The Regional Chief Counsel (RCC) opinion examines the revocability of grantor trusts and the validity of spendthrift clauses in the six states that comprise Region VIII (Colorado, Montana, North Dakota, South Dakota, Utah, and Wyoming). The opinion states that for third party trusts all states in Region VIII recognize the validity of a spendthrift clause, however for self-settled trusts, the issue is less straightforward:

In Montana, a spendthrift clause in a self-settled trust is invalid.

In North Dakota, a spendthrift clause is valid in a special needs trust or a pooled trust meeting the criteria in POMS SI 01120.203.

In South Dakota, Utah, and Wyoming, a spendthrift clause will be valid in a self-settled trust that meets specific and detailed requirements. The requirements differ for each state.

In Colorado, the law is unclear.

The opinion also discusses the important issue of examining whether the SSI beneficiary may sell his or her beneficial interest in the trust. In the states where a spendthrift clause would be viewed as invalid, thus allowing the beneficial interest to be sold, it is necessary to determine the value of that interest. In conclusion, the RCC recommended that trusts be referred to OGC for further review for Colorado, South Dakota, Utah, and Wyoming, if the trust provides for mandatory distributions (because the beneficial value of those distributions may or may not be countable).

Question Presented

You have requested a legal opinion on the revocability of grantor trusts and the validity of spendthrift clauses in the six states that comprise Region VIII (Colorado, Montana, North Dakota, South Dakota, Utah, and Wyoming).

Background

A grantor trust is a trust in which the grantor is also the sole beneficiary. The grantor is the individual who provides the trust principal. SSA considers the individual who funds the trust to be the grantor, even if the trust agreement names a person acting on behalf of the individual as the grantor. The grantor is often called the “settlor,” and these terms may be used interchangeably.

Some states follow the general principle of trust law that if a grantor is the sole beneficiary of a trust, the trust is revocable regardless of language in the trust to the contrary. See POMS SI 01120.200(D)(3). However, many of these states also recognize that if the trust names a residual beneficiary to receive the benefit of the trust interest after a specific event, usually the death of the primary beneficiary, then the trust is irrevocable. The primary beneficiary cannot unilaterally revoke the trust because he/she would need the consent of the residual beneficiary. You asked whether states in the Denver region follow these general principles.

A spendthrift clause prohibits voluntary and involuntary transfers of a beneficiary’s interest in the trust income or principal. See POMS SI 01120.200(B)(16). A spendthrift clause is a way to protect the beneficiary’s interest from creditors, because creditors must wait until money is paid from the trust to the beneficiary before they can attempt to claim it to satisfy any debts. Likewise, spendthrift clauses prevent the beneficiary from selling or assigning his or her right to receive future trust distributions to a third party for a lump sum. Under these principles, if a trust has a valid spendthrift clause, the value of the beneficiary’s right to receive payments from the trust is not countable as a resource for SSI purposes. See id.; see also POMS SI 01120.200(D)(1)(a) & (D)(2). However, some states that recognize spendthrift clauses do not allow a grantor to establish a spendthrift trust for his/her own benefit. You asked how these rules apply in the Denver region states.

These considerations are relevant in determining whether a trust is countable as a resource. If the SSI beneficiary has the authority to revoke or terminate the trust and use the funds for support, the trust is counted as a resource. Further, if the SSI beneficiary may sell his or her beneficial interest in a trust, the amount of that interest is a resource; a valid spendthrift clause, however, would prevent such a sale, making the interest not countable.

Discussion

Revocability where Grantor is the Sole Beneficiary

(A) It is appropriate to assume that all six states in Region VIII follow the general principle that, where the settlor is the sole beneficiary of the trust (i.e., does not name any residual beneficiaries), the trust is revocable regardless of the express language of the trust. Montana, Utah, and Wyoming have directly relevant statutes or case law, and we believe the other states would follow the majority rule absent any contrary authority. See Restatement (Third) of Trusts, § 65 (majority of states find trust revocable when settlor is the sole beneficiary); Scott and Ascher on Trusts, § 34.3 (same).

(B) All six states in Region VIII follow the principle that residual beneficiaries are created when the settlor designates heirs, next of kin, or similar groups to receive remaining trust assets upon the primary beneficiary’s death.

(C) As relevant to revocability, it should also be noted that in Colorado, Montana, North Dakota, Utah, and Wyoming, the settlor may revoke a trust unless the trust expressly states that it is irrevocable (even if there are residual beneficiaries). In other words, if the trust is silent with respect to revocability, the trust is revocable. Therefore, when a trust is evaluated under these states’ laws, it is important to confirm that there is specific language in the trust expressly stating it is irrevocable.

References:

Colorado:

(A) No relevant statute or case law so assume state follows majority rule.

(B) Colo. Rev. Stat. § 15-11-710 (abolishing “doctrine of worthier title,” such that reference to heirs or next of kin does not create reversionary interest in settlor).

(C) Colo. Rev. Stat. § 15-16-702(a) (settlor may revoke or amend unless trust expressly states that it is irrevocable).

Montana:

(A) Mont. Code Ann. § 72-38-411 (irrevocable trust may be terminated upon consent of the settlor and all beneficiaries).

(B) Mont. Code Ann. § 72-2-720 (abolishing doctrine of worthier title).

(C) Mont. Code Ann. § 72-38-602 (settlor may revoke or amend unless trust expressly states that it is irrevocable).

North Dakota:

(A) N.D. Cent. Code Ann. § 59-12-11. (411) (omitting provision of Uniform Trust Code (UTC) regarding termination by consent of settlor and beneficiaries). Pursuant to Drafting Committee’s comments to UTC (2004), this omission suggests the state’s prior law controls and prior law was silent on the issue, therefore assume state will follow majority rule.

(B) N.D. Cent. Code Ann. § 30.1-09.1-10. (2-710) (abolishing doctrine of worthier title).

