Legal Network
News:
A(d)(4)(A) Q&A
by Gregory Wilcox, Esq.
Author's Note: This "short" article got out of hand and became
too big for one issue of The Legal Network News. Accordingly, I will
offer CANHR a second part for a later issue.
What is a (d)(4)(A)? It's a special kind of trust
authorized by a federal statute at 42 United States Code §1396p(d)(4)(A).
Why should you care? Because it is by far the easiest way for you to protect
people who receive Supplemental Security Income (SSI) and/or Medi-Cal
from losing all their benefits when they receive a "windfall"
(e.g., an inheritance, a personal injury award, or life insurance benefit).
Bonehead (d)(4)(A)
Since 1993, the federal Medicaid statutes have carved out an exemption
allowing (d)(4)(A) trusts. Under the exemption, Medicaid authorities (Medi-Cal
in California) will not count the assets held in such a trust against
the eligibility of a Medi-Cal beneficiary -- even though the Medi-Cal
beneficiary funds the trust with his or her own assets. However, there
are a number of catches:
- The trust will only work for a person who is under 65 when it is established.
- It must be established for the benefit of such a person by a parent,
grandparent, legal guardian of the individual, or a court.
- It must pay back all amounts remaining in the trust upon the death
of such individual up to an amount equal to the total assistance paid
by Medi-Cal on behalf of the individual.
In 1999, Congress decided that SSI applicants were having it much too
easy, and adopted new rules to disqualify such applicants when they had
given their assets away so that they then qualified for benefits. However,
Congress also carved out an exception to the new anti-transfer rules:
(d)(4)(A) Medicaid trusts. In other words, if the applicant had transferred
funds into a valid (d)(4)(A) trust, the SSI program may not disqualify
the applicant from SSI because of it (42 USC §1382b(e)(5)). For previous
comment on these points in The Legal Network News, see "New
SSI Trust Provisions", by Peter Stern, September 2001, Vol. 12, No.
3.
So now we have a fairly attractive statutorily-authorized trust container
into which an SSI and Medi-Cal recipient can dump any unwanted "windfall"
and still maintain benefits. Of course, the (d)(4)(A) trust should always
include discretionary "special needs" distribution language
so that SSI and Medi-Cal would not treat the benefits coming back out
of the trust as "income" and thereby stop or reduce benefits
on that account.
Note: There are various ways to write the "special needs"
distribution language, from very restrictive to very loose. Usually,
the language gives the trustee discretion to make distributions of income
and principal, but encourages the trustee to make them only for "special
needs" that do not include food, shelter, and clothing (that SSI
is supposed to cover) or medical care (that Medi-Cal is supposed to cover).
But this is another whole topic for a separate article. See also Probate
Code §§16080-16081 on the standards of care that apply when
discretion is granted to trustees.
However, there are problems with (d)(4)(A) trusts. Practitioners who
have tried to use the available rules to create such trusts have found
a number of puzzles and frustrations. For example:
What rights must a person have who "establishes" such a
trust?
One of the devils in the (d)(4)(A) details is that it (apparently) distinguishes
between "creating" a trust and "establishing" a trust.
This is what the SSI rules say:
An individual is considered to have established a trust if any of the
assets of the individual (or spouse), regardless of how little, were
transferred to a trust other than by will. [SI 01120.201B.7., in the
Social Security Administration's "Program Operations Manual System"
(POMS)].
Knowing only this, an innocent reader might be forgiven for thinking
that SSI does not distinguish between the funder of the trust and the
establisher of the trust. However, SSI goes on with additional language
that completely confuses the issue:
NOTE: The grantor (see SI 01120.200B.2.) named in the trust
document and the individual who established the trust may not be the
same for purposes of this provision. The trust may name the individual
who physically took action to establish the trust rather than the individual
who provided the trust assets as grantor, e.g., a parent, insurance company,
or other agent. This distinction is important, especially in developing
Medicaid trust exceptions in SI 001120.203. [Id.]
Okay, the first sentence in the foregoing "NOTE" might make
some sense, if it distinguishes the person who signs the trust document
from the "grantor" who funds the trust. Reassuringly, this thought
is consistent with the language defining "grantor" in SI 01120.200B.2,
"a grantor (also called a settlor or trustor) is the individual who
provides the trust principal (or corpus)." So the "e.g."
in the second sentence in the "NOTE" above must actually refer
to the individual who "physically took action" rather than to
the "grantor" (who provided the principal or corpus).
