § 6.05.

The Master Trust provides that it shall be governed by California law. See Master Trust § 8.01.

ANALYSIS

Generally, a trust established after January 1, 2000, with the assets of an individual will be a resource countable to that individual for purposes of determining SSI eligibility. See Social Security Act §§ 1613(e), 1917(d); 42 U.S.C. §§ 1382b(e), 1396p(d); POMSSI 01120.201.A. However, a trust established with the assets of a disabled individual that is part of a pooled trust may be excepted under certain circumstances. Social Security Act §§ 1613(e)(5), 1917(d)(4)(C); 42 U.S.C. §§ 1382b(e)(5), 1396p(d)(4)(C); POMS SI 01120.203.B.2. 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) the beneficiary’s account must be established for his or her sole benefit by a parent, grandparent, legal guardian, by the beneficiary, or by a court; and (4) upon the beneficiary’s death, to the extent that amounts reaminining in the beneficiary’s account are not retained by the trust, the trust must pay the State(s) the amount remaining in the account up to the total amount of medical assistance paid on behalf of the beneficary under State Medicaid plan(s). Social Security Act § 1917(d)(4)(C), 42 U.S.C. § 1396p(d)(4)(C); POMS SI 01120.203.B.2.a.

Here, K~ established her account in the JLA Trust on July XX, 2017 with assets she received from Social Security in past-due disability benefits. Accordingly, her account constitutes a countable resource unless excepted under section 1917(d)(4)(C) of the Act.

K~’s account appears to satisfy the first two requirements for an exception to resource counting. First, Jewish Los Angeles Special Needs Financial Services, Inc., a non-profit organization, established and manages the JLA Trust. See Master Trust § 1.04. Jewish Los Angeles Special Needs Financial Services, Inc. has the authority to remove and replace any trustee at any time and may elect to serve as a trustee. See Master Trust § 1.07. Furthermore, the Master Trust provides that the trustee will maintain a separate account for each beneficiary, though the trust may pool the accounts for purposes of investment and management of funds. See Master Trust §§ 2.03, 4.01. As for the final two requirements, we provide the following analysis.

1. The trust account is for the beneficiary’s sole benefit.

A trust subaccount will not meet the “sole benefit” requirement of section 1917(d)(4)(C)(iii) of the Act if the trustee has power to terminate the trust prior to the beneficiary’s death, unless:

The early termination clause solely allows for transfer of the beneficiary’s assets from one pooled trust to another pooled trust, POMS SI 01120.199.F.2; or

The early termination clause provides that, upon termination of the trust:

(1) the State receives all amounts remaining in the trust up to an amount equal to the amount of medical assistance paid on behalf of the individual, and

(2) after payment of allowable administrative expenses and reimbursement to the State, all remaining funds are distributed to the beneficiary, and

(3) the beneficiary does not have power to terminate the trust. POMS SI 01120.199.F.1; see also POMS SI 01120.203.B.2.e (the pooled trust exception does not apply if the trust account “allows for termination of the trust account prior to the individual's death and payment of the corpus to another individual or entity”).

Here, the Master Trust provides that all distributions made by the trustee shall be for the beneficiary’s sole benefit. See Master Trust § 1.04. Furthermore, Article 6 of the Master Trust gives the trustee “sole and absolute” discretion to terminate the beneficiary’s account prior to the beneficiary’s death. See Master Trust § 6.03.

Such early termination is permissible here because the Master Trust provides that the State receives all amounts remaining in the trust up to an amount equal to the amount of medical assistance paid on behalf of the individual. See id. In accordance with POMS SI 01120.203.B.2.e, the Master Trust also provides that no entity or person other than the beneficiary may benefit from the early termination of the individual account except for payment of allowable administrative expenses and reimbursement to the State(s). See id. Thus, the remaining balance of the beneficiary’s account after reimbursing the states will be distributed to the beneficiary. Finally, the Master Trust does not give the beneficiary the power to terminate her account under any circumstances. See id.

As discussed, the foregoing early termination provision does not violate the “sole benefit” requirement of section 1917(d)(4)(C)(iii) of the Act. Distributing the remaining balance of the beneficiary’s account to the beneficiary after reimbursing the states for medical assistance paid on the beneficiary’s behalf is an acceptable form of early termination. See POMS SI 01120.199.F.1. Therefore, K~’s account in the JLA Trust meets section 1917(d)(4)(C)(iii) of the Act.

2. The Master Trust contains an acceptable Medicaid reimbursement provision

To satisfy the pooled trust exception, a trust must ensure that upon a beneficiary’s death, to the extent the trust does not retain amounts remaining in the beneficiary’s account, the State(s) are reimbursed from “such remaining amounts in the account” equal to 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)(iv), 42 U.S.C. § 1917(d)(4)(c)(iv); POMS SI 01120.203.B.2.g. The State(s) must be listed as the first payee(s) and have priority over payment of other debts and administrative expenses. Id. The trust must provide payback for any State(s) that provided medical assistance under the State Medicaid plan(s) and not be limited to any particular State(s). Id.

The Master Trust provides that upon a beneficiary’s death, to the extent the trust does not retain amounts remaining in the beneficiary’s account, “the State(s) shall be the first payee(s)” and receive reimbursement for the total amount of medical assistance paid by the State(s) on behalf of the beneficiary. See Master Trust § 6.04(a). K~’s Joinder similarly provides that the trustee “shall comply with all state and federal law pertaining to disposition of the remaining assets in the individual account” and repay the costs of medical assistance paid by the state Medi-Cal program “or other state Medicaid agencies from whom the beneficiary received medical services.”

The Master Trust and the Joinder contain acceptable Medicaid reimbursement language, compliant with POMS SI 01120.203.B.2.g. The provisions provide that the states will be the first payee after allowable taxes and administrative expenses. Additionally, the provisions make clear that all states providing medical assistance should receive reimbursement; not limiting repayment to any particular state(s).

CONCLUSION

K~’s account in the JLA Trust meets the requirements for an exception to resource counting under section 1917(d)(4)(C) of the Act. Specifically, K~ established the account for her sole benefit, and the Master Trust ensures that amounts remaining in her account upon her death, to the extent not retained by the trust, are to be paid to the State(s) equal to the total amount of medical assistance paid on her behalf under a State plan.

This Regional Chief Counsel (RCC) opinion examines whether an amendment to a revocable living trust (which, upon the death of both settlors, provided for distribution of the trust estate to the irrevocable Special Needs Trust (SNT) of their child) resulted in the establishment of a valid third-party or self-settled trust for the benefit of the child, and whether the resulting trust constituted a countable resource for determining the child’s eligibility for Supplemental Security Income (SSI). The RCC concludes that the amendment resulted in a valid third-party trust, and because the child did not have authority to revoke the trust or direct use of the trust principal or income for his own support and maintenance, the trust is not a countable resource for SSI purposes, in accordance with POMS SI 01120.200D.2.

QUESTIONS

You asked whether the January XX, 2008 amendment of the Revocable Living Trust of F~ and S~ (Living Trust) resulted in the establishment of a valid third-party or self-settled trust for the benefit of T~. If a self-settled trust, you asked whether the trust met the exception to resource counting under section 1917(d)(4)(A) of the Social Security Act. Finally, you asked whether the resulting trust constituted a countable resource for purposes of determining T~’s eligibility for supplemental security income (SSI).

SHORT ANSWERS

The January XX, 2008 amendment to the Living Trust resulted in the establishment of a valid third-party trust for T~’s benefit. The third-party trust is not a countable resource because T~ did not have authority to revoke the trust or direct use of the trust principal or income for his own support and maintenance.

BACKGROUND & RELEVANT TRUST PROVISIONS

On February XX, 2002, F~ and S~ (the Settlors) established a revocable living trust. See Living Trust. The Settlors appointed themselves as the initial trustees and lifetime beneficiaries of the trust. See Living Trust, Sec. 1.4, 2.1. Upon the death of both of the Settlors, the Living Trust provided for distribution of the trust estate to their children T~ and T2~, to be held and administered in trust for their benefit. See Living Trust, Sec. 2.18 and Art. 6.

On January XX, 2008, the Settlors amended the Living Trust, revoking Section 2.18 and Article 6. See First Amendment to the Living Trust. As amended, upon the Settlors’ deaths, the Living Trust provided for the division and distribution of the trust estate in equal shares to the T2~ Special Needs Trust and the T~ Special Needs Trust, existing as separate irrevocable trusts. See id.

Also on January XX, 2008, the Settlors executed a trust agreement for the T~ Special Needs Trust (SNT), and appointed themselves as the initial trustees. See, SNT, Introduction. The SNT provided for the transfer of property, identified in Schedule A, to T~, to be held, managed, and distributed under the trust agreement. See SNT, Sec. I.A. The SNT purported to be irrevocable, and contained a spendthrift provision, prohibiting T~ from assigning or encumbering the trust property prior to his actual receipt of a trust distribution. See SNT, Art. II and Sec. IV.G. The SNT provided that the trustee would have absolute discretion to make distributions of the trust income and principal as necessary to meet T~’s special needs. See SNT, Sec. IV.B. The Settlors intended for the SNT to supplement and not supplant T~’s receipt of public benefits. See SNT, Sec. III.A. The SNT gave the trustee discretion to terminate the trust if the existence of the trust had the effect of rendering T~ ineligible for public benefits or if the value of the trust was so low as to not justify the continued expense of maintaining the trust. See SNT, Sec. V.A, V.C. Otherwise, the trust terminated upon T~’s death. See SNT, Sec. V.B.

As of November 11, 2015, both Settlors were still alive.

ANALYSIS

A trust established with the assets of a third party are only countable as a resource to the beneficiary if the beneficiary has the power to revoke the trust or direct the use of trust assets for his or her own support and maintenance. Program Operations Manual System (POMS) SI 01120.200.B.19 & D.2. A trust established after January 1, 2000 with the assets of the beneficiary will generally be countable as a resource to that beneficiary. See Social Security Act (Act) § 1613(e), 42 U.S.C. § 1382b(e); POMS SI 01120.201.A.^[15]

The Living Trust provided for a distribution to T~ only upon the death of both Settlors. See Living Trust, Sec. 2.18. At the time of the January XX, 2008 amendment, both Settlors were still living, and thus, T~ was never entitled to any property under the Living Trust. Accordingly, T~ had no ownership interest in the property the Settlors transferred to the SNT in January 2008.^[16]

As a third-party trust, the SNT only constitutes a countable resource if T~ had the power to revoke the trust or direct use of the trust income or principal. The SNT provides that it was irrevocable. See SNT, Art. II. Further, the SNT gives absolute discretion to the trustee to make distributions for T~’s health and maintenance, and prohibited T~ from making voluntary or involuntary transfers of trust property. See SNT, Sec. IV.B, IV.G. As a result, T~ does not have power to revoke the trust or direct use of the trust income or principal for his own support and maintenance. Therefore, the SNT is not a countable resource to T~.

CONCLUSION

The January XX, 2008 amendment to the Living Trust resulted in the establishment of a third-party trust for T~’s benefit. Because T~ does not have power to revoke the SNT or direct use of the trust income and principal for his own support and maintenance, the SNT does not constitute a countable resource for purposes of determining his eligibility for SSI.

This Regional Chief Counsel (RCC) opinion examines whether a disabled minor’s (Claimant’s) parents had legal authority to petition the California Superior Court to terminate Claimant’s third-party special needs trust (2011 Trust), and establish a new first-party special needs trust (2016 Trust), in order for the trust to qualify for an exception to resource counting under section 1917(d)(4)(A) of the Social Security Act (Act). The RCC concludes that under California law, Claimant’s parents as trustees had legal authority to do both. The RCC also confirms that the terms of the new 2016 Trust meet the requirements for an exception to resource counting under the Act, making it a valid Medicaid Special Needs Trust.

BACKGROUND

On September XX, 2011, the United States District Court for the Eastern District of California granted a compromised settlement in a lawsuit between G~ (Claimant), a minor, and the T~ Unified School District. Under the terms of the settlement agreement, Claimant received $45,000. The Court ordered that the funds be placed into the G~ Irrevocable Trust (2011 Trust).

On October XX, 2015, G2~ and G3~, Claimant’s parents and trustees of the 2011 Trust, petitioned the Superior Court of the State of California, County of S~, to terminate the 2011 Trust and establish a new first-party special needs trust for Claimant’s benefit. The petitioners requested that the Superior Court fund the new first-party special needs trust with property currently held in the 2011 Trust.

On December XX, 2015, the Superior Court granted the petition. The Court ordered the termination of the 2011 Trust, and directed assets from that trust be used to fund the G~. First Party Special Needs Trust (2016 Trust). The Court attached the 2016 Trust agreement to its order, and directed Claimant’s parents execute the trust document as settlors of the trust. Claimant’s parents signed the 2016 Trust document on July XX, 2016.

QUESTION

You asked whether the Claimant’s parents had legal authority to petition the California Superior Court to terminate the 2011 Trust and establish the 2016 Trust. You also asked whether the Court’s order terminating the 2011 Trust was valid, and if so, the effective date of that termination. Finally, you asked whether the 2016 Trust meets the requirements for the exception to resource counting under section 1917(d)(4)(A) of the Social Security Act.

SHORT ANSWER

Under California law, Claimant’s parents had legal authority to petition the Superior Court to terminate the 2011 Trust and establish the 2016 Trust. Additionally, the Superior Court’s order, terminating the 2011 Trust was valid, and the effective date of termination was December XX, 2015. Finally, the 2016 Trust meets the exception to resource counting under section 1917(d)(4)(A) of the Social Security Act.

RELEVANT TRUST PROVISIONS

2011 Trust Provisions:

The 2011 Trust was dated June XX, 2011. Article I provided that Claimant’s parents were co-trustees, and the trust was irrevocable. Article II provided that the intent of the trust was to supplement, and not supplant, any benefits Claimant received through various government assistance programs. Article II further provided that Claimant did not have access to the trust income or principal, and he had no power to direct the trustee to make distributions. Under Article IV, the trustees had sole and absolute discretion to distribute trust income and principal for Claimant’s benefit to provide for his supplemental needs. If the trustees’ right to make such distributions had the effect of rendering the beneficiary ineligible for SSI, Medi-Cal, or other public benefits, the trustees had authority to terminate the trust and distribute the trust property as if Claimant was deceased. Pursuant to Article VII, section D, California law governed the trust.

2016 Trust Provisions:

Article 1, section 1 provides that the special needs trust was established for Claimant’s sole benefit. Assets purchased from proceeds of a litigation settlement initially funded the trust. Article 1, section 2 provides that Claimant’s parents serve as the initial trustees. Section 3 provides that Claimant is disabled. Section 5 provides that the trust is irrevocable, and Claimant does not have authority to revoke the trust or direct use of the trust principal or income for his support and maintenance. Article 3, section 1 provides that the trustees hold, administer and distribute trust property and income for the sole benefit of Claimant during Claimant’s lifetime. Article 4, section 2 purports that the trust was established by a court.

Article 6, section 1 provides that the trust terminates on Claimant’s death. Under Article 6, section 2, upon the death of the beneficiary or earlier termination of the trust, the trustees shall distribute to the States’ Medicaid agencies an amount equal to the total medical assistance paid on behalf of Claimant by each State’s Medicaid or Medi-Cal program. If the trust contains insufficient assets to pay all claims, each state shall receive a pro-rata recovery from the trust assets. However, the trustees may retain funds to pay certain permissible expenses, such as taxes due to the state or federal government because of the Claimant’s death, and reasonable administration fees associated with wrapping up and terminating the trust. Pursuant to Article 6, section 1, any remaining trust assets will be distributed as Claimant directs through a power of appointment. Should Claimant not exercise the power of appointment, the remaining assets will be distributed to Claimant’s heirs at law.

Article 8, section 7 provides that California law governs the trust.

ANALYSIS

Termination of the 2011 Trust

Under section 17200 of the California Probate Code, a trustee or beneficiary of a trust may petition a court concerning the internal affairs of the trust. Cal. Prob. Code § 17200(a). Proceedings concerning the internal affairs of the trust include approving or directing the modification or termination of the trust. Cal. Prob. Code § 17200(b)(13).

Claimant’s parents were the trustees of the 2011 Trust. See 2011 Trust, Art. I. Accordingly, under section 17200 of the California Probate Code, Claimant’s parents had authority to petition the Superior Court for termination of the 2011 Trust.

Additionally, Article IV, section 7 of the 2011 Trust conferred authority on the trustees to terminate the 2011 Trust if distributions had the effect of rendering him ineligible for SSI or MediCal. As Claimant’s parents pointed out in their October 2015 petition, the 2011 Trust was incorrectly established as a third-party special needs trust and did not meet the requirements for a proper first-party special needs trust; and, as a result, jeopardized Claimant’s eligibility for needs-based public benefits. See October 2015 Petition, par. 11. Further, the petition purported that the only way to preserve Claimant’s eligibility for SSI and MediCal was to terminate the existing third-party trust and transfer the trust assets into a first-party special needs trust. Id. at par. 11-13. Accordingly, Claimant’s parents had authority to petition the Court to terminate the 2011 Trust pursuant to the terms of Article IV.

Furthermore, the Superior Court had power to grant the petition brought under section 17200 of the California Probate Code. See Cal. Prob. Code § 17206 (the court in its discretion may make any orders and take any other action necessary or proper to dispose of the matters presented by the petition). Therefore, the Court’s order terminating the 2011 Trust was valid under California law, and the effective date of the termination was the date of the Court’s order, December 2, 2015.

Establishment of the 2016 Trust

Under section 3611 of the California Probate Code, a court may order money paid into a special needs trust for the benefit of a minor or person with a disability. Cal. Prob. Code § 3611(c). Furthermore, if a court could have ordered money placed into a special needs trust, but such an order was not requested, a parent, guardian, conservator, or other interested person may petition a court of general jurisdiction for such an order. Cal. Prob. Code § 3604(a)(2). Under such circumstances, the court must determine that the minor or disabled person has a disability that substantially impairs his or her ability to provide for his or her own care and constitutes a substantial handicap, the minor or disabled person is likely to have special needs that will not be met without the trust, and the money paid into the trust does not exceed the amount reasonably necessary to meet the minor or disabled person’s special needs. Cal. Prob. Code § 3604(b).

Under section 3604(a) of the California Probate Code, Claimant’s parents had authority to petition the Superior Court for establishment of a special needs trust. See Cal. Prob. Code § 3604(a)(2). In compliance with subsection (b) of section 3604, the Court properly found that Claimant had a disability that substantially impaired his ability to provide for his own care or custody and constituted a substantial handicap, he was likely to have special needs that would not be met without the trust, and the money paid into the trust did not exceed the amount that appeared reasonably necessary to meet Claimant’s special needs. Therefore, pursuant to sections 3604 and 3611(c) of the Probate Code, Claimant’s parents had authority to petition the Court for establishment of the 2016 Trust, and the Court had authority to grant the petition.

Exception to Resource Counting

Generally, a trust established after January 1, 2000, with the assets of an individual will be a countable resource to that individual for purposes of determining his or her SSI eligibility. See Social Security Act § 1613(e), 42 U.S.C. § 1382b(e); Program Operations Manual System (POMS) SI 01120.201.A. However, pursuant to section 1917(d)(4)(A) of the Social Security Act, commonly referred to as the Special Needs Trust exception, a trust will be excepted as a resource if:

1. 1. 

   It contains the assets of a disabled individual under the age 65;

2. 2. 

   It is established for the individual’s benefit by the individual’s parent, grandparent, legal guardian, or a court; and

3. 3. 

   It contains language that the State(s) will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State plan.

Social Security Act § 1917(d)(4)(A), 42 U.S.C. § 1396p(d)(4)(A); POMS SI 01120.203.B.1.

Here, the available facts and the terms of the 2016 Trust satisfy the exception to resource counting under section 1917(d)(4)(A). Specifically, Claimant is a disabled individual under 65 years of age, and the contents of the trust were traced back to proceeds paid to Claimant from a litigation settlement in September 2011. Further, the 2016 Trust was established by court order. Lastly, Article 6, section 2 of the 2016 Trust provided for reimbursement to all states upon Claimant’s death for an amount equal to the total medical assistance paid on Claimant’s behalf under a State Medicaid plan. In compliance with POMS SI 01120.203.B.1.h, the states were listed as first payee and had priority of payment over other debts and administrative expenses other than those expenses permitted under POMS SI 01120.203.B.3.a. Moreover, the Medicaid payback provision did not limit reimbursement to any particular state(s). See POMS SI 01120.203.B.1.h.

Therefore, the terms of the 2016 Trust meet the requirements for an exception to resource counting under section 1917(d)(4)(A) of the Social Security Act.

CONCLUSION

Under California law, Claimant’s parents had legal authority to petition the Superior Court to terminate the 2011 Trust and establish the 2016 Trust. Additionally, the Superior Court’s order, terminating the 2011 Trust was valid, and the effective date of termination was December 2, 2015. Finally, the 2016 Trust meets the exception to resource counting under section 1917(d)(4)(A) of the Social Security Act.

This Regional Chief Counsel opinion discusses whether a California Court order established an account in the Inland Counties Regional Center’s (ICRC) master pooled trust and whether such account is excepted from resource counting for Supplemental Security Income (SSI) purposes. The RCC concluded that the Court order did not establish a subaccount in the ICRC pooled trust because there was no evidence that a joinder agreement was executed. However, the Court order established an independent special needs trust where the Inland Counties Regional Center is the trustee. The claimant’s special needs trust does not meet the requirements for exception under section 1917(d)(4)(A) of the Social Security Act (Act).

ISSUES PRESENTED

You asked whether the June 18, 2015 California Court order established an account for J~ (Claimant) in the Inland Counties Regional Center’s master pooled trust (Inland Counties Pooled Trust) and whether such account is excepted from resource counting for purposes of determining Claimant’s eligibility for Supplemental Security Income (SSI).

SHORT ANSWER

The June 18, 2015 California Court order established a trust for the benefit of Claimant. The Court order did not join Claimant’s trust to the Inland Counties Pooled Trust. Therefore, to the extent the terms of the Inland Counties Pooled Trust differ from the terms set out in the Court order, the former have no bearing and the latter control. Furthermore, the Court-established trust does not meet an exception to resource counting under sections 1917(d)(4)(A) or (C) of the Social Security Act (Act). Specifically, the trust terms fail to ensure reimbursement to all states that provided medical assistance on Claimant’s behalf.

FACTUAL BACKGROUND

On June XX, 2015, the Superior Court of California, County of S~, issued an order appointing Inland Counties Regional Center the conservator for Claimant. The order also granted the conservator authority to execute a special needs trust for Claimant. The order decreed that the conservatorship would end upon the conservator transferring funds held for Claimant’s benefit into the special needs trust.

The order went on to set forth the terms of the trust. The relevant terms are summarized below.

RELEVANT TRUST PROVISIONS

The trust was titled the Master Trust of California Agreement for J~ (Trust).

Article 1, Section 1 (Establishment of the Trust): Inland Counties Regional Center, a California non-profit corporation, is the trustee of the Trust.

Article 1, Section 2 (Conformity with Applicable Law): The Trust purports that it was established in accordance with section 1917(d)(4)(C) of the Act and Social Security Program Operations Manual System (POMS) SI 01120.203. The laws provide that an irrevocable trust to be established for the benefit of an individual with a disability and the assets directed to the trust should not be deemed to have been owned by, or be available to, the beneficiary.

Article 1, Section 6 (Irrevocability of Trust): The Trust is irrevocable.

Article 2, Section 2 (Trust Purpose): The purpose of the Trust is to provide for the special needs of the beneficiary, a disabled individual. No part of the principal or income of the Trust is considered available to the beneficiary.

Article 3, Section 1 (Distributions Standard): The trustee shall, hold, administer and distribute all trust property and income for the beneficiary’s sole benefit during the beneficiary’s lifetime, unless the trust is earlier terminated. Distributions shall be made in the trustee’s sole and absolute discretion.

Article 3, Section 3 (Definition of Special Needs): The trustee has sole and absolute discretion to determine if and when to make distributions of income and principal for the beneficiary’s “Special Needs.” “Special Needs” include supplemental support, health, maintenance or education, but not in lieu of government or agency benefits.

Article 4, Section 1 (Treatment of Trust by Public Benefits Program): It is the intention of the settlor that the Trust satisfy the Medi-Cal and Supplemental Security Income (SSI) program requirements so that establishing and funding the Trust do not prejudice the beneficiary’s eligibility for public benefits. The Trust purports to meet the requirements of section 1917(d)(4)(C) of the Act.

Article 6, Section 1 (Remainder Beneficiaries): This trust shall terminate on the death of the beneficiary. The trust assets shall be distributed to the beneficiary’s heirs at law under the laws of intestate succession.

Article 6, Section 3 (Notice and Payback Provisions): It is the intent of the Master Trust that the trust estate be exempt from being counted as an available resource under SSI and California Medi-Cal regulations:

A. Notice to State Agencies: On the death of beneficiary, the trustee shall give notice to the California Department of Health Care Services, to the State Department of Developmental Services and the State Department of Mental Health, and to any county or city and county that has made a written request to the trustee for such notice.

B. Distributions and payments - Payback to Medi-Cal: The department, county, or city has four months after notice to make a claim with the trustee. A claim made under this subdivision shall be paid as a preferred claim prior to any other distribution. Upon death of the beneficiary, the trustee shall first distribute to the California Department of Health Care Services, then to any other appropriate State agency entitled to Medi-Cal reimbursement from the remaining principal and income of the trust, up to the amount remaining in the trust, an amount equal to the total medical assistance paid on behalf of the beneficiary by the Medi-Cal program. If the beneficiary has received Medicaid (Medi-Cal in California) from more than one state, and if on termination of this trust the remaining income and principal is insufficient to satisfy the foregoing payment requirement in full, then payment shall be made to each such state pro rata based on the percentage that each such state’s Medicaid payments were made to, or on behalf of the beneficiary.

C. Expenses to be paid before Medi-Cal payback: The trustee may retain funds in the trust to pay certain expenses prior to such disbursements to Department of Health Care Services. In order to preserve the beneficiary’s SSI eligibility, the trustee is prohibited from paying debts owed to third parties and funeral expenses prior to reimbursing Department of Health Care Services for the beneficiary’s medical assistance.

Article 8, Section 2 (Spendthrift): No interest in the principal or income of the Trust may be assigned, encumbered or subject to any . . . voluntary or involuntary creditors.

Article 8, Section 6 (Choice of Law): This trust shall be governed by the laws of the State of California.

ANALYSIS

Generally, a trust established after January 1, 2000, with the assets of the trust beneficiary will be a countable resource to that beneficiary for purposes of determining his or her SSI eligibility. See Social Security Act § 1613(e), 42 U.S.C. § 1382b(e); POMS SI 01120.201.A.

Here, a June XX, 2015 Court order established the Trust and funded it with insurance proceeds held for Claimant’s benefit. As the Trust was established after January 1, 2000, and funded with Claimant’s assets, it generally would constitute a countable resource in determining Claimant’s SSI eligibility.

However, a trust established with the assets of a disabled individual that is part of a pooled trust may be excepted under certain circumstances. Social Security Act §§ 1613(e)(5), 1917(d)(4)(C); 42 U.S.C. §§ 1382b(e)(5), 1396p(d)(4)(C); POMS SI 01120.203.B.2.

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) the beneficiary’s account must be established for his or her sole benefit by a parent, grandparent, legal guardian, by the beneficiary, or by a court; and

(4) upon the beneficiary’s death, to the extent that amounts remaining in the beneficiary’s account are not retained by the trust, the trust must pay the State(s) the amount remaining in the account up to the total amount of medical assistance paid on behalf of the beneficiary under State Medicaid plan(s). Social Security Act § 1917(d)(4)(C), 42 U.S.C. § 1396p(d)(4)(C);

POMS SI 01120.203.B.2.a.

Inland Counties Regional Center operates a Pooled Trust for disabled beneficiaries. See OGC Opinion: Inland Counties Master Trust dba Master Trust of California for SSI recipient K? M? (issued June 22, 2015). Here, the June XX, 2015 Court order makes no reference to Inland Counties Pooled Trust, nor does the Court decree provide that Claimant’s Trust should be subject to the terms of the Inland Counties Pooled Trust. Moreover, we have no evidence a joinder was executed, which would have been necessary to create an account for Claimant in the Pooled Trust.

Rather, the Court effectively established a stand-alone trust and set forth terms for the trust’s administration. While the terms of the Trust may be substantially similar or identical to those of the Inland Counties Pooled Trust, those terms do not govern, and any amendments to (or the termination of) the Pooled Trust do not affect Claimant’s Trust. Because the June XX, 2015 Court order established a stand-alone special needs trust, consideration of a resource counting exception under section 1917(d)(4)(A) of the Act appears more applicable.

Pursuant to section 1917(d)(4)(A) of the Act, commonly referred to as the special needs trust exception, a trust will be excepted from resource counting if:

(1) It contains the assets of a disabled individual under the age 65;

(2) It is established for the individual’s benefit by the individual’s parent, grandparent, legal guardian, or a court; and

(3) It contains language that the State(s) will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State plan.

Social Security Act § 1917(d)(4)(A), 42 U.S.C. § 1396p(d)(4)(A); POMS SI 01120.203.B.1.

1. Claimant is a disabled individual under 65 years of age.

Claimant was born in 1981 and is currently 36 years old. Claimant is a SSI recipient since

May 1988. Accordingly, Claimant qualifies as a disabled individual under 65 years of age.

2. A Court established the Trust for Claimant’s sole benefit.

“In the case of a trust established through the actions of a court, the creation of the trust must be required by a court order. Approval of a trust by a court is not sufficient.” POMS SI 01120.203.B.1.f. However, where a petition is brought before a court requesting the establishment of a special needs trust under section 1917(d)(4)(A) of the Act, the court can “entertain the petition and establish the trust by court order, so long as the creation of the trust has not been completed before the petition is submitted to the court.” In re Conservatorship of Estate of Kane, 137 Cal. App. 4th 400, 408, 40 Cal. Rptr.3d 378, 383 (Cal. Ct. App. 2006) (citations omitted); see also POMS PS 01825.006.A (determining that a trust was court-established where the court granted a petition for the trust’s creation because the trust did not come into creation until after the court’s order).

Here, the California Court issued an order establishing the Trust and setting forth the terms of the Trust. The Court is deemed to have established the Trust because the Trust did not exist prior to the Court’s order. The Master Trust was also created for the Claimant’s sole benefit.

3. The Trust does not ensure reimbursement to all States that provide medical assistance on Claimant’s behalf during her lifetime.

For purposes of the third element of the special needs trust exception, the State(s) must be listed as the first payee(s) and have priority over payment of other debts and administrative expenses. POMS SI 01120.203.B.1.h. The trust must provide payback for any State(s) that may have provided medical assistance under the State Medicaid plan(s) and not be limited to any particular State(s). Id.