(C) N.D. Cent. Code Ann. § 59-14-02. (602)(1) (settlor may revoke or amend unless trust expressly states that it is irrevocable).

South Dakota:

(A) No relevant statute or case law so assume state follows majority rule.

(B) S.D. Codified Laws § 29A-2-710 (abolishing doctrine of worthier title).

(C) S.D. Codified Laws § 55-4-30 (settlor may reserve power to terminate trust through terms of the trust).

Utah:

(A) Utah Code Ann. § 75-7-411 (irrevocable trust may be terminated upon consent of settlor and all beneficiaries).

Clayton v. Behle, 565 P.2d 1132, 1133 (Utah 1977) (where settlor is “sole beneficiary . . . he can terminate the trust at any time and compel the trustee to reconvey the property to him”).

(B) Utah Code Ann. § 75-2-710 (abolishing doctrine of worthier title).

(C) Utah Code Ann. § 75-7-605(1) (settlor may revoke or amend unless trust expressly states that it is irrevocable).

Wyoming:

(A) Wyo. Code Ann. § 4-10-412(a) (termination allowed after finding by court that settlor and all qualified beneficiaries consent). Absent contrary authority, it is reasonable to assume court finding not required where settlor is the only beneficiary.

(B) Wyo. Code Ann. § 34-1-137 (abolishing doctrine of worthier title).

(C) Wyo. Code Ann. § 4-10-602(a) (settlor may revoke or amend unless trust expressly states that it is irrevocable).

Validity of Spendthrift Clause

A. Validity of Spendthrift Clause in a Third-Party Trust

In a third-party trust (i.e., the trust is funded with the assets of an individual who is not the SSI beneficiary), all states in Region VIII recognize the validity of a spendthrift clause. Therefore, where a third-party trust includes a spendthrift clause, the beneficiary cannot sell his or her beneficial interest in the trust and that interest is not a resource.

References:

Colorado:

University Nat. Bank v. Rhoadarmer, 827 P.2d 561, 563 (Colo. App. 1991) (“The validity and enforceability of spendthrift provisions in this state is not disputed.”).

Montana:

Mont. Code Ann. § 72-38-502 (“A beneficiary may not transfer an interest in a trust in violation of a valid spendthrift provision . . . .”).

Lundgren v. Hoglund, 711 P.2d 809, 811 (Mont. 1985) (“We hold spendthrift provisions to be valid in Montana.”).

North Dakota:

N.D. Cent. Code Ann. § 59-13-02.(502) (“A beneficiary may not transfer an interest in a trust in violation of a valid spendthrift provision . . . .”).

In re Schauer, 246 B.R. 384, 388 (Bankr. D. N.D. 2000) (“North Dakota law generally recognizes the validity of spendthrift trust provisions.”) (citing Brownell v. Leutz, 149 F.Supp. 98, 103 n.7 (D.N.D. 1957)).

South Dakota:

S.D. Codified Laws § 55-1-34 (“A settlor may provide in the terms of the trust that a beneficiary’s beneficial interest . . . may not be voluntarily or involuntarily transferred before payment or delivery . . . by the trustee.”).

First Northwestern Trust Co. v. IRS, 622 F.2d 387, 392 (8th Cir. 1980) (interpreting South Dakota law, concluding court would enforce spendthrift provision consistent with majority rule).

Utah:

Utah Code Ann. § 75-7-502(3) (“A beneficiary may not transfer an interest in trust in violation of a valid spendthrift provision . . . .”).

Wyoming:

Wyo. Stat. Ann. § 4-10-502(c) (“[A] beneficiary may not transfer an interest in a trust in violation of a spendthrift provision . . . .”).

B. Validity of Spendthrift Clause in Trust for Grantor’s Own Benefit

In a self-settled trust (i.e., the trust is funded with the assets of the SSI beneficiary), the issue is less straightforward:

• •

  In Montana, a spendthrift clause in a self-settled trust is invalid.

• •

  In North Dakota, a spendthrift clause is valid in a special needs trust or a pooled trust meeting the criteria in POMS SI 01120.203.

• •

  In South Dakota, Utah, and Wyoming, a spendthrift clause will be valid in a self-settled trust that meets specific and detailed requirements. The requirements differ for each state.

• •

  In Colorado, the law is unclear.

For SSI purposes, the important issue is whether the SSI beneficiary may sell his or her beneficial interest in the trust. In the states where a spendthrift clause would be viewed as invalid, thus allowing the beneficial interest to be sold, it is necessary to determine the value of that interest.

Where the trust is completely discretionary, meaning the trustee has sole authority to determine when and whether distributions will be made, the beneficial interest will have little to no market value. Even if the beneficial interest may be sold and technically counts as a resource, it will have zero value.

If the trust directs any type of mandatory disbursements, the beneficial interest will generally have a market value and should be considered a resource if it can be sold. Determining whether or not the beneficial interest may be sold is unsettled or complicated in Colorado, Utah, Wyoming, and South Dakota. Therefore, if a trust is governed by the law in one of these states and directs mandatory disbursements, we recommend referring the trust to OGC for further evaluation.

References:

Colorado

Colorado law states that grantor trusts that contain a spendthrift clause do not afford the grantor protection from existing creditors—i.e., existing at the time of the trust’s creation. See Colo. Rev. Stat. § 38-10-111. It is not entirely clear whether the statute applies to future creditors. Compare Alberico v. Health Mgmt. Sys., Inc., 5 P.3d 967, 970 (Colo. App. 2000) (referencing claims at the time of the conveyance) with In re Cohen, 8 P.3d 429, 433-34 (Colo. 1999) (applying statute to future creditors). Moreover, the statute is silent with respect to assignees. Therefore, whether or not a spendthrift clause in a self-settled trust would restrict the settlor from selling his or her beneficial interest it is currently unsettled in Colorado.

