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Legal Network News:
New SSI Trust Provisions -
Insights From The New POMS Sections


By Peter Stern, Esq.

HR 3443, the Foster Care Independence Act of 1999, added trust and transfer provisions to the SSI law. Section 205 adds subsection (e) to 42 USC 1382b and applies to trusts created on or after January 1, 2000. This article will discuss the new law in light of the Social Security regulations promulgated in Transmittal 35 as they affect trusts and non-long-term-care SSI recipients.

Content of the New Law

The new provisions borrow heavily from the 1993 OBRA changes. The law states that "an individual shall be considered to have established a trust if any assets of the individual (or of the individual's spouse) are transferred to the trust other than by will." As in OBRA, the new law applies without regard to the purposes of the trust, whether or not the trustee has discretion, and whether or not there are restrictions on the timing or purpose of trust distributions.

The Social Security Administration released Transmittal 35 in February 2001. The release, 109 pages long, restates POMS Section SI 01120.200 [Trusts Established Prior to 1/1/00, Trusts Established by Third Parties, and Trusts Not Subject to Section 1613(e) of the Social Security Act] and adds Section SI 01120.201 [Trusts Established by an Individual on or after 1/1/00], Section SI 01120.202 [Development and Documentation of Trusts Established after 1/1/00]; SI 01120.203 [Exceptions to Counting Trusts Established on or after 1/1/00]; and SI 01120.204 [Notices for Trusts Established on or after 1/1/00]. The substantive POMS sections are SI 01120.200; 01120.201; and 01120.203. You can obtain Transmittal 35 by purchasing the Social Security Administration's CD-Rom, Social Security Administration CD-Rom Publications, a monthly CD-Rom available from the Government Printing Office website, or by going on line at the following URL, where all the POMS can be found: http://policy.ssa.gov/poms.nsf/

The Old Rules and Where They Still Apply

SI 01120.200 essentially restates the old POMS section of the same number. This section applies to trusts established by third parties and to trusts established by SSI beneficiaries prior to 1/1/00. If the trust is not revocable by the SSI beneficiary, cannot be accessed by the SSI beneficiary, and names a remainder beneficiary, it is not a resource of the SSI beneficiary. Under the old rules, it was possible for an SSI recipient to receive a windfall, such as an inheritance or a personal injury settlement, and to give it away. There would be a one month payback of SSI required, since the windfall was treated as income in the month of receipt, but the payback could be made by modest withholding from the SSI payment over several months and could be structured not to have a severe impact on the lifestyle of the recipient. Trusts set up prior to January 1, 2000, are governed by SI 01120.200, and transfers made prior to December 14, 1999, by the SSI recipient are sheltered under the old transfer rules. Where a third party has set up a trust for an SSI recipient, the old rules shelter that trust.

The New Rules

SI 01120.201 implements the major changes of the 1999 law- Section 01220.201D develops how trusts established on or after 1/1/2000 by the SSI beneficiary or his/her spouse are treated:

i. Revocable Trusts Resources: in a revocable trust established by the individual or the individual's spouse are considered available to the individual.

ii. Irrevocable Trusts: If payments from an individual's trust, or  from an irrevocable trust established by the spouse of the individual, could be made to or for the benefit of the individual or spouse, the portion of the trust from which payment could be made that is attributable to the individual is a resource. The examples provide frequent cross references to the transfer penalty provisions of SI 0150.110, where an individual transfers assets to a trust that do not count as a resource because they cannot be paid to or for the benefit of the individual, and where a particular trust asset might be counted both as a transfer and as an available resource, the trust provisions take precedence over the transfer provisions (SI 01120.201D5). The irrevocable trust procedures take away from the SSI beneficiary the opportunity permitted previously of establishing an irrevocable trust that was out of the control of the SSI beneficiary. Such trusts could provide supplemental payments to or for the benefit of the beneficiary, which would count as ISM if in the form of food, clothing, or shelter, providing discretion to the trustee to weigh the costs and benefits of such payments.

iii. Definitions: The term "trust" includes any legal instrument or device similar to a trust; the term "corpus" means property and other interests held by the trust but not earnings or addition to the trust in the month received by or credited to the trust; the term "asset" includes any income or resource of the individual or spouse, including income or assets to which the individual or spouse is entitled but does not receive or have access to because of action by the individual or spouse, or some other individual or entity acting on behalf of or at the request of the individual or spouse.