The Trust contains conflicting language as to whether all States contributing medical assistance on Claimant’s behalf will receive reimbursement upon her death. Article 6, section 3, subsection A provides that, on the death of the beneficiary, or earlier termination of the Trust, the trustee shall give notice to the California Department of Health Care Services, to the State Department of Developmental Services, to the State Department of Mental Health, and to any county or city and county that has made a written request to the trustee for such notice. As such, the Trust appears to provide for notice to only California State agencies, cities and counties. Subsection B provides that the trustee shall first distribute payment to the California Department of Health Care Services and then to other State agencies that are entitled to “Medi-Cal” reimbursement. However, the subsection goes on to provide that, if the beneficiary received Medicaid from more than one state, and if the remaining trust income and principal is insufficient to satisfy the foregoing payments in full, payment shall be made to each state pro rata based on the percentage each state provided medical assistance on the beneficiary’s behalf. Subsection C then goes on to prohibit payment of third party debts and funeral expenses prior to reimbursing California’s Department of Health Care Services for medical assistance provided on the beneficiary’s behalf.

Under Article 6, the Trust initially appears to provide for reimbursement only to California State agencies, cities and counties, and sets forth notice requirements only applicable to these entities. While subsection B appears to recognize the right of reimbursement of other states providing Medicaid payments on Claimant’s behalf, subsection A and C discuss only California entities and reimbursement for “Medi-Cal” (California’s Medicaid program). Moreover, subsection B appears to give the California Department of Health Care Services priority of reimbursement over other State agencies. While the drafters may have intended for the trustee to reimburse all States that provided medical assistance on Claimant’s behalf, the language does not ensure such reimbursement. The Trust language is unclear and may limit reimbursement to, or at least give priority of reimbursement to, California agencies. As currently drafted, the Trust terms do not meet the requirements to qualify as an exempted resource. In order to meet the requirements under the Act, Article 6, section 3 will need to be revised to (1) ensure notice and priority of reimbursement to all State agencies that provided medical assistance on Claimant’s behalf, and (2) a prohibition on the payment of third party debts and funeral expenses prior to reimbursement of all States that provided medical assistance on Claimant’s behalf.

CONCLUSION

As currently drafted, the Trust does not meet the requirements for an exception to resource counting under sections 1917(d)(4)(A) or (C) of the Act. Accordingly, the Trust constitutes a countable resource for purposes of determining Claimant’s eligibility for SSI.

However, revisions to Article 6, section 3 could bring the Trust into compliance with the requirements of section 1917(d)(4)(A) of the Act. Specifically, the revisions would need to (1) ensure notice and priority of reimbursement to all State agencies that provided medical assistance on Claimant’s behalf, and (2) prohibit payment of third party debts and funeral expenses prior to reimbursement of all States that provided medical assistance on Claimant’s behalf.

On June 14, 2016, the Special Needs Trust Foundation (SNTF) amended and restated the Special Needs Trust Foundation First Party Master Trust II. This Regional Chief Counsel (RCC) opinion discusses whether trust account in the amended SNTF pooled trust meets the requirements for the pooled trust exception under section 1917(d)(4)(C) of the Social Security Act (Act). The RCC concluded that the SNTF pooled trust meets the requirements of section 1917(d)(4)(C) of the Act and the subaccount in question is excepted from resource counting for Supplemental Security Income (SSI) purposes.

QUESTION

You asked whether Supplemental Security Income (SSI) recipient D~’s trust account in the Special Needs Trust Foundation’s pooled trust may be excepted from resource counting under section 1917(d)(4)(C) of the Social Security Act (Act).

SHORT ANSWER

The Special Needs Trust Foundation’s pooled trust meets the requirements of section 1917(d)(4)(C) of the Act. Accordingly, D~’s account in the pooled trust is excepted from resource counting for purposes of determining her eligibility for SSI.

BACKGROUND

On June XX, 2016, the Special Needs Trust Foundation (SNTF) amended and restated the Special Needs Trust Foundation First Party Master Trust II (Master Trust). On December XX, 2015, D~ executed a Joinder agreement, establishing an account in the Master Trust.

RELEVANT TRUST PROVISIONS

The intent of the Master Trust is to establish a pooled trust under section 1917(d)(4)(C) of the Act. See Master Trust, § 2.1. Each sub-account established under the Master Trust shall be held and distributed for the “sole benefit” of each beneficiary. See Master Trust, § 2.2. Upon the delivery and acceptance of trust property by the trustee, the trust account shall be irrevocable and the contributed property shall be non-refundable. See Master Trust, §§ 3.2, 8.1. A separate sub-account shall be maintained for each beneficiary; however, the trustee may pool the assets of sub-accounts for investment and management of funds. See Master Trust, § 6.1. Trust principal and income cannot be anticipated, assigned, encumbered, or subject to any creditor’s claims or to legal process before actual receipt by the beneficiary, and no part of the trust principal or income may be subject to the claims of voluntary or involuntary creditors. See Master Trust, § 6.7.

If the trustee has reasonable cause to believe that the assets in a beneficiary’s sub-account are or will become liable for basic maintenance, support, or care that that would otherwise be provided through a government program, the trustee, in its sole discretion, may terminate the trust account during the beneficiary’s lifetime. See Master Trust, § 9.1. In the event of such early termination, prior to reimbursement to the State(s) for medical assistance paid on the beneficiary’s behalf, the trustee may pay State and Federal taxes due from the termination of the trust account, and reasonable fees and administrative expenses associated with the termination of the trust account. See Master Trust, § 9.1.2.A. After payment of these allowable expenses, the trustee shall pay the State(s), as primary assignee, all amounts remaining in the trust account up to the total amount of medical assistance paid on the beneficiary’s behalf under the State Medicaid plan(s). See Master Trust, § 9.1.2.B. Following reimbursement to the State(s), the trustee shall distribute the balance of the trust account to the beneficiary, or the beneficiary’s conservator or guardian, as appropriate. See Master Trust, § 9.1.2.C.

Upon the death of the beneficiary, the trustee shall distribute the remaining amounts in the beneficiary’s trust account as follows. First, the Master Trust shall retain the portion of the beneficiary’s account as designated in his or her Joinder Agreement (Trust Remainder Share). See Master Trust, § 9.2.A. Thereafter, the trustee may pay allowable expenses, including State and Federal taxes due because of the beneficiary’s death, and reasonable administrative fees associated with the termination and final administration of the beneficiary’s account. See Master Trust, § 9.2.B. After payment of such allowable expenses, the trustee shall pay all state claims for reimbursement for medical assistance paid on the beneficiary’s behalf under California’s Medicaid plan or any other state’s plan. See Master Trust, § 9.2.C. After reimbursement to the States, the trustee shall distribute all remaining funds in the beneficiary’s account to final remainder beneficiaries designated in the beneficiary’s Joinder Agreement. See Master Trust, § 9.2.D. Unless the beneficiary’s Joinder Agreement provides otherwise, the entire remainder amount in the beneficiary’s account shall be added to the trust operating account maintained by the Master Trust. See id.

If it becomes impossible or impracticable for the trustee to carry out the Master Trust’s purposes with respect to all beneficiaries, the trustee may, in its sole discretion, seek termination of the entire trust and distribute the trust assets in accordance with section 9.1.2 (pertaining to termination and distribution of a trust account during a beneficiary’s lifetime). See Master Trust, § 9.4. In such event that SNTF ceases to exist, the Trust Remainder Share shall be paid to such other non-profit organization or organization as the trustee, in its sole discretion, may determine to be serving the interests and needs of people with disabilities in a manner consistent with the purposes of this Master Trust. See id.

If the beneficiary moves out of the State of California, or no longer meets the definition of a disable person, SNTF may direct the trustee to: (A) continue to administer the beneficiary’s sub-account, (B) transfer the beneficiary’s sub-account to another pooled trust under section 1917(d)(4)(C); or (C) terminate the beneficiary’s trust account in accordance with section 9.1, pertaining to termination and distributions of a trust account during the beneficiary’s lifetime. See Master Trust, § 10.1. In the event of such termination, the trustee shall give notice to the California Department of Health Services, the California Department of Mental Health, and the California Department of Developmental Services as well as any Medicaid department in any other state in which the beneficiary received such benefits. See Master Trust, § 10.2. Amounts remaining in the trust account shall be paid to the State(s) Department of Health Services, or equivalent, up to an amount equal to the total medical expenses paid on the beneficiary’s behalf. See id.

California law governs the Master Trust. See Master Trust, § 11.4.

RELEVANT JOINDER PROVISIONS

D~’s account in the Master Trust was initially funded with approximately $70,000, proceeds from a wrongful death lawsuit. See Joinder Agreement, § E. The Joinder Agreement provides that, upon the beneficiary’s death, all unspent money in the trust account, with the exception of the Trust Remainder Share, are to be used to reimburse the State(s) for medical assistance provided on the beneficiary’s behalf during her lifetime. See Joinder Agreement, § G. At the time of the beneficiary’s death, after payment of allowable expenses, but prior to reimbursement to the State(s), 70% of the funds remaining in the account are to be retained by the Master Trust (Trust Remainder Share). See id.

If a balance remains in the trust account after the State(s) have been reimbursed, the balance shall be disbursed to S~, D~’s brother. See id. If S~ is deceased at the time of distribution, final distribution should be made to D~’s heirs at law. See id.

ANALYSIS

Generally, a trust established after January 1, 2000, with the assets of an individual will be a resource countable to that individual for purposes of determining SSI eligibility. See Social Security Act §§ 1613(e), 1917(d); 42 U.S.C. §§ 1382b(e), 1396p(d); Program Operations Manual System (POMS) SI 01120.201.A. However, a trust established with the assets of a disabled individual that is part of a pooled trust may be excepted under certain circumstances. Social Security Act §§ 1613(e)(5), 1917(d)(4)(C); 42 U.S.C. §§ 1382b(e)(5), 1396p(d)(4)(C); POMS SI 01120.203.B.2. 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) the beneficiary’s account must be established for his or her sole benefit by a parent, grandparent, legal guardian, by the beneficiary, or by a court; and

(4) upon the beneficiary’s death, to the extent that amounts reaminining in the beneficiary’s account are not retained by the trust, the trust must pay the State(s) the amount remaining in the account up to the total amount of medical assistance paid on behalf of the beneficary under State Medicaid plan(s). Social Security Act § 1917(d)(4)(C), 42 U.S.C. § 1396p(d)(4)(C); POMS SI 01120.203.B.2.a.

Here, D~’s account with the Master Trust was established after January 1, 2000. Furthermore, the account was funded with her assets. Because the trust account was established after January 1, 2000, with D~’s assets and for her benefit, it is a countable resource for purposes of determining her SSI eligibility.

However, as discussed further hereafter, the trust meets the requirements of the pooled trust exception under section 1917(d)(4)(C) of the Act.

1. Managed by a Non-Profit Association.

To satisfy the pooled trust exception, the trust must be established and managed by a non-profit association. Social Security Act § 1917(d)(4)(C)(i), 42 U.S.C. § 1396p(d)(4)(C)(i); POMS SI 01120.203.B.2.c. The SNTF is a non-profit organization and serves as trustee for the Master Trust. While the trustee may delegate some or all of its investment and management funcitons to an investment advisor, it maintains oversight of the agency’s overall performance and compliance with the terms of the delegation. See Master Trust, § 5.8; POMS SI 01120.225.D (a non-profit entity may employ the services of a for-profit entity, but the non-profit entity must maintain ultimate managerial control over the trust). Therefore, D~’s account in the Master Trust meets the requirements of section 1917(d)(4)(C)(i) of the Act.

2. Maintenance of Separate Accounts for Each Trust Beneficiary.

To satisfy the pooled trust exception, the pooled trust must maintain a separate account for each trust beneficiary, although it is acceptable under POMS for individual accounts to be pooled for investment and management purposes. Social Security Act § 1917(d)(4)(C)(ii), 42 U.S.C. § 1396p(d)(4)(C)(ii); POMS SI 01120.203.B.2.d. The Master Trust provides that the trustee shall maintain a separate sub-account for each beneficiary; however, the trustee may pool the assets of sub-accounts for investment and management of funds. See Master Trust, § 6.1. Because the Master Trust maintains separate accounts for each trust beneficiary, it satisfies section 1917(d)(4)(C)(ii) of the Act.

3. Established for the Beneficiary’s Sole Benefit by the Beneficiary, a Parent, Grandparent, Legal Guardian, or a Court.

To satisfy the pooled trust exception, the pooled trust sub-account must be established by the account beneficiary, his or her parent, grandparent, legal guardian, or a court. On December XX, 2015, D~ executed a Joinder agreement, establishing her account in the Master Trust.

Furthermore, the trust account was for D~’s sole benefit. A trust subaccount will not meet the “sole benefit” requirement of section 1917(d)(4)(C)(iii) of the Act if the trustee has power to terminate the trust prior to the beneficiary’s death, unless:

• •

  The early termination clause “solely allows for transfer of the beneficiary’s assets” from one pooled trust to another pooled trust and contains specific language precluding disbursements other than to the secondary trust or for allowable administrative expenses, POMS SI 01120.199.F.2; or

• •

  The early termination clause provides that, upon termination of the trust:

(1) the State receives all amounts remaining in the trust up to an amount equal to the amount of medical assistance paid on behalf of the individual, and

(2) after payment of allowable administrative expenses and reimbursement to the State, all remaining funds are distributed to the beneficiary, and

(3) the beneficiary does not have power to terminate the trust. POMS SI 01120.199.F.1; see also POMS SI 01120.203.B.2.e (the pooled trust exception does not apply if the trust account “allows for termination of the trust account prior to the individual's death and payment of the corpus to another individual or entity”).

Section 9.1.2 of the Master Trust provides for the termination and distribution of a trust account during a beneficiary’s lifetime, and does not violate the sole benefit requirement. Specifically, in the event of early termination, section 9.1.2 provides that after the payment of allowable administrative expenses, and reimbursement to the State(s) for medical assistance paid on the beneficiary’s behalf, the remaining balance of the trust account shall be distributed to the beneficiary (or his or her conservator or guardian). See Master Trust, § 9.1.2. These terms are consistent with agency guidance on valid early termination provisions. See POMS SI 01120.199.F.

Additionally, section 9.4 of the Master Trust gives the trustee discretion to terminate the entire trust if it becomes impossible or impracticable for the trustee to carry out the Master Trust’s purposes. See Master Trust, § 9.4. In the event of such termination, the Master Trust provides that the trustee shall distribute the trust accounts in accordance with the terms of section 9.1.2, which, as discussed, do not violate the sole benefit requirement. See id. Accordingly, D~’s account in the Master Trust meets the requirements of section 1917(d)(4)(C)(iii) of the Act.

4. Reimbursement to the State(s) Upon the Beneficiary’s Death.

To satisfy the pooled trust exception, a trust must ensure that upon a beneficiary’s death, to the extent that amounts remaining in the beneficiary's account are not retained by the trust, the State(s) are reimbursed from any remaining trust balance equal to the total amount of medical assistance paid on behalf of the beneficiary during his or her lifetime. Social Security Act §§ 1917(d)(4)(C)(iv), 42 U.S.C. § 1917(d)(4)(c)(iv); POMS SI 01120.203.B.2.g. To the extent the trust does not retain the funds in the account, the State(s) must be listed as the first payee(s) and have priority over payment of other debts and administrative expenses, except those expenses allowed under POMS SI 01120.203.B.3.a. Id. The trust must provide payback for any State(s) that may have provided medical assistance under the State Medicaid plan(s) and not be limited to any particular State(s). Id.

Here, sections 9.1 and 9.2 of the Master Trust provide that, in the event of an account’s termination, all States that provided medical assistance to the beneficiary under a State Medicaid plan shall receive reimbursement. See Master Trust, §§ 9.1-9.2. These trust provisions do limit reimbusre to any particular State(s). See id. Therefore, D~’s account in the Master Trust meets the requirements of section 1917(d)(4)(C)(iv).

CONCLUSION

D~’s account in the Master Trust meets an exception to resource counting under section 1917(d)(4)(C) of the Act.

The Regional Chief Counsel (RCC) opinion examines whether the principal of an Irrevocable Trust established under California law with proceeds from a legal malpractice settlement, and future additions to the principal from the settlement, are resources to the number holder (NH). Also, if the earnings of the Trust and disbursements from the Trust are income to the NH for Supplemental Security Income (SSI) purposes. In sum, the RCC concluded that Trust principal and future additions to the principal from the settlement of the NH’s legal malpractice case are not resources of the NH and the Trust earnings are not income to the NH, unless the Trustee makes a payment to the NH.

QUESTION

You asked whether the principal of the D~ Irrevocable Trust (Trust), established under California law for the number holder with proceeds from a legal malpractice settlement, and future additions to the principal from the settlement, are resources of the number holder for Supplemental Security Income (SSI) purposes. You also asked if the earnings of the Trust and disbursements from the Trust are income to the number holder.

OPINION

The Trust principal and future additions to the principal from the settlement of the number holder’s legal malpractice case are not resources of the number holder for SSI purposes. Trust earnings are not income to the number holder unless the Trustee makes a payment to the number holder.

BACKGROUND

D~, the number holder (NH), was born in 1978 to M~ and C~ (NH’s mother). He was born prematurely and was admitted to B~ Medical Center (B~) for observation. During this time, NH developed citrobacter diversus meningitis, a rare disease that attacks the meninges, which line the brain and spinal cord.

In 1980, NH’s parents, on NH’s behalf, brought a medical malpractice action against B~ and its physicians who attended to NH, but their action was dismissed as untimely. Thereafter, the law firm that represented NH in the medical malpractice claim, through their insurer, offered a settlement in compromise of a potential legal malpractice claim for failing to timely file the action against B~ or its physicians.

As a result of the settlement, NH’s mother, as Settler of the Trust, established the Trust on April XX, 1990, on behalf of NH. See Trust, pmbl. NH’s mother was named the Trustee, and NH was identified as the initial and primary beneficiary of the Trust. See Trust, pmbl., art. III. The Trust property used to create the Trust was primarily from the settlement proceeds of NH’s claim against the individual lawyers and their firm and included monthly payments from a single premium annuity for at least thirty years, totaling $2,735,020, and then lump sum payments in 1994, 1997, 2000, 2004, 2009, 2019, and 2029 totaling $1,000,000. See Schedule A & Annuity application. The application for the annuity described NH as the annuitant and stated the payments would be made to NH’s mother as Trustee of the Trust. See Annuity application. The Trust also provides that additional property may be added to the Trust at any time by any person or entities. See Trust, art. I.

The Trust provides that it is irrevocable and cannot be altered or amended except as specifically provided in the Trust document or terminated except through distributions permitted by the Trust document. See Trust, art. II. All Trust property, including principal and income “shall be expended solely for the benefit” of NH and all rights of contingent beneficiaries are secondary. Trust, pmbl. The Trustee must pay or apply for NH’s benefit any Trust principal or income up to the whole of the Trust that the Trustee believes in her discretion is necessary for NH’s health, education, support, maintenance, comfort, and welfare. See Trust, art. IV, V.

The Trust contains a “Spendthrift Clause,” which provides that “No interest in the principal or income of any trust created under this instrument shall be anticipated, assigned, encumbered, or subjected to creditor’s claim or legal process before actual receipt by the Beneficiary.” Trust, art. VII.b.

The Trust further provides that upon NH’s death, all Trust property shall be distributed to his issue by right of representation. See Trust, art. IV. If NH leaves no issue, then the Trust property shall be distributed to his sister, if living. See Trust, art. IV. If she is not living, then the Trust property shall be distributed to her living issue by right of representation. See Trust, art. IV. If she has no living issue, but they have issue, then those issue shall take by right of representation the share their ancestor would have taken had he or she been living. See Trust, art. IV. Finally, if at any time prior to full distribution of the Trust estate all of NH’s and his sister’s issue are deceased and no other disposition of the property is directed by the Trust, the remaining portion shall then be distributed to NH “heirs at law.” Trust, art. IV.

The Trust provides that the validity of the Trust for construction, interpretation, and administrative of the Trust shall be governed by California law regardless of whether the situs or place of administration of the Trust changes. See Trust, art. VIII.

DISCUSSION

SSI is a general public assistance program for aged, blind, or disabled individuals who meet certain income and resource restrictions and other eligibility requirements. See Social Security Act (Act) §§ 1602, 1611(a); 20 C.F.R. §§ 416.110, 416.202 (2017).^[17] “Resources” include 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. See Act § 1613; 20 C.F.R. § 416.1201(a); Program Operations Manual System (POMS) SI 01110.100.B.1; POMS SI 01120.010.B. “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); see POMS SI 01110.100.B.1, B.3; POMS SI 01120.010.B.

The Act does not contain specific SSI resource provisions for trusts created prior to January 1, 2000. The Foster Care Independence Act of 1999 added trust provisions to the Act, but those provisions only apply to trusts established on or after January 1, 2000. See Foster Care Independence Act of 1999, Pub. L. No. 106-169 (HR 3443), § 205, 113 Stat. 1822 (1999); POMS SI 01120.201.A. However, the POMS set forth the policies of the Social Security Administration (SSA) for trusts established prior to January 1, 2000, which contain the assets of the individual. See POMS SI 01120.200.A.2.a.

For trusts created with an individual’s assets before January 1, 2000, the principal is countable as a resource for SSI purposes “[i]f an individual (claimant, recipient, or deemor) has legal authority to revoke the trust and then use the funds to meet his food or shelter needs, or if the individual can direct the use to the trust principal for his/her support and maintenance . . . .” POMS SI 01120.200.D.1.a. “Additionally, if the individual can sell his or her beneficial interest in the trust, the interest is a resource.” Id. “If an individual does not have the legal authority to revoke or terminate the trust or to direct the use of the trust assets for his or her own support and maintenance, the trust principal is not the individual’s resource for SSI purposes.” POMS SI 01120.200.D.2. The revocability of a trust and the ability to use the trust principal is determined by the terms of the trust and/or state law. See id. “If a trust is irrevocable by its terms and under State law and cannot be used by an individual for support and maintenance . . . , it is not a resource.” Id. If a grantor (also called a settler or trustor) is the sole beneficiary of the trust (i.e., a grantor trust), SSA may consider the trust revocable, regardless of the language in the trust depending on state law. See POMS SI 01120.200.B.2, .B.8, .D.3.

Because the Trust was established in California and expressly provides that California law would govern the validity of the Trust for construction and interpretation, we look to California law to determine if the Trust is revocable or if NH can direct the use of the trust principal for his support and maintenance.^[18] See Trust, art. VIII. In California, a grantor trust that explicitly states that it is irrevocable maintains its irrevocability if the trust conveys a remainder interest to the grantor’s “heirs” or a category of people such as “living issue.” See POMS PS 01825.006.K (PS 14-142); POMS PS 01825.006.P (PS 12-122);^[19] see also POMS SI 01120.200.D.3 (providing SSA usually considers a trust irrevocable if the trust names a residual beneficiary who would receive the trust principal upon the grantor/beneficiary’s death). NH is both the grantor and beneficiary of the Trust because the Trust was established by his mother acting on his behalf with the settlement proceeds from his potential legal malpractice case. See POMS SI 01120.200.D.3 (providing that an individual may be the grantor even if an agent or other individual legally empowered to act on his or her behalf establishes the trust with funds or property that belong to the individual). The Trust contains explicit language that it is irrevocable and conveys a remainderman interest to NH’s issue, the issue of his sister if he has no issue, her issue’s issue, or to his “heirs at law” if neither NH nor his sister have living issue before full distribution of the Trust.^[20] See Trust, art. IV. Thus, NH cannot revoke the Trust.

We also have analyzed whether NH could assign or sell his beneficial interest in the Trust. See POMS SI 01120.200.B.16, D.1. The Trust contains a spendthrift clause. See Trust, art. VII.b. A spendthrift clause or trust prohibits voluntary or involuntary transfers of the beneficiary’s interest in the trust income or principal. See POMS SI 01120.200.B.16. The validity of a spendthrift provision depends on state law. See id. In California, a spendthrift clause in a self-settled trust is invalid against transferees or creditors. See Cal. Prob. Code § 15304(a) (West 2017); POMS PS 01825.006.I (PS 15-023). Because the Trust was created with NH’s assets, it is a self-settled trust, and the spendthrift clause is not enforceable against any transferees or creditors. This interpretation is true even though Trust distributions to NH are at the discretion of the Trustee because, under California law, when the settlor is the beneficiary of the trust, a transferee or creditor may reach the maximum amount the trustee could pay the settlor up to the amount of the settlor’s contribution to the trust, notwithstanding a spendthrift clause in the trust document. See Cal. Prob. Code § 15304(b); POMS PS 01825.006.I (PS 15-023).

Although the spendthrift clause would not be enforceable against assignees or transferees, the provision remains effective in restricting NH from voluntarily transferring, assigning, selling or encumbering his interest in the Trust property. The underlying public policy behind California Probate Code § 15304 is to prevent individuals from placing their property beyond the reach of their creditors while at the same time reaping the bounties of such property. See In re Moses, 167 F.3d 470, 473 (9th Cir. 2014). Accordingly, California Probate Code § 15304 does not wholly invalidate a spendthrift clause; rather it prohibits invocation of the clause to protect the rights of transferees and creditors.

Beyond the spendthrift provision, which remains in effect as to voluntary transfers, the Trust provides that all payments of trust property shall be at the Trustee’s sole discretion. See Trust, art. IV, V. NH has no power to compel payment of, or otherwise exercise control over, the trust income and principal.^[21] Therefore, because NH does not have power to revoke or terminate the Trust or direct use of the trust principal or income for his support or maintenance, the Trust principal is not a resource to NH.^[22] See POMS SI 01120.200.D.2.^[23] Also, any settlement proceeds later deposited into the Trust would not count as income to the NH. See POMS SI 01120.200.G.1.b. In addition, any Trust earnings would not be income to NH unless the Trustee makes a payment to the NH. See POMS SI 01120.200.G.1.a.

CONCLUSION

Based on the information provided, the Trust principal and future settlement proceeds added to the Trust are not NH’s resources for SSI purposes. Trust earnings are not income to the NH unless the Trustee makes a payment to the NH.

The Regional Chief Counsel (RCC) opinion examines whether October 12, 2012 amendments to the Planned Lifetime Assistance Network of California Master Pooled Trust (PLAN Trust) modified a Joinder Agreement that the SSI recipient executed on October 25, 2012, such that his account may be excepted from resource counting under the Social Security Act (Act). It was concluded that the October 12, 2012 PLAN Trust amendments do not modify the terms of his subsequently-executed Joinder. Because the Joinder does not comply with the sole benefit requirement of the Act, his sub-account cannot be excepted from resource counting.

QUESTIONS PRESENTED

You asked whether October 12, 2012 amendments to the Planned Lifetime Assistance Network of California Master Pooled Trust (PLAN Trust) modified a Joinder Agreement that Social Security Income (SSI) recipient S~ executed on October 25, 2012, such that his account may be excepted from resource counting under the Social Security Act (Act)?

SHORT ANSWERS

No, the PLAN Trust was amended before S~ executed his Joinder Agreement. Therefore, the Trust’s amendments do not control over the terms of the joinder that S~ signed. Because S~’s Joinder does not comply with the sole benefit requirement of the Act, his sub-account may not be excepted from resource counting. S~ may execute a new, complying Joinder agreement to remedy this problem.

BACKGROUND

On November 30, 2006, Proxy Parent Foundation dba Planned Lifetime Assistance Network of California (PLAN of California) established the PLAN Trust.

In an opinion dated August 27, 2012, OGC advised that the PLAN Trust, as originally drafted, did not comply with the early termination requirements of section 1917(d)(4)(C) of the Act. See Program Operations Manual System (POMS) PS 01825.006.M (PS 12-130 Legal Opinion on Planned Lifetime Assistance Network of California (PLAN) Master Pooled Trust for SSI Recipient S~).

PLAN of California petitioned the Superior Court for the State of California, County of Los Angeles, to modify the early termination provisions in Article 12 of the PLAN Trust. On October 11, 2012, the Court approved the proposed amendments.

On October 12, 2012, PLAN of California executed the First Amendment to the PLAN Trust, amending the early termination provisions in Article 12.

On October 25, 2012, S~ executed a Joinder Agreement (Joinder) for the PLAN Trust.

In an opinion dated January 2, 2014, OGC advised that the PLAN Trust, as amended in October 2012, met the resource exclusion requirements for pooled trusts. In pertinent part, OCG concluded that the early termination provisions in Article 12 were acceptable under section 1917(d)(4)(C) of the Act. OCG also concluded that the October 2012 amendments to the PLAN Trust effectively modified SSI recipient H~’s Joinder Agreement (H~ Joinder), which she executed on March 6, 2008, even though the H~ Joinder did not comply with the early termination requirements of section 1917(d)(4)(C) of the Act. See POMS PS 01825.006.J (PS 14-039 Legal Opinion on Planned Lifetime Assistance Network of California (PLAN) Master Pooled Trust for SSI Recipient H~).

Relevant Joinder and PLAN Trust Provisions

Joinder:

Pursuant to the Joinder, effective October 25, 2012, S~ “enrolls in and adopts the [PLAN Trust] dated Nov. 30, 2006, which is incorporated herein by reference.” Joinder, Art. A & p. 10 (signature page).

The Joinder further provides that, in the event of the beneficiary’s death, 25% of funds remaining in his sub-account will be retained by the PLAN Trust (Trust’s Remainder Share) and the balance will be used to reimburse the State(s) for medical services provided to the beneficiary. Joinder, Art. K(1) & (2). Any funds remaining in S~’s sub-account after payment of the Trust’s Remainder Share and reimbursement to the State(s) will go to the Final Remainder Beneficiaries that S~ identified in the Joinder. Joinder, Art. K(2)(b).

The Joinder also provides that, if the sub-account is terminated prior to the beneficiary’s death, the trustee will either (A) distribute the sub-account funds to S~, or (B) if the trustee, in his sole discretion, deems that such a distribution is not in S~’s best interest, the trustee will distribute the funds to the Final Remainder Beneficiaries identified in Article K(2)(b). Joinder, Art. K(3).

Article 12 (as amended October 12, 2012):

As amended on October 12, 2012, Article 12.1 provides that, in the event of early termination, the trustee will distribute a beneficiary’s sub-account as follows:

(A) If distributed directly to the beneficiary: First, the trustee will pay for state or federal taxes and administrative expenses accrued due to the account’s termination. Second, the trustee will reimburse the State(s) for the medical assistance paid to the beneficiary under State Medicaid Plan(s). Third, the trustee will distribute any remaining funds in the sub-account directly to the beneficiary; or

(B) If transferred to a different (secondary) section 1917(d)(4)(C) trust: First, the trustee shall obtain acceptance by another section 1917(d)(4)(C) trust. Second, the trustee will pay for state or federal taxes and administrative expenses accrued due to the account’s termination. Then, the trustee will pay any remaining balance of the sub-account to a secondary trust for establishment of the beneficiary’s sub-account with that trust.