Montana

Montana statutes and case law consistently indicate that a spendthrift clause in a self-settled trust is invalid. See Mont. Code Ann. § 72-38-505(1)(b) (regardless of the existence of a spendthrift provision, “a creditor or assignee of the settlor may reach the maximum amount that can be distributed to or for the settlor’s benefit”); In re Ullman, 116 B.R. 228, 231 (D. Mont. 1990) (interpreting Montana law, concluding it is “essential in creation of a spendthrift trust under Montana law that the settlor and a beneficiary be different persons . . . .”).

North Dakota

North Dakota statute indicates that a spendthrift clause in a self-settled trust is generally invalid, but provides a specific exception for “special needs trusts.” See N.D. Cent. Code Ann. § 59-13-03.(503)(2)-(3) (listing exceptions that would make spendthrift provisions unenforceable and noting such exceptions “do not apply to a self-settled special needs trust or a third-party special needs trust . . . nor to any trust that meets the qualifications of 42 U.S.C. 1396p(d)”); N.D. Cent. Code Ann. § 59-13-05.(505)(1) (regardless of the existence of a spendthrift provision, “with respect to an irrevocable trust, other than a special needs trust, a creditor or assignee of the settlor may reach the maximum amount that can be distributed to or for the settlor’s benefit”) (emphasis added). Therefore, assuming that the trust was established in compliance with the requirements of POMS SI 01120.203 (which track 42 U.S.C. 1396p(d)), the spendthrift clause is valid.

South Dakota

South Dakota statute indicates that, where the settlor is also a beneficiary of the trust, spendthrift provisions and protections apply to a “qualified transfer pursuant to chapter 55-16 . . . .” S.D. Codified Laws § 55-1-36. Therefore, some spendthrift clauses in South Dakota will be valid, even in a self-settled trust. The criteria for a “qualified transfer” are numerous. See S.D. Codified Laws §§ 55-16-1 to 55-16-16.

Conversely, if the settlor is a beneficiary and the transfer is not a “qualified transfer . . . a provision restraining the voluntary or involuntary transfer of the settlor’s beneficial interest does not prevent the settlor’s creditors from satisfying claims from the settlor’s interest in the trust estate.” S.D. Codified Laws § 55-1-36. The statute is specific to creditors and silent with respect to assignees. Therefore, whether or not the settlor is restricted from selling his or her beneficial interest appears unsettled in South Dakota. We also note that South Dakota specifically rejects certain sections of the Restatement (Third) of Trusts and the Uniform Trust Code for purposes of interpreting these statutes. See S.D. Codified Laws § 55-1-25.

Utah

Utah statute indicates that a spendthrift clause in a self-settled trust is generally invalid, but provides a specific exception for “asset protection trust” as defined in another section. See Utah Code Ann. § 75-7-505(1)(b) (regardless of spendthrift provision, “[w]ith respect to an irrevocable trust other than an irrevocable trust that meets the requirements of Section 25-6-14, a creditor or assignee of the settlor may reach the maximum amount that can be distributed to or for the settlor’s benefit.”) (emphasis added). The requirements for an asset protection trust are numerous. See Utah Code Ann. § 25-6-14(5)(a)-(m).

Wyoming

Wyoming statutes recognize the validity of spendthrift clauses in two types of self-settled trusts if certain criteria are met. See Wyo. Code Ann. § 55-10-506 (discussing creditor’s claim against settlor generally, noting creditor and assigning claims limited for discretionary trusts created in accordance with other Wyoming provisions). There are numerous criteria under both provisions. See Wyo. Code Ann. §§ 55-10-504; 55-10-510.

Conclusion

We recommend that trusts be referred to OGC for further review in the following situations:

In Colorado, South Dakota, Utah, and Wyoming, if the trust provides for mandatory distributions (because the beneficial value of those distributions may or may not be countable).

This opinion discusses whether the trust complies with Social Security Act (Act) § 1917(d)(4)(A) such that the trust assets are excepted from resource counting for Supplemental Security Income (SSI) eligibility purposes. The trust was established by the beneficiary’s parents and states that it is irrevocable. The trust does not meet the provision of being for the sole benefit of the beneficiary because it (a) provides benefits to other individuals or entities during the disabled individual’s lifetime; or (b) allows for early termination without meeting SSA’s early termination requirements. The Trust does not contain medical assistance payback provisions. In fact, it contains a provision that could be read to prohibit any such pay back. Since the trust does not meet the sole beneficiary and State Medicaid reimbursement requirements of the special needs trust exception, the trust is a countable resource.

QUESTION PRESENTED

You asked us to review the ALJQ Special Needs Trust (the “Trust”) to determine whether the Trust is a resource for purposes of determining eligibility for SSI, i.e., whether the Trust meets the special needs trust exception.

SHORT ANSWER

The Trust does not meet the requirements of Section 1917(d)(4)(A) of the Social Security Act (the “special needs trust exception”). Although labeled as a “Special Needs Trust,” the Trust does not contain the required provision for reimbursement to Medicaid and, therefore, the Trust is considered a resource for determining SSI eligibility. In addition, because the Trust has been defunded, amendment would appear to be moot.

BACKGROUND

The ALJQ Special Needs Trust was created in September 2002. According to the trust document, A~ and L~ are the “Trustmakers” and J~ is the beneficiary. At the time of the creation of the trust, J~ was a minor and was purported to have a number of conditions that might qualify him as disabled. The trust was funded, according to Schedule A of the trust, with “Ten Dollars Cash” (presumably from his parents) and $10,582.62 in assets bequeathed to J~ by his uncle. ^[1] The trust contains a provision stating that the trust is irrevocable (Section 1.05).