Exceptions

SI 01120.203 provides for exceptions to counting trusts established on or after 1/1/00. This POMS section covers the "Medicaid Trust" exceptions and the hardship exceptions of the new law.

i. The "Medicaid Trust" exception covers trusts established with the assets of disabled persons under age 65 where the trust was established for the benefit of such individual by a parent, grandparent, legal guardian, or a court, and which provides that the state 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 a state Medicaid plan. These provisions are the same as the familiar "d4A" provisions of OBRA and integrate such additional provisions as continuing coverage for someone who was under 65 when a trust was established after the person attains age 65. The rule emphasizes that an individual cannot establish a trust him- or herself; that the person establishing the trust must have legal authority to act with regard to the assets of the individual. To underscore this point, the POMS adds a Note: "This requirement refers to the individual who physically took action to establish the trust even though the trust was established with the assets of the SSI claimant/recipient." [SI 01120.203b1e]. The Medicaid reimbursement requirement contains the chilling note that "The State must be listed as the first payee and have priority over payment of other debts and administrative expenses [emphasis added]." [SI01120.203b1f].

ii. Hardship provisions: If failure to receive SSI payments would deprive the individual of food or shelter and the individual's available funds do not equal or exceed the federal benefit rate plus a federally administered state supplement, an undue hardship exists. The undue hardship finding does not apply where a trust counts as a resource under SI 01120.200 (a pre-year 2000 trust; or a third party trust available to the SSI beneficiary). Thus, if an individual transferred money to an irrevocable trust and thus became ineligible, he or she might still receive SSI if the undue hardship provisions applied.

What the New Law Means

First, all first party trusts--a trust funded with the assets of the individual and spouse--with the exception of (d)(4) trusts are now counted as resources.

a. Prior Treatment of Trusts POMS SI 01120.200 D.1. defines trusts as resources if the individual has legal authority to revoke the trust and then use the funds to meet food, clothing, or shelter needs, or if the trust itself provides for mandatory disbursements to the beneficiary. D.2. describes trusts that are not resources as those trusts where the individual does not have the legal authority to revoke the trust or direct the use of the trust's assets for support and maintenance.

b. New Availability Treatment The old safe harbor of irrevocability is gone; any trust established other than by will by the individual or spouse with the assets of the individual or spouse is available to the extent that corpus is available for distribution. An income-only trust would technically be unavailable, but whatever income was distributed would count as income received by the individual.

c. Safe Harbor for (d)(4) Trusts The new statute does not apply to trusts for disabled persons under age 65 established according to the guidelines of 42 USC 1396p(d)(4), and transfers to such trusts are permissible under the new transfer rules. Note that there is no requirement to provide for a payback of SSI rightfully received: the payback provisions of the (d)(4) trusts apply only to medical payments received under Medicaid or similar state programs.

d. Who is Most Affected by the Law? Clearly, disabled elderly persons will feel the brunt most severely. A thirty-year-old disabled person who receives a settlement or inheritance and who has not transferred it before it became a resource can have the funds placed in a (d)(4) trust; but an eighty-year-old woman who receives a windfall settlement of $15,000 cannot similarly shelter her funds.

Suggested Strategies

While the new trust rules stand on their own with regard to treatment of trusts established on or after 1/1/2000, the rules have to be read in tandem with Section 206's treatment of transfers. While according to a strict reading of the law the transfer penalties apply to the transfer of resources, not of income, and while traditionally the POMS have treated receipt of a windfall, such as an inheritance, or a personal injury settlement, as income in the month of receipt, the transfer POMS [SI 01150.001 and following; SI 01550.001B5] single out the transfer of inheritances as the transfer of a resource, thus taking away from the older SSI recipient the strategy of divesting him- or herself of an inheritance that otherwise could have been transferred to a trust prior to 1/1/00. Better yet, be sure to plan for the receipt of the windfall before the payer mails the check.

Where the SSI recipient is under age 65, he or she can transfer funds to a d4a special needs trust and still preserve SSI and Medi-Cal eligibility. There has been considerable discussion over the internet in the summer of 2001 of hostility to special needs trusts on the part of certain Social Security workers. The law and the regulations, however, are firmly in favor of recognizing such trusts and of protecting transfers made to such trusts. It is recommended to attorneys whose clients have had such problems that counsel directly contact the local Social Security offices to insist that the law and the regulations be enforced, and where there are continuing problems to waste no time in invoking the assistance of the congressperson in whose district the noncompliance has taken place.

What to do for SSI recipients 65 or older:

1. There is no d4a safe harbor. The only effective remedies involving trusts would apply to situations in which the SSI recipient can set up a trust for the benefit of a blind or disabled child. Such a trust would not do much good for the SSI recipient.

2. The recipient could use windfall money to acquire an exempt resource such as a home or a vehicle.

3. The recipient could use transfer strategies by transferring funds to protected categories of transferees.

4. The SSI recipient could use the undue hardship exceptions by transferring funds to an irrevocable trust over which the SSI recipient had no control and then seek continuation of SSI under the theory that he or she did not have income or resources to pay for food, clothing, or shelter without SSI.

5. The SSI recipient could rely upon a Medi-Cal only strategy, make transfers to trusted third parties, go off SSI, and qualify for non long term care Medi-Cal.

Peter S. Stern, Esq., is an attorney in private practice in Palo Alto, California.

From the September 2001 Legal Network News

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