RELEVANT LAW

A trust established with the assets of an individual and for his or her benefit is considered a resource in determining his or her eligibility for SSI. Social Security Act §§ 1613(e), 1917(d)(4). However, a trust established with the assets of a disabled individual that is part of a pooled trust may be exempted as a resource. Social Security Act §§ 1613(e)(5), 1917(d)(4)(C). To meet this exception:

(i) The trust must be managed by a non-profit association;

(ii) A separate account must be maintained for each beneficiary of the trust;

(iii) Accounts in the trust must be established for the sole benefit of the disabled beneficiaries, and the account must be established by the actions of the individual, or his or her parent, grandparent, legal guardian, or by a court; and

(iv) To the extent that amounts remaining in the beneficiary’s account upon the death of the beneficiary are not retained by the trust, upon the beneficiary’s death, the trust must pay the State(s), from such remaining amounts, the total amount of medical assistance paid on behalf of the deceased beneficiary during the beneficiary’s lifetime.

Social Security Act §§ 1613(e)(5), 1917(d)(4)(C); POMS SI 01120.203.B.2.

If a pooled trust contains a provision permitting the early termination of a sub-account (i.e., termination of the sub-account prior to the beneficiary’s death), the trust must meet the following criteria to be an excludable resource under section 1917(d)(4)(C):

(1) Upon early termination, the State(s) would receive all amounts remaining in the account up to an amount equal to the total amount of medical assistance paid on behalf of the individual under the State(s) Medicaid Plan(s);

(2) Other than state and federal taxes and reasonable administrative fees, all remaining funds must be disbursed to the trust beneficiary; and

(3) The early termination clause must give the power for early termination to someone other than the beneficiary.

POMS SI 01120.199.F.1.

A pooled 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.

ANALYSIS

OGC previously concluded that the PLAN Trust, as amended on October 12, 2012, met the requirements of section 1917(d)(4)(C) of the Act. See POMS PS 01825.006.J. S~ enrolled in the PLAN Trust upon execution of his Joinder on October 25, 2012. Joinder, Art. A & p. 10. However, the Joinder contains early termination provisions that are inconsistent with the requirements of section 1917(d)(4)(C)(iii) of the Act and the amended PLAN Trust.

Specifically, the Joinder states that if the trustee terminates S~’s sub-account prior to his death, the trustee would, in his discretion, distribute the sub-account funds either (1) to S~, or (2) to the Final Remainder Beneficiaries identified in the Joinder, if the trustee determines it would not be in S~’s best interest to distribute the funds to him. Joinder, Art. K(3).

The Joinder’s early termination provisions do not comply with the requirements of section 1917(d)(4)(C)(iii) of the Act. If the trustee terminates the sub-account before S~’s death, the Joinder does not require that State(s) be reimbursed for medical assistance before any remaining sub-account funds are distributed and it does not ensure that S~ receives the balance after reimbursement to the State(s). Joinder, Art. K(3) (stating the trustee has discretion to distribute remaining sub-account funds to the Final Remainder Beneficiaries listed in Article K(2)(b) if he or she deems that a distribution to S~ would not be in his best interest). These provisions do not comply with the Act’s requirement that the trust be for the sole benefit of the beneficiary. Social Security Act § 1917(d)(4)(C); POMS SI 01120.199.F (providing guidance on when early termination provisions might still comply with the Act).

The Joinder’s early termination provisions are also inconsistent with the amended PLAN Trust, which provides that, in the event of early termination, sub-account assets are either (1) distributed to the beneficiary after reimbursement to the State(s) for medical assistance and after payment of taxes and administrative fees, or (2) transferred to another qualified pooled trust. PLAN Trust, Art 12.1(A) & (B) (as amended on Oct.12, 2012).

Although the PLAN Trust, as amended, may be excepted from resource counting under the Act, neither the Trust nor the Joinder address which document’s terms control in the event of a conflict. S~ executed the Joinder on October 25, 2012, almost two weeks after the October 12, 2012 PLAN Trust amendments, and the Joinder is a legal agreement in and of itself. When S~ signed the Joinder, he “agree[d] to be bound by its terms.” Joinder, p. 10. While the Joinder’s terms may be modified, see Joinder, Article O, that has not happened here. For these reasons, the October 12, 2012 PLAN Trust amendments cannot be construed as amending the later-executed Joinder. Notably, this situation is distinguishable from the circumstances that OGC addressed in its January 2, 2014 opinion regarding the PLAN Trust, where we concluded that the PLAN Trust amendments effectively amended the H~ Joinder, which had been executed prior to those amendments. See POMS PS 01825.006.J.

CONCLUSION

The October 12, 2012 PLAN Trust amendments do not modify the terms of S~’s subsequently-executed Joinder. Because S~’s Joinder does not comply with the sole benefit requirement of the Act, his sub-account cannot be excepted from resource counting.

To remedy this issue, PLAN Trust may wish to have S~ execute a new Joinder that contains early termination provisions consistent with those in the Trust.

This Regional Chief Counsel (RCC) opinion examines additional amendments made to the Z Pooled Trust in December of 2016. The RCC previously opined that the original trust and earlier 2016 amendments to the Master Trust did not meet the requirements of section 1917(d)(4)(C) of the Act and therefore could not be excepted from resource counting. In the present opinion, the RCC concludes that based on the most recent amendments, the December 2016 Master Trust now satisfies the requirements of section 1917(d)(4)(C) of the Act and may be excepted from resource counting.

INTRODUCTION

In an opinion dated June 23, 2015, we advised that a claimant’s account in the Z Pooled Trust could not be excepted from resource counting because the trust’s early termination provisions did not comply with the sole benefit requirement of section 1917(d)(4)(C) of the Social Security Act (Act). See Social Security Act § 1917(d)(4)(C)(iii).

The Z Foundation amended its master trust on July 31, 2015, June 1, 2016, and November 15, 2016. We advised that the trust’s early termination provisions, as amended, remained inconsistent with the sole benefit requirement of the Act.

The Z Foundation again amended the early termination provisions of its master trust on December 13, 2016.

QUESTION

You asked whether the Z Pooled Trust, as amended on December 13, 2016 (December 2016 Master Trust), may be excepted from resource counting under section 1917(d)(4)(C) of the Act.

SHORT ANSWER

Upon early termination of a beneficiary’s account, the December 2016 Master Trust permits either (i) reimbursement to the State(s) for medical assistance and distribution of remaining account assets to the beneficiary, or (ii) distribution of account assets to another pooled trust while expressly precluding any other disbursements. Therefore, the December 2016 Master Trust satisfies the sole benefit requirement of section 1917(d)(4)(C) of the Act and may be excepted from resource counting.

RELEVANT TRUST PROVISIONS

This discussion is limited to the provisions of the December 2016 Master Trust that are relevant to the legal analysis that follows.

The December 2016 Master Trust provides, in pertinent part:

• •

  Upon the death of a beneficiary, Article 6.1 provides that amounts remaining in the beneficiary’s account shall be “distributed to the state in which the beneficiary received government assistance, based on each state’s proportionate share of the total government assistance paid by all of the states on the beneficiary’s behalf, to the extent that any such property is not retained by the trust as hereinafter provided” and any remaining funds shall be distributed as provided in the joinder agreement or to persons designated in the beneficiary’s will, excluding creditors. December 2016 Master Trust, Art. 6.1. Article 6.2 permits the trust to retain an amount for administrative expenses and gives the trustee discretion as to how to use funds that the trust retains. December 2016 Master Trust, Art. 6.2.

• •

  Article 7 addresses the early termination of a beneficiary’s account during his or her lifetime. In the event of early termination, the trust may “treat the property in the sub-account according to the provisions above in Article 6, Sections 6.1 and 6.2, except that after payment of Trust administration fees, [the] Trustee shall either: (i) make reimbursement to the states for government assistance provided on behalf of the individual beneficiary and, the balance remaining in the affected Beneficiary’s Trust sub-account shall be distributed to the affected Beneficiary, [or] (ii) the balance remaining in the affected Beneficiary’s Trust sub-account shall be distributed to another Section 1917(d)(4)C Medicaid Pooled Trust and all other payments other than to the secondary pooled trust are expressly prohibited.” December 2016 Master Trust, Art. 7.1.

RELEVANT AUTHORITIES

As a general rule, a trust established after January 1, 2000 with an individual’s assets for his or her own benefit is considered a resource under sections 1613 and 1917 of the Act. Social Security Act §§ 1613(e), 1917(d); Program Operations Manual System (POMS) SI 01120.201. However, a trust established with the assets of a disabled individual that is part of a pooled trust may be excepted and not counted as a resource under certain circumstances. Social Security Act §§ 1613(e)(5), 1917(d)(4)(C); POMS SI 01120.201; POMS SI 01120.203.

To satisfy the pooled trust exception, the trust must meet the following requirements:

• •

  The trust must be established by a non-profit organization. Social Security Act § 1917(d)(4)(C)(i); POMS SI 01120.203.B.2.c.

• •

  The trust must maintain a separate account for the benefit of each trust beneficiary. Social Security Act § 1917(d)(4)(C)(ii)-(iii); POMS SI 01120.203.B.2.d & e.

• •

  Each sub-account must be established for the sole benefit of the beneficiary, and must be established by the beneficiary, a parent, a grandparent, a legal guardian, or a court. Social Security Act § 1917(d)(4)(C)(iii); POMS SI 01120.203.B.2.f.

• •

  Upon the death of the beneficiary, the trust must reimburse the State(s) that provided medical assistance to the beneficiary, to the extent that amounts remaining in the beneficiary’s account upon death are not retained by the trust. Social Security Act § 1917(d)(4)(C)(iv); POMS SI 01120.203.B.2.g.

ANALYSIS

We previously concluded that the Z Pooled Trust, as amended, satisfied all but one of the requirements to be excepted from resource counting under section 1917(d)(4)(C) of the Act. Therefore, this analysis only addresses the final requirement, i.e., whether the December 2016 Master Trust complies with the sole benefit requirement of the Act. See Social Security Act § 1917(d)(4)(C)(iii).

A trust account will not meet the sole benefit requirement of section 1917(d)(4)(C)(iii) if the trustee has power to terminate the trust prior to the beneficiary’s death, unless either of the following conditions exist:

• •

  The early termination clause provides that, upon termination of the trust: (1) the State receives all amounts remaining in the trust up to an amount equal to the amount of medical assistance paid on behalf of the individual, and (2) after payment of allowable administrative expenses and reimbursement to the State, all remaining funds are distributed to the beneficiary, and (3) the beneficiary does not have power to terminate the trust. POMS SI 01120.199.F.1; see also POMS SI 01120.203.B.2.e (the pooled trust exception does not apply if the trust “allows for termination of the trust account prior to the individual’s death and payment of the corpus to another individual or entity”), or

• •

  The early termination clause “solely allows for transfer of the beneficiary’s assets” from one pooled trust to another pooled trust and contains specific language precluding disbursements other than to the secondary trust or for allowable administrative expenses. POMS SI 01120.199.F.2.

Here, in the event of a trust account’s early termination, Article 7.1 requires the trustee to treat the account in accordance with Articles 6.1 and 6.2 as if the beneficiary had died^[24] , “except that after payment of Trust administration fees,” the trustee will either:

• •

  Reimburse the State(s) for assistance provided to the beneficiary and provide any amounts remaining in the account to the beneficiary, or

• •

  Distribute account assets to another pooled trust, and not make any other payments from the account besides the disbursement to the secondary trust.

December 2016 Master Trust, Art. 7.1(i) & (ii). The first option is consistent with the requirements of POMS SI 01120.199.F.1, which permits reimbursement to the State(s) for medical assistanceif remaining account assets are ultimately distributed to the beneficiary. December 2016 Master Trust, Art. 7.1(i). The second option is consistent with POMS SI 01120.199.F.2 because it permits distribution of account assets to another pooled trust while expressly precluding any other disbursements. December 2016 Master Trust, Art. 7.1(ii).

CONCLUSION

The early termination provisions of the December 2016 Master Trust are consistent with the sole benefit requirement of the Act. See Social Security Act § 1917(d)(4)(C)(iii). Accordingly, the trust may be excepted from resource counting.

This Regional Chief Counsel (RCC) opinion examines whether the Z Pooled Trust, as amended in 2016 (2016 Master Trust), may be excepted from resource counting under section 1917(d)(4)(C) of the Act. The RCC concluded that the 2016 Master Trust may not be excepted from resource counting, because the trust’s early termination provisions permits a beneficiary’s assets to be used for reimbursement of State Medicaid expenses, and then gives the option to distribute the balance remaining in the affected Beneficiary’s Trust sub-account to the affected Beneficiary, or to another Section 1917(d)(4)C Medicaid Pooled Trust. The 2016 Master Trust therefore does not comply with the sole benefit requirement of section 1917(d)(4)(C)(iii) of the Act.

INTRODUCTION

In an opinion issued June 23, 2015, we advised that a claimant’s account in the Z Pooled Trust could not be excepted from resource counting under section 1917(d)(4)(C) of the Social Security Act (Act). Specifically, the trust was not for the beneficiary’s sole benefit because it could be terminated during the beneficiary’s lifetime with distribution of account assets to the beneficiary’s designees or heirs. See Social Security Act § 1917(d)(4)(C)(iii). The trust also contained language suggesting that the State of California would receive priority for Medicaid reimbursement over other States, which is inconsistent with section 1917(d)(4)(C)(iv) of the Act.

On July 31, 2015, the Z Foundation amended the Z Pooled Trust. In an opinion issued December 4, 2015, we advised that the claimant’s account in the Z Pooled Trust, as amended in 2015, still could not be excepted from resource counting because the impermissible early termination provisions remained.

On June 1, 2016, the Z Foundation again amended its master trust and joinder agreement. The claimant G~ (Claimant) signed a joinder agreement (2015 Joinder) for the trust on July 31, 2015. She signed another joinder for the Z Pooled Trust (2016 Joinder) on July 20, 2016.

QUESTION

You asked whether the Z Pooled Trust, as amended in 2016 (2016 Master Trust), may be excepted from resource counting under section 1917(d)(4)(C) of the Act.

SHORT ANSWER

The 2016 Master Trust may not excepted from resource counting because the trust’s early termination provisions permit a beneficiary’s assets to be used for reimbursement of State Medicaid expenses before the account is transferred to a secondary trust. The 2016 Master Trust therefore does not comply with the sole benefit requirement of section 1917(d)(4)(C)(iii) of the Act.

RELEVANT TRUST PROVISIONS

This discussion is limited to the provisions of the 2016 Master Trust and joinder agreements that are relevant to the legal analysis that follows.

The 2016 Master Trust provides, in pertinent part:

• •

  A beneficiary enrolls in the Trust when the grantor executes a joinder agreement with the trustee for the sole benefit of the beneficiary. 2016 Master Trust, Art. 2.6.

• •

  Upon the death of a beneficiary, Article 6.1 provides that amounts remaining in the beneficiary’s account shall be “distributed to the state in which the beneficiary received government assistance, based on each state’s proportionate share of the total government assistance paid by all of the states on the beneficiary’s behalf, to the extent that any such property is not retained by the trust” and any remaining funds shall be distributed as provided in the joinder agreement or to persons designated in the beneficiary’s will, excluding creditors. 2016 Master Trust, Art. 6.1. Article 6.2 permits the trust to retain an amount for administrative costs and gives the trustee discretion as to how to account funds that the trust retains. 2016 Master Trust, Art. 6.2.

• •

  Article 7 of the 2016 Master Trust addresses the early termination of a beneficiary’s account during his or her lifetime. In the event of early termination, the trust may “treat the property in the sub-account according to the provisions above in Article 6, . . . except that after reimbursement to the states for government assistance provided on behalf of the individual beneficiary and payment of Trust administration fees, the balance remaining in the affected Beneficiary’s Trust sub-account shall be distributed to the affected Beneficiary or to another Section 1917(d)(4)C Medicaid Pooled Trust.” 2016 Master Trust, Art. 7.1.

• •

  The 2015 Joinder and 2016 Joinder both provide, in pertinent part:

• •

  Article 5.1 discusses future amendments to the Trust. It provides that “the Trustee may . . . make any unilateral amendments as may be necessary to comply with any changes in the law and/or agency policy or for the proper and efficient administration of the Trust as determined in the Trustee’s sole discretion without notice to the Beneficiary or the Beneficiary’s representative.” 2015 Joinder, Art. 5.1; 2016 Joinder, Art. 5.1.

• •

  Article 5.10 provides that the terms of the trust control if there is a conflict or ambiguity between the provisions of the joinder agreement and the trust. 2015 Joinder, Art. 5.10; 2016 Joinder, Art. 5.10.

RELEVANT AUTHORITIES

As a general rule, a trust established after January 1, 2000 with an individual’s assets for his or her own benefit is considered a resource under sections 1613 and 1917 of the Social Security Act (the Act). Social Security Act §§ 1613(e), 1917(d); Program Operations Manual System (POMS) SI 01120.201. However, a trust established with the assets of a disabled individual that is part of a pooled trust may be excepted and not counted as a resource under certain circumstances. Social Security Act §§ 1613(e)(5), 1917(d)(4)(C); POMS SI 01120.201, SI 01120.203.

To satisfy the pooled trust exception, the trust must meet the following requirements:

• •

  The trust must be established by a non-profit organization. Social Security Act § 1917(d)(4)(C)(i); POMS SI 01120.203.B.2.c.

• •

  The trust must maintain a separate account for the benefit of each trust beneficiary. Social Security Act § 1917(d)(4)(C)(ii)-(iii); POMS SI 01120.203.B.2.d & e.

• •

  Each sub-account must be established for the sole benefit of the beneficiary, and must be established by the beneficiary, a parent, a grandparent, a legal guardian, or a court. Social Security Act § 1917(d)(4)(C)(iii); POMS SI 01120.203.B.2.f.

• •

  Upon the death of the beneficiary, the trust must reimburse the State(s) that provided medical assistance to the beneficiary, to the extent that amounts remaining in the beneficiary’s account upon death are not retained by the trust. Social Security Act § 1917(d)(4)(C)(iv); POMS SI 01120.203.B.2.g.

ANALYSIS

We previously concluded that the Z Pooled Trust, as amended in 2015, satisfied all but one of the requirements to be excepted from resource counting under section 1917(d)(4)(C) of the Act. Therefore, this analysis only addresses the final requirement, i.e., whether the 2016 Master Trust complies with the sole benefit requirement of the Act. See Social Security Act § 1917(d)(4)(C)(iii).

When the Claimant enrolled in the Z Pooled Trust, she used her own assets to fund the account. 2015 Joinder, pp. 1, 8; 2016 Joinder, pp. 1, 8. Accordingly, unless the trust is excepted under section 1917(d)(4)(C) of the Act, the Claimant’s account will constitute a countable resource. See Social Security Act §§ 1613(e), 1917(d). As discussed below, the 2016 Master Trust does not satisfy the Act’s requirement that trust accounts be established solely for the benefit of the beneficiary. See Social Security Act § 1917(d)(4)(C)(iii).

A trust account will not meet the sole benefit requirement of section 1917(d)(4)(C)(iii) if the trustee has power to terminate the trust prior to the beneficiary’s death, unless either of the following conditions exist:

• •

  The early termination clause provides that, upon termination of the trust: (1) the State receives all amounts remaining in the trust up to an amount equal to the amount of medical assistance paid on behalf of the individual, and (2) after payment of allowable administrative expenses and reimbursement to the State, all remaining funds are distributed to the beneficiary, and (3) the beneficiary does not have power to terminate the trust. POMS SI 01120.199.F.1; see also POMS SI 01120.203.B.2.e (the pooled trust exception does not apply if the trust “allows for termination of the trust account prior to the individual’s death and payment of the corpus to another individual or entity”), or

• •

  The early termination clause “solely allows for transfer of the beneficiary’s assets” from one pooled trust to another pooled trust and contains specific language precluding disbursements other than to the secondary trust or for allowable administrative expenses, POMS SI 01120.199.F.2.

• •

  The early termination provisions of the 2016 Master Trust do not fall within either exception. In the event of the trust’s early termination, Article 7.1 incorporates by reference the portion of Article 6 providing for reimbursement to the States for government assistance. 2016 Master Trust, Arts. 6.1, 7.1. Then, after reimbursement to the States and payment of administrative expenses, any funds remaining in the account are distributed either to the beneficiary or to another pooled trust. 2016 Master Trust, Art. 7.1. This is inconsistent with the requirements of POMS SI 01120.199.F.1, which permits reimbursement to the States only if remaining account assets are ultimately distributed to the beneficiary. Under Article 7.1, however, remaining account assets are not necessarily distributed to the beneficiary and could instead be transferred to another pooled trust.

• •

  The 2016 Master Trust also does not comply with POMS SI 01120.199.F.2, which states that no other disbursements may be made (aside from payment of administrative expenses) if account assets are distributed to another pooled trust. Article 7.1, however, permits reimbursement to the States before remaining account funds are distributed to a secondary trust. Therefore, this early termination clause does not solely allow for transfer of account assets to another pooled trust and does not specifically preclude disbursements other than to the secondary trust or for allowable administrative expenses as required under POMS SI 01120.199.F.2.

• •

  The early termination provisions in Article 7.1 therefore do not comply with the sole benefit requirements of the Act. See Social Security Act § 1917(d)(4)(C)(iii); POMS SI 01120.199.F.

With respect to the Claimiant’s joinder agreement, the 2015 Joinder and 2016 Joinder both anticipate amendments to the Master Trust. In Article 5.1, it authorizes the Trustee to make “any unilateral amendments as may be necessary . . . for the proper and efficient administration of the Trust as determined in the Trustee’s sole discretion without notice to the Beneficiary or the Beneficiary’s representative.” 2015 Joinder, Art. 5.1; 2016 Joinder, Art. 5.1. The joinder agreements both provide that the terms of the trust control in the event of a conflict or ambiguity between the joinder agreement and the trust. 2015 Joinder, Art. 5.10; 2016 Joinder, Art. 5.10. These provisions convey the beneficiary’s consent to future changes to the Master Trust that further the “proper and efficient administration of the Trust” as well as the beneficiary’s agreement that the terms of the trust are controlling. Amendments to the Master Trust to bring it within the exception to resource counting would meet that definition. However, as discussed above, the 2016 Master Trust does not currently satisfy all of the requirements to be excepted from resource counting under the Act.

CONCLUSION

As currently drafted, the 2016 Master Trust does not meet the requirements to be excepted from resource counting because the early termination provisions are inconsistent with the sole benefit requirement of the Act. However, these provisions could be revised to satisfy the requirements of the Social Security Act and POMS SI 01120.199.F:

• •

  Section 7.1 could be revised to provide for reimbursement to the States upon early termination of the trust only if remaining account assets are then distributed to the beneficiary. See POMS SI 01120.199.F.1

• •

  Alternatively, Section 7.1 could be revised to expressly preclude all disbursements except for payment of administrative expenses if, upon early termination of the trust, the account assets are distributed to a secondary trust. See POMS SI 01120.199.F.2.

This legal opinion discusses whether E~’s sub account in the California Charities Pooled Trust (CPT), as amended, is excepted from resource counting under section 1917(d)(4)(C) of the Social Security Act (Act). Although the amended CPT and joinder agreement meet the requirements for exception, this specific subaccount counts as a resource for SSI purposes. The CPT Termination Agreement which remains effective and controlling despite E~’s execution of a revised Joinder Agreement in April 2016, contains an early termination provision that violates the “sole benefit” requirement of section 1917(d)(4)(C)(iii).

QUESTION

You asked whether E~’s account in the California Charities Pooled Trust (CPT), as amended, is excepted from resource counting under section 1917(d)(4)(C) of the Social Security Act (Act) and, if so, what month the account became excepted.

SHORT ANSWER

E~’s account is not excepted from resource counting under section 1917(d)(4)(C) of the Act. The CPT Termination Agreement, which remains effective and controlling despite E~’s execution of a revised Joinder Agreement in April 2016, contains an early termination provision that violates the “sole benefit” requirement of section 1917(d)(4)(C)(iii).

FACTUAL BACKGROUND

CPT established the California Charities Pooled Trust (the Trust) on July 9, 2010. E~ executed a Joinder Agreement on November 12, 2014, enrolling himself in the Trust. On the same date he also executed a CPT Termination Agreement. At that time, the Trust was governed by the Declaration of Trust of the California Charities Pooled Trust (Master Trust), as amended and restated January 15, 2011.^[25]

On June 25, 2015, we advised that the Master Trust and a CPT Termination Agreement executed by a different number holder contained impermissible early termination provisions in violation of the “sole benefit” requirement of section 1917(d)(4)(C) of the Act.

On February 16, 2016, CPT amended the Master Trust (2016 Master Trust). On April 13, 2016, E~ executed a new Joinder Agreement. We have no evidence that E~ revoked the 2014 Termination Agreement or executed a new Termination Agreement.

RELEVANT TRUST PROVISIONS

CPT, a Florida not-for-profit public benefit corporation, is the settlor and trustee of the Master Trust. 2016 Master Trust, Sec. 2.1 & 2.2. A beneficiary is a disabled person for whose sole benefit CPT maintains a separate sub-account within the Trust. 2016 Master Trust, Sec. 2.5. A beneficiary enrolls in the Trust by entering into a Joinder Agreement with CPT. 2016 Master Trust, Sec. 3.1.

Prior to the 2016 amendment, in the event of early termination (i.e., termination during the beneficiary’s lifetime) the Master Trust permitted CPT to retain a remainder share prior to State Medicaid reimbursement and distribution of the remaining trust funds to the beneficiary. 2010 Master Trust, Sec. 8.2. Likewise, the CPT Termination Agreement contains a materially identical early termination provision. Termination Agreement, Sec. 3.0.

The 2016 Master Trust eliminated section 8.2 and clarified that “[t]he Trust shall have no . . . right to any funds in the Trust Beneficiary’s [account] on early termination.” 2016 Master Trust, Sec. 8.1.

RELEVANT AUTHORITIES

As a general rule, a trust established after January 1, 2000 with an individual’s assets for his or her own benefit is considered a resource under sections 1613 and 1917 of the Social Security Act (the Act). Social Security Act §§ 1613(e), 1917(d); Program Operations Manual System (POMS) SI 01120.201. However, a trust established with the assets of a disabled individual that is part of a pooled trust may be excepted and not counted as a resource under certain circumstances. Social Security Act §§ 1613(e)(5), 1917(d)(4)(C); POMS SI 01120.201, SI 01120.203.

To satisfy the pooled trust exception, the trust must meet the following requirements:

The trust must be established by a non-profit organization. Social Security Act § 1917(d)(4)(C)(i); POMS SI 01120.203.B.2.c.

The trust must maintain a separate account for the benefit of each trust beneficiary. Social Security Act § 1917(d)(4)(C)(ii)-(iii); POMS SI 01120.203.B.2.d & e.

Each sub-account must be established for the sole benefit of the beneficiary, and must be established by the beneficiary, a parent, a grandparent, a legal guardian, or a court. Social Security Act § 1917(d)(4)(C)(iii); POMS SI 01120.203.B.2.f.

Upon the death of the beneficiary, the trust must reimburse the State(s) that provided medical assistance to the beneficiary, to the extent that amounts remaining in the beneficiary’s account upon death are not retained by the trust. Social Security Act § 1917(d)(4)(C)(iv); POMS SI 01120.203.B.2.g.

ANALYSIS

E~ established his account in the Trust on November XX, 2014, and used his own assets to fund the account. Accordingly, unless the Trust is excepted under section 1917(d)(4)(C) of the Act, E~’s account will constitute a countable resource.

The Trust contains a provision for termination before the death of the beneficiary. Under POMS SI 001120.199.F.1, early termination will not violate the “sole benefit” requirement if: (1) after payment of allowable administrative expenses, the State(s) receive all amounts remaining in the trust up to an amount equal to the amount of medical assistance paid on behalf of the beneficiary, (2) all remaining funds are distributed to the beneficiary, and (3) the beneficiary does not have power to terminate the trust. POMS SI 01120.199.F.1 & 3.

The Trust does not meet the “sole benefit” requirement under section 1917(d)(4)(C)(iii) because, in the event of early termination, the Master Trust permits CPT to retain a remainder share. 2010 Master Trust, Sec. 8.2; Termination Agreement, Sec. 3.0. To meet the “sole benefit” requirement in the event of early termination, all remaining funds in the trust account, other than payment of allowable administrative expenses and Medicaid reimbursement to the State(s), must go to the beneficiary. See POMS SI 001120.199.F.1. The payment of a remainder share to CPT should the Trust account terminate during E~’s lifetime violates this “sole benefit” requirement.

The 2016 amendment eliminated Section 8.2 of the Master Trust and clarified that “[t]he Trust shall have no . . . right to any funds in the Trust Beneficiary’s [account] on early termination.” 2016 Master Trust, Sec. 8.1. Accordingly, the terms of the 2016 Master Trust meet the “sole benefit” requirement of section 1917(d)(4)(C)(iii).

Nevertheless, the Termination Agreement, executed by E~ in 2014, remained active and controlling. Specifically, the Termination Agreement expressly provides that, in the event of conflict between the Termination Agreement and the Master Trust, “the terms of this Termination Agreement shall supersede the Master Trust.” Termination Agreement, Sec. 14.0. While execution of the new Joinder Agreement in 2016 effectively nullified the prior Joinder, it had no effect on the Termination Agreement. E~ independently executed the Joinder and Termination Agreements, and the new Joinder Agreement makes no mention of the Termination Agreement, nor does it suggest that its terms, or the terms of the Master Trust, should prevail in the event of conflict with the Termination Agreement. Accordingly, because section 3.0 of the Termination Agreement continues to violate the “sole benefit” requirement and controls in the event of conflict with the Master Trust, E~’s trust account is not excepted from resource counting under section 1917(d)(4)(C).

CONCLUSION

As currently drafted, the Termination Agreement does not meet the requirements to be excepted from resource counting because it contains an improper early termination provision. However, CPT may have E~ execute a revised Termination Agreement satisfying the requirements of the Social Security Act and POMS SI 01120.199.F.2:

Specifically, CPT could amend section 3.0 of the Termination Agreement to eliminate all provisions for a trust remainder share in the event the Trust terminates prior to E~’s death.

This legal opinion discusses whether court-approved modifications to an existing third party trust created a new self-settled trust. R~ was a trust beneficiary of the B~ Trust, a third party trust.

The B~ Trust trustee petitioned the court to modify the provisions governing R~’s share in order to create a special needs trust for his benefit, the R~ Trust. The Regional Chief Counsel determined the court’s order approving the R~ Trust did not create a new trust, but merely modified the terms of the R~’s share.

The R~ Trust is a continuation of R~’s share of the B~ Trust. Therefore, the R~ Trust continues to be a third party trust. R~ does not have power to revoke the R~ Trust or direct use of the R~ Trust assets for his own support and maintenance, the R~ Trust is not a countable resource for SSI purposes.

QUESTION

1. You asked whether the R~ Special Needs Trust (R~ Trust), established through court-approved modifications to the B~ Trust (B~ Trust), is a third party trust or self-settled trust.

2. You also asked whether the R~ Trust is a countable resource for purposes of determining R~’s eligibility for Supplemental Security Income (SSI).