The stated purpose of the trust is to provide for the “supplemental special needs” of J~ (Article 2 – Trust Purpose). The trustee has, under the terms of the trust, complete discretion to distribute the income and principle of the trust to meet the stated purpose of the trust, including the power to terminate the trust (Article 3-6). The trustee has the power to terminate the trust and distribute the trust property if the trust has become uneconomical to administer (Section 6.02). Upon J~’s death, the trustee is authorized to pay various expenses and taxes, and must distribute the balance of trust assets to the descendants and charities designated by J~ pursuant to his will (Article 7). The trust contains a provision that prohibits reimbursement for expenses incurred prior to J~’s death if the trustee decides that such expenses were the obligation of governmental entities responsible to serve person with disabilities (Section 7.02).

A court order dated January 2, 2003, instructs the trustee that withdrawals from the trust are permitted only pursuant to court order.

DISCUSSION

Whether the Trust Is a Resource for Purposes of SSI Eligibility

1. Special Needs Trust Exception

For the special needs trust exception to apply, a trust (established on or after 1/1/00 with assets of the disabled individual) must meet the following three requirements:

1. Contain the assets of an individual under age 65 and who is disabled; and

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(s) Medicaid plan.

POMS SI 01120.203(B)(1)(a)-(h).

In this case, the Trust (established in 2002) does not meet the Special Needs Trust exception requirements because it does not contain a provision allowing for repayment to the applicable state Medicaid plan(s), and it allows for early termination without meeting SSA’s early termination requirements.

Contains the Assets of an Individual Under Age 65 and Disabled

First, in order for a trust to meet the special needs trust exception, it must contain the assets of an individual under age 65 who is disabled. See POMS SI 01120.203(B)(1)(a). Here, J~ is under age 65 and disabled. The Trust contains his assets. As such, the first requirement of the special needs trust exception has been met.

Established for the Sole Benefit of the Disabled Individual

Second, the Trust must be established for the “sole benefit” of an individual through the actions of a parent, grandparent, legal guardian or court. See POMS SI 01120.203(B)(1)(e)-(f). In this case, the Trust was established for J~’s benefit by A~ and L~, his parents, while he was a minor.

However, a trust is not considered to be for the “sole benefit” of the disabled individual if it (a) provides benefits to other individuals or entities during the disabled individual’s lifetime; or (b) allows for early termination without meeting SSA’s early termination requirements. See POMS SI 01120.199; SI 01120.203(B)(1)(e).

Here, the Trust contemplates the possibility of termination prior to J~’s death (Section 6.02). Where a trust can be terminated during a beneficiary’s lifetime, the trust must provide that:

Upon early termination, the trust must reimburse the state(s) in an amount equal to the total amount of medical assistance paid under the state Medicaid plan(s);

After reimbursement to the state(s) and payment of allowed expenses, all remaining funds must be disbursed to the trust beneficiary; and

The early termination power is given to someone other than the trust beneficiary.

POMS SI 01120.199(F). Here, although the power of early termination has been given to someone other than the trust beneficiary, the Trust has no provision for payback to the applicable state Medicaid plan. For this reason, the Trust does not meet the second requirement of the special needs trust exception. See POMS SI 01120.203(B)(1)(e).

Medicaid Payback

Third, to qualify for the special needs trust exception; a trust must contain specific language providing that, upon the death of the individual, the state(s) will receive all amounts remaining in the trust, up to the amount equal to the total amount of medical assistance paid on behalf of the individual under the state Medicaid plan(s). The trust must provide for payback to any state(s) that may have provided medical assistance under the state Medicaid plan(s) and not be limited to any particular state(s). See POMS SI 01120.203(B)(1)(h). Additionally, the states must be listed as first payee(s) and have priority over payment of other debts and administrative expenses, with limited exceptions. Id.

Here, the Trust contains no such payback provision. In fact, it contains a provision that could be read to prohibit any such pay back. Specifically, section 7.02 prohibits reimbursement for expenses incurred prior to J~’s death, if the Trustee determines the payment is the obligation of a government entity, which has a legal responsibility to serve persons with disabilities.

Because the Trust contains no payback provision, the Trust fails to meet the third requirement for the special needs trust exception to apply. See POMS SI 01120.203(B)(1)(h).

2. Court Order Requiring Approval of Withdrawals

The court order requiring approval of withdrawals from the Trust does not change our analysis. Under the applicable provisions of the Social Security Act, if there are any circumstances under which payment from the trust could be made to or for the benefit of J~, the Trust must be counted as a resource—unless an exception applies. See 42 U.S.C. § 1382b(e)(3)(A), (e)(5). As we have explained, the Special Needs Trust exception does not apply. Even if the court order limits the trustee’s discretion, the Act makes clear that such trusts are countable regardless of any restrictions on the trustee’s discretion regarding distributions. See 42 U.S.C. § 1382b(e)(2)(C). ^[2]

3. Effect of Defunding

According to the information received from the field office, proof was provided on June 30, 2014 that all the trust funds were withdrawn on May 7, 2014. Had this event not occurred, it might have been possible to amend the trust so that it would not be considered a countable resource. However, since the trust has been defunded, suggestions as to how the trust might be amended would be moot.

Most importantly, the defunding of the Trust, under its own terms, appears to have effectively terminated the Trust (Section 6.01-6.02). Since the Trust no longer exists, as of 5/7/14, it should not be considered a countable resource for future eligibility. However, from the time it was created, through 5/7/14, it should have been considered as a countable resource for SSI eligibility purposes, since it did not qualify, as a special needs trust. In addition, we recommend that the field office inquire about what was done with the trust proceeds, once the trust was defunded, to determine whether the trust was converted to another countable resource or transferred for less than fair market value. See generally POMS SI 01150.001.

CONCLUSION

The trust, although it appears to be the intent, does not meet the criteria of the special needs trust exception, and therefore must be counted as a resource.