My note: It is a little worrisome that the language seems to
define parents and insurance companies as "agents", a concept
not otherwise defined or even mentioned -- but never mind. It may also
bother some people that these latter provisions appear to contradict
the first indented quotation above, which seems clearly to make the grantor
also an establisher in the general case -- but never mind (perhaps the
fact that the (d)(4)(A) rules are an exception to the overall trust rules
can take us out of its definitions as well!).
So then we look at the SSI language that specifically describes the
(d)(4)(A) trusts whose assets SSI will not count. First, it notes that
a (d)(4)(A) trust may not be "established" by the individual
public benefits beneficiary himself/herself [SI 01120.203B.1.e.]. It must
be "established" by one of the four named above: parent, grandparent,
guardian, or court. Of course, the public benefits beneficiary may still
be the grantor -- and even the "creator" of the trust under
California law (Probate Code §15200), since he or she will be the
"owner" of property transferred to a trust.
Here's where the SSI rules go into the Twilight Zone. They state:
The person establishing the trust must have legal authority to act
with regard to the assets of the individual. An attempt to establish
a trust by an individual without the legal right or authority to act
with respect to the assets of the individual may result in an invalid
trust.
NOTE: This requirement refers to the individual who took action
to establish the trust even though the trust was established with the
assets of the SSI claimant/recipient. [SI 01120.203B.1.e.]
So, what if a parent "establishes" a (d)(4)(A) trust for a
disabled but legally competent child who receives SSI and Medi-Cal? Why
does the parent have to have a "legal right or authority to act with
respect to the assets of the" child? If the child does not like the
trust, presumably he or she will simply not fund it. Does this language
require that the child also give a parent a power of attorney or some
other agency authority to make the parent an "agent" as suggested
by the other language mentioned above? Why?
Perhaps this language was intended to deal with public benefits beneficiaries
without legal capacity. Then it is certainly clear that someone
has to have legal authority over the beneficiary's assets in order to
effect a valid transfer to the trustee of the trust. But why does it have
to be the person who took "physical action" to make (i.e., establish)
the trust? Why can't it be some other "agent" or fiduciary.
Probably the POMS just got mixed up in its own complicated language
and used the word, "establish", too loosely. Probably it meant
that any attempt by a person to fund a trust (that is, the grantor,
trustor, and funder) without legal authority over the assets may result
in an invalid trust (which seems obvious). I hope so. But SSA's local
offices are not likely to realize or correct the error. They may instead
disregard (d)(4)(A) trusts when the parent who signed the trust document
did not also have a valid agency from the public benefits beneficiary
to fund the trust as well as physically "establish" it.
How do you get a court to establish the trust?
Often clients don't come in with a convenient parent or grandparent
to establish a (d)(4)(A) trust. Indeed, they don't even have a "guardian"
(i.e., a conservator here in California). Only a "court" is
left of the four potential actors who can establish such a trust. But
how do we get a court to agree to do this job?
If the prospective trust beneficiary is "an incompetent person"
who receives money from a settlement, compromise, or judgment, the answer
is often easy: use the procedures outlined in Probate Code §§3600,
3602(d), 3604, and 3605. These sections provide for court review and approval
of a special needs trust to receive such proceeds (the trust must meet
certain state requirements which are not the same as, but do not conflict
with, the federal (d)(4)(A) requirements). The state rules also authorize
a court order that the money from such settlement, compromise, or judgment
"be paid to a special needs trust established under Section 3604
for the benefit of the minor or incompetent person" (Probate Code
§3602(d)).
It is interesting in light of the discussion above that the state statutes
just described never actually authorize the court to "establish"
a trust -- although court establishment is what (d)(4)(A) and the SSI
POMS rules literally require. In fact, using SSI's language, the person
who took physical action to establish the trust was almost certainly not
the court but someone else acting on behalf of the "incompetent person".
But I quibble. The Medi-Cal program has never made the argument that the
court's order funding the proposed trust only "creates" the
trust (under Probate Code §15200) but does not "establish"
it. Whether or not the SSI program will also ignore this technicality
is unclear.