SHORT ANSWER

1. The R~ Trust is a continuation of R~’s share of the B~ Trust. Court-approved modifications of the B~ Trust did not create a new self-settled trust; rather, they merely altered the method of administration with respect to R~’s share.

2. The R~ Trust is not a countable resource to R~ because he does not have the power to revoke the trust or direct use of the trust assets for his own support and maintenance.

BACKGROUND

R~ was born on November XX, 1954. R~ received SSI payments until May 2014.

B~ established the B~ Trust on November 17, 1997, initially funding the trust with her assets. B~ Trust, p.1, ¶ A; Ex. A. The B~ Trust provided that B~ was the settlor, trustee, and lifetime beneficiary of the trust, with the power to direct distributions of the trust income or principal during her lifetime. B~ Trust, §§ 1.A-1.B. During her lifetime, B~ had the power to modify, amend or revoke the trust at any time. See B~ Trust, § 5.A.

B~ died in July 2004. See July 2005 Petition for Reformation of Trust to Incorporate Special Needs Trust (Petition), ¶ 2. Upon her death, the B~ Trust became irrevocable, and designated A~ and E~ as the successor trustees. B~ Trust, §§ 5.B & 6.A. After paying taxes or fees relevant to B~’s death, the B~ Trust directed the successor trustees to allocate the balance of the trust into equal shares for each of B~’s surviving descendants. See B~ Trust, §§ 1.D & 3.G.

Article 2 of the B~ Trust specifically governed the administration of R~’s share. B~ Trust, §§ 1.D & 2. The B~ Trust provided that the trustee shall hold and administer R~’s share, and make discretionary distributions as necessary or advisable for R~’s support and maintenance. B~ Trust, §§ 2.A-2.B. Neither R~ nor any other beneficiary had a general power of appointment or removal of the trustees. See B~ Trust, § 6.B.

Following B~’s death, A~, as the B~ Trust’s successor trustee, petitioned the California Superior Court, County of Contra Costa, to modify the provisions of the B~ Trust governing R~’s share, pursuant to California Probate Code section 15409(a). See Petition, ¶¶ 7-14.^[26] The purpose of the modification was to “create” a special needs trust for the benefit of R~, replacing the provisions governing the administration of R~’s share of the B~ Trust. See Petition, ¶ 14.

The R~ Trust names A~ and E~ as the co-trustees and R~ as the primary beneficiary. R~ Trust, §§ 1.2-1.3. R~’s share of the B~ Trust initially funded the R~ Trust. R~ Trust, §§ 1.5 & 3.1; see also R~ Trust, § 3.3 (“No assets of R~ have been transferred to [the R~] Trust.”) The stated purpose of the R~ Trust is to provide financial assistance that “supplements, rather than replaces” the public benefits for which R~ is eligible, and to provide for R~’s living needs that public benefits will not provide. R~ Trust, §§ 2.1-2.2. The trust instrument indicates that the trustee will exercise discretion to effectuate B~’s wish that R~ live as independently as possible despite his disability. See R~ Trust, § 2.3. The R~ Trust vests absolute discretion in the trustees to distribute funds to R~ for his sole benefit. R~ Trust, §§ 1.3, 2.1-2.2. R~ does not have any legal right or authority to amend, modify, or revoke the trust or direct use of the funds for his own support or maintenance. R~ Trust, § 1.6. The R~ Trust is irrevocable and governed by California law. R~ Trust, §§ 1.6 & 11.3.e.

In September 2005, pursuant to Section 15409(a), the court approved the Petition, establishing the R~ Trust and incorporating its terms into the B~ Trust. See September 2005 Order on Petition for Reformation of Trust to Incorporate Special Needs Trust.

ANALYSIS

A trust established with the assets of a third party are only countable as a resource to the beneficiary if the beneficiary has the power to revoke the trust or direct the use of trust assets for his or her own support and maintenance. Program Operations Manual System (POMS) SI 01120.200.B.19 & D.2. Meanwhile, a trust established after January 1, 2000 with the assets of the beneficiary will generally be countable as a resource to that beneficiary. See Social Security Act (Act) § 1613(e), 42 U.S.C. § 1382b(e); POMS SI 01120.201.A.^[27]

 

Here, as it pertains to R~’s SSI eligibility, the B~ Trust constitutes a third-party trust because B~ established the trust with her own assets. Moreover, R~’s share of the B~ Trust is not a countable resource to R~ because R~ had no power to revoke the trust or direct use of the trust assets for his own support and maintenance. See POMS SI 01120.200.D.2; B~ Trust, §§ 2.A-2.B.

In September 2015, the California Superior Court modified the terms of the B~ Trust and purportedly “established” the R~ Trust.^[28] However, the Court’s order did not create a new trust, but merely modified the terms of R~’s share of the B~ Trust. In fact, the Court’s authority to modify the B~ Trust arose under section 15409(a) of the California Probate Code, which permits a trustee to petition for modification of an irrevocable trust if such modifications are necessary to serve the original intention of the settlor in establishing the trust. See Cal. Prob. Code § 15409(a); Ike v. Doolittle, 61 Cal. App. 4th 51, 82-83 (Cal. Ct. App. 1998) (in 1986, the California legislature revised the California Probate Code and codified the common law power of the court to modify the terms of a trust instrument where such modification was necessary to serve the original intentions of the settlors). Section 15409(a) does not give the Court authority to terminate the existing trust in favor of a new trust; such action exceeds the scope of the statutory provision.

Moreover, even if the Court’s actions created a new trust, R~’s assets did not fund it. For purposes of determining whether a trust was self-settled, the agency considers a beneficiary’s “assets” to be his income or resources, or property to which he is “entitled” even if he does not have access to that property. Social Security Act § 1613(e)(6)(C), 42 U.S.C. § 1382b(e)(6)(C); POMS SI 01120.201.B.2.

Here, R~ was not entitled to his share of the B~ Trust. Even after B~’s death, the B~ Trust directed that the successor trustees should continue to hold R~’s share in trust. The trustees had sole discretion to decide if, and when, to make distributions for R~’s support and maintenance. See B~ Trust, §§ 2.A-2.B. Until the trustees exercised that discretionary power and made a distribution to R~, his entitlement to the trust property remained unvested. See generally Young v. McCoy, 147 Cal. App. 4th 1078, 1085-86 (Cal. Ct. App. 2007) (authorizing a judgment creditor to obtain satisfaction from trust payments the beneficiary is entitled or that the trustee, in the exercise of discretion, has determined to pay the beneficiary, but finding that a creditor cannot seek satisfaction from property held in trust for the beneficiary from which the trustee has not yet decided to make a discretionary distribution) (citing Cal. Prob. Code § 15306.5(a)).

Because R~ was not entitled to his share of the B~ Trust, the trust property did not constitute his “assets.” Accordingly, funding the R~ Trust with his share of the B~ Trust did not result in the establishment of a self-settled trust for purposes of section 1613(e) of the Act. Rather, the agency deems the R~ Trust to be a third-party trust, initially funded by B~.

Finally, as a third-party trust, the R~ Trust would only be countable as a resource if R~ had the ability to revoke the trust or direct use of the trust assets for his own support and maintenance. See POMS SI 01120.200.B.19 & D.2. The R~ Trust provides that it is irrevocable and restricts R~ from directing use of the trust assets. The trustee has sole discretion in determining when to make distributions for R~’s special needs. R~ Trust, §§ 1.3, 1.6, 2.1-2.2 Thus, the R~ Trust is not a countable resource for purposes of determining his SSI eligibility. See POMS SI 01120.200.B.19 & D.2.

CONCLUSION

The R~ Trust is a third-party trust. As R~ does not have power to revoke the R~ Trust or direct use of its assets for his own support and maintenance, the trust is not a countable resource for purposes of determining R~’s SSI eligibility.

This legal opinion discusses the March 23, 2016 amendments to the Special Needs Trust Foundation Self-Settled Master Trust (Master Trust) and Joinder Agreement (Joinder) which bring the Master Trust and Joinder into compliance with SI 01120.203. The Regional Chief Counsel had reviewed previous versions of the Master Trust and Joinder and determined they did not meet all the requirements for exception under section 1917(d)(4)(C) of the Social Security Act. With the March 23, 2016 amendments, the early termination and distribution of assets upon the beneficiary’s death provisions are acceptable. Therefore, the Master Trust and Joinder do not count as a resource for SSI purposes.

QUESTION

You asked whether Supplemental Security Income (SSI) recipient G~’s trust account may be excepted from resource counting under section 1917(d)(4)(C) of the Social Security Act (Act) after March 23, 2016 amendments to the Special Needs Trust Foundation Self-Settled Master Trust (Master Trust) and Joinder Agreement (Joinder).

SHORT ANSWER

With the March 23, 2016 amendments, the Master Trust and Joinder satisfy the requirements to be excepted from resource counting for purposes of determining G~’s eligibility for SSI.

FACTUAL BACKGROUND

The Special Needs Trust Foundation (SNTF) established the Master Trust on March 17, 2006. SNTF amended and restated the Master Trust on January 1, 2013. We determined the Master Trust, as amended and restated in January 2013, did not satisfy all requirements to be excluded as a countable resource. SNTF again amended and restated the Master Trust on March 23, 2016 SNTF also revised the Joinder that beneficiaries complete to enroll in the Master Trust.

SSI claimant G~ (G~) is enrolled in the Master Trust. The Social Security Administration (SSA or agency) placed G~ in non-payment status effective December 2014 after making an excess resource determination based on the terms of the Master Trust as amended and restated in January 2013.

RELEVANT TRUST PROVISIONS, AS AMENDED

This discussion is limited to the provisions of the Master Trust and Joinder that are relevant to the legal analysis that follows.

As amended and restated in March 2016, the Master Trust provides, in pertinent part:

1. Article Twelve (Changes in Eligibility): If a beneficiary moves out of California or is no longer disabled, SNTF may, in its sole discretion:

a. continue to administer the sub-account;

b. transfer the sub-account assets to a pooled trust; in the event of such a transfer, no disbursements will be made other than to the successor trust or to pay costs and expenses as provided in POMS SI 01120.199.F.3 and SI 01120.201.F.2.c; or

c. terminate the sub-account and, after payment of administrative expenses and Medicaid liens, make a distribution to or for the beneficiary’s benefit.

If SNTF terminates a sub-account under this provision, the Trustee will provide notice to the California Department of Health Services, California Department of Mental Health, and California Department of Developmental Services as well as any Medicaid department in any other state in which the beneficiary received benefits “in compliance with all state and federal law pertaining to the disposition of such assets;” amounts remaining in the sub-account will be paid to the State(s) up to an amount equal to the medical expenses paid on the beneficiary’s behalf. Master Trust, Art. Twelve. Any assets remaining in the sub-account thereafter will be distributed as directed by the Master Trust and the beneficiary’s Joinder Agreement. Id.

2. Article Fifteen (Termination of SNTF): If it becomes “impossible” or “impracticable” for SNTF to carry out the Master Trust’s purpose with respect to all beneficiaries, the Trustee may terminate the Master Trust and transfer sub-accounts to another pooled trust pursuant to subpart (b) of Article Twelve. Master Trust, Art. Fifteen. Article Fifteen is intended to provide direction if SNTF is unable to continue in its role as trustee, not to allow termination of individual sub-accounts. Id. Termination under Article Fifteen shall not cause disbursements to be made other than to a successor trust or to pay costs and expenses as provided in POMS SI 01120.199.F.3 and SI 01120.201.F.2.c. Id.

3. The amended Joinder states, in pertinent part:

Section G (Distribution upon the Beneficiary’s death): Upon the death of the beneficiary, to the extent the Master Trust does not retain amounts remaining in the beneficiary’s sub-account, any funds remaining will be used to reimburse the State(s) for medical services provided to the beneficiary, up to the total amount that the State(s) spent on medical services for him or her. Joinder, § G. The beneficiary may designate a percentage of the amount remaining in his or her sub-account that the Master Trust may retain upon the beneficiary’s death. Id. If funds remain in the beneficiary’s sub-account after reimbursement to the State(s), the balance will be distributed to the remainder beneficiaries identified in the Joinder, or to the beneficiary’s heirs at law if he or she did not identify any remainder beneficiaries. Id.

RELEVANT AUTHORITIES

1. 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 sections 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).

2. Program Operations Manual System (POMS)

Additional guidance is provided in 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).

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 id.

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 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.

ANALYSIS

In connection with the claim of a different number holder (OGC Opinion issued February XX, 2015), we previously advised that the Master Trust 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 early termination provisions in subpart (b) of Article Twelve and in Article Fifteen of the Master Trust did not satisfy the requirement that a trust be for the “sole benefit” of the beneficiary.^[29] See Social Security Act § 1917(d)(4)(C)(iii). As POMS SI 001120.201.F.2.a explains, the trust cannot benefit anyone but the beneficiary from the time of the trust’s establishment through the remainder of the individual’s life to be excepted from resource counting. Under POMS SI 001120.199.F.2, if a pooled trust may be terminated during the beneficiary’s lifetime, it may not be counted as a resource if it “solely allows for transfer of the beneficiary’s assets” from one pooled trust to another pooled trust and contains specific language precluding disbursements other than to the successor trust or for allowable administrative expenses. With the March XX, 2016 amendments, the early termination provisions in subpart (b) of Article Twelve and in Article Fifteen of the Master Trust are consistent with POMS SI 001120.199.F.2 and the “sole benefit” requirement of the Act. See Social Security Act § 1917(d)(4)(C)(iii); POMS SI 001120.199.F.2.

We also previously advised that Section F of the Joinder, which concerned distributions upon the death of the beneficiary, permitted disbursement of sub-account assets to persons other than the beneficiary if he or she were to move to another state. The Joinder therefore appeared to conflict with the “sole benefit” requirement of the Act as well as subpart (c) of Article Twelve of the Master Trust. Viewing the trust instrument as a whole and considering extrinsic evidence of SNTF’s intent, we previously found a court would likely resolve this ambiguity by giving effect to subpart (c) of Article Twelve, which was consistent with the sole benefit requirement of the Act. Through the March 23, 2016 amendments, the Joinder replaced prior Section F with a new Section G, which does not permit early termination of sub-accounts or distribution of assets to others if the beneficiary moves out of state. Section G of the Joinder regarding distributions upon the death of the beneficiary is consistent with POMS guidance and the Act. See Social Security Act § 1917(d)(4)(C)(iv); POMS SI 01120.203.B.2.g.

The Master Trust and Joinder do not meet the exception for resource counting under section 1917(d)(4)(C) of the Act. While the Master Trust and Joinder, as amended, resolve much of the ambiguity pertaining to State Medicaid reimbursement, the amendment does not remove the impermissible early termination provision.

INTRODUCTION

On June 23, 2015, we issued an opinion advising that J~’s account in the Z Pooled Trust did not meet the exception to resource counting under section 1917(d)(4)(C) of the Social Security Act (Act). Specifically, the trust contained an impermissible early termination provision, which allowed termination of the trust during the beneficiary’s lifetime with distribution of the corpus to the beneficiary’s designees or heirs. The trust also contained conflicting language pertaining to Medicaid reimbursement, indicating that the State of California would receive priority or reimbursement over other states.

On July 31, 2015, the Z Foundation amended its master trust. It also created a new template joinder agreement.

QUESTION

You asked whether the amended master trust (Master Trust) and template joinder agreement (Joinder) meet the criteria for an exception to resource counting under section 1917(d)(4)(C) of the Act.^[30]

SHORT ANSWER

The Master Trust and Joinder do not meet the exception for resource counting under section 1917(d)(4)(C) of the Act. While the Master Trust and Joinder, as amended, resolve much of the ambiguity pertaining to State Medicaid reimbursement, the amendment does not remove the impermissible early termination provision.

RELEVANT TRUST PROVISIONS

The Z Pooled Trust – Master Trust, as amended July 31, 2015

Section 2.8 of the Master Trust defines “government assistance” as “all services, benefits, medical care, financial assistance, and any other assistance of any kind that may be provided by any county, state, or federal agency to, or on behalf of, a Beneficiary. Such assistance includes, but is not limited to, the Supplemental Security Income program (SSI), the Old Age Survivor and Disability Insurance Program (OASDI), the Supplemental Security Disability Income program (SSDI), and the Medicaid program, together with any additional, similar, or successor public programs.”

Section 4.1 of the Master Trust provides that it is the intent of the grantor not to displace any public and/or private financial assistance that may otherwise be available to the beneficiary. Further, section 4.1 provides that the intent of the grantor is to establish a supplemental fund pursuant to 42 U.S.C. § 1396p, and to limit disbursement from the sub-account to only pay for the beneficiary’s supplemental care and supplemental needs.

Sections 4.2 and 4.3 of the Master Trust provide that, upon execution of the sub-account joinder agreement and delivery of property to the sub-account, the trust shall be irrevocable as to such sub-account grantor and beneficiary.

Section 5.1 of the Master Trust provides that the trustee shall have sole and absolute discretion to make distributions of sub-account principal and/or income for the beneficiary’s supplemental needs as the trustee from time to time deems necessary or advisable. Section 5.2 provides that the trustee shall not make sub-account distributions if such distributions would displace or disqualify the beneficiary from receiving government assistance. Section 5.3 provides a non-exclusive list of appropriate distributions, including the payment of medical and dental treatment for which there is no available private or public funds; supplemental nursing or rehabilitative care; and expenditures for travel, companionship, and other expenditures that will improve the quality of the beneficiary’s physical, emotional, psychological, and/or spiritual life.

Article 6 of the Master Trust provides for distributions upon the death of a sub-account beneficiary. Section 6.1 provides that, upon the death of a beneficiary, any amounts remaining in the sub-account shall be administered to conform with the requirements of 42 U.S.C. § 1396p “pertaining to reimbursement to the states for government assistance provided on behalf of the individual beneficiary.” Section 6.1 further provides that, “[s]uch property shall be distributed to the state in which the beneficiary received government assistance, based on each state’s proportionate share of the total government assistance paid by all of the states on the beneficiary’s behalf, to the extent that any such property is not retained by the trust as hereinafter provided, and the excess shall be distributed as provided in the joinder agreement or to person[s]” designated by the beneficiary. If the beneficiary does not exercise or invalidly exercises this testamentary power of appointment, the remaining trust estate shall be distributed to the beneficiary’s legal heirs. In addition, “[w]hen the remaining balance is less than or equal to the amounts required to reimburse the states for the total government assistance paid on the beneficiary’s behalf such that there will be no amount payable to designees or heirs of the beneficiary, the Z Pooled Trust shall be entitled to retroactive reasonable monthly costs of administration for the entire term of the sub-trust account in the amount of $100.00 per month,” and “any amounts retained in the trust may in the trustee’s sole discretion, as to the specific use, instead be used” (1) for the direct or indirect benefit of other sub-account beneficiaries, (2) to add disabled indigent persons as sub-account beneficiaries, or (3) provide disabled persons with suitable equipment, medication, or services.

Section 6.2 of the Master Trust provides that, upon termination of the sub-account, whether by death of a beneficiary or otherwise, and after payment of administration expenses and other obligations payable by the beneficiary’s sub-account, the remaining trust account balance “shall be payable to any state, or agency of a state, which has provided Medi-Cal assistance to the [b]eneficiary under a state plan under Title XIX of the Social Security Act, up to an amount equal to the total Medi-Cal assistance paid on behalf of the beneficiary under such state plan.” However, Section 6.2 also provides that, after payment of administration expenses and other obligations payable by the beneficiary’s sub-account, the trustee “shall pay from the remaining principal and income of beneficiary’s trust sub-account to the State Department of Health Services, the State Department of Mental Health, the State Department of Developmental Services, and any county or city and county in the State of California or any other state which has provided benefits on behalf of the beneficiary during the beneficiary’s lifetime [within the meaning of 42 U.S.C. § 1396p(d)(4)(A)], for all medical assistance paid…up to the amount remaining in beneficiary’s trust sub-account.” Section 6.2 further provides that “the State Department of Mental Health, the State Department of Developmental Services, and any county or city and county in the State of California or any other state shall be reimbursed for the purpose of reimbursing it for costs and expenses of medical, health, vocational or other services provided to the beneficiary, and other assistance for such services paid by it to the beneficiary, to the full extent to which it may be so entitled pursuant to law or regulation.”

Section 6.3 of the Master Trust provides that, notwithstanding any trust provisions to the contrary, the trust sub-accounts are subject to the requirements of California Probate Code sections 3604 and 3605, which require that “notice of the beneficiary’s death...be given...to, among others, the State Department of Health Services, the State Department of Mental health and the State Department of Developmental Services.”

Section 7.1 of the Master Trust provides that, if the trustee has reasonable cause to believe that it is necessary to use the principal or income in a beneficiary’s sub-account for the beneficiary’s care, which would otherwise be provided through government assistance, the trustee has the discretion to terminate the beneficiary’s sub-account as though the beneficiary had died.

Section 8.1 of the Master Trust provides that a separate sub-account shall be established for each beneficiary, but the trust shall pool the sub-accounts for investment purposes.

Section 10.3 of the Master Trust provides that California law shall govern the trust.

Template Joinder Agreement

The introduction to the Joinder provides that the Joinder is irrevocable upon acceptance by the trustee.

Article 2 of the Joinder provides that the trustee shall make distributions from the beneficiary’s sub-account for the beneficiary’s supplemental needs and supplemental care, and such distributions shall be subject to the trustee’s sole and absolute discretion. It further provides that all distributions shall be solely for the benefit of the beneficiary.

Section 3.1 and 3.2 of the Joinder provide that, in the event the trust sub-account should be terminated in the event of the beneficiary’s death, or otherwise, all amounts remaining in the trust sub-account shall be paid to “any state, county, city where beneficiary resided which distributed Medicaid benefits or other public benefits to deceased beneficiary during his/her lifetime up to an amount equal to the total Medi-Cal assistance paid on behalf of the beneficiary under such state plan.”

Section 3.3 of the Joinder provides that the trustee shall not make any distributions for debts or expenses, including expenses for the beneficiary’s last illness and funeral, prior to distributing any remaining amounts to any state, county, city where beneficiary resided which distributed Medicaid benefits or other public benefits to deceased beneficiary during his/her lifetime up to an amount equal to the total Medi-Cal assistance paid on behalf of the beneficiary under such state plan.”

Section 3.4 of the Joinder provides that any amounts remaining in the beneficiary’s sub-account at the death of the beneficiary shall “be administered as to conform with all of the requirements of 42 U.S.C. § 1396p…and specifically pertaining to reimbursement to the states for government assistance provided on behalf of the individual [b]eneficiary over the [b]eneficiary’s lifetime.”

Section 5.3 of the Joinder provides that, subject to the provisions of Article 3, and all other relevant provisions and laws requiring the trustee to reimburse each state in which the beneficiary received government assistance, the beneficiary shall have the power, through his last will and testament, to direct distribution of the residual property remaining in the beneficiary’s sub-account. However, the beneficiary shall not have power to direct that such property be delivered to the beneficiary or the beneficiary’s estate.

ANALYSIS

Generally, a trust established after January 1, 2000, with the assets of an individual will be a resource countable to that individual for purposes of determining SSI eligibility. See Social Security Act §§ 1613(e), 1917(d); 42 U.S.C. §§ 1382b(e), 1396p(d); Program Operations Manual System (POMS) SI 01120.201.A. However, a trust established with the assets of a disabled individual that is part of a pooled trust may be excepted under certain circumstances. Social Security Act §§ 1613(e)(5), 1917(d)(4)(C); 42 U.S.C. §§ 1382b(e)(5), 1396p(d)(4)(C); POMS SI 01120.203.B.2. 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) the beneficiary’s account must be established for his or her sole benefit by a parent, grandparent, legal guardian, by the beneficiary, or by a court; and (4) upon the beneficiary’s death, to the extent that amounts reaminining in the beneficiary’s account are not retained by the trust, the trust must pay the State(s) the amount remaining in the account up to the total amount of medical assistance paid on behalf of the beneficary under State Medicaid plan(s). Social Security Act § 1917(d)(4)(C), 42 U.S.C. § 1396p(d)(4)(C); POMS SI 01120.203.B.2.a.

In our prior opinion, we advised that J~’s sub-account with the Z Pooled Trust was established after January 1, 2000. Furthermore, the account was funded with his assets. Thus, we concluded that, because the sub-account was established after January 1, 2000, with J~’s assets and for his benefit, it is a countable resource for purposes of determining his SSI eligibility.

Even as amended, the Master Trust and Joinder do not meet the requirements of the pooled trust exception under section 1917(d)(4)(C) of the Act. The amended Master Trust and Joinder contain modified language resolving most of the ambiguity pertaining to reimbursement of the State(s) for medical assistance paid on a beneficiary’s behalf. However, the Master Trust still contains an impermissible early termination provision, permitting termiantion of the trust sub-account during the beneficiary’s lifetime with distribution of the corpus to the beneficiary’s designees or heirs.

The trust sub-account is not for the beneficiary’s sole benefit.

A trust subaccount will not meet the “sole benefit” requirement of section 1917(d)(4)(C)(iii) of the Act if the trustee has power to terminate the trust prior to the beneficiary’s death, unless:

The early termination clause “solely allows for transfer of the beneficiary’s assets” from one pooled trust to another pooled trust and contains specific language precluding disbursements other than to the secondary trust or for allowable administrative expenses, POMS SI 01120.199.F.2; or

The early termination clause provides that, upon termination of the trust: (1) the State receives all amounts remaining in the trust up to an amount equal to the amount of medical assistance paid on behalf of the individual, and (2) after payment of allowable administrative expenses and reimbursement to the State, all remaining funds are distributed to the beneficiary, and (3) the beneficiary does not have power to terminate the trust. POMS SI 01120.199.F.1; see also POMS SI 01120.203.B.2.e (the pooled trust exception does not apply if the trust account “allows for termination of the trust account prior to the individual's death and payment of the corpus to another individual or entity”).

Here, even as amended, section 7.1 of the Master Trust gives the trustee power to terminate a beneficiary’s subaccount prior to his or her death if the trustee uses funds from the beneficiary’s sub-account to pay for care that would otherwise be provided through government assistance. In the event of such early termination, section 7.1 provides that the trustee shall distribute the trust subaccount as if the beneficiary had died. Furthermore, Section 6.1 of the Master Trust and section 5.3 of the Joinder provide that, upon a beneficiary’s death, after application of Medicaid reimbursement provisions, any remaining funds in the trust account shall be distributed to the beneficiary’s designees (through a last will and testament), and, if there are no valid designees, the funds shall be distributed to the beneficiary’s legal heirs.

The foregoing provisions permit early termination of a beneficiary’s subaccount and distribution of subaccount funds to his designees or heirs. Accordingly, the provisions violate the “sole benefit” requirement of the pooled trust exception.

You also asked whether section 5.3 of the Master Trust violates the “sole benefit” requirement. Specifically, section 5.3.5 permits the trustee to make expenditures for “travel, companionship, and other expenditures that will improve the quality of the beneficiary’s physical, emotional, psychological, and/or spiritual life.”

Agency policy allows third party payments for goods or services received by the trust beneficiary. SeePOMS SI 01120.201F.2.b. Here, “companionship” would be a service provided for the beneficiary. We recently consulted OISP on this issue, and they agreed that “companionship may constitute payment for a service,” and would not be a “violation of policy on its face.” However, because we already find that section 7.1 violates the “sole benefit” requirement, we see no harm in advising the revision of section 5.3 to clarify that any payments to a third party must result in goods or services for the beneficiary.

As amended, the Master Trust and Joinder do not limit Medicaid reimbursement to the State of California.

To satisfy the pooled trust exception, a trust must ensure that upon a beneficiary’s death, the State(s) are reimbursed from any remaining trust balance equal to 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)(iv), 42 U.S.C. § 1917(d)(4)(c)(iv); POMS SI 01120.203.B.2.g. The State(s) must be listed as the first payee(s) and have priority over payment of other debts and administrative expenses. Id. The trust must provide payback for any State(s) that provided medical assistance under the State Medicaid plan(s) and not be limited to any particular State(s). Id.

In our prior opinion, we advised that certain provisions in the Master Trust and Joinder suggested that Medicaid reimbursement may be limited to the State of California. Specifically, the second part of section 6.2 of the Master Trust provided that, after a beneficiary’s death, the trustee shall reimburse the “State Department of Health Services, the State Department of Mental Health, the State Department of Developmental Services, and any county or city and county in the State of California,” suggesting that only California and its agencies/subdivisions would receive Medicaid reimbursement. Additionally, sections 3.2 and 3.3 of the Joinder provided that upon the beneficiary’s death, the State Department of Health Services for the state of California shall be “the primary beneficiary” of the trust subaccount. Section 3.1 of the Joinder similarly provided solely for reimbursement to the State of California upon the beneficiary’s death.

However, as amended, the Master Trust and Joinder have modified these sections to ensure that the trust did not limit Medicaid reimbursement to the State of California. Specifically, as amended, section 6.2 now provides for reimbursement to the State of California “or any other state” for medical services provided to the beneficiary. Likewise, sections 3.1, 3.2, and 3.3 of the Joinder now provide for reimbursement to “any state, county, city” that provided Medicaid benefits to the beneficiary.

We note that section 6.3 of the Master Trust still provides that, notwithstanding any trust provisions to the contrary, the trust and beneficiary sub-account are subject to the requirements of sections 3604 and 3605 of the California Probate Code. Section 3604 of the California Probate Code, in turn, requires that an order establishing a special needs trust pursuant to that section must include a provision providing that the “State Department of Health Care Services, the State Department of State Hospitals, the State Department of Developmental Services, and any county or city and county in this state shall first be satisfied.” Cal. Prob. Code § 3604 (emphasis added).

Section 6.3, standing alone, may still reflect an intent for the State of California to receive priority Medicaid reimbursement over other states. However, in light of the modifications to section 6.2 of the Master Trust and sections 3.1 through 3.3 of the Joinder, as well as previously existing provisions providing for reimbursement to all states,^[31] a California court would likely construe the trust, as a whole, to provide for equal reimbursement to all states.^[32] See Cal. Prob. Code § 21121 (“All parts of an instrument are to be construed in relation to each other and so as, if possible, to form a consistent whole. If the meaning of any part of an instrument is ambiguous or doubtful, it may be explained by any reference to or recital of that part in another part of the instrument”).

As you point out, section 6.1 of the Master Trust provides for State reimbursement of “government assistance” paid on a beneficiary’s behalf. Meanwhile, section 2.8 of the Master Trust defines “government assistance” as all services, benefits, medical care, financial assistance, and any other assistance of any kind that may be provided by any county, state, or federal agency to the beneficiary. Additionally, section 6.2 of the Master Trust provides that the State of California or any other state shall be “reimbursed for the purpose of reimbursing it for costs and expenses of medical, health, vocational, or other services provided to the beneficiary.” Similarly, sections 3.1 through 3.3 of the Joinder provide for reimbursement to any state, county or city which distributed Medicaid benefits “or other public benefits” to the beneficiary.