John J. Lee

Regional Chief Counsel, Region VIII

By: Paul R. Ritzma

Assistant Regional Counsel

This RCC opinion discusses whether the Life Enrichment Master Trust Agreements (MTAs or “the Trusts”) and blank Joinder Agreements (JAs) for Montana, North Dakota, South Dakota, Utah, and Wyoming meet the requirements of section 1917(d)(4)(C) of the Social Security Act. The trust's early termination provision states that the trustee “will first try to transfer the sub account assets only to another trust that meets the requirements of 42 USC 1396p(d)(4)(C).” However, it does not address what will happen to the assets if it is not possible to transfer the assets into another pooled trust. This faulty early termination language leaves room for the Trustee to terminate the Trust and transfer trust sub-accounts to someone other than the State(s) or the trust beneficiary; or to refund the assets to the beneficiary without first reimbursing the state(s) for medical assistance.

This opinion also points that in South Dakota, Utah, and Wyoming if a grantor is also the sole beneficiary of a trust, the trust is revocable regardless of language in the trust document. In addition, the RCC believes that the courts in Montana and North Dakota would take the same position. However, we consider the sub accounts as irrevocable because the Master Trust is a residual beneficiary per SI 01120.200D.3.

Questions Presented

You asked us to review the Life Enrichment Master Trust Agreements (MTAs or “the Trusts”) and blank Joinder Agreements (JAs) for Montana, North Dakota, South Dakota, Utah, and Wyoming to determine whether they conform to section 1917(d)(4)(C) of the Social Security Act (the “pooled trust exception”).

Short Answer

The Trust documents do not meet the pooled trust exception to counting assets in the Trust

sub-accounts as resources. The MTAs allow for the possibility that a sub-account could be terminated prior to the death of the beneficiary and the assets could be given to someone other than the beneficiary. If, however, the Trustee were to amend the Trust to satisfy the pooled trust exception (as recommended below), and assuming no other modifications to the MTAs or JAs are made, trust sub-accounts established under the amended trust documents would not be countable as resources under the regular resource counting rules.

Background

Life Enrichment Pooled Trusts and the Joinder Agreement

Life Enrichment offers trusts for Montana, North Dakota, South Dakota, Utah, and Wyoming. ^[3] Except for references to different state statutes in the “Pooled Trust” introductory section of the MTAs, the trust documents are identical. Relevant provisions of the MTAs are discussed below.

Definitions, Establishment, and Purpose

Life Enrichment Trust, a non-profit corporation, established and manages the MTAs and serves as Trustee. MTAs, pp. 4, 5. The purpose of the MTA is to provide for the supplemental needs of the Beneficiary of each Trust sub-account. Id. The Trusts define “Beneficiary” as an individual who is disabled pursuant to the Social Security Act, 42 U.S.C. § 1382c(a)(3). Id. at 5. The Trustee maintains a separate sub-account for each Beneficiary and pools the sub-accounts for the purpose of investing and managing the funds. Id. at 4. Only a disabled individual or his or her parent, grandparent, legal guardian, or the court may establish a trust sub-account. Id. Third parties may contribute funds to an established trust sub-account. Id.

Distribution of Assets and Spendthrift Provisions

The MTA and JA documents provide that each trust sub-account is for the Beneficiary’s sole benefit. Id. at 5; JAs, p. 2. The court or individual who establishes the trust sub-account may designate persons permitted to request distributions for the Beneficiary. Id. The Trustee decides whether to honor distribution requests and is prohibited from making any distributions that will reduce any benefits to the Beneficiary or result in his or her ineligibility for benefits. Id.

Except as permitted by law, a Beneficiary may not pledge, assign, transfer, anticipate, charge, or encumber any trust sub-account property or money for any purpose while in the Trustee’s possession. MTAs, p. 5. The Trustee is not liable for unapproved debts but may, in its sole discretion, choose to pay them. Id. The Trustee is permitted to pay administrative fees to administer the trusts and taxes due on funds deposited in a trust sub-account. Id. at 6.

Irrevocability and Termination

The MTAs and JAs provide that trust sub-accounts are irrevocable. MTAs, p. 4; JAs, p. 3. During a Beneficiary’s lifetime, the Trustee may terminate a trust sub-account by spending down all of the assets. MTAs, p. 4. Further, if it becomes impossible or impractical to carry out the Trust’s purpose, the Board, in its sole and absolute discretion, may choose to terminate the Trust or resign as Trustee. Id. at 6. In either event, the Trustee “will first try to transfer the sub account assets only to another trust that meets the requirements of 42 USC 1396p(d)(4)(C).” Id.

Upon the death of a Beneficiary, the Trust is authorized to retain all residual funds. Id. at 7. All of the funds retained by the Trust are to be used for the benefit of “individuals with disabilities.” Id. To the extent the Trust does not retain funds remaining in a sub-account, the Trust is directed to pay 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.” Id.

Discussion

(A) The Master Trust Does Not Meet the Pooled Trust Exception Under 42 U.S.C.

§ 1396p(d)(4)(C).

In general, irrevocable trusts created after January 1, 2000, that are established with the assets of an individual by means other than transfer by a will are considered to be a resource of that individual for SSI eligibility purposes. See 42 U.S.C. § 1382b(e)(2)(A). The purpose of the trust, the discretion of the trustee, and restrictions on distributions will not affect its status as a resource. See id. at (e)(2)(C). There is an exception to this general rule for trusts that are established pursuant to the provisions of § 1917(d)(4)(C) of the Act, commonly known as the pooled trust exception. See 42 U.S.C. § 1396p(d)(4)(C). For this exception to apply, the pooled trust must satisfy certain requirements:

(1) The trust must be established and managed by a non-profit association;

(2) A separate account must be maintained for each beneficiary of the trust, but the trust pools these accounts for purposes of investing and managing the trust;

(3) Accounts in the trust must be established solely for the benefit of the disabled individual;

(4) Accounts must be established by the individual, a parent, a grandparent, a legal guardian, or a court; and

 

(5) The trust must provide that, to the extent that amounts remaining in the beneficiary’s sub-account upon the death of the beneficiary are not retained by the trust, the state(s) will receive all amounts remaining in the trust upon the death of the individual up to an amount equal to the total medical assistance paid on behalf of the individual under the state Medicaid plans.

