NOTE:  The following is an edited version of an article first appearing in the July/August/September issue of NAELA News. I have rerun it now because (i) the topic was the subject of a lively discussion on the North Carolina NAELA chapter list serve (a very active list serve, I might add), and (ii) I will be conducting a NAELA Lunch and Learn (free if you’re a NAEA member) based on this article at 1 PM EST on January 19, 2016. If you are interested in registering, CLICK HERE.

What if I told you that you might be able to transfer assets to a trust for the benefit of an SSI recipient, free of a transfer sanction, free of a payback requirement, and free of danger to the SSI recipient’s benefits? Before thinking someone is pulling your leg, read on.

Under the right circumstances (and in the right state), “sole benefit trusts” (“SBTs”) are a great way to transfer assets free of a Medicaid transfer sanction and without state “payback” concerns that apply to so-called self-settled trusts.

I call such a trust an SSI-SBT, which really sounds like some sort of scary Cold War Era missile.

The Medicaid Transfer Statute

Pursuant to 42 USC § 1396p(c)(2)(B)(iii) and (iv) exempts from sanctions transfers “to a trust (including a trust described in subsection (d)(4) of this section) established solely for the benefit of” either an individual under age 65 or the transferor’s child of any age. Under the statute a transfer to a “payback” or D4A trust under 42 USC § 1396p(d)(4)(A) is but one type of transfer to a trust “established solely for the benefit of” an individual.

While subsection (d) of the statute clearly articulates requirements for a D4A trust (including the infamous payback provision), the statute is silent as to what requirements apply to the other types of trusts that might qualify as “solely for the benefit of.”

Actuarial Soundness OR Payback

Sections 3257 through 3259 of Chapter 3 of the CMS State Medicaid Manual (SMM)[i] is CMS’s explanation to state Medicaid directors of the trust provisions of OBRA ’93. To the extent the SMM does not contradict more recent statute, it is good law.

SMM Section 3257 B.6 of the Transmittal lays out the general requirement that a trust, to be considered “for the sole benefit of” an individual, must require distributions “on a basis that is actuarially sound based on the life expectancy of the individual involved.” However, the immediately following paragraph begins:

An exception to this requirement exists for trusts discussed in §3259.7 [the section dealing with D4 Trusts]. Under these exceptions, the trust instrument must provide that any funds remaining in the trust upon the death of the individual must go to the State.

Thus a transfer by a grantor to a trust for a child or other “under age 65” person with disabilities is not a sanctionable transfer for the grantor if the trust is either a D4 trust, or a trust that contains an actuarially sound distribution standard.

Actuarial Soundness

SSM Section 3258.9B. describes “actuarial soundness” as a distribution standard that will insure complete distribution of the trust within the beneficiary’s anticipated life expectancy (as determined by tables in the transmittal).[ii]  Significantly, and as demonstrated by the example of actuarial soundness provided by HCFA at SSM Section 3258.9.B., the distributions may be made more rapidly. “Actuarial soundness” provides a minimum distribution standard that may be exceeded.

This interpretation leaves room for a few drafting choices.

First, you may structure the distributions as an annuity-like stream of distributions set to exhaust the trust corpus within the beneficiary’s actuarial life