The foregoing language deviates from the language contained in section 1917(d)(4)(C) of the Act, and corresponding agency policy, which requires that a qualifying trust provide for State reimbursement of “medical assistance” paid on a beneficiary’s behalf.^[33] See Social Security Act §§ 1917(d)(4)(C)(iv), 42 U.S.C. § 1917(d)(4)(c)(iv); POMS SI 01120.203.B.2.g. However, the deviation is not substantial. See POMS SI 01120.203.B.2.g (“The trust must containt language susbtantially similar to the language” provided in section 1917(d)(4)(C)(iv) of the Act). Initially, the terms of reimbursement may appear overly expansive. However, other language in the Master Trust and Joinder appear to limit the amount of reimbursement at an “amount equal to the total Medi-Cal assistance paid on behalf of the beneficiary under [a] state plan.”^[34] See Master Trust, section 6.2, and Joinder sections 3.1 through 3.3. Accordingly, while the Master Trust and Joinder may contain langauge indicating that the State(s) (and political subdivisions thereof) may receive reimbursement for public services not anticipated under section 1917(d)(4)(C), other language in the trust appears to limit state reimbursement to the total amount of Medicaid assistance each state paid on behalf of a beneficiary under a state plan.

CONCLUSION

As amended, the Master Trust and Joinder still fail to meet the “sole benefit” requirement of section 1917(d)(4)(C)(iii) of the Act. The Master Trust still permits early termination of the subaccount with distribution of the trust property to someone other than the beneficiary.

As we previously advised, the Z Foundation could resolve this issue by amending section 7.1 of the Master Trust to either eliminate the early termination provision or, in the event of early termination, provide that the beneficiary receive any amounts remaining in the trust subaccount, after reimbursement to the state(s) and acceptable administrative expenses.

This Regional Chief Counsel (RCC) opinion discusses who established the trust and whether the C~ Irrevocable Special Needs Trust (Trust) meets all the requirements for exception under section 1917(d)(4)(A) of the Social Security Act (Act). The RCC did not resolve the issue of whether a conservator of estate can be considered as a legal guardian for purposes of establishing a trust in California. In this case, the conservator of estate petitioned the Court to establish the trust. Thus, the RCC focused its analysis on whether the Court established the Trust. The RCC determined that the petition and court order satisfied the requirement in POMS SI 01120.203B.1.f. because courts can “entertain petitions and establish trusts by court order, so long as the creation of the trust has not been completed before the petition is submitted to the court.” Specifically, the Court stated that it “orders and approves the creation and funding” of the Trust. Therefore, the Court established the Trust. The Trust meets all the requirements for exception under section 1917(d)(4)(A) of the Act.

QUESTIONS PRESENTED

You asked whether the C~ Irrevocable Special Needs Trust (Trust) meets the elements of a special needs trust under section 1917(d)(4)(A) of the Social Security Act (Act), such that it should be excluded as a countable resource for purposes of Claimant’s eligibility for Supplemental Security Income (SSI). In particular, you asked whether the Trust was established through the actions of a legal guardian.

SHORT ANSWERS

The Trust meets the elements of the Special Needs Trust exception under section 1917(d)(4)(A) of the Act and, thus, the agency should exclude it as a countable resource. Although not established by a legal guardian, the trust was permissibly established by a court.

BACKGROUND

Establishment of the Trust

Claimant was born on December. On April XX, 2010, a California Superior Court appointed Claimant’s brother, R~, conservator of Claimant’s estate. Letters of Conservatorship issued by the Court identify R~ as conservator of Claimant’s “estate,” but not of her “person.”

On August 2, 2012, R~ petitioned the Court to create and order the funding of the Trust. Specifically, the petition identified Claimant as a mentally disabled individual, diagnosed with schizophrenia and bi-polar disorder. The petition further indicated that Claimant was involuntarily psychiatrically hospitalized on three occasions in 2012. R~ advised the court that Claimant would benefit from residing in a mental health facility that provides medication supervision, as well as meals and social interaction. R~ requested that that the Court order the transfer of Claimant’s real property and Individual Retirement Account (IRA) into the Trust. R~ represented that Claimant’s IRA was held in a blocked Wells Fargo account, and requested access to $18,000.00 of the funds for anticipated initial expenditures of the Trust for the first year of its operation.

In addition, the petition represented that the Trust met each of the elements of the Special Needs Trust exception under section 1917(d)(4)(A) of the Act (42 U.S.C. § 1396p(d)(4)(A)). The petition stated that Claimant was a disabled person under age 65, and the Trust contained language that, upon Claimant’s death, the remaining assets in the Trust would be used to pay back Medi-Cal. The petition also recognized that under the special needs trust exception, the Trust must be established by Claimant’s parent, grandparent, legal guardian, or a court. R~ advised the Court that he was “not within the listed class of persons or entities permitted to establish the [T]rust,” and, for this reason, sought to “have the Court establish the [T]rust.” R~ attached a proposed draft of the Trust to his petition, and asked the Court to appoint him as trustee.

On October 16, 2012, the California Superior Court issued an order establishing the Trust. Specifically, the Court stated that it “orders and approves the creation and funding” of the Trust. The order identified Claimant’s assets to be transferred to the Trust, including funds in her Citibank checking account, her Wells Fargo IRA, future spousal support payments, and Claimant’s real property.

On October 30, 2012, R~ executed the Trust’s declaration of trust. The declaration of trust provides that the Trust was established “pursuant to court order.”

Terms of the Trust

Articles One and Two of the Trust provide that the Trust is irrevocable and intended to supplement public benefits for Claimant’s special needs. The Trust defines “special needs” as the requisites for maintaining Claimant’s health, safety, and welfare. Article Three provides that the trustee has sole and absolute discretion to make distributions of Trust income or principal when necessary or advisable for the satisfaction of Claimant’s special needs. It further provides that Claimant shall not have access to the Trust principal or undistributed Trust income, nor shall the Trust income be subject to assignment, encumbrance, or creditor claims.

Article Four provides that the Trust shall terminate upon Claimant’s death or upon the exhaustion of the Trust estate. Upon Claimant’s death, the trustee shall notify the California Department of Health Care Services, the California Department of Mental Health, and the California Department of Developmental Services, and learn of the amount of assistance they provided to Claimant. In addition, if Claimant received medical assistance from “any other State Medicaid plan(s),” the trustee shall notify “the other state(s)” of the termination of the Trust and learn the amount of assistance they provided. The trustee “shall pay the Department of Health Care Services, the Department of Mental Health and any state that provided Medicaid assistance, the dollar amount of services provided or the amount remaining in the Trust, whichever is less.” The trustee shall pay any remaining funds to Claimant’s then-living children. Prior to reimbursement of medical assistance to any state, the Trust permits the payment of administrative expenses specifically permitted under Program Operations Manual System (POMS) SI 01120.203.B.3.a., and prohibits payment of those expenses specifically prohibited under POMS SI 01120.203.B.3.b.

Article Six provides that California law shall govern the Trust, and the Trust will be subject to the continuing jurisdiction of the California Superior Court.

ANALYSIS

Generally, a trust established after January 1, 2000, with the assets of an individual will be a countable resource to that individual for purposes of determining SSI eligibility. See Social Security Act § 1613(e), 42 U.S.C. § 1382b(e); POMS SI 01120.201.A. However, pursuant to section 1917(d)(4)(A), commonly referred to as the Special Needs Trust exception, a trust will be excluded as a resource if:

1. It contains the assets of a disabled individual under the age 65;

It is established for the individual’s benefit^[35] by the individual’s parent, grandparent, legal guardian, or a court; and

2. It contains language that the State(s) will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State plan.

Social Security Act § 1917(d)(4)(A), 42 U.S.C. § 1396p(d)(4)(A); POMS SI 01120.203.B.1.

Here, the Court ordered the creation and funding of the Trust, and R~ executed the declaration of trust, in October 2012. Furthermore, Claimant’s real property and financial assets funded the Trust. Accordingly, the Trust was created with Claimant’s assets after January 1, 2000 and, unless the Trust meets the Special Needs Trust exception, it would constitute a countable resource.

The August 2, 2012 petition for establishment of the Trust indicates that Claimant was born December XX, 1961 and that she meets the definition of a disabled person under the Act.^[36] Therefore, the Trust meets the first element of the Special Needs Trust exception.

Article Four of the Trust contains specific language providing that, upon Claimant’s death, the trustee shall reimburse the State(s) for medical assistance paid on behalf of Claimant during her lifetime, up to the dollar amount of services provided or the amount remaining in the Trust, whichever is less. The State(s) are listed as first payee, and have priority of payment over other debts and administrative expenses, except those administrative expenses specifically permitted in POMS SI 01120.203.B.3.a. See POMS SI 01120.203.B.1.h (the State(s) must be listed as the “first payee”). Therefore, the Trust meets the third element of the Special Needs Trust exception.

The Trust provides for termination of the Trust prior to Claimant’s death only in the event that the trustee has exhausted the Trust estate. The Trust, therefore, does not provide for early termination of the Trust and payment of the Trust corpus to someone other than the Claimant. Nor does the Trust otherwise benefit another individual or entity during Claimant’s lifetime.

Thus, the only outstanding issue is who established the Trust. As you have correctly identified, a California Superior Court appointed R~ as the conservator of Claimant’s estate, but not her person. Under California law, a “guardian or conservator of the estate” may contract on behalf of and bind the estate of the conservatee or ward. See Cal. Prob. Code § 2451.5. However, only a “guardian or conservator of the person” may exercise care, custody, and control of the conservatee or ward. See Cal. Prob. Code § 2351(a). These provisions indicate that California law distinguishes between various functions of a conservator in ways that have legal significance.

Under the facts presented here, however, we do not need to resolve the question of whether a California conservator of estate meets the Act’s statutory requirement for a legal guardian to establish a special needs trust. R~ does not claim to have powers of a legal guardian. In his August 2, 2012 petition for establishment of the Trust, R~ advised the California court that he did not have authority to establish the Trust as Claimant’s legal guardian and therefore sought to “have the Court establish the trust.” Thus, we analyze whether the California Superior Court properly established the Trust for purposes of the Special Needs Trust exception.

POMS SI 01120.203.B.1.f provides that “[i]n the case of a trust established through the actions of a court, the creation of the trust must be required by a court order. Approval of a trust by a court is not sufficient.” POMS SI 01120.203.B.1.f. A court is not deemed to “establish” a trust when it merely approves a modification of a previously existing trust. POMS PS 01825.006 (PR 15-004 and PS 13-109); see also Draper v. Colvin, --- F.3d ----, 2015 WL 871789, *7 (8th Cir. Mar. 9, 2015) (holding that a state court’s nunc pro tunc order modifying a trust did not “establish” the trust under 1917(d)(4)(A) of the Act). However, where a petition is brought before a court requesting the establishment of a special needs trust under section 1917(d)(4)(A) of the Act, the court can “entertain the petition and establish the trust by court order, so long as the creation of the trust has not been completed before the petition is submitted to the court.” In re Conservatorship of Estate of Kane, 137 Cal. App. 4th 400, 408, 40 Cal. Rptr.3d 378, 383 (Cal. Ct. App. 2006) (citing In re Gillette, 756 N.Y.2d 835, 838 (N.Y. Sur. Ct. 2003)).

Here, R~ petitioned the California Superior Court to order the establishment of the Trust. Although he submitted a proposed draft of the Trust to the Court with his petition, R~ did not execute the trust documents until October 30, 2012, after the Court ordered him to do so in its October 16, 2012 order. Moreover, the Court ordered transfer of Claimant’s assets into the Trust, including the funds in Claimant’s blocked IRA account, which R~ was otherwise unable to fully access or control. Finally, the Court retained jurisdiction over the Trust, suggesting that the Court would continue to oversee the Trust and ensure that R~ complied with the Court’s order and declaration of trust.

Based on the foregoing, the Court fully established the Trust and did not merely approve an existing Trust. Accordingly, both the terms of the Trust and the party establishing the Trust meet the requirements of a Special Needs Trust under section 1917(d)(4)(A) and should not be counted as a resource to Claimant.

CONCLUSION

From the information available to us, it appears that the Trust meets the elements of the Special Needs Trust exception under 1917(d)(4)(A) of the Act and should be excluded as a countable resource.

In this Regional Chief Counsel (RCC) opinion, the RCC determined that in California court-approved “ab initio” (from the beginning) modifications to the G~ Children’s Non-Revocable Trust (Trust) had no retroactive effect and became effective on the date the court approved them. The RCC also determined the modifications did not establish a new self-settled trust for the benefit of the SSI claimant. The court order purportedly “created” a special needs trust for the benefit of claimant. However, the RCC found that the court order merely modified the terms of the previously existing third-party trust. Therefore, the Trust continued to be a third-party trust since the modifications did not change the corpus of the Trust. Moreover, the Trust as amended ceases to be a countable resource to the claimant because the claimant does not have the power to direct the use of the trust corpus.

QUESTIONS PRESENTED

1. You asked whether court-approved modifications to the G~ Children’s Non-Revocable Trust (Trust) applied retroactively to the date of the Trust’s creation.

2. You also asked whether the Trust continued as a third-party trust, or whether the court-approved modifications effectively established a new self-settled trust for the benefit of K~ (Claimant).

SHORT ANSWERS

1. The court-approved modifications to the Trust do not apply retroactively. Rather, the modifications became effective on January 15, 2013, the date the California Superior Court approved them.

2. The available evidence does not show that Claimant contributed any of her assets to the Trust. Furthermore, the court-approved trust modifications did not change the corpus of the Trust; it merely altered the method of administration with respect to Claimant’s share. Therefore, the Trust continues to be a third-party trust.

BACKGROUND

Claimant was born on August. On July XX, 1997, Claimant’s mother (Settlor) executed the Trust, initially funding the trust with $10.00 and assets contained in Schedule “A” of the Trust. ^[37] The Trust was expressly irrevocable. During the Settlor’s lifetime, all contributions to the Trust were divided into four equal shares, one for each of Settlor’s four children. Article III, section C of the Trust specifically governed the administration of Claimant’s share. Article III, section D of the Trust governed the administration of the shares of Claimant’s three siblings. ^[38] The Trust provided that the trustee pay to Claimant, or apply for her benefit, all of the net income of her share of the Trust. The Trust also gave Claimant the power to compel the trustee “to convert any nonproductive trust property to productive trust property.” ^[39] Additionally, Claimant had a general power of appointment, granting her the right to determine how the trustee would distribute her trust share upon her death. The Trust contained a spendthrift provision, prohibiting the voluntary and involuntary transfer of each beneficiary’s share of the Trust. Lastly, California law governs the Trust. ^[40] The Settlor died in 2001. On September 5, 2012, Claimant’s brother, serving as the trustee, filed a petition in a California Superior Court, requesting modification of the Trust’s provisions governing Claimant’s share. The purpose of the modifications was to “create” a special needs trust ab initio (from the beginning) for the benefit of Claimant.

On December 19, 2012, the trustee executed the trust modifications, and on January 15, 2013, the Court approved those modifications ab initio. As amended, the Trust provides that the trustee would hold Claimant’s trust assets and make discretionary distributions for her special needs. The expressed purpose of the modifications was to supplement, and not supplant, any public benefits for which Claimant may be eligible.

Additionally, as amended, the Trust provides for distribution of Claimant’s trust assets to her three siblings, in equal shares, upon Claimant’s death. The modifications further allowed for termination of the trust prior to Claimant’s death should Claimant become ineligible for public benefits due to the nature of the Trust distributions. In the event of such early termination, the Trust provided for distribution of Claimant’s assets to her three siblings. The Trust requested, but did not require, that the siblings conserve, manage, and use the distributed funds for Claimant’s benefit.

ANALYSIS

Generally, a third-party trust created prior to January 1, 2000, will not be a countable resource to the trust beneficiary so long as the beneficiary does not have the power to revoke the trust and compel distribution of the trust corpus, or direct the use of trust assets for his or her own support and maintenance. Program Operations Manual System (POMS) SI 01120.200.B.19 and D.2. Claimant’s mother established the Trust on July 25, 1997, and expressly made the Trust irrevocable. However, the Trust gave Claimant significant authority to direct management of her trust property, as well as power of appointment to determine distribution of her trust share upon her death. The agency previously determined that Claimant’s trust share was a countable resource due to Claimant’s ability to direct use of the trust property. ^[41]

I. Did the January 15, 2013 Trust Modifications have Retroactive Application?

On January 15, 2013, a California Superior Court approved modifications to the Trust ab initio, purportedly making the modifications retroactive from the time of the Trust’s creation on July 25, 1997. The Court cited California Probate Code section 15409(a) for the source of its authority to modify the Trust. This section permits a court to modify the provisions of a trust if, based on circumstances not known to or anticipated by the Settlor, the terms of the trust defeat or substantially impair the accomplishment of the purpose of the trust. Cal. Prob. Code § 15409(a); Balian v. Balian, 179 Cal. App. 4th 1505, 1512 (Cal. Ct. App. 2009). ^[42] Though the Court purportedly made the modifications ab initio, we found no legal authority suggesting that California permits retroactive application of substantive trust modifications.

California courts have inherent power to issue orders nunc pro tunc to correct clerical errors, by placing on the record what the court actually decided, but incorrectly recorded. Carpenter v. Pacific Mut. Life. Ins. Co., 14 Cal. 2d 704, 707 (Cal. 1939); Hamilton v. Laine, 57 Cal. App. 4th 885, 890 (Cal. Ct. App. 1997). “The function of the nunc pro tunc order is merely to correct the record of the judgment and not to alter the judgment actually rendered.” Id. (citing Estate of Eckstrom, 54 Cal. 2d 540, 544 (Cal. 1960)). A court may only issue an order nunc pro tunc to correct clerical error or to finalize completed litigation. Cal. Code Civ. Pro. § 473(d) (the court may correct clerical mistakes in its judgment or orders as entered, so as to conform to the judgment or order directed, and may set aside any void judgment or order); Social Security Ruling (SSR) 77-11 (“unless the particular judgment nunc pro tunc was entered either to correct a judicial error or to finalize completed litigation, it would be invalid under California law”).

The California Appellate Court has held that issuance of an order nunc pro tunc to retroactively modify a special needs trust exceeded the limited permissible purpose of the court’s inherent power to rectify clerical errors. Hamilton, 57 Cal. App. 4th at 887, 892; accord In re Conservatorship of Estate of Kane, 137 Cal. App. 4th 400, 408 n.4 (Cal. Ct. App. 2006) (noting that trial courts should avoid using the nunc pro tunc procedure in connection with special needs trusts). In Hamilton, the trial court established a trust fund for a minor in 1985, which resulted in the minor losing his eligibility for Medi-Cal. Id. at 887-88. The Department of Developmental Services (DDS) requested reimbursement from the trust for medical benefits paid on the minor’s behalf, and in 1995, the minor’s guardian ad litem petitioned the court to restructure the minor’s trust to establish a special needs trust. See id. In 1996, the court granted the petition, establishing a special needs trust which related back nunc pro tunc to 1985. See id. at 889. The California Appellate Court found that the nunc pro tunc order was not made to cure a clerical error or omission; rather, it “materially altered the relative rights of the parties…in a manner not contemplated.” Id. at 892 (“It is apparent that the effect of the nunc pro tunc order was to ensure the special needs trust would predate the monetary disbursements made by DDS in the minor’s behalf, thereby rendering DDS without legal redress for its outstanding lien”).

Here, like in Hamilton, the Court’s attempt to modify a previously existing trust did not fall under the nunc pro tunc powers of the court. Indeed, nunc pro tunc is only applicable when there is some prior court action that is not properly reflected in the record. See, e.g., POMS PS 01825.047 (PS 10-114), PS 01825.006 (PS 13-109). The Court was not involved with the creation of the Trust in July 1997; therefore, there was no prior court action to rectify.

The Court did not explicitly state that it was issuing its order nunc pro tunc; rather, the Court used the term “ab initio,” which means “from the beginning.” However, an exhaustive review of California statutory and case law revealed no other legal authority that would permit the Court to issue an order modifying a trust retroactively. Therefore, because the Court exceeded its authority to issue its order nunc pro tunc, the trust modifications merely applied prospectively, from the date of the Court’s January 15, 2013 order. ^[43] II. Did the Trust Modifications Create a New Self-Settled Trust?

Whether the January 15, 2013 Court order established a new self-settled trust, or merely continues a previously existing third-party trust, is dispositive in determining whether the Trust, as amended, constitutes a countable resource. As discussed, a trust established with the assets of a third party prior to January 1, 2000 will only be countable as a resource if the beneficiary has the power to direct the use of trust assets. See POMS SI 01120.200.B.19 & D.2. On the other hand, a trust established after January 1, 2000 with the assets of the beneficiary will generally be countable as a resource. ^[44] See Social Security Act § 1613(e), 42 U.S.C. § 1382b(e); POMS SI 01120.201.A.

Although the Court’s January 15, 2013 order purportedly “created” a special needs trust for the benefit of Claimant, in actuality, the Court’s order merely served to modify the terms of the previously existing third-party trust. See In re Conservatorship of Estate of Kane, 137 Cal. App. 4th at 407 (the Court can “establish” a special needs trust only where the trust has not yet been created) (citing In re Gillette, 756 N.Y.S. 2d 835, 838 (N.Y. Surr. Ct. 2003)). Indeed, the Court’s authority to approve the trust modifications arose from Probate Code section 15409(a). The central premise of section 15409(a) is that trust modifications are necessary for the continuance of the trust as intended by the Settlor. See Cal. Prob. Code § 15409(a); Ike v. Doolittle, 61 Cal. App. 4th 51, 82-83 (Cal. Ct. App. 1998) (in 1986, the California legislature revised the California Probate Code and codified the common law power of the court to modify the terms of a trust instrument where such modification was necessary to serve the original intentions of the Settlors). Section 15409(a) does not give the Court authority to terminate the existing trust in favor of a new trust; such action exceeds the scope of the statutory provision.

Moreover, the trust corpus, originally funded by Claimant’s mother, continued to be held and managed by the trustee. At no point was Claimant entitled to an outright distribution of her trust share; thus, she did not have access to the trust assets and could not use them to fund a new trust. Compare POMS PR 01825.006 (PR 15-004) (a beneficiary was entitled an outright distribution of trust assets under the terms of a third-party trust; thus, when a court ordered that a new special needs trust be established and funded with his assets, it effectively created a self-settled trust). Therefore, even after the Court’s January 15, 2013 order, the Trust continued to constitute a third-party trust.

Finally, on January 15, 2013 the trust was no longer a countable resource to Claimant. The trust modifications effectively restrict Claimant’s ability to direct use of the Trust property. As amended, Article III, section C, of the Trust provides that the trustee has sole discretion to make distributions from the trust income and principal for Claimant’s special needs. Claimant no longer has the right to distributions of trust income, she no longer has a general power of appointment to determine distribution of her trust estate upon her death, nor does she have the power to compel the trustee to convert unproductive trust property to productive trust property. As Claimant no longer has power to direct the use of trust property, her interest in the thirdparty trust ceased to be a countable resource on January 15, 2013. ^[45] See POMS SI 01120.200.B.19 & D.2 (a third-party trust created before January 1, 2000 is not a countable resource if the beneficiary does not have power to direct use of the trust assets for her support and maintenance).

CONCLUSION

The Court’s January 15, 2013 modifications of the Trust, ab initio, had no retroactive effect. In addition, the Trust continued to be a third-party trust; and, because Claimant no longer had the power to direct the use of the trust corpus, her trust share ceased to be a countable resource for purposes of SSI eligibility.

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.

QUESTIONS

You asked whether the Region IX states recognize spendthrift clauses in trusts. ^[46]

SHORT ANSWERS

Arizona, California, Hawaii, and Nevada all recognize the validity of s-pendthrift 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. ^[47] 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. ^[48] 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. ^[49] 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) ^[50] (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 S~’s creditors. ^[51] 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. ^[52] 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. ^[53]

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).

This Regional Chief Counsel (RCC) opinion discusses whether the J~ Revocable Trust of 1998 (1998 Trust) and the J~ Special Needs Trust (J~ SNT) count as a resource for Supplemental Security Income (SSI) eligibility purposes. The 1998 Trust was a third party trust and J~ did not have the power to terminate the trust and obtain the trust assets, or direct the use of the trust principal. Therefore, the 1998 Trust is not a resource until J~ turned age 18. At age 18, J~ was entitled to receive an outright distribution of his remaining share of the 1998 Trust. On the month of his 18th birthday, his share of the 1998 Trust became income, and any retained assets became a countable resource the following month. When the Superior Court granted the modification of the 1998 Trust, it created the J~ SNT. The RCC determined that by modifying the 1998 Trust, the Superior Court in fact approved the creation of a new trust, as opposed to the continuation of the 1998 Trust. The J~ SNT is a countable resource for SSI purposes because it does not meet the “special needs trust” exception under Section 1917(d)(4)(A) of the Social Security Act.

QUESTION

You asked whether J~’s share of the J~ Revocable Trust of 1998 (1998 Trust) is a countable resource for purposes of determining his eligibility for Supplemental Security Income (SSI).

SHORT ANSWER

J~’s share of the 1998 Trust became a countable resource when he turned 18 years old. The transfer of J~’s share to the J~ Special Needs Trust (J~ SNT) in February 2011 did not except these assets from resource counting because the J~ SNT does not meet the special needs trust requirements.

BACKGROUND

G~, the S~, created the 1998 Trust, which became irrevocable upon G~’s death. See 1998 Trust § 2.03. According to the 1998 Trust, upon G~’s death, the trustee was to make several cash distributions to various beneficiaries, including family, friends and charities. See 1998 Trust § 4.04. The remaining balance of the trust estate was to be equally divided between G~’s two children, K~ and C~, and held in trust for them, with mandatory monthly distributions of $1,000 each. See 1998 Trust § 4.04(H). Upon the death of either K~ or C~, the trustee was to distribute 80% of his or her remaining share to residual beneficiaries, free of trust. See id. The trustee would hold the remaining 20% of K~ or C~’s share for J~, making discretionary payments for J~’s support, care, and education, until J~ turned 18 years old. See id. When J~ turned 18 years old, the trustee was to distribute J~’s share to him, free of trust. See id.

K~ died on June XX, 2001. ^[54] Thus, upon G~’s death, J~ was immediately entitled to 20% of K~’s residuary share of the 1998 Trust.

G~ died on June XX, 2007. On November XX, 2009, J~ turned 18 years of age. M~ is still alive.

Trust Distribution Flow Chart

 

On September 22, 2010, D~, the successor trustee of the 1998 Trust, petitioned a California Superior Court to modify the 1998 Trust. ^[55] D~ represented in court documents that a sub-trust was funded for J~ in 2008 in the amount of $33,079.11. The Court noted that the record was unclear why the trustee did not provide J~ a direct distribution when he turned 18 years old on November 16, 2009. See In the matter of G~ , Case No. ~, Doc. No. ~. On February 4, 2011, R~, an attorney for Sacramento Child Advocates, purportedly acting on behalf of J~, consented to the modification of the 1998 Trust. See id. at Doc. No. ~. On February 7, 2011, the Superior Court approved the modification of the 1998 Trust. The Court ordered that J~’s 20% residuary interest in the 1998 Trust be transferred to the J~ SNT. The Court ordered the trustee to retain and administer the J~ SNT, and to apply the J~ SNT’s principal and income, to the extent the trustee considers necessary and advisable, to pay for J~’s special needs. The J~ SNT does not provide for any Medicaid reimbursement to California or any other state upon the trust’s termination. Furthermore, the J~ SNT provides that, in the event of early termination, the remaining trust principal and income would go to the trustee. After such distribution, the J~ SNT requests, but does not direct, the trustee to manage the funds for J~’s benefit.

ANALYSIS

1. Before J~ Turned 18 years old (June 6, 2007 to November 18, 2009)

Generally, an irrevocable third-party trust established prior to January 1, 2000 is not a resource for purposes of determining an individual’s SSI eligibility. Program Operations Manual System (POMS) SI 01120.200(B)(19), (D)(2). G~ established the 1998 Trust on January 15, 1998, and the trust became irrevocable upon her death on June 26, 2007. Additionally, G~ established the 1998 Trust with her assets. Therefore, the 1998 Trust would only be a countable resource to J~ if he had the power to terminate the trust and obtain the trust assets, or alternatively, direct the use of the trust principal and income. See POMS SI 01120.200(B)(19) (“In a third-party trust situation, the focus should be on whether the individual (claimant, recipient, or deemor) can terminate the trust and obtain the assets for himself or herself.”); POMS SI 01120.200(D)(2) (“If an individual does not have the legal authority to revoke or terminate the trust or to direct the use of the trust assets for his or her own support and maintenance, the trust principal is not the individual’s resource for SSI purposes.”).

Because K~ pre-deceased G~, upon G~’s death, J~ became entitled to 20% of K~’s residuary share. See 1998 Trust § 4.04(H)(6). However, because J~ had not yet turned 18, his share continued to be held by the trustee and subject to the terms of the trust. See id. The trustee had discretion to make payments for J~’s support, care, and education; and J~ had no power to terminate the trust or direct the use of trust assets. Accordingly, before J~ turned 18 years old, the 1998 Trust was not a countable resource to him.

2. After J~ Turned 18 years old (November XX, 2009 to Present)

On November XX, 2009, J~ turned 18. The 1998 Trust provides that when J~ attained 18 years of age “the Trustee shall distribute the principal and accumulated interest of the child’s Trust to J~, free of trust.” See 1998 Trust § 4.04(H)(6)(E) (emphasis added). Accordingly, J~ was entitled to receive an outright distribution of his remaining share of the 1998 Trust in November 2009. In that month, the trust property owed to J~ was countable as income to him, and any income retained by J~ in following months was countable as a resource. See POMS SI 01120.005(B), SI 01120.200(E)(1)(a).

The resource rules do not turn on whether the trustee actually distributed the trust assets to J~. The trust property was a resource to J~ because he owned it and he had a legal right to obtain it under the plain terms of the 1998 Trust. See POMS SI 01110.100(B)(1), SI 01120.010(B)(2) (“The fact that an owner does not have physical possession of property does not mean it is not his/her resource, provided the owner still has the legal ability to spend it or convert it to cash.”). Although J~ never took action to enforce distribution, he had the legal ability to do so; thus, the trust property became a countable resource.

On February 7, 2011, a California Superior Court approved the modification of the 1998 Trust; resulting in the creation of the J~ SNT funded by J~’s 20% interest in the residuary estate of the 1998 Trust. Generally, a trust established after January 1, 2000, with the assets of an individual will be a resource attributable to that individual for purposes of determining SSI eligibility. See Social Security Act § 1613(e), 42 U.S.C. § 1382b(e); POMS SI 01120.201(A). Here, the J~ SNT was created ^[56] in February 2011 with J~’s assets; accordingly, it is countable as a resource to him unless an exception applies.

Pursuant to the special needs trust exception, a trust will not count as a resource if it: (1) contains the assets of a disabled individual under the age 65; (2) is established for the benefit of the individual by the actions of the individual’s parent, grandparent, legal guardian, or court; and (3) contains a provision for the states to receive all amounts remaining in the trust upon the death of the individual up to an amount equal to the total medical assistance paid to the individual. See Social Security Act § 1917(d)(4)(A), 42 U.S.C. § 1396p(d)(4)(A); POMS SI 01120.203(B)(1).