See id.; POMS SI 01120.203(B)(2). In this case, as discussed below, the MTAs fail to meet the third pooled trust exception requirement.

(1) The Trust is Established and Maintained by a Non-Profit Association and Separate Sub-Accounts are Maintained.

The Trust documents meet the first requirement, because Life Enrichment is a nonprofit corporation that established and manages the Trust. MTAs, p. 4. Consistent with the second requirement, each beneficiary has a separate sub-account and Life Enrichment pools these accounts for purposes of investing and managing the funds. Id.

(2) The Trust Allows for Possible Early Termination and Transfer of Assets to Someone Other than the Beneficiary; Thus, the Trust Accounts are not Established Solely for the Benefit of the Disabled Individual.

To meet the third requirement, the trust must be established for the sole benefit of the disabled individual, which means that the trust must not benefit anyone but that individual during his or her lifetime (other than reasonable compensation for a trustee and reasonable costs associated with managing the trust). See 42 U.S.C. § 1396p(d)(4)(C)(iii); POMS SI 01120.203(B)(2)(a), (e); POMS SI 01120.201(F)(2).

In the event that a trust can be terminated during a beneficiary’s lifetime, the trust must provide that:

(1) Upon early termination, the trust must reimburse the state(s) in an amount equal to the total amount of medical assistance paid under state Medicaid plan(s);

(2) After reimbursement to the state(s) and payment of allowed expenses, all remaining funds must be given to the trust beneficiary; and

(3) The early termination power is provided to someone other than the trust beneficiary.

See POMS SI 01120.199(F). An exception to this policy is if the early termination provision provides, solely, that a beneficiary’s assets will be transferred to another pooled trust meeting the requirements of 42 U.S.C. § 1396p(d)(4)(C). POMS SI 01120.199(F)(2). This is sometimes referred to as a “trustee-to-trustee” transfer.

Here, the Trust allows for early termination, and the early termination provision does not limit the distribution of Trust property to the State(s) and the Beneficiary. Specifically, the Trust permits the Trustee to terminate a trust sub-account before a beneficiary’s death if it becomes “impossible or impractical” to carry out the purpose of the Trust. MTAs, p. 6. The Trustee must “first try to transfer the sub account assets only to another trust that meets the requirements of 42 USC 1396p(d)(4)(C).” Id. However, the Trust does not specify what will happen to the assets if it is not possible to transfer the funds into another pooled trust. This language is not sufficient to meet the “trustee-to-trustee” transfer exception. Given the vagueness of the early termination language, it is possible the Trustee could terminate the Trust and transfer trust sub-accounts to someone other than the State(s) or the trust beneficiary; or that assets could be refunded to the beneficiary without first reimbursing the state(s) for medical assistance. See POMS SI 01120.199(F)(1). Thus, this section does not comply with the early termination requirements. See id.

(3) The Trust Limits Establishment of an Account to Those Individuals Permitted by Statute.

To meet the fourth requirement, the accounts in the Trust must be established by the parent, grandparent, or a legal guardian of such individual, by such individual, or by a court. See 42 U.S.C. § 1396p(d)(4)(C); see also POMS SI 01120.203(B)(2)(f). The Trust documents comply with this requirement. MTAs, p. 4.

(4) The Trust Properly Provides for Medicaid Reimbursement.

Except for the early termination problem identified above, the Trust documents otherwise satisfy the fifth requirement because the Trust contains specific language providing that, to the extent that amounts remaining in an beneficiary’s account after their death are not retained by the Trust, the Trust pays to the State(s) an amount equal to the total amount of medical assistance paid on behalf of the individual under the State Medicaid plan(s). See MTAs, p. 7. The Trust does not limit payment to any particular State(s) or any particular period of time. See id.; see also POMS SI 01120.203(B)(2)(g).

(B) Assuming the Trust Documents Met the Criteria for an Exception under 42 U.S.C.

§ 1396p(d)(4)(C), Which They Currently Do Not, the Sub-Accounts Would Not Be a Resource under the Regular Resource Counting Rules.The Agency applies the regular resource rules to determine whether a trust that is established with a beneficiary’s own assets is a resource. See POMS SI 01120.200(D). Pursuant to these rules, trust property may be a resource for SSI purposes if the individual: (1) has the authority to revoke the trust and then use the funds to meet his basic needs for food or shelter; (2) can direct the use of the trust principal for his support and maintenance; or (3) can sell his beneficial interest in the trust. See POMS SI 01120.200(D)(1)(a)-(b).Here, the Trust documents provide that the sub-accounts are irrevocable. See MTAs, p. 4; JAs, p. 2. Nonetheless, South Dakota, Wyoming, and Utah follow the general principle of trust law that if a grantor is also the sole beneficiary of a trust, the trust is revocable regardless of language in the trust document to the contrary. See Restatement (Second) of Trusts § 339 (1959); see also Farmers State Bank v. Janish, 410 N.W.2d 188, 190 (S. D. 1987) (“[w]here a person creates for his own benefit a trust with a provision restraining the voluntary or involuntary transfer of his interest, his transferee or creditors can reach his interest.”); Spratt v. Security Bank of Buffalo, Wyo., 654 P.2d 130, 136 (Wyo. 1982) (same); Clayton v. Behle, 565 P.2d 1132, 1133 (Utah 1977) (recognizing that “where the settlor is the sole beneficiary . . . he can terminate the trust at any time and compel the trustee to reconvey the property to him.”). We have found no Montana or North Dakota cases or statutes that specifically address the question of the revocability of settlor trusts. We believe that the courts in these States would take the position taken by the majority of the States that “where the settlor of the trust is also the sole beneficiary and is not incapacitated, the trust is revocable.” Memorandum from OGC Region VIII to ARC, SSA VIII, Validity and Accessibility of Three Trusts in Colorado; State Law in Region VIII, Regarding the Revocability of Grantor or Settlor Trusts (Nov. 30, 1994). Here, however, the Trust is a contingent residual beneficiary because the Master Trust generally retains any funds left over after the beneficiary’s death. MTAs, p. 7. Therefore, the sub-accounts have an identifiable residual beneficiary and are irrevocable. See POMS SI 01120.200(D)(3) (providing that “residual beneficiaries are assumed to be created, absent evidence of a contrary intent, when a grantor names heirs, next of kin, or similar groups to receive the remaining assets in the trust upon the grantor’s death. In such case, the trust is considered to be irrevocable.”).