The Real Problem
But this is not the real problem. The real problem is that the state
statutory scheme for the creation and/or establishment of special needs
trusts only covers part of the territory. There are at least two categories
of people left out:
- What about "incompetent persons" who receive money and other
property that is not from a settlement, compromise, or judgment.
Suppose, for example, that such a person receives money as a beneficiary
of a life insurance policy or IRA, or from a probate or trust distribution,
or even from a personal injury award that was settled before it ever
went to court? What court is to be used to order payment to a special
needs trust?
- What about disabled persons who receive public benefits and a "windfall"
but are not "incompetent"? They are apparently not within
the scope of people entitled to use the procedures under Probate Code
§§3600, et seq. Once again, the lawmakers seem unable to conceive
of the possibility that people can be disabled without being incompetent.
These omissions by our lawmakers have been an challenge to the fertile
imaginations of attorneys determined to achieve their clients' goals.
With regard to the first group of omitted potential (d)(4)(A) beneficiaries,
many attorneys have argued that an Order for Distribution in a probate
proceeding is a "judgment" that brings the matter within Probate
Code §§3600, et seq. Other attorneys, wishing to avoid the payback
provisions required in a (d)(4)(A) trust, try to get the distributee changed
under Probate Code §11700. At least if the recipient of anticipated
funds is not competent, it might be possible to get a conservator appointed,
and a conservator is someone who is eligible to establish a (d)(4)(A)
trust.
But what if there is a court involved in a matter but the disabled recipient
is not incompetent? Or worse, what if there is no court involved in the
matter? There appear to be two popular approaches to solving these problem,
both are crazy but brilliant.
First, if there is a court involved in the matter but the beneficiary
is competent, some attorneys argue that the procedures in Probate
Code §3600, et seq., can still be applied. The theory? They point
out that under Probate Code §3603 an incompetent person includes
"any person for whom a conservator may be appointed". Then referring
to Probate Code §1802, they point out that a conservator can be appointed
for anyone who voluntarily requests such an appointment and establishes
good cause to the court for the appointment. In other words, all of us
are "incompetent" under these definitions, allowing the court
to order our settlements, compromises, and judgments into a state authorized
special needs trust. I know; if I hadn't seen it work I wouldn't believe
it either.
Second, if there is no court involved in the matter and the beneficiary
is competent, some attorneys advise their clients to execute a durable
power of attorney appointing an attorney-in-fact and including the authority
to create special needs trusts. The attorney-in-fact then drafts the trust
and files a petition under Probate Code §4541. This provision allows
an attorney-in-fact to ask a court to pass on the proposed acts of the
agent, i.e., the establishment of the proposed trust. Bingo, a court order
(kudos to attorney Thomas Beltran who not only invented this strategy
but has made it work).
Of course, there is still the lingering technical question of whether
or not the court has actually "established" the trust
for purposes of the (D)(4)(A) requirements. However, my hunch is that
both SSI and Medi-Cal will deem the requirement satisfied if they receive
an order approving a specific trust on official-looking pleading paper
with a court caption, signed by a judge, and stamped "filed"
in blue ink.
Finally, there is recent word on the street that the judges in some
probate courts (including Alameda and Orange Counties) are showing reluctance
to participate in the creation of (d)(4)(A) trusts unless there are specific
state procedures authorized by statute, as in Probate Code §3600,
et seq. Hopefully these problems can be worked out without having to resort
to an appellate court order. There is a helpful case on this point from
New York, Application of Moretti, 606 NYS 2d 543, 159 Misc Rpts
2d 654 (1993). The state had argued in that case that a (d)(4)(A) trust
could not be created until the state legislature had passed conforming
procedural rules. The court disagreed and held that it could go ahead
and approve the proposed trust with or without state procedural rules.
Indeed, it even went out of its way to say that if that state's eventual
procedural rules ended up burdening the Medicaid beneficiary's substantive
federal rights, the rules would violate the Supremacy Clause of the U.S.
Constitution and be invalid.
Coming up in the Next Installment:
- Who is allowed to benefit from a (d)(4)(a) trust?
- What has to be paid back from a (d)(4)(A) trust?
- How are (d)(4)(A) trusts taxed?
Gregory Wilcox, Esq., is an attorney in private practice in Berkeley,
California.
From the March 2002 Legal Network News
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