The terms of the J~ SNT do not meet the special needs trust requirements. As an initial matter, the J~ SNT was not established by the actions of J~’s parent, grandparent, legal guardian, or a court. The Court’s order, approving D~’s petition for a trust modification, did not constitute a court action “establishing” the J~ SNT. ^[57] Merely approving a petition to modify a trust is insufficient; rather, the court must mandate the creation of the trust. See POMS SI 01120.203(B)(1)(f) (“In the case of a trust established through the actions of a court, the creation of the trust must be required by a court order. Approval of a trust by a court is not sufficient.”).

Furthermore, to qualify as a special needs trust, the trust must be established and used for the “sole benefit” of the individual. POMS SI 01120.203(B)(1)(e). To meet this requirement, in the event of early termination, all remaining funds in the trust (after reimbursement to State Medicaid plan(s) and payment of administrative expenses) must be disbursed to the individual. See id. (“termination of the trust prior to the individual’s death and payment of the corpus to another individual or entity…will result in disqualification for the special needs trust exception”); POMS SI 01120.199(F). Here, the J~ SNT permits early termination, with distribution of the remaining trust corpus to the trustee. Although the J~ SNT “requests” that the trustee continue to manage the distributed funds for J~’s benefit, use of the distributed funds for J~’s benefit is not mandatory. Accordingly, the J~ SNT is not for J~’s sole benefit, and does not qualify for the special needs trust exception.

Finally, to qualify as a special needs trust, the trust must contain specific language providing for state reimbursement of medical assistance paid on behalf of the individual under State Medicaid plan(s). See POMS SI 01120.203(B)(1)(h) (“To qualify for the special needs trust exception, the trust must contain specific language that provides that upon the death of the individual, the State(s) will receive all amounts remaining in the trust, up to an amount equal to the total amount of medical assistance paid on behalf of the individual under the State Medicaid plan(s)”). Here, the J~ SNT contains no such provision. In fact, the J~ SNT explicitly prohibits the reimbursement of medical expenses incurred on J~’s behalf. Specifically, the J~ SNT states that “[n]o part of the Trust principal or income may be subject to the claims of voluntary or involuntary creditors for any costs incurred or sums expended by any public agency, office, or department of California, any other state, or the United States, for the provision of care and services.” Accordingly, the J~ SNT does not meet the special needs trust requirement pertaining to state Medicaid reimbursement.

CONCLUSION

When J~ turned 18 years old, his share of the 1998 trust became a countable resource to him, and the subsequent transfer of his assets into the J~ SNT did not except them from resource counting.

 

Below is a brief summary:

 

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.

QUESTIONS

You asked for guidance on the following questions with respect to states in Region IX: ^[58]

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 S~ 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 B~-H~, 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 S~ 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 S~ 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. ^[59] 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 S~ 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 S~ 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 S~ 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 K~’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 S~ 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. ^[60] 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 S~s).

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 S~).

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).

This RCC opinion states that the Planned Lifetime Assistance Network of California (PLAN) Master Pooled Trust (Trust), as amended on October 12, 2012, meets the resource exclusion requirements for pooled trusts under section 1917(d)(4)(C) of the Act. It also discusses that the trust may retain 100% of a sub-account’s assets upon the death of the beneficiary without conflicting with section 1917(d)(4)(C). Lastly, it discusses that a California Court would likely find that the Trust’s amended terms effectively modified the trust beneficiary’s Joinder Agreement. However, it points out that a PLAN employee or a legal representative does not have the legal authority to establish a Trust sub-account on the beneficiary’s behalf. Therefore, the beneficiary’s sub-account would not be an excludable resource because the account was not established through her actions, or through the actions of her parent, grandparent, legal guardian, or a court.

Question Presented

You asked:

(1) Whether the Planned Lifetime Assistance Network of California (PLAN) Master Pooled Trust (Trust), as amended on October 12, 2012, met the resource exclusion requirements of section 1917(d)(4)(C) of the Social Security Act (Act), 42 U.S.C. § 1396p(d)(4)(C);

(2) Whether a joinder agreement, providing for the Trust’s retention of 100% of a sub-account’s assets at the death of the account’s beneficiary, precluded resource exclusion under section 1917(d)(4)(C); and

Whether the Trust’s October 12, 2012 amendment modified the terms of the H~ ^[61] Joinder Agreement?

Short Answer

(1) As amended, the Trust meets the resource exclusion requirements for pooled trusts under section 1917(d)(4)(C) of the Act.

(2) A term providing for the trust’s retention of 100% of a sub-account’s assets upon the death of the account’s beneficiary would not conflict with section 1917(d)(4)(C).

(3) A California Court would likely find that the Trust’s amended terms effectively modified the H~’ Joinder Agreement, making the sub-account’s early termination provision compliant with the requirements of section 1917(d)(4)(C). Nevertheless, H~’s sub-account would not be an excludable resource because the account was not established through her actions, or through the actions of her parent, grandparent, legal guardian, or a court

BACKGROUND

On December 23, 2004, the Superior Court of the State of California, County of Riverside, ordered that settlement funds H~ received through a lawsuit against Anheuser be placed in a special needs trust, the terms of which the Court approved.

On October 24, 2005, the Inland Counties Regional Center petitioned the Court to authorize its execution of joinder agreement on H~’s behalf to the Inland Counties Master Pooled Trust. The petition indicated that the Court relieved D~, H~’s guardian ad litem, as trustee and appointed Inland Regional Center as her successor trustee on September 14, 2005.

On November 30, 2006, Proxy Parent Foundation dba Planned Lifetime Assistance Network of California (PLAN), executed the PLAN of California Master Pooled Trust (Trust). PLAN established the Trust with the intention that it qualify as a pooled trust under section 1917(d)(4)(C) of the Act. Beneficiaries join the Trust by executing a Joinder Agreement, thereby creating a sub-account from which the trustee pays the beneficiary’s special needs. The purpose of the Trust was to supplement public benefits available to disabled beneficiaries.

The case docket of the Superior Court of the State of California, County of Riverside, shows that it considered and ruled on petitions relating to some aspects of H~’s special needs trust (SNT). See Case No. RIP087605. The docket indicates that, on January 3, 2008, Inlands Regional Center petitioned to add PLAN as a successor trustee. However, we are only able to access the docket listings and do not have access to the case documents themselves. ^[62] Therefore, we cannot confirm when PLAN began serving as the SNT’s trustee; however, a June 4, 2008 order suggested that the Court previously approved PLAN as the successor trustee. ^[63] Nor do we have information regarding the Inland Counties Master Pooled Trust, and that entity’s authority to transfer H~’s sub-account to PLAN.

On March 6, 2008, G~, board member and Director of Legal Affairs for PLAN, signed a Joinder Agreement as grantor, ^[64] establishing a sub-account for the benefit of H~. The Joinder Agreement listed PLAN as H~’s legal representative, indicating that it served as her “Trust Protector.”

On October 12, 2012, PLAN amended Article 12 of the Trust.

Relevant Trust and Joinder Provisions

Original Trust Provision - Article 12

Trust Article 12, as originally drafted, set forth provisions under which the trustee may terminate a sub-account. This article provided that the trustee had the power to terminate a beneficiary’s sub-account prior to the beneficiary’s death (early termination) if the trustee reasonably believed that the assets in the sub-account would be liable for support payments that would otherwise be available through public benefits. In the event of early termination, the trustee would distribute the sub-account’s assets as if the beneficiary were deceased.

Additionally, Trust Article 12 provided for the distribution of a beneficiary’s sub-account upon his or her death. From the assets remaining in the beneficiary’s account at the time of his or her death, the Trust shall first retain the remainder portion (Trust’s Remainder Share) authorized in the beneficiary’s joinder agreement. ^[65] Second, the trustee will pay for state or federal taxes and administrative expenses accrued due to the account’s termination. Third, the trustee will reimburse the State(s) for the medical assistance paid to the beneficiary under State Medicaid Plan(s). Fourth, the trustee will distribute all remaining funds to the final remainder beneficiary as listed in the beneficiary’s joinder agreement.

Joinder Agreement:

In relevant part, the Joinder Agreement provided that, in the event of H~’s death, the Trust’s Remainder Share would be 100%, effectively leaving no remaining funds to be used for reimbursement to State(s) for medical assistance paid on H~’s behalf during her lifetime. The Joinder Agreement also provided that, in the event of the sub-account’s termination prior to H~’s death, the trustee would either (A) distribute the sub-accounts’ funds to H~, or (B) if the trustee, in his sole discretion, deems such a distribution not in H~’s best interest, then he may distribute any remaining funds to PLAN, the final remainder beneficiary. The Joinder Agreement provides that the Grantor and Trustee may jointly agree to amend the terms of the Joinder Agreement, so long as the amendment is consistent with the Trust, and does not modify the beneficiary or the final remainder beneficiary.

Amended Trust Provision – Article 12

As amended on October 12, 2012, Article 12 provides that, in the event of early termination, the trustee will distribute a beneficiary’s sub-account as follows: ^[66]

(A) If distributed directly to the beneficiary: First, the trustee will pay for state or federal taxes and administrative expenses accrued due to the account’s termination. Second, the trustee will reimburse the State(s) for the medical assistance paid to the beneficiary under State Medicaid Plan(s). Third, the trustee will distribute any remaining funds in the sub-account directly to the beneficiary; or

(B) If transferred to a different (secondary) section 1917(d)(4)(C) trust: First, the trustee shall obtain acceptance by another section 1917(d)(4)(C) trust. Second, the trustee will pay for state or federal taxes and administrative expenses accrued due to the account’s termination. Then, the trustee will pay any remaining balance of the sub-account to a secondary trust for establishment of the beneficiary’s sub-account with that trust.

RELEVANT LAW A trust established with the assets of an individual and for his or her benefit is considered a resource in determining his or her eligibility for SSI. Act §§ 1613(e), 1917(d)(4); 42 U.S.C. §§ 1382b(e), 1396p. However, a trust established with the assets of a disabled individual that is part of a pooled trust may be exempted as a resource. Act §§ 1613(e)(5), 1917(d)(4)(C), 42 U.S.C. §§ 1382b(e)(5), 1396p(d)(4)(C). To meet this exception,

(i) The trust must be managed by a non-profit association;

(ii) A separate account must be maintained for each beneficiary of the trust;

(iii) Accounts in the trust must be established for the sole benefit of the disabled beneficiaries, and the account must be established by the actions of the individual, or his or her parent, grandparent, legal guardian, or by a court; and

To the extent that amounts remaining in the beneficiary’s account upon the death of the beneficiary are not retained by the trust, upon the beneficiary’s death, the trust must pay the State(s), from such remaining amounts, the total amount of medical assistance paid on behalf of the deceased beneficiary during the beneficiary’s lifetime. ^[67]

Act §§ 1613(e)(5), 1917(d)(4)(C), 42 U.S.C. §§ 1382b(e)(5), 1396p(d)(4)(C); POMS SI 01120.203(B)(2)).

If a pooled trust contains a provision for the early termination of a sub-account (i.e., termination of the sub-account prior to the beneficiary’s death), the following criteria must also apply, in order for the trust to be an excludable resource under section 1917(d)(4)(C):

(1) Upon early termination, the State(s) would receive all amounts remaining in the account up to an amount equal to the total amount of medical assitance pain on behalf of the individual under the State(s) Medicaid Plan(s);

(2) Other than state and federal taxes, as well as administrative fees, accuing from the termination of the account, all remaining funds must be disbursed to the trust beneficiary; and

(3) The early termination clause must give the power for early termination to someone other than the beneficiary.

See POMS SI 01120.199(F)(1).

A pooled trust with an early termination clause will still be excluded as a countable resource if it allows for transfer of the beneficiary’s assets from one special needs pooled trust to another special needs pooled trust, so long as the early termination clause contains limiting language precluding disbursements other than to the new trust or for administrative expenses. POMS SI 01120.199(F)(2).

ANALYSIS

(1) Does the PLAN Trust, as amended on October 12, 2012, meet the resource exclusion requirements?

As originally drafted, the Trust provided that, in the event of early termination, the trustee would distribute a beneficiary’s sub-account as if he or she were deceased. The priority of distribution, therefore, would result in the trust receiving its Remainder Share prior to reimbursement to State(s) for medical assistance paid on the beneficiary’s behalf. The early termination provision also provided that any remaining balance be paid to a remainder beneficiary.

The Trust’s retainment of a Remainder Share and distributions to a remainder beneficiary violated the requirements of section 1917(d)(4)(C). A special needs trust must be established for and used for the sole benefit of the disabled individual, and any provision of the trust that “allow(s) for termination of the trust prior to the individual’s death and payment of the corpus to an individual or entity (other than the State(s) . . . ) will result in disqualification for the special needs trust exception.” POMS SI 01120.203(B)(1)(e). In the event of early termination, after reimbursement of State(s) Medicaid Plan(s) and payment of taxes and administrative fees, all remaining funds must be disbursed to the beneficiary. POMS SI 01120.199(F). On October 12, 2012, the Trust amended its early termination language to bring the Trust into compliance with section 1917(d)(4)(C). ^[68] The Trust now provides that, in the event of early termination, after reimbursement to the State(s) Medicaid Plan(s) and payment of taxes and administrative fees, any remaining assets in the sub-account shall either (1) be distributed directly to the beneficiary, or (2) be transferred to another qualified master pooled trust.

As amended, the Trust’s early termination provisions comply with section 1917(d)(4)(C). Specifically, only the beneficiary will benefit from the early termination, either through direct receipt of the account’s assets, or through the transfer of his or her account to a different master pooled trust. See POMS SI 01120.199(F).

(2) Does the joinder agreement providing for the Trust’s retention of 100% of a sub-account’s assets on the death of the account’s beneficiary, preclude resource exclusion?

Upon the death of a beneficiary, a master pooled trust may retain a percentage of the assets in the beneficiary’s account prior to any other disbursements, including reimbursement to State(s) for medical assitance paid the beneficiary during his or her lifetime. See Act § 1917(d)(4)(C), 42 U.S.C. § 1396p(d)(4)(C) (“To the extent that amounts remaining in the beneficiary’s account upon the death of the beneficiary are not retained by the trust…”) (emphasis added); POMS SI 01120.199(F) (“it is permissible for the trust to retain amounts remaining in the individual’s account upon the death of the individual”).

H~’s Joinder Agreement provides that, in the event of her death, the Trust will retain 100% of the assets in her sub-account. This provision effectively precludes reimbursement to any state for medical assistance paid on H~’s behalf during her lifetime. Nevertheless, the Act does not limit the amount or extent to which a master pooled trust may retain assets from a deceased beneficiary’s sub-account. See Act § 1917(d)(4)(C), 42 U.S.C. § 1396p(d)(4)(C). Indeed, the Third Circuit held that “Congress intended to permit special needs trust – at the discretion of the trust – to retain up to 100% of the residual after the death of the disabled beneficiary.” Lewis v. Alexander, 685 F.3d 325, 348 (3d Cir. 2012).

Accordingly, the Trust complied with section 1917(d)(4)(C), despite the Joinder Agreement’s provision that the Trust will retain up to 100% of H~’s sub-account’s assets upon her death.

(3) Whether the Trust’s October 12, 2012 amendment modified the terms of the H~ Joinder Agreement?

In 2008, G~, executed a Joinder Agreement as grantor, establishing a PLAN sub-account for H~’s benefit. Although the Joinder Agreement listed PLAN as H~’s legal representative, and indicated that it served as her “Trust Protector,” the agency has not been provided with evidence showing that G~ or PLAN had any legal authority to establish a Trust sub-account on her behalf. Indeed, the Joinder Agreement itself has blank spaces in the place where the beneficiary is asked to provide the name of the court appointed conservator.

Section 1917(d)(4)(C) requires that the a pooled trust account be established through the actions of the beneficiary, a parent, grandparent, legal guardian or court. G~ is not H~’s parent or grandparent, but an employee of PLAN. We have no evidence indicating that he acted as H~’s conservator or through power of atto rney, or that the Court ordered the execution of the H~’ Joinder Agreement. ^[69] See POMS 01120.203(B)(2)(g) (“In the case of a trust established through the actions of a court, the creation of the trust must be required by a court order. Approval of a trust by a court order is not sufficient.”). In the absence of this type of documentation, it appears that G~’s execution of H~’s Joinder Agreement and the establishment of her Trust sub-account did not comply with the requirements of section 1917(d)(4)(C). ^[70] Accordingly, H~’s trust account does not qualify as an excludable resource.

However, we recognize that PLAN may seek to re-execute H~’s Joinder Agreement in compliance with section 1917(d)(4)(C). Therefore, we offer further analysis regarding the effect of the Trust’s October 12, 2012 amendment on the terms of H~’s Joinder Agreement.

H~’s Joinder Agreement provides that, in the event of early termination, the trustee has discretion to either (A) distribute the remaining sub-accounts’ funds to H~, or (B) distribute those funds to PLAN, the entity listed as the final remainder beneficiary. The Joinder Agreement’s early termination clause does not meet the requirements of section 1917(d)(4)(C). In the event of early termination, first, the State(s) must be reimbursed for medical assistance paid on H~’s behalf, then, all remaining funds must be disbursed to the beneficiary or to another qualifying pooled trust. POMS SI 01120.199(F); SI 01120.203(B)(1)(e). Here, the Joinder Agreement’s early termination clause does not provide for State(s) Medicaid Reimbursement, and does not ensure that only H~ will benefit from the early termination. Indeed, the provision leaves it entirely within the trustee’s discretion to terminate H~’s account early and distribute all of the account’s funds to PLAN. ^[71]

The Joinder Agreement permits modification of its provisions so long as the Grantor and Trustee jointly agreed. However, the Joinder Agreement is silent as to whether an amendment to the Trust would control, or whether a separate document, amending the Joinder Agreement, was necessary.

Based on California rules of contract interpretation, we believe that a California court would find that the amendment to the master trust served to modify the terms of the Joinder Agreement. ^[72] One such rule, as codified in California Civil Code § 1642, provides that “[s]everal contracts relating to the same matters, between the same parties, and made as parts of substantially one transaction, are to be taken together.” Cal. Civ. Code § 1642; see also Cal. Civ. Code § 1641 (“The whole of a contract is to be taken together, so as to give effect to every part. . . each clause helping to interpret the other.”), § 1650 (“Particular clauses of a contract are subordinate to its general intent.”). H~’s Joinder Agreement incorporated the Trust by reference, thus making the Trust and the Joinder two contracts relating to the same matter between the same parties. Accordingly, as the Trust pertains to H~’s sub-account, it should be interpreted together with the Joinder Agreement. It follows that any amendment to the Trust subsequent to the execution of the Joinder Agreement would modify like-terms in the Joinder Agreement.

Another California rule of contract interpretation, codified as California Civil Code § 1643, provides that “[a] contract must receive such an interpretation as will make it lawful, operative, definite, reasonable, and capable of being carried into effect, if it can be done without violating the intention of the parties.” Cal. Civ. Code § 1643. The purpose of the Trust and Joinder Agreement was to supplement, rather than replace, public benefits available to H~ as a disabled individual. Accordingly, it was the intent of the parties for H~’s Trust account to qualify under section 1917(d)(4)(C) as an excludable resource. Accordingly, interpreting the October 12, 2012 Trust amendment as modifying the Joinder Agreement’s early termination clause will have the most favorable effect in carrying out the parties’ intent and having the account meet the terms of section 1917(d)(4)(C).

As discussed, the Trust’s October 12, 2012 amendment modifies the provisions for early termination, bringing the terms into compliance with section 1917(d)(4)(C). With the revision, in the event of early termination, after reimbursement to the State(s) Medicaid Plan(s) and payment of taxes and administrative fees, any remaining assets in H~’s sub-account shall either (1) be distributed directly to H~, or (2) be transferred to another qualified master pooled trust. Only H~ will benefit from the early termination, either through direct receipt of the account’s assets, or through the transfer of her account to a different master pooled trust.

In sum, we do not currently have evidence showing that G~ or any PLAN employee had legal authority to sign the Joinder Agreement on H~’s behalf. However, separating out the two issues, the terms of the Joinder Agreement, as modified through the October 12, 2012 Trust amendment, appear to comply with section 1917(d)(4)(C).

This Regional Chief Counsel (RCC) opinion examines whether a court order amending the terms of special needs trust, brought the trust into compliance with section 1917(d)(4)(A) of the Act and whether such amendment applies retroactively. The original trust did not meet the requirements for the special needs trust exception because it was established through the beneficiary’s own actions, as opposed to the actions of his parents, grandparents, legal guardian, or the court. The beneficiary sought to remedy this deficiency by requesting the State court to establish an amended trust and make it retroactive, so that the original trust would become exempt from resource counting from the time of its creation. However, the court order amending the trust did not bring the trust into compliance with section 1917(d)(4)(A) of the Act because the court order merely served to modify the original trust, rather than “create” a new trust. Furthermore, the California court did not have authority to order retroactive application of the amended terms.

Question

You asked whether the California court’s January 3, 2013 order, amending the terms of the Irrevocable Special Needs Trust for R~ (Original Trust), brought the trust into compliance with Social Security Act (Act) § 1917(d)(4)(A), 42 U.S.C. § 1396p(d)(4)(A), and whether the amendment applies retroactively such that the Original Trust became exempt from resource counting from the time of its creation.

Short Answer

The California court’s January 3, 2013 order amending the terms of the trust did not bring the trust into compliance with section 1917(d)(4)(A) of the Act. The Original Trust was created through R~’s actions, and the Court’s order merely served to modify the Original Trust, rather than “create” a new trust. Furthermore, the California court did not have authority to order retroactive application of the amended terms.

BACKGROUND

R~ was born on May and resides in San Jose, California. He receives Supplemental Security Income (SSI) due to disability.

On May 20, 2001, R~ established the Original Trust, funding the trust with approximately $12,500 of inheritance money he received from his mother, Sonia. R~ declared that he suffered from a disability that substantially impaired his ability to care for himself and he established the fund to supplement his basic living needs, which public benefits might not cover. He gave the trustee sole discretion to pay trust principal or income to the extent necessary to satisfy R~’s special needs. The declaration of trust defined “special needs” as “dental care, special equipment, programs of training, education and habilitation, travel needs, and recreation.” Additionally, the declaration of trust expressed R~’s intent that the trustee be cognizant of applicable resource and income limitations for public assistance programs when making trust distributions to him. The stated purpose of the trust was to supplement, and not supplant, public assistance benefits available from state, federal or local government agencies.

The declaration of trust stated that, upon R~’s death, the trust would terminate, and the trustee would notify the State of California for possible reimbursement of funds spent for R~’s benefit. The trustee would then deliver all remaining principal and income, after the State’s reimbursement, to W~ and G~ .

On November 13, 2012, S~ , acting under a Power of Attorney for R~, petitioned the Superior Court of California, County of Santa Clara, to amend the Original Trust and retroactively “establish” the R~ Special Needs Trust (Amended Trust). The petition sought to have the amended terms deemed “established” as of the date of the Original Trust, May 20, 2001, and also fund the Amended Trust with assets of the Original Trust.

On January 3, 2013, the State court granted R~’s petition, ^[73] and approved the trust amendment. The State court’s order directed that the Amended Trust was “deemed to have been established as of 5/20/2001.” The court directed the petitioner, S~, “to execute the trust as S~.” The court order repeatedly referred to the Amended Trust as the “R~ SPECIAL NEEDS TRUST dated 5/20/2001 (Amended).”

The Amended Trust provided that its purpose was to supplement, and not supplant, public benefits available to R~. The trustee was directed to administer the trust so as to encourage support and maintenance from public resources, including SSI and Medi-Cal (California’s term for Medicaid). The trustee had sole and absolute discretion in determining how to distribute trust principal and income, taking into consideration applicable resource and income limitations of the public benefits programs for which R~ was eligible.

In addition, the declaration of the Amended Trust stated that R~ was a disabled individual under 65, and the court purportedly “established” the trust using his assets. The declaration also stated that R~ was the sole beneficiary of the trust, and upon R~’s death, the trust would reimburse all states for medical assistance paid to R~ during his lifetime.

ANALYSIS

Generally, a trust established after January 1, 2000, with the assets of an SSI beneficiary will be a resource attributable to that beneficiary for purposes of determining SSI eligibility. See Social Security Act § 1613(e), 42 U.S.C. § 1382b(e); Program Operations Manual System (POMS) SI 01120.201(A).

Here, the Original trust was created after January 1, 2000, with R~’s assets. R~ funded the Original Trust with inheritance money he received from his mother. Accordingly, the Original Trust would normally be considered a countable resource.

However, pursuant to the Special Needs Trust exception, a trust will not count as a resource if it: (1) contains the assets of a disabled individual under the age 65; (2) is established by the actions of the individual’s parent, grandparent, legal guardian, or court; and (3) contains a provision for the states to receive all amounts remaining in the trust upon the death of the individual up to an amount equal to the total medical assistance paid to the individual. See Social Security Act § 1917(d)(4)(A), 42 U.S.C. § 1396p(d)(4)(A); ^[74] POMS SI 01120.203(B)(1).

As initially drafted, the Original Trust did not meet the requirements for the Special Needs Trust exception. Although the Original Trust was established as an irrevocable trust to provide for the special needs of R~, a disabled individual under 65 years old, the trust was created by R~’s own action, as opposed to the actions of his parents, grandparents, legal guardian, or the court. ^[75]

R~ sought to remedy this deficiency when he petitioned the State court in November 2012, requesting that it establish the Amended Trust and make it retroactive to May 20, 2001. The provisions of the Amended Trust appear specifically tailored for the purpose of meeting the requirements of a Special Needs Trust, pursuant to section 1917(d)(4)(A) of the Act. The declaration of trust stated that R~ was a disabled individual under 65, the trust was “established” with his assets, he was the sole beneficiary of the trust, the trust was purportedly “established” by the actions of the court, and upon R~’s death, the trust would reimburse all states for medical assistance paid to R~ during his lifetime. In theory, the Amended Trust would replace the previously existing Original Trust, and, because it was created by court order, would satisfy the Special Needs Trust requirements of section 1917(d)(4)(A) of the Act. This theory fails, however, because the State court did not have power to establish a new trust and have its terms apply retroactively.

In 1986, the California legislature revised the California Probate Code and codified the common law power of the court to modify the terms of a trust instrument where such modification was necessary to serve the original intentions of the S~s, often due to a mistake or ambiguity in the original document. See Ike v. Doolittle, 61 Cal. App. 4th 51, 82-85 (Cal. App. 1998); Cal. Prob. Code §§ 15400-15414, 17200(b)(13). Probate Code § 15409 provides that the court has power to modify the provisions of the trust if, based on circumstances not known to or anticipated by the Settlor, the terms of the trust defeat or substantially impair the accomplishment of the purpose of the trust. Cal. Prob. Code § 15409. In addition, if all of the beneficiaries to an irrevocable trust consent, they may compel modification of the trust upon petition to the probate court. Cal. Prob. Code § 15403(a). A court may also equitably reform a trust based on mistake, but may not “create a new trust agreement under the theory of reformation.” See Ike, 61 Cal. App. at 84-85 (discussing Cal. Civ. Code § 3399); see also Giammarrusco v. Simon, 171 Cal. App. 4th 1586 (Cal. App. 2009) (discussing and approving the analysis and rationale of Ike).

R~ was the sole beneficiary of the Original Trust, and therefore, modification of the trust based on his petition under section 15403 was appropriate. Furthermore, as the Original Trust was intended to supplement, rather than supplant, public benefits available to R~, the court appropriately modified the trust terms under section 15409 to carry out that purpose.

However, while state law gave the court power to modify the Original Trust and replace its terms with those of the Amended Trust, the modifications had prospective (future) impact only. We found no legal authority suggesting that California permits substantive modifications to have retroactive effect. Moreover, the modification was not merely to correct a drafting error or clarify an ambiguity, as in I~, but instead its purpose was to substantially revise the trust’s terms and provisions.

California courts have inherent power to issue orders nunc pro tunc to correct clerical errors, by placing on the record what the court actually decided, but incorrectly recorded. Carpenter v. Pacific Mut. Life. Ins. Co., 14 Cal. 2d 704, 707-708 (Cal. 1939); Hamilton v. Laine, 47 Cal. App. 4th 885, 890 (Cal. App. 1997). “The function of the nunc pro tunc order is merely to correct the record of the judgment and not to alter the judgment actually rendered.” Id. (citing Estate of E~, 54 Cal. 2d 540, 544 (Cal. 1960)). A court may only issue an order nunc pro tunc to correct clerical error or to finalize completed litigation. Cal. Code Civ. Pro. § 473(d) (the court may correct clerical mistakes in its judgment or orders as entered, so as to conform to the judgment or order directed, and may set aside any void judgment or order); Social Security Ruling (SSR) 77-11 (“unless the particular judgment nunc pro tunc was entered either to correct a judicial error or to finalize completed litigation, it would be invalid under California law.”).

The California Appellate Court has held that issuance of an order nunc pro tunc to retroactively modify a special needs trust exceeded the limited permissible purpose of the court’s inherent power to rectify clerical errors. H~, 57 Cal. App. 4th at 887, 892; accord In re Conservatorship of Estate of K~, 137 Cal. App. 4th 400, 408 n.4 (Cal. App. 2006) (noting that trial courts should avoid using the nunc pro tunc procedure in connection with special needs trusts). In H~, the trial court established a trust fund for a minor in 1985, which resulted in the minor losing his eligibility for Medi-Cal. Id. at 887-88. The Department of Developmental Services (DDS) requested reimbursement from the trust for medical benefits paid on the minor’s behalf, and in 1995, the minor’s guardian ad litem petitioned the court to restructure the minor’s trust to establish a special needs trust. See id. In 1996, the court granted the petition, establishing a special needs trust which related back nunc pro tunc to 1985. See id. at 889. The California Appellate Court found that the nunc pro tunc order was not made to cure a clerical error or omission; rather, it “materially altered the relative rights of the parties…in a manner not contemplated.” Id. at 892 (“It is apparent that the effect of the nunc pro tunc order was to ensure the special needs trust would predate the monetary disbursements made by DDS in the minor’s behalf, thereby rendering DDS without legal redress for its outstanding lien.”). Therefore, the 1996 order to restructure the trust retroactively exceeded the court’s power and authority.

Here, although the State court did not explicitly state that it was issuing its order nunc pro tunc, an exhaustive review of California statutory and case law revealed no other legal authority that would permit a trial court to issue an order modifying the rights of parties retroactively in the absence of a drafting error in the original document. ^[76] As in H~, the trial court’s attempt to establish a new trust or modify a previously existing trust did not fall under the nunc pro tunc powers of the court. Indeed, nunc pro tunc is only applicable when there is some prior court action that is not properly reflected in the record. See POMS PS 01825.047. The court was not involved with the creation of the Original Trust in May 2001; therefore, there was no prior court action to rectify. An order nunc pro tunc cannot be issued to rectify an attorney’s failure to draft a trust with provisions in compliance with section 1917(d)(4)(A) of the Act. See id.