Further, while a Beneficiary or individual previously designated by the Beneficiary may appeal the Trustee’s refusal to make a distribution, a Beneficiary cannot compel the Trustee to make a distribution of trust sub-account assets to the Beneficiary. MTAs, p. 5. With respect to selling a Beneficiary’s interest in a sub-account, the MTAs contain a spendthrift clause which precludes a Beneficiary from assigning his or her interest. Id.; see also POMS SI 1120.200(D)(1)(a). Where the settlor is also the beneficiary, such spendthrift provisions are generally invalid. See Restatement (Third) of Trusts § 58, cmt. e (2003); see also POMS SI 01120.200(B)(16). However, a Beneficiary’s interest in the Trust has no significant market value because disbursements are within the sole discretion of the Trustee. Thus, a Beneficiary’s interest in the Trust should be considered a resource with zero market value. See Memorandum from Reg. Chief Counsel, Chicago, to Ass’t Reg. Comm-MOS, Chicago, SSI-WI-Review of the WisPACT Pooled Trust I for Kyle (Jan. 10, 2011); 20 C.F.R. § 416.1201(a)(1) (“[i]f a property right cannot be liquidated, the property will not be considered a resource of the individual (or spouse).”).^[4]

Conclusion

In sum, we conclude that the Trust documents do not satisfy the pooled trust exception to counting assets in the sub-account as resources. If, however, the Trustee were to amend the MTAs to satisfy the pooled trust exception, and assuming no other modifications are made, trust sub-accounts established under the amended MTAs and JAs would not be countable as resources under the regular resource counting rules.

John Jay Lee,

Regional Chief Counsel, Region VIII

By: Kati Bostwick

Assistant Regional Counsel

This opinion contains a very concise description of the requirements of a Special Needs Trust whereby it was determined that this particular trust did not meet all of the criteria. Specifically, this trust does not provide a provision for Medicaid reimbursement to any state other than Wyoming making it a countable resource. The opinion also offers a suggestion for revising the language of the trust so that it would meet the criteria and could, therefore, be a non-countable resource.

Questions Presented

You have asked for an opinion on whether the Trust created for Michael (hereinafter Michael or the Beneficiary) meets the requirement for a special needs trust under section 1917(d)(4)(A) of the Social Security Act (the Act). More specifically, you questioned whether the term "heirs" in the "After Beneficiary's Death" clause is sufficient under Wyoming law to provide for reminder interests, which would make the Trust irrevocable; whether the Trust terms, limiting Medicaid reimbursement to the state of Wyoming only, is sufficient; and, if not, whether the Trust's "voiding language" could apply to the Medicaid reimbursement clause, thereby curing any defect.

Short Answer

The Trust is irrevocable under Wyoming law, because the Trust expressly provides that it is irrevocable. Moreover, under Wyoming law, the term "heirs" is sufficient to provide for remainder interests after the death of the Beneficiary, also making the Trust irrevocable. Nonetheless, the Trust does not qualify as a special needs trust, because the Trust limits Medicaid reimbursement to the state of Wyoming only and does not permit reimbursement to any other state for Medicaid payments made on behalf of the Beneficiary. Therefore, the Trust assets would be considered a resource. While the Trust's "voiding language" may cure the Medicaid reimbursement defect, Michael's legal Guardian, would need to go to court to have the language at issue judicially severed. Alternatively, the Guardian could revise the Trust to remove language limiting Medicaid reimbursement to the state of Wyoming.

Facts

According to the documents attached to your opinion request, Michael, the Beneficiary, is under the age of 65 and suffers from paranoid schizophrenia (see Petition For Establishment Of Special Needs Trust And Authorization To Transfer Assets To Trust). On December 5, 2006, Mr. S~, Michael’s legal Guardian, petitioned the court to create a special needs trust for Michael, using his own assets, which consisted of real property valued at $75,000.00 (see Exhibit A, Warranty Deed). On December 5, 2006, in an Order Authorizing and Establishing the Trust, District Judge John for Sheridan County, Wyoming, appointed Mr. S~ as Trustee.

The stated purpose of the Trust is to provide for the administration and disposition of the trust estate during and after Michael's lifetime (see Article II, paragraph 2.1), to provide supplemental care over and above that which the government provides, and to continue Michael's eligibility for Medicaid (see Article II, paragraph 2.2). The Trust contributions are to consist of only Michael's assets. During Michael lifetime, the Trustee can pay or apply for Michael's benefit amounts from the principal or income as may from time to time be necessary for the satisfaction of his needs. In no event, however, shall any income or principal of the trust be paid or applied for Michael basic living needs (see Article IV, paragraph 4.1). Any income not distributed shall be accumulated and added to the principal, but in no event shall any cash or assets readily convertible into cash be distributed directly to the Beneficiary (see Article IV, paragraph 4.5).