In addition to the absence of specific state authority permitting the court’s action here, other authority cautions against permitting these types of retroactive modifications that could negatively impact third parties, including government parties. The Uniform Trust Code provides that a court has power to reform the terms of a trust to conform to the S~’s intent. See Unif. Trust Code § 415. This provision of the Uniform Trust Code was based on the Restatement (Third) of Property: Donative Transfers, section 12.1. Comment f of this section provides that “unless otherwise stated, a judicial order of reformation relates back and operates to alter the text as of the date of execution rather than the date of the order.” Restatement (Third) of Property: Donative Transfers § 12.1, comment f; see also Unif. Trust Code § 416 (to achieve the S~’s tax objectives, the court may modify the terms of a trust and the modification will have retroactive effect). However, the Court of Appeals for the Seventh Circuit has held that, even when reformation of a trust relates back to the date of the original trust, it does not affect the rights acquired by non-parties, including the federal government. Van Den Wymelenberg v. U.S., 397 F.2d 443, 445 (7th Cir. 1968) (“Were the law otherwise there would exist considerable opportunity for ‘collusive’ state court actions having the sole purpose of reducing federal tax liabilities.”).

California has not adopted the Uniform Trust Code and thus its provisions regarding reformation of trusts cannot provide a basis for the court’s action here. ^[77] Moreover, the Seventh Circuit’s holding in Van W~ suggests that the rights of the federal government would not be affected by any retroactive amendment. See id. Here, SSA has an interest in recovering an overpayment based on counting the Original Trust as a resource, and the State court’s action could be viewed as collusively attempting to reduce a federal liability. See id. Similarly, to the extent California Civil Code § 3399 might apply to permit revision of a contract based on mistake, it may only be revised “so far as it can be done without prejudice to rights acquired by third persons[.]” The H~ court’s rationale in considering the impact on the state’s lien in rejecting the attempt to make a special needs trust is in line with this policy. H~, 57 Cal. App. 4th at 892.

Finally, even supposing that the State court’s order made the terms of the Amended Trust effective as of May 20, 2001, the trust would nevertheless fail to meet the requirements of a Special Needs Trust under 1917(d)(4)(A) of the Act. Specifically, the Amended Trust was not established by the actions of the R~’s parent, grandparent, legal guardian, or a court. ^[78] While it is apparent that R~ intended the State court’s January 3, 2013 order to constitute a court action “establishing” the Amended Trust, in fact, by its own terms and language the court merely approved an amendment of the already existing Original Trust. See POMS PS 01825.046 (opining that a court’s mere approval of an amendment to an already existing trust is not “establishing” the trust for purposes of section 1917(d)(4)(A) of the Act; rather, “the creation of the trust must be required by court order”) (citing POMS SI 01120.203(B)(1)(f) and In re G~, 756 N.Y.S.2d 835, 837 (N.Y. Sur. Feb. 27, 2003) (since the trust was already created by the petitioner, the court could not “establish” the trust through its order; “It had already been established by Mr. G~ when the trust was signed by him and the trustee and funded, thus completing the acts necessary to create a trust”)).

The Amended Trust retained the assets of the Original Trust, and though R~ changed the trust’s terms in an attempt to comply with the requirements of a Special Needs Trust, the underlying purpose of the trust remained the same, i.e., the trust would supplement, rather than supplant, public benefits available to R~. Also, the Amended Trust contained the term “amended” in its title, and claimed to be retroactive to the date the Original Trust was created. The foregoing factors support a conclusion that the order “establishing” the Amended Trust merely served to approve a modification of the Original Trust. ^[79]

Accordingly, as the Original Trust remained in effect, though with modified terms and a slightly different name, it continued to be the product of R~’s actions, not those of the court. The court can only “establish” a trust if the trust has not already been created. Cf. In re Conservatorship of Estate of K~, 137 Cal. App. 4th at 407-408 (a court can “establish” a special needs trust even if the court ordered the action based on the petition of the disabled individual, so long as the trust has not already been created) (citing In re G~, 756 N.Y.S.2d at 838).

CONCLUSION

The State court’s retroactive modification of R~’s trust exceeded the court’s nunc pro tunc powers, and therefore, the trust did not meet the requirements of a Special Needs Trust under section 1917(d)(4)(A) of the Act. Moreover, even after the State court’s order, the trust failed to meet the requirements of a Special Needs Trust because the trust was initially established by R~ and not through court action.

This opinion reveals the inadequacy of the provisions of a Special Needs Trust to meet the requirements for exception from SSI resource counting. The Regional Chief Counsel’s office reveals that this Trust does not satisfy the State Medicaid reimbursement requirement for several reasons. The Trust does not list the State(s) as the primary creditor and it allows other debts to take precedence over the State. The Trust fails again by not adhering to the “sole benefit” provisions when it allows termination prior to death and distribution to the beneficiary’s mother or other heirs.

Question Presented

You submitted a copy of the K~ Special Needs Trust (Trust) with questions about certain trust terms. In particular, you asked: (1) whether the Trust satisfies the State Medicaid Reimbursement Requirement; and (2) whether the Trust was established for the “sole benefit” of beneficiary K~.

Short Answer

(1) The Trust terms do not satisfy the State Medicaid Reimbursement Requirement.

(2) The Trust is not considered established for K~’s “sole benefit.”

BACKGROUND ^[80] K~ was born on December. He has paraplegia which is expected to be permanent. On February 19, 2004, the Los Angeles County Superior Court issued an Order establishing the Trust. The Trust is titled, “The K~ Special Needs Trust (Payback Trust, Los Angeles County).”

The Trust may be terminated in one of four ways, whichever occurs first: (1) upon K~’s death; (2) if K~ becomes ineligible for public benefits and the trustee determines that termination of the trust would restore eligibility or otherwise be a financial benefit to K~; (3) if a court orders the Trust to reimburse a government agency; or (4) if the Trust comes under attack from creditors. ^[81] See Trust § 4.8. If the trust is terminated by death, “the Trustee shall pay the State of California up to an amount equal to the total medical assistance paid on behalf of the Beneficiary under the State plan.” See Trust § 4.8.1.1. The same provision also applies if the Trust terminates after K~ becomes ineligible for public benefits. See Trust §§ 4.8.2.1.1, 4.8.2.2.1. However, if the Trustee terminates the Trust in response to court-ordered reimbursement or creditor attack, the remaining Trust property is distributed to K~’s mother or other heirs. See Trust §§ 4.8.3, 4.8.4.

In a separate section titled “Rights Upon Termination,” the Trust states as follows:

The State of California or any other state shall be entitled to receive all amounts remaining in the Trust up to an amount equal to the total medical assistance paid on behalf of the Beneficiary under the State plan to the extent authorized by federal Medicaid law as provided in 42 U.S.C. § 1396p(d)(4)(A), or successor provisions. The Trust property shall be subject to claims for reimbursement from the State of California Department of Health Services, Department of Mental Health, Department of Developmental Services and any county or city in California to the extent authorized by California law as provided in Probate Code § 3605(b), or successor provisions.

Trust § 5.2. Another section specifies that all references to California’s state program called “Medi-Cal” are to be construed as including any other state’s Medicaid program equivalent. See Trust § 7.9.

Trust funds may be used for “goods and services relating to the Beneficiary’s health, protection and welfare” that “enhance the Beneficiary’s quality of life.” Trust § 4.1. The Trust lists examples of goods and services for which Trust funds may be used, including the following:

• •

  medical and dental services and supplies;

• •

  rehabilitation, training, or education programs;

• •

  therapy, including psychological, physical, occupational, or speech;

• •

  special equipment;

• •

  housing;

• •

  transportation services, including the purchase, modification of, maintenance, and insuring of a vehicle;

• •

  specialized dietary needs;

• •

  personal hygiene expenses;

• •

  attendant and companion care;

• •

  educational aides;

• •

  vacations, camping, athletic contests, travel, recreation, and entertainment; and

• •

  electronic equipment, such as computers, radios, stereo systems, CD players, television sets, and video recorders.

See Trust § 4.1.

DISCUSSION

Because the Trust was established on or after January 1, 2000, it is subject to the statutory provisions of section 1613(e) of the Social Security Act (Act). See Act § 1613(e), 42 U.S.C. § 1382b(e); Program Operations Manual System (POMS) SI 01120.201. Generally, under these provisions, a trust established with the assets of an individual is considered a resource for SSI purposes. However, there is an exception for certain trusts established under section 1917(d)(4)(A) of the Act, 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, a trust must: (1) contain the assets of an individual under age 65 and who is disabled; (2) be established for the sole benefit of such individual through the actions of a parent, grandparent, legal guardian, or a court; and (3) provide that the State(s) will receive all amounts remaining in the trust upon the death of the individual up to the amount equal to the total medical assistance paid on behalf of the individual under a State Medicaid plan. See POMS SI 01120.203(B)(1)(a)-(h).

Here, K~ is under age 65, disabled, and the trust was established by a court on February 19, 2004. ^[82] You have raised specific concerns as to whether the “payback” and “sole benefit” requirements are met.

1. Does the Trust Meet State Medicaid Reimbursement Requirements?

The special needs trust Medicaid “payback” provision must list the State(s) as the first payee and specify that the State(s) has priority over payment of other debts or administrative expenses (with exceptions for taxes and fees for winding up the trust). See POMS SI 01120.203(B)(1)(h); SI 01120.203(B)(3)(a). The trust must allow payback to any State(s) that provided care under the State’s Medicaid plan and cannot be limited to any particular State(s). POMS SI 01120.203(B)(1)(h). In addition, payback may not be limited to any particular period of time. Id.

Here, the Trust contains two different clauses regarding State Medicaid payback. First, the Trust termination section states that “the Trustee shall pay the State of California up to an amount equal to the total medical assistance paid on behalf of the Beneficiary under the State plan.” See Trust § 4.8.1.1. This clause does not meet the payback requirement because it: (1) allows payback only to California rather than to any State(s); and (2) does not give that payback priority over other debts or expenses. See POMS SI 01120.203(B)(1)(h). In addition, only two of the four possible termination scenarios include this clause; as currently written, the other two seem to disperse funds directly to K~’s mother or heirs. See Trust §§ 4.8.3, 4.8.4. Sections 4.8.3 and 4.8.4 therefore do not meet the payback requirement because they omit payback to the State(s) at all. See POMS SI 01120.203(B)(1)(h).

Trust Article Five, “Rights Upon Termination,” also addresses State Medicaid payback, in a section called “Claims for Reimbursement.” Section 5.2 provides that “[t]he State of California or any other state shall be entitled to receive all amounts remaining in the Trust up to an amount equal to the total medical assistance paid on behalf of the Beneficiary under the State plan to the extent authorized by federal Medicaid law as provided in 42 U.S.C. § 1396p(d)(4)(A), or successor provisions.” Trust § 5.2. This provision applies to any termination scenario and provides for payback to any state, rather than solely to California. See also Trust § 7.9 (broadening use of term “Medi-Cal” to mean any state Medicaid programs). However, section 5.2 does not identify the state as the first payee or give Medicaid payback priority over payment of other debts or administrative expenses. See POMS SI 01120.203(B)(1)(h). Accordingly, the Trust terms do not satisfy the State Medicaid Reimbursement Requirement. See id.

2. Is the Trust Established Solely for K~’s Benefit?

As outlined above, to meet the special needs exception, a trust must be established for the sole benefit of an individual, among other requirements. See Act § 1917(d)(4)(A), 42 U.S.C. § 1396p(d)(4)(A); POMS SI 01120.203(B)(1)(e). If a trust allows disbursements to other individuals or entities during the disabled individual’s lifetime, the trust cannot be considered for the “sole” benefit of the disabled individual. See POMS SI 01120.203(B)(1)(e). Likewise, the trust is not considered for the beneficiary’s sole benefit if, during the disabled individual’s lifetime, the terms allow for termination and payment of the trust property to another individual or entity. See POMS SI 01120.203(B)(1)(e). In addition to the written trust terms, actual expenditures from a special needs trust must be made for the sole benefit of the individual. See POMS SI 01120.203(B)(1)(e); SI 01120.201(F)(2).

Here, the Trust states that funds may be used for goods and services relating to K~’s health, protection and welfare and that enhance his quality of life. See Trust § 4.1. The Trust does not identify another individual to whom Trust funds can be paid or for whom Trust funds can be used. Thus, on its face, the Trust would appear to have been established for K~’s “sole benefit. ^[83]

However, the Trust’s termination provisions are not consistent with the sole benefit rules. The Trust permits termination of the Trust prior to K~’s death, and payment of the trust property to another individual or entity. See Trust § 4.8; POMS SI 01120.203(B)(1)(e). Specifically, the Trust sets out three possible terminating events prior to K~’s death, two of which allow the trust property to pass to K~’s mother or heirs. See Trust §§ 4.8.3, 4.8.4. These lifetime termination and distribution provisions indicate that the Trust is not for the individual’s “sole benefit.” POMS SI 01120.203(B)(1)(e). Therefore the Trust was not established for K~’s sole benefit.

CONCLUSION

The Trust does not satisfy the State Medicaid Reimbursement Requirement because it does not identify the State(s) as the first payee or provide that Medicaid has priority over other debts or administrative expenses. In addition, the Trust is not considered to have been established for K~’s “sole benefit” because it contains provisions allowing the Trust to be terminated prior to K~’s death and the trust property distributed to another individual, namely K~’s mother or heir.

The Planned Lifetime Assistance Network of California Master Pooled Trust examined by the San Francisco Regional Chief Counsel (RCC) counts as a resource because its provisions treat early termination the same as termination by death. The RCC clearly identified the significant fact that this would violate the sole benefit provisions by allowing remainder beneficiaries a way to obtain these trust funds as if the sole beneficiary were dead.

Question

You asked whether the Planned Lifetime Assistance Network of California (PLAN) Master Pooled Trust (Trust) should be counted as a resource for Supplemental Security Income (SSI) eligibility purposes, given (1) the provisions in the Trust and Joinder Agreement requiring a 25 percent gift of the trust remainder before satisfying any State Reimbursement Claims, and (2) the language of the early termination clause.

Short Answer

The 25 percent gift requirement does not violate the agency’s requirements, but the early termination clause does. Thus, the trust is a countable resource.

RELEVANT TRUST AND JOINDER PROVISIONS

PLAN, a nonprofit corporation with tax-exempt status under Internal Revenue Code (I.R.C.) § 501(c)(3), established the Trust with the intention that it qualify as a pooled trust under section 1917(d)(4)(C) of the Social Security Act (Trust Art. 1). ^[84] PLAN established a master pooled trust in which individual grantors have sub-accounts established by executing joinder agreements (Trust Art. 1). PLAN holds, administers, and distributes assets as the Trustee for the benefit of persons with disabilities (id., see also Trust Art. 7.1). The purpose and objective of the Trust is to promote the health, wellness and opportunities for independence by providing the beneficiaries with supplemental services, supervision, goods, and care (Trust Art. 3.2, 3.3).

Trust Art. 12 sets forth provisions under which a sub-account may be terminated (Trust Art. 12.1). The early termination clause states, “Every reasonable attempt” will be made to continue each sub-account, but the Trustee “cannot know how future developments in the law” may affect any sub-account (id.). The Trustee “should consider the public benefits consequences” to each Beneficiary before any disbursement of assets in a sub-account (id.).

One of the situations in which a sub-account may be terminated early is “[i]f the Trustee has reasonable cause to believe that the assets of a Trust sub-account (other than a court established trust) are or will become liable for basic maintenance, support, or care that has been or would otherwise be provided” via public benefits (id.). If a sub-account is terminated early, the Trustee generally has three options for handling any funds in the sub-account: the Trustee may (a) seek court approval to terminate the Trust sub-account and establish a support trust for the affected Beneficiary, funding it with the net benefits after any reimbursement and fees and costs; (b) continue to administer the sub-account “under separate arrangement with the affected Beneficiary or his or her Primary Representative,” or (c) “make distributions from the Trust estate” as though the Beneficiary had died (id.: see also Trust Art. 12.2 (“Early Termination of a Trust Sub-Account Due to the Death of the Beneficiary”)). However, for subaccounts established pursuant to “42 U.S.C. § 1396(d)(4)(C), the Trustee shall follow the procedure” set forth in Trust Art. 12.2A, the provisions for distribution after the death of the beneficiary (id. & Art. 12.2A). ^[85] In other words, the terms of the Trust require the Trustee to handle early termination of sub-accounts established under the Social Security Act in only one way—to make distributions as though the beneficiary has died.

Any amounts remaining in the Beneficiary’s sub-account after the beneficiary’s death are distributed sequentially (Trust Art. 12.2). First, the Trust “retains the portion of the Remainder that has been authorized by the Grantor in the Joinder Agreement to be added to the sub-account retained by and in the name of the Trust (the ‘Trust’s Remainder Share’), if any, to be used as set forth in Section 12.7” (Trust Art. 12.2(A)(a); see also Trust Art. 12.7). Second, the Trust pays any taxes or administrative fees (Trust Art. 12.2(A)(b)). Third, the Trust reimburses the state Medicaid agency, pursuant to the applicable law (Trust Art. 12.2(A)(c)). Fourth, the Trust distributes any remainder to the remainder beneficiaries identified in the Joinder agreement (Trust Art. 12.2(A)(d)).

Trust Art. 12.7 provides that the Trust’s Remainder Share is retained by the Trust and distributed according to the sole discretion of the Trustee (Trust Art. 12.7). Besides for “purposes related to PLAN,” the Trustee may make discretionary distributions (a) for the benefit of other Beneficiaries who are indigent, disabled persons, as defined in 42 U.S.C. § 1382c(a)(3); (b) to add indigent disabled persons to the Trust as Beneficiaries; or (c) to provide indigent, disabled persons with equipment, medication, or services deemed suitable by the Trustee (id.).

S~ executed the Joinder as Grantor on October 25, 2010 (id. at 10). He identified the source of funds as a settlement arising from litigation under the Americans with Disabilities Act (id. at 4). He indicated a 25 percent gift to PLAN prior to satisfaction of any State Reimbursement Claims and designated M~ as the sole Remainder Beneficiary (id. at 5).

RELEVANT AUTHORITIES

A trust established with the assets of an individual and for his or her benefit is considered a resource under sections 1613 and 1917 of the Social Security Act (the Act) in determining eligibility for SSI. Act §§ 1613, 1917; 42 U.S.C. §§ 1382b, 1396p. A trust established with the assets of a disabled individual that is part of a pooled trust may be exempted as a resource. Act §§ 1613(e)(5), 1917(d)(4)(C); 42 U.S.C. §§ 1382b(e)(5), 1396p(d)(4)(C). To meet this exception,

i. the trust must be managed by a non-profit association;

ii. a separate account must be maintained for each beneficiary of the trust;

iii. accounts in the trust must be established for the sole benefit of the beneficiaries; and

iv. to the extent that amounts remaining in the beneficiary’s account upon the death of the beneficiary are not retained by the trust, upon the beneficiary’s death, the trust must pay the State, from such remaining amounts, the total amount of medical assistance paid on behalf of the deceased beneficiary during the beneficiary’s lifetime.

Act §§ 1613(e)(5), 1917(d)(4)(C)(i)-(iv); 42 U.S.C. §§ 1382b(e)(5), 1396p(d)(4)(C)(i)-(iv). Additionally, the account in the trust must be established through the actions of the individual, a parent, grandparent, legal guardian, or a court. POMS SI 01120.203(B)(2)(a)). 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).

Administrative expenses may be paid from the pooled trust prior to reimbursement to State(s) for medical assistance, including taxes due from the trust to the State(s) or Federal government because of the death of the beneficiary and reasonable fees for administration of the trust estate such as an accounting of the trust to a court, completion and filing of documents, or other required actions associated with termination and wrapping up of the trust. POMS SI 01120.201(F)(3).

“[U]pon death of the beneficiary, retention of a certain percentage of the funds in a ‘pooled trust’ established through the actions of a nonprofit association in accordance with the trust agreement” is permitted. POMS SI 01120.201(F)(2), SI 01120.203(B)(2). ^[86] Because a special needs trust must be established for and used for the sole benefit of the disabled individual, any provision of the trust that “allow(s) for termination of the trust prior to the individual’s death and payment of the corpus to an individual or entity (other than the State(s) . . . ) will result in disqualification for the special needs trust exception.” POMS SI 01120.203(B)(1)(e). Thus, if the trust contains an early termination clause, the terms of this clause must be closely reviewed to determine whether the trust may be excepted as a resource or is countable. Id.

“For the purpose of SSI eligibility, a trust that contains an early termination provision or clause may not be excepted from the resource counting rules . . . unless it satisfies either the requirements in Section 1917(d)(4)(A) or (C),” as set forth above. POMS SI 01120.199(F)(1). Additionally, a trust must satisfy the resource counting rules of POMS SI 01120.200(D) and SI 01110.100(B) to not be a countable resource. To meet those requirements, a trust must meet all of the following criteria:

Upon early termination (i.e., termination prior to the death of the beneficiary), the State(s), as primary assignee, receives all amounts remaining in the trust at the time of termination up to an amount equal to the total amount of medical assistance paid on behalf of the individual under the State Medicaid plan(s);

Other than payment for those expenses listed in POMS SI 01120.199(F)(3), no entity other than the trust beneficiary can benefit from early termination (i.e., after reimbursement to the State(s), all remaining funds are disbursed to the trust beneficiary); and

The early termination clause gives the power to terminate to someone other than the trust beneficiary.

POMS SI 01120.199(F)(1); see also POMS SI 01120.200(D), SI 01110.100(B). Prior to reimbursement of the state medical assistance, the trust may pay taxes due to the State(s) or Federal government due to the early termination of the trust, and reasonable fees and administrative expenses associated with the early termination of the trust. POMS SI 01120.199(F)(3).

A pooled trust with an early termination clause is still excepted if it “(1) solely allows for transfer of the beneficiary’s assets” from one special needs pooled trust to another special needs pooled trust, and (2) contains specific language precluding disbursements other than to the secondary trust. POMS SI 01120.199(F)(2).

DISCUSSION

In assessing whether the Trust is a countable resource with respect to S~’s SSI eligibility, you have raised two concerns. The first relates to the provisions in Joinder § K and Trust Art. 12 for a 25 percent gift of the sub-account trust remainder before satisfying any State Reimbursement Claims. The second relates to the early termination clause in Trust Art. 12. We address each in turn.

1. The Gift Does Not Render the Trust Countable as a Resource

Under the Act, the Trust may retain a portion of the assets remaining in the subaccount of a deceased beneficiary. See Act § 1917(d)(4)(C)(iv), 42 U.S.C. § 1396p(d)(4)(C)(iv) (“to the extent that amounts remaining in the beneficiary’s account upon the death of the beneficiary are not retained by the trust, upon the beneficiary’s death, the trust must pay the State, from such remaining amounts, the total amount of medical assistance paid on behalf of the deceased beneficiary during the beneficiary’s lifetime.” (emphasis added)). The relevant statutory language suggests that the amount retained is first determined, and then, from the remainder, the State is reimbursed for medical assistance rendered to the deceased beneficiary. See id. The POMS tracks this language: “To qualify for the [special needs] trust exception, 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) (emphasis added).

In this case, S~ and the Trust have established a percentage of the assets from his subaccount that the Trust will retain upon his death (Joinder § K(2)). See POMS SI 01120.201(F)(2). The Trust will retain that percentage of the remaining assets, adding it to the sub-account retained by and in the name of the Trust (Trust Art. 12(A)(a)). See id. Prior to reimbursement of the State medicaid agency, the Trust may pax taxes due from S~’s subaccount to the State or Federal government because of S~’s death and reasonable fees for termination and final administration of the trust (Trust Art. 12(A)(b)). See POMS SI 01120.201(F)(3). Then the State Medicaid agency is reimbursed (Trust Art. 12(A)(c)). See Act § 1917(d)(4)(C)(iv); 42 U.S.C. § 1396p(d)(4)(C)(iv); POMS SI 01120.203(B)(2)(g). Because this procedure comports with both the Act and the POMS, the 25 percent gift to the Trust provided for in Joinder § K and Trust Art. 12 does not render the Trust countable as a resource.

2. The Early Termination Clause Renders the Trust Countable as a Resource

The early termination clause of Trust Art. 12 runs afoul of criteria specified in the Act and POMS. While Trust Art. 12.1 does not specifically designate the State for reimbursement, it specifically refers to Trust Art. 12.2 and directs the Trustee to follow the procedures in Art. 12.2 when a subaccount has been created under the Act’s special needs trust provision. ^[87] Thus, the only action that the Trustee will take for section 1917(d)(4)(C) special needs trusts is to follow the termination-upon-death procedures, even on early termination.

Again, under the termination-upon-death procedures, any amounts remaining in the Beneficiary’s sub-account after the beneficiary’s death are distributed sequentially (Trust Art. 12.2). The Trust first retains its remainder share, then the Trust pays any taxes or administrative fees, next Medicaid reimbursement is made to the states, and, finally, the Trust distributes any remainder to the remainder beneficiaries identified in the Joinder agreement (Trust Art. 12.2(A)).

This early termination sequence violates the Medicaid repayment and sole benefit requirements. If a trust is terminated while the beneficiary is still living, state Medicaid reimbursement must be paid first; only taxes and reasonable fees and administrative expenses associated with the termination of the trust may be paid from the trust prior to reimbursement of State medical assistance. POMS SI 01120.199(F)(1) & (3). The provision of the Trust providing for the Trust to receive its Remainder Share prior to payment of taxes and administrative fees and State Medicaid reimbursement does not comply with this requirement (Trust Art. 12(A)(a)-(c)). In addition, the sole benefit requirement that no entity other than the trust beneficiary can benefit from early termination during the beneficiary’s lifetime precludes both retention of the Trust’s Remainder Share and distributions to remainder beneficiaries (Trust Art. 12(A)(a), (d)). See POMS SI 01120.199(F)(1).

Finally, the early termination provisions do not solely allow for transfer of the beneficiary’s assets to another special needs trust or contain language precluding disbursements other than to the secondary trust. See POMS SI 01120.199(F)(2).

For all these reasons, the early termination clause renders the trust a countable resource.

This opinion clearly establishes California as a state where residual beneficiaries of trusts need not be specifically named. It suffices to use terms “heirs” and “heirs at law” to maintain the irrevocability of a grantor trust.

Question

Whether an irrevocable California trust naming “heirs” or “heirs at law” ^[88] as the only residual beneficiaries may be unilaterally revoked by the S~ such that the trust should be considered revocable.

Short Answer

No. Under current California law, use of the terms “heirs” or “heirs at law” is sufficient to identify residual beneficiaries. Therefore, a S~ may not unilaterally revoke an irrevocable trust that has “heirs” or “heirs at law” named as the only residual beneficiaries. Consequently, the trust is properly considered irrevocable and the S~ who is a current beneficiary of a trust must have consent from his or her heirs in order to modify or terminate the trust.

DISCUSSION

The question posed stems from common law developed from ancient feudal law. Under the common law rule known as “the doctrine of worthier title,” passing title to real property through one’s descendants (the principles of intestate succession) is preferred over passing it by written devise (will or other conveying instrument). ^[89] 28 Am. Jur. 2d Estates § 182. Thus, when the doctrine is applied, a S~ cannot transfer a remainder interest generally to his or her heirs; instead, the remainder interest is reclassified as a reversionary interest to the S~. This would mean that the creator of the trust (the S~), the current beneficiary, and the future beneficiary (remainder beneficiary) could all be the same person. In this circumstance, where the current and future beneficiary are the same person with presumably identical interests, an irrevocable trust would not truly be irrevocable because it could be changed at any time.

One case, Bixby v. California Trust Co., 33 Cal. 2d 495 (1949), illustrates this doctrine. In B~, the plaintiff sought to terminate a self-settled irrevocable trust. Id. at 496. The trust provided that the plaintiff S~ was to receive income for life, and that his interest was “inalienable and inaccessible to creditors.” Id. at 497. Upon the death of the plaintiff, all of the residue and remainder of the trust was to be distributed to his “heirs at law” as determined by the laws of succession then in effect in California. Id. at 497. The B~ court found that the words “heirs at law” were not sufficient to show his intent to create remainder interests in his heirs at law. Id. at 498. The court reasoned that, when a person creates a life estate for himself with a future gift to his heirs, “he ordinarily intends the same thing as if he had given the property to his estate,” and “he does not intend to make a gift to any particular person.” Id. The unspoken rationale unerlying B~ was that a residual beneficiary must be a specific person.

However, in 1958, the California Law Revision Commission proposed abolishing the doctrine of worthier title. Cal. Law Revision Comm’n, http://www.clrc.ca.gov/pub/1959/M59-0102.pdf & http://www.clrc.ca.gov/pub/1959/M59-0204.pdf. The California Legislature approved the proposal and enacted Civil Code section 1073 and Probate Code section 109. ^[90] 1959 Cal. Stat. ch. 122, §§ 1, 2. Under these two sections, the Legislature explicitly abolished the doctrine of worthier title: “The law of this State does not include (1) the common law rule of worthier title that a testator cannot devise an interest to his own heirs or (2) a presumption or rule of interpretation that a testator does not intend, by a devise or bequest to his own heirs or next of kin, to transfer an interest to them.” See also Levy v. Crocker-Citizen Nat’l Bank, 14 Cal. App. 3d 102, 106 (1971) (recognizing Civil Code section 1073 overturned common law doctrine of worthier title).

More recent code provisions reflect the abolition of the doctrine of worthier title. California Probate Code section 21108, the successor statute to California Civil Code section 1073 and Probate Code section 109, contains identical language. Probate Code section 15404(c) lends further support by implying that “heirs” is a valid beneficiary: “If the trust provides for the disposition of principal to a class of persons described only as ‘heirs’ or ‘next of kin’ of the S~ . . . the court may limit the class of beneficiaries whose consent is needed to compel the modification or termination of the trust to the beneficiaries who are reasonably likely to take under the circumstances.”

Despite these developments in California trust law, a S~ who is the sole beneficiary of the trust (also called a “grantor trust”; see POMS SI 01120.200.B.8) still remains able to modify or terminate an irrevocable trust even though the S~ may not do so unilaterally. See Cal. Prob. Code § 15403; B~, 33 Cal. 2d at 497; 60 Cal. Jur. 3d Trusts § 306; see also Heifetz v. Bank of America Nat’l Trust & Sav. Ass’n, 147 Cal. App. 2d 776, 777, 784 (1957). Because “heirs” or “heirs at law” are valid residual beneficiaries of a trust, under Probate Code section 15404(a), the S~ must have the consent of the heirs in order to modify or terminate the trust, subject to the limitation that such heirs must be reasonably likely to take under the circumstances. Probate Code section 15403 similarly requires all beneficiaries to consent in order to modify or terminate an irrevocable trust. Thus, the rule for modifying self-settled irrevocable trusts in California is the same as for non-grantor irrevocable trusts.

CONCLUSION

Under the doctrine of worthier title, a trust that named “heirs” or “heirs at law” as the only residual beneficiary would be read as having failed to create any remainder interests. Because the trust would have no beneficiaries other than the S~, the S~ could revoke even an irrevocable trust unilaterally. However, California no longer follows the doctrine of worthier title, and “heirs” or “heirs at law” are valid beneficiaries of a trust. Consequently, the heirs must consent to any modification or termination of the trust.

This guide from the San Francisco Regional Chief Counsel's office informs us that the establishment of "empty" or "dry" trusts are not valid in the state of California with regard to SSI excluded trusts.

OVERVIEW

You asked whether an unfunded, or “empty,” California 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 California 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 California law recognizes the validity of an empty trust, trusts created in this manner may be eligible for the Medicaid payback trust exception. Conversely, if California law does not recognize the validity of an empty trust, such trusts will not qualify for the exception.

DISCUSSION

California has not directly addressed whether it would recognize an empty Section 1917(d)(4)(A) trust. As a general rule, however, California law does not recognize empty trusts as valid. The relevant statute on this issue is clear: “[a] trust is created only if there is trust property.” Cal. Prob. Code § 15202. This provision mirrors the rule set forth in section 74 of the Restatement (Second) of Trusts, a well-established authority on trust law. See Cal. Prob. Code § 15202, Comments. Longstanding state case law is also consistent with this provision. As a California court explained in 1923, “[t]o the creation of a trust, a trust res or subject-matter is a sine qua non.” Ex Parte Lamb, 215 P. 109, 112 (Cal. Ct. App. 1923) (citations omitted). “In order for [a] trust[ ] to exist there must be an estate to vest in the trustee, and the property must be clearly and definitely pointed out.” Id. (quoting In re J~’s Estate, 196 P. 385 (Or. 1921)); see also In re R~’s Estate,37 P.2d 76, 77-78 (Cal. 1934) (holding that uncertainty as to trust res will render a trust invalid).

Recent California case law reinforces the requirement that a trust must contain property in order to be valid. See Osswald v. Anderson,49 Cal. App. 4th 812, 818 (Cal. Dist. Ct. App. 1996) (listing trust property as an essential element of a trust and citing Cal. Prob. Code § 15202) (other citations omitted); accord Chang v. Redding Bank of Commerce, 29 Cal. App. 4th 673, 684 (Cal. Dist. Ct. App. 1994). Moreover, the future expectation of trust property is insufficient to validate an empty trust under California law. See Gonsalves v. Hodgson, 237 P.2d 656, 660 61 (Cal. 1951) (“Trust property” may include interests that could be the subject of a present transfer) (emphasis added). Thus, an expectation that property may eventually fill an empty trust is not sufficient to establish a valid trust.

CONCLUSION

California 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).

This opinion examines whether the assets and income of a living trust should be counted when determining the eligibility of an SSI beneficiary. The living trust was established in 2002 by the beneficiary's mother using only the mother's assets. Upon the death of the mother the trust became irrevocable and her sons succeeded her as co-trustees. The assets remaining in the trust post-mortem were to be used for the benefit of the SSI beneficiary at the sole discretion of the trustees. Since the trust is irrevocable and the SSI beneficiary cannot revoke the trust or direct the use of assets the trust principal is excluded from resource counting. Furthermore, income derived from the real property contained in the trust is deposited directly in the trust and is not directly accessible to the SSI beneficiary at any time.

Thus, the rental income is not countable for purposes of determining SSI eligibility and payment amount.

QUESTION

(1) Whether the assets of the C~ Living Trust are resources of L~ (the "claimant") for purposes of determining her continuing eligibility for Supplemental Security Income (SSI) benefits.

(2) Whether monthly rental income generated by Los Angeles, California is the claimant's income for purposes of determining her continuing eligibility for SSI benefits.

ANSWER

(1) The assets of the C~ Living Trust are not the claimant's resources for purposes of determining her continuing eligibility for SSI benefits.(2) Unless distributed to the claimant, monthly rental income generated by Los Angeles, California is not the claimant's income for purposes of determining her continuing eligibility for SSI benefits.

FACTUAL BACKGROUND

The claimant, who was born on January, has received SSI benefits since 1986. The Social Security Administration (SSA) recently discovered that the claimant is a trust beneficiary.

On October 24, 2002, the claimant's mother, C~, established the C~ Living Trust as S~, Trustee, and beneficiary (Trust at 19). The trust provided that it was subject to revocation and/or modification during the life of C~, and that, upon her death, it would be irrevocable and not subject to modification (Trust at 18-19).

C~ died on April XX, 2004. Two of her sons, John and Bernard, succeeded her as co-trustees (John statement).

In pertinent part, the trust provided that, upon the S~'s death, the successor trustee(s) would distribute all trust property except (1) the real property commonly known as Belmont Avenue, Los Angeles, California (the Belmont Avenue property) and (2) a one-sixth interest in the residual trust estate (Trust at 3-5). The trust further provided that the successor trustee(s) would administer the two remaining trust assets solely for the claimant's benefit as a Supplemental Needs Trust according to Article 4 of the trust (Trust at 4-5). The explicit purpose of the Supplemental Needs Trust is "to provide financial aid that supplements, rather than replaces, government benefits provided to . . . [the claimant], without disturbing government benefits that would be available . . . if the trust did not exist" (Trust at 6). Article 4 also provides that the successor trustee(s) would have sole discretion to apply as much trust income and trust principal as may be necessary or desirable to meet the claimant's supplemental needs and that the successor trustee(s) is/are neither obligated nor compelled to make any distribution from the trust (Trust at 6). Article 4 further provides that no part of the principal or undistributed income of the trust shall be considered available to the claimant and that the claimant essentially cannot compel the trustee to release any part of the principal or undistributed income of the trust (Trust at 7).

The trust conferred general property powers on the successor trustee(s) (Trust at 11). The trust also specifically authorized the successor trustee(s) to collect rent to which the trust is entitled (Trust at 11) and maintain financial trust accounts (Trust at 12). In addition, the trust provided that "[a]ny undistributed income shall be accumulated and added to principal" (Trust at 6).

The successor co-trustees have not made any trust distribution to the claimant and continue to hold the Belmont Avenue property in trust according to Article 4 of the trust (John statement at 1). The successor co-trustees also collect $800 per month in gross rent generated by the Belmont Avenue property (John statement at 1). The successor co-trustees deposit such rental income into a trust account that is not accessible by the claimant, not subject to the claimant's control, and not available to the claimant (John statement at 2).

Although established in the State of Michigan, the trust expressly provides that California law governs the validity and construction of the trust (Trust at 18).

DISCUSSION

(1) The assets of the C~ Living Trust are not resources of the claimant for purposes of determining her continuing eligibility for SSI benefits.

The C~ Living Trust was established in October 2002 solely with assets of a third person, i.e., the claimant's mother. Accordingly, although established after January 1, 2000, the C~ Living Trust is governed by Program Operations Manual System (POMS) SI 01120.200. POMS SI 01120.200.A.2(b).

When C~ died, the C~ Living Trust became an irrevocable trust. See Trust at 18-19 (trust became irrevocable by its terms); and Cal. Prob. Code § 15400 (2006) (trust irrevocable by its terms is irrevocable under California law). In addition, the claimant does not have authority to revoke the trust, does not have authority to direct the use of any trust asset, and otherwise cannot compel the successor co-trustees to take any particular action. Trust at 6-7, 18-19. Accordingly, given such circumstances, "the trust principal is not the individual's resource for SSI purposes." POMS SI 01120.200.D.2 (emphasis in original).

(2) Unless distributed to the claimant, monthly rental income generated by 266 Belmont Avenue, Los Angeles, California is not the claimant's income for purposes of determining her continuing eligibility for SSI benefits.

Trust earnings (e.g., interest, dividends, royalties, or rents) are not income to the SSI recipient unless the trust directs, or the trustee makes, payment to the SSI recipient. POMS SI 01120.200G.1.a. Here, the claimant never received any distribution from the trust. Moreover, the claimant and successor co-trustees all state that the rental income generated by the Belmont Avenue property is deposited in a segregated trust account that is neither accessible by the claimant nor made available to the claimant (John statement at 2). Accordingly, unless a future distribution is made to the claimant, the rental income collected from the Belmont Avenue property is not the claimant's income for purposes of determining her continuing eligibility for SSI benefits. If the successor co-trustees ever distribute such rental income to the claimant, such monies then will be deemed unearned income to the claimant and assessed according to the regular rules for determining the effect of income on the claimant's continuing eligibility for SSI benefits. POMS SI 01120.200.E.1.

This Regional Chief Counsel (RCC) opinion discusses whether a revocable living trust has any income or resource implications for Supplemental Security Income (SSI) purposes. The opinion states the trust is not a countable resource for SSI because the trust was funded with the assets of someone other than the SSI recipient. Furthermore, the recipient does not have power to revoke the trust or direct use of the trust property for her support and maintenance. The opinion further clarifies that the trustee’s payment of rent directly to the recipient’s landlord constitutes countable income in the form of in-kind support and maintenance (ISM) in the months paid. Based on the presumed maximum value (PMV) rule, the income is valued at one-third of the federal benefit rate (FBR) plus $20.

QUESTION

You asked whether the Revocable Living Trust of M~ (“Levine Trust”) constituted a countable resource to T~ for purposes of evaluating her eligibility for supplemental security income (SSI). You also asked whether the trustee’s disbursement of trust funds to pay for T~’s rent constituted countable income.

SHORT ANSWER

The Levine Trust is not a countable resource for purposes of determining T~'s eligibility for SSI because the trust was funded with the assets of someone other than T~ and T~ does not have power to revoke the trust or direct use of the trust property for her support and maintenance. Furthermore, the trustee’s payment of rent directly to T~’s landlord constituted countable income in the form of in-kind support and maintenance (ISM) in the months paid. Based on the presumed maximum value (PMV) rule, the income is valued at one-third of the federal benefit rate (FBR) plus $20.

SUMMARY OF FACTS

Through a declaration of trust, executed on October 9, 1992, M~ established the Levine Trust. M~ funded the Levine Trust with his own assets, served as the initial trustee, and had unlimited use of the trust principal and income during his lifetime. See Levine Trust, §§ 1.2, 1.4, 1.7, 2.1. M~ retained the right to amend and revoke the trust during his lifetime. See Levine Trust, § 3.1.

Upon M~’s death, the declaration of trust provided for distribution of real property to be held in trust for his daughter, G~, if still living. See Levine Trust, § 2.2.1. The declaration of trust also provided for distribution of his personal tangible property to be held in trust for G~. See Levine Trust, § 2.2.2. As to the balance of the trust estate, the trust provided for distribution of three shares to each daughter, G~ and B~, if still living, with G~’s shares to be held in trust, and distribution of one share to T~ to be held in trust pursuant to the terms contained in Article 8 (Special Needs Trust for T~ (“Abramson SNT”). See Levine Trust, § 2.3. As to the property held in trust for G~, Article 6 provided that, upon G~’s death, if B~ was also deceased, then the Abramson SNT would receive the remaining balance of G~’s trust. See Levine Trust, § 6.8.3.

The declaration of trust expresses M~’s intent that the Abramson SNT would serve as a discretionary trust for T~ to supplement, but not supplant, public benefits. See Levine Trust, § 8.1. Specifically, the Abramson SNT provides that the trustee had sole and absolute discretion to pay or apply for T~’s benefit as much trust income and principal as the trustee deems necessary for her supplemental health, support and education. See Levine Trust, § 8.4. T~ has no power to assign or encumber her interest in the trust property. See Levine Trust, § 8.6. If the trustee determines that the trust renders T~ ineligible for public benefits, or is subject to garnishment or attachment, then the trustee has the discretion to terminate the trust and distribute the trust corpus as if T~ died. See Levine Trust, § 8.9. Upon T~’s death, the declaration of trust provides that the trustee shall pay T~’s last funeral and burial expenses, and then distribute the remaining balance to G~ and/or B~ if still living, but if they are deceased, then to M~’s heirs. See Levine Trust, §§ 2.8, 8.10.

On August 6, 2018, J~, the current trustee for the Abramson SNT completed a declaration. J~ declared that she served as the trustee for the Abramson SNT since January 27, 2014, and previously served as the trustee for the G~ Special Needs Trust. According to J~, when G~ died, the property remaining in her trust transferred to the Abramson SNT. Those assets had a market value of $344,750.71. J~ further declared that T~ did not contribute any of her own property to the Abramson SNT. Finally, J~ reported that she paid rent directly to T~’s landlord from November 20, 2015 to the present. A notation attached to the declaration indicates that T~ reported her rent was $1,723.06 on March 18, 2016.

ANALYSIS

In order to be eligible for SSI, an applicant’s resources cannot exceed $2,000.00 per month for an individual and $3,000.00 per month for an individual with a spouse. 20 C.F.R. § 416.1205; POMS SI 01110.003.A.2. Generally, a trust established with the assets of the beneficiary on or after January 1, 2000 is a countable resource. Social Security Act § 1613(e), 42 U.S.C. § 1382b(e); POMS SI 01120.201.A.1. However, trusts established with the assets of a third-party are not a countable resource to the beneficiary so long as the beneficiary does not power to revoke or terminate the trust or to direct the use of the trust assets for his or her own support and maintenance. POMS SI 01120.200.D.2.

Here, M~ initially funded the Levine Trust. See Levine Trust, § 1.7. Following M~’s death, and ultimately the death of his daughter, G~, the remaining trust estate transferred to the T~’s sub-trust (i.e., the Abramson SNT). See Levine Trust, §§ 2.3, 6.8.3; Declaration of J~. Accordingly, M~’s assets funded the Abramson SNT; and therefore, the Abramson SNT constitutes a third-party trust for purposes of evaluating T~’s eligibility for SSI.

Furthermore, the Abramson SNT does not constitute a countable resource to T~ because she does not have power to revoke or terminate the trust or direct use of the trust property for her own support and maintenance. Specifically, M~ retained the power to amend and revoke the Levine Trust during his lifetime, but the declaration of trust did not indicate any other person had power to revoke the trust or that the power of revocation continued after M~’s death. See Levine Trust, § 3.1. The trustee has discretion to terminate the trust should it render T~ ineligible for public benefits or become subject to garnishment or attachment, but nothing in the trust instrument suggests T~ has power to revoke or terminate the trust. See Levine Trust, § 8.9. Additionally, T~ has no power over distributions from the trust. Rather, the trustee has sole and absolute discretion to decide whether to make distributions for T~’s supplemental health, support and education. See Levine Trust, §§ 8.1, 8.4.

Where a trust does not constitute a resource, disbursements from the trust may be income to the beneficiary depending on the nature of the disbursements. See POMS SI 01120.200.E.1. Distributions from the trust to a third-party for the beneficiary’s food and shelter is income in the form of in-kind support and maintenance (ISM) and is valued under the presumed maximum value (PMV) rule. See 20 C.F.R. § 416.1130(b); POMS SI 01120.200.E.1.b. The PMV is a regulatory cap on the amount of ISM charged to a beneficiary for food and shelter. See 20 C.F.R. § 416.1140(a); POMS SI 00835.300. The amount of the PMV is equal to one-third the federal benefit rate (FBR) in the month in which the beneficiary received ISM, plus $20. See id. The FBR rate for an individual from January 2015 to December 2016 was $733; from January to December 2017 the FBR was $735, and the FBR from January 2018 to December 2018 was $750. See POMS SI 02001.020.

Here, the trustee of the Abramson SNT reported paying rent to T~’s landlord from November 2015 to at least August 2018. See Declaration of J~. Furthermore, the amount of the rent, at least in March 2016, was $1,723.96. Accordingly, in the months that the trustee paid T~’s rent, the agency should apply the PMV rule, which would result in countable ISM income ranging from $264.33 ($733/3+20) to $270 ($750/3+20). Such income should be counted on a monthly basis, and may either reduce or eliminate T~’s SSI benefit for that month, but would not render her entirely ineligible for SSI. See 20 C.F.R. § 416.1100; POMS SI 00810.001.B.2.

CONCLUSION

T~’s share of the Levine Trust is not a countable resource because she does not have power to revoke the trust or direct use of the trust property for her own support and maintenance. Additionally, ISM distributions from the trust constitute countable income in the months received, which may reduce or eliminate her benefit for those months, but the value of that income is based on the PMV.

This Regional Chief Counsel opinion examines whether a sub-account of the Good Shepherd Fund Pooled Trust meets the criteria for an exception to resource counting under section 1917(d)(4)(C) of the Act. The trust contains an early termination provision with language that ensures the trust account is for the NH's sole benefit and ensures priority reimbursement to the State(s) for medical assistance paid on the NH's behalf under a State Medicaid plan. Because the exception criteria in 1917(d)(4)(C) are met, the trust account is not counted as a resource.

QUESTION

You asked whether NH’s account in the Good Shepherd Fund Pooled Trust (Good Shepherd Trust) meets the criteria for an exception to resource counting under section 1917(d)(4)(C) of the Social Security Act (Act).

SHORT ANSWER

Yes. NH's account in the Good Shepherd Trust meets the criteria for an exception to resource counting under section 1917(d)(4)(C) of the Act.

RELEVANT TRUST PROVISIONS

Good Shepherd Trust – Master Trust Agreement

The Good Shepherd Fund, a California non-profit corporation, executed a pooled master trust agreement (Master Trust) on June 14, 2002.

The Master Trust provides that The Good Shepherd Fund established the trust and serves as trustee. Master Trust §§ 1, 6. Although the trust is irrevocable, and may not be altered, amended, revoked, or terminated, the trust may be amended from time to time to effectuate its purpose and intent in order to comply with any federal or state laws or regulations in connection with 42 U.S.C. § 1396p. Master Trust § 2. Each sub-account shall become “irrevocable” upon execution of the beneficiary’s Joinder and receipt of the trust property. Id. The Master Trust further provides that the Good Shepherd Trust shall maintain a separate sub-account for each beneficiary, though the trust may pool the sub-accounts for investment and management purposes. Master Trust § 3.

The Master Trust provides that the trust is established and managed for the beneficiary’s sole benefit. Master Trust § 3. Subject to the trustee’s “sole, absolute, and uncontrolled” discretion, the trustee makes all distributions and such distributions are intended to supplement, not supplant, government benefits received by the beneficiary. Master Trust § 4.

The trustee may terminate the beneficiary’s sub-account during the lifetime of the beneficiary if his or her eligibility for existing public or private benefits is no longer desirable or necessary, or asset protection afforded by this trust is no longer desirable or necessary, or the beneficiary is able to handle his or her own financial affairs. Master Trust § 5. Under such circumstances, the trustee shall distribute the remaining balance of the sub-account to the beneficiary after providing notice and acting in compliance with applicable law. Id.

Further, the trustee may terminate the beneficiary’s sub-account during his or her lifetime due to impossibility of performance, failure of essential purpose, or other good and valid cause such as changes in the law pertaining to the trust. Master Trust § 5. In such event, the trustee may distribute the remaining balance of the sub-account as though the beneficiary had died. Id.

Upon the beneficiary’s death, the Master Trust provides that the trustee may pay all or a portion of the expenses of the beneficiary’s last illness, funeral, burial, administration, probate expenses, legal costs, and taxes. Master Trust § 5.

Further, the Master Trust provides that, before “any other distributions” are made to successor beneficiaries designated by the trustor, the trustee shall satisfy from the remaining account balance all proper state and/or federal agency reimbursement for medical assistance paid on behalf of the beneficiary under a plan of any such agency, up to an amount equal to the total medical assistance paid, but only such amounts as are required by law. Master Trust § 5. Thereafter, the remaining balance in the sub-account shall be distributed to the successor beneficiary or beneficiaries designated by the trustor in the Joinder. Id.

Lastly, the Master Trust provides that California law governs its validity and construction. Master Trust § 12.

Good Shepherd Trust – First Restatement of the Master Trust Agreement^[91]

The Good Shepherd Fund restated “in its entirety” the Master Trust dated June 14, 2002, as amended February 14, 2014 and February 2, 2015 (Restated Trust). As amended, the Restated Trust provides that the trustee may terminate the beneficiary’s sub-account during the lifetime of the beneficiary if his or her eligibility for existing public or private benefits is no longer desirable or necessary, or asset protection afforded by the trust is no longer desirable or necessary, or the beneficiary is able to handle his or her own financial affairs. Restated Trust § 5. Under such circumstances, the trustee shall pay to any state or federal agency from the beneficiary’s sub-account a sum up to the total amount of Medicaid paid on behalf of the beneficiary after providing notice as required by law. Id. Any remaining balance in the sub-account shall be distributed to the beneficiary. Id.

Further, the beneficiary’s sub-account may also terminate during his or her lifetime due to impossibility of performance, failure of essential purpose, or other good and valid cause such as changes in the law pertaining to the trust. Restated Trust § 5. In such event, the trustee shall pay to any state or federal agency from the beneficiary’s sub-account a sum up to the total amount of Medicaid paid on behalf of the beneficiary after providing notice as required by law. Id. Any remaining balance in the sub-account shall be distributed to the beneficiary. Id. Alternatively, the trustee may distribute the remaining balance to another first party pooled trust or first party special needs trust for the benefit of the beneficiary. Id.

The Restated Trust allows certain administrative expenses associated with the trust’s early termination to be paid from the beneficiary’s sub-account prior to payback of the medical assistance to the State(s). Restated Trust § 5. Such expenses include (1) taxes due from the trust to the State(s) or Federal government due to the termination of the trust and (2) reasonable fees and administrative expenses associated with the termination of the trust. Id.

Upon the beneficiary’s death, the Restated Trust provides that the trustee must first reimburse all proper state and/or federal agencies for Medicaid paid on behalf of the beneficiary, up to an amount equal to the total Medicaid paid. Restated Trust § 5. After the satisfaction of the payback, the trustee may pay all or a portion of the expenses of the beneficiary’s last illness, funeral, burial, administration, probate expenses, legal costs, and taxes. Id. Thereafter, any remaining amount in the beneficiary’s sub-account shall be distributed to the successor beneficiaries. Id.

Joinder Agreement

On March 12, 2003, NH’s father executed a joinder agreement (Joinder), establishing NH's sub-account in the Good Shepherd Trust.^[92]

The introduction of the Joinder provides that the Joinder adopts and incorporates by reference the Master Trust.^[93] The Joinder also provides that it becomes irrevocable upon execution of the Joinder agreement by the trustor and trustee.

The Joinder provides that the trustee has discretion in making distributions for the beneficiary’s special needs. Joinder § 7.

The Joinder designates the Good Shepherd Fund and J~ as successor beneficiaries after the beneficiary’s death. Joinder § 8. The Joinder provides for distribution to the successor beneficiaries only after payment of last expenses of th beneficiary, expenses of trust administration, payback of governmental agencies, and taxes. Id.

ANALYSIS

Generally, a trust established after January 1, 2000, with the assets of an individual will be a resource countable to that individual for purposes of determining his or her SSI eligibility. See Social Security Act §§ 1613(e), 1917(d); 42 U.S.C. §§ 1382b(e), 1396p(d); Program Operations Manual System (POMS) SI 01120.201.A. However, a trust established with the assets of a disabled individual that is part of a pooled trust may be excepted under certain circumstances. Social Security Act §§ 1613(e)(5), 1917(d)(4)(C); 42 U.S.C. §§ 1382b(e)(5), 1396p(d)(4)(C); POMS SI 01120.203.D.1. 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) the beneficiary’s account must be established for his or her sole benefit by a parent, grandparent, legal guardian, by the beneficiary, or by a court; and (4) upon the beneficiary’s death, to the extent that amounts remaining in the beneficiary’s account are not retained by the trust, the trust must pay the State(s) the amount remaining in the account up to the total amount of medical assistance paid on behalf of the beneficiary under the State Medicaid plan(s). Social Security Act § 1917(d)(4)(C), 42 U.S.C. § 1396p(d)(4)(C); POMS SI 01120.203.D.1.

Here, NH’s father established an account in the Good Shepherd Trust on March 12, 2003 with NH’s assets. Accordingly, his account constitutes a countable resource unless excepted under section 1917(d)(4)(C) of the Act.

NH’s account appears to satisfy the first two requirements for an exception to resource counting. First, the Good Shepherd Fund, a non-profit organization, established and manages the Good Shepherd Trust. Master Trust §§ 1, 6, Restated Trust §§ 1, 6. Furthermore, the Master Trust and the Restated Trust provide that the trustee will maintain a separate account for each beneficiary, though the trust may pool the accounts for purposes of investment and management of funds. Master Trust § 3, Restated Trust § 3.

As for the final two requirements of section 1917(d)(4)(C), we provide the following analysis.

1. The trust sub-account is for the beneficiary’s sole benefit.

A trust sub-account will not meet the “sole benefit” requirement of section 1917(d)(4)(C)(iii) of the Act if the trustee has power to terminate the trust prior to the beneficiary’s death, unless:

• •

  The early termination clause solely allows for transfer of the beneficiary’s assets from one pooled trust to another pooled trust and contains specific language precluding disbursements other than to the secondary trust or for allowable administrative expenses, POMS SI 01120.199.F.2; or

• •

  The early termination clause provides that, upon termination of the trust: (1) the State receives all amounts remaining in the trust up to an amount equal to the amount of medical assistance paid on behalf of the individual, and (2) after payment of allowable administrative expenses and reimbursement to the State, all remaining funds are distributed to the beneficiary, and (3) the beneficiary does not have power to terminate the trust. POMS SI 01120.199.F.1; see also POMS SI 01120.203.D.5 (the pooled trust exception does not apply if the trust account “allows for termination of the trust account prior to the individual's death and payment of the corpus to another individual or entity”).

Here, the Master Trust’s early termination provision violates the “sole benefit” requirement because it permits distribution of the remaining funds to person(s) other than the beneficiary. Master Trust § 5. Specifically, in the event of impossibility of performance, failure of essential purpose, or changes in trust law, the trustee may terminate the trust account and distribute the remaining account assets as if NH had died. See id. This would involve payment to remainder beneficiaries after reimbursement to the states for medical assistance paid on NH behalf during his lifetime. See id. Accordingly, the early termination violates the “sole benefit” requirement because it allows for distribution of the remaining account assets, after reimbursement to the states, to an individual and entity other than NH.

However, the Restated Trust’s early termination provision cures this defect. The Restated Trust provides that no entity or person other than the beneficiary may benefit from the early termination of the account except for payment of allowable administrative expenses and reimbursement to the states. See Restated Trust § 5. Specifically, the Restated Trust provides that any remaining balance of the beneficiary’s sub-account after reimbursing the state or federal agency will be distributed to the beneficiary or to another pooled or special needs trust “for the benefit of the beneficiary.” Id.

Additionally, the Restated Trust does not give the beneficiary the power to terminate his sub-account. See Restated Trust §§ 2,5.

In short, the Restated Trust’s early termination provision does not violate the “sole benefit” requirement of section 1917(d)(4)(C)(iii) of the Act. Distributing the remaining balance of the beneficiary’s sub-account to the beneficiary or to another pooled or special needs trust “for the benefit of the beneficiary” after reimbursing the states for Medicaid paid on the beneficiary’s behalf is an acceptable form of early termination. See POMS SI 01120.199.F.1. Because the Restated Trust’s terms supersede the terms of the Master Trust, NH’s account in the Good Shepherd Trust meets section 1917(d)(4)(C)(iii) of the Act.

2. The trust contains an acceptable Medicaid reimbursement provision.

To satisfy the pooled trust exception, a trust must ensure that upon a beneficiary’s death, to the extent the trust does not retain amounts remaining in the beneficiary’s account, the State(s) are reimbursed from such remaining amounts in the account equal to the total amount of medical assistance paid on behalf of the beneficiary during his or her lifetime. Social Security Act §§ 1917(d)(4)(C)(iv), 42 U.S.C. § 1917(d)(4)(c)(iv); POMS SI 01120.203.D.8. The State(s) must be listed as the first payee(s) and have priority over payment of other debts and administrative expenses. Id. The trust must provide payback for any State(s) that provided medical assistance under the State Medicaid plan(s) and not be limited to any particular State(s). Id.

The Master Trust does not contain acceptable Medicaid payback language because it does not specifically list the state(s) as the first payee(s). Master Trust § 5. The Master Trust provides that the state(s) have priority only over “distributions” made to the successor beneficiaries. Id. The Master Trust allows payment of impermissible administrative expenses prior to reimbursement to the State(s), including the payment of the beneficiary’s last illness, funeral, burial, and probate expenses. Id, The payment of such expenses prior to State Medicaid reimbursement violates POMS SI 01120.203.E.2.

Nonetheless, the Restated Trust amended the payback language to provide that upon the beneficiary’s death, the trustee must first reimburse “all proper state and/or federal agenc[ies]” for Medicaid paid on behalf of the beneficiary, up to an amount equal to the total Medicaid paid on the beneficiary’s behalf.^[94] Restated Trust § 5. Only after the state and/or federal agencies have been repaid may the trustee pay all or a portion of the expenses of the beneficiary’s last illness, funeral, burial, administration, probate, legal costs, and taxes. Id.

The Restated Trust contains acceptable Medicaid payback language, compliant with section 1917(d)(4)(C)(iv) of the Act. The provision provides that the state(s) will have priority over payment of other debts and administrative expenses. Additionally, the provision makes clear that all state(s) providing Medicaid assistance should receive reimbursement; not limiting repayment to any particular state(s).

You asked whether the payback language in a trust must literally state “Medicaid” or “Title 19” assistance. Section 1917(d)(4)(C)(iv) of the Act provides that the trust must reimburse the State(s) that provided medical assistance under a “State [Medicaid] plan.” Accordingly, a trust’s payback provision should specify that the state(s) are entitled to reimbursement of medical assistance paid under a Medicaid plan and not just any medical assistance. Here, the Master Trust provides that all proper state and/or federal agencies are entitled to reimbursement of any and all “Medical Assistance” under a “plan of such agency.” Master Trust § 5. The Master Trust does not define “Medical Assistance” or “plan of such agency.” However, reading the trust document as a whole, and with due consideration of the settlor’s intent, the term may reasonably be interpreted as meaning medical assistance provided under a State Medicaid plan. See Cal. Prob. Code §§ 21102(a) (the intention of the transferor as expressed in the instrument controls the legal effect of the dispositions made in the instrument); 21120 (“If the meaning of any part of an instrument is ambiguous or doubtful, it may be explained by any reference to or recital of that part in another part of the instrument”). In any event, the Master Trust’s Medicaid reimbursement provision fails for other reasons as discussed above, and the Restated Trust resolves the issue by amending the payback language to provide that the State(s) are entitled to reimbursement of “Medicaid paid on behalf of the beneficiary.” See Restated Trust § 5. Accordingly, the Restated Trust’s payback language satisfies the requirements of section 1917(d)(4)(C)(iv) of the Act.

CONCLUSION

NH’s account in the Good Shepherd Trust, as amended, meets the requirements for an exception to resource counting under section 1917(d)(4)(C) of the Act. The Restated Trust contains an early termination provision with language that ensures the trust account is for NH’s sole benefit and ensures priority reimbursement to the State(s) for medical assistance paid on NH’s behalf under a State Medicaid plan(s).