According to Article VIII of the Trust, it is irrevocable. Michael has no rights to anticipate, sell, assign, mortgage, pledge or otherwise dispose of or encumber all or any part of the trust (see Article V, paragraph 5.1). And the grantor, in this case Mr. Thomas as Michael's legal Guardian, "expressly waive[d] all rights and powers, whether alone or in conjunction with others . . . to alter, amend, revoke, or terminate the trust, or any terms of the agreement, in whole or in part" (see Article VIII, paragraph 8.1).

Upon Michael's death, Article IV, paragraph 4.11 provides that:

[T]he trust assets shall be paid to the State of Wyoming, its agent, designee, or successor up to the total amount Medicaid payments made to or on behalf of [Michael] under the State of Wyoming Medicaid plan. Any remaining trust assets shall be distributed by the Trustee to such persons or beneficiary, including his own assets, in whole or in part, in such proportions and manners, as [Michael] by his Last Will shall direct, limit, and appoint, by specific reference to this power. If [Michael] shall fail to exercise his general power of appointment over the remaining trust assets, the same shall be distributed by the Trustee to [Michael's] heirs as determined by the laws of intestate succession of the State of Wyoming.

The trust also provides that if any provision of the trust is inconsistent or contrary to the intent and provisions of the above-referenced federal law, it shall be deemed void and of no further force or effect (see Article II, paragraph 2.2).

Applicable Federal Law

In the case of an irrevocable trust, if payments from the trust could be made to or for the benefit of the individual or the individual's spouse, that portion of the trust from which a payment could be made that is attributable to the individual is a resource, see 42 U. S.C. § 1396p(d)(3)(B), unless an exception applies. If a trust qualifies as a special needs trust, it will not be counted as a resource. See id. § 1396p(d)(4)(A). In order to qualify as a special needs trust, three requirements must be met: (1) the trust must contain the assets of an individual under age 65 who is disabled; (2) the trust must be established for the benefit of such individual by a parent, grandparent, legal guardian of the individual, or a court; and (3) the trust must provide for a Medicaid reimbursement provision, that upon the death of such individual, the state will receive up to an amount equal to the total amount of medical assistance paid on behalf of the individual under that state's Medicaid plan. See id.

Legal Analysis

Effective July 1, 2003, Wyoming enacted the Uniform Trust Code, which provides that a trust is presumed revocable, unless the trust terms provide otherwise. See Wyo. Stat. Ann. § 4-10-602 (2003) ("[u]nless the terms of a trust expressly provide that the trust is irrevocable, the settlor may revoke or amend the trust"). Although the Trust is a grantor trust (Michael is both the settlor and the sole beneficiary of the trust during his lifetime), the Article VIII states that "[t]he Trust shall be irrevocable." See id. Furthermore, there is a contingent remainder interest that exists upon the death of the Beneficiary. Thus, Michael is not the sole beneficiary of the Trust. See Article IV, paragraph 4.11. According to Wyoming law, the words "heirs" or "any similar reference used after the grant of a life estate" merely designate the remaindermen. See Crawford v. Barber, 385 P.2d 655, 657 (Wyo. 1963). Because the Trust names a residual beneficiary, it is irrevocable. A primary beneficiary cannot unilaterally revoke the trust; he needs the consent of the residual beneficiary. See POMS SI 01120.200(B)(2), 01120.200(D)(3).

Although the Trust is irrevocable, an irrevocable trust established on or after January 1, 2000, is a resource if payments from the trust principal could be made to or for the benefit of the individual or the individual's spouse, unless the trust qualifies as a special needs trust. See 42 U.S.C. § 1396p(d)(4)(A); see also POMS SI 01120.201(D)(2). While the Trust at issue satisfies the first two requirements-it was established with the assets of a disabled individual under age 65 by his legal guardian-the Trust does not satisfy the third requirement number. The Trust limits reimbursement of Medicaid payment made to or on behalf of Michael to the state of Wyoming. Thus, contrary to the statute, the Trust does not provide for Medicaid reimbursement to any other state where Michael may live. In a June 11, 2007 memorandum, the Office of Income Security Programs advised that the Agency does not believe this type of provision satisfies the statutory requirement, because it would frustrate any other state's ability to receive medical assistance paid to the beneficiary during his lifetime. See Memorandum from OGC Region V to Management and Operations Support, SSA-Region V, SSI-Illinois-review of the David C~ f/k/a K~ Supplemental Care and Needs Trust, p.3, June 11, 2007. Therefore, although irrevocable, the Trust does not qualify as a special needs trust.

The terms of the Trust provide "voiding language" that states if "any provision[] is inconsistent or contrary to the intent and provisions of the above-referenced federal law [it] shall be deemed to be void and of no further force or effect." (See Article II, paragraph 2.2). Under Wyoming law, if an improper provision can be judicially severed and the remaining contract enforced, a finding of total illegality is not required. See Dixon v. Williams, 584 P.2d 1078, 1081 (Wyo. 1978). While the "voiding language," could remedy the problem with the Trust's state Medicaid reimbursement provision, Michael’s legal Guardian would need to go to court to have the language at issue judicially severed. Alternatively, the most practical approach would be for the legal Guardian to revise the Trust to remove the language limiting Medicaid reimbursement to the state of Wyoming.

CONCLUSION

In sum, we conclude that, while the Trust is irrevocable, it does not meet the state Medicaid reimbursement requirement necessary to satisfy the special needs trust under section 1917(d)(4)(A) of the Act, 42 U.S.C. § 1396p(d)(4)(A). Limiting reimbursement to the state of Wyoming would frustrate any other state's ability to receive medical assistance paid to the beneficiary during his lifetime. While the Trust's "voiding language" may remedy this defect, Michael legal Guardian would need to go to court to have the language at issue judicially severed. A more practical alternative, however, would be for the Guardian to revise the Trust and remove the language limiting Medicaid reimbursement to the state of Wyoming.

Deana R. Ethl~-Lombardi

Regional Chief Counsel, Region VIII

By: Carolyn Cooper

Assistant Regional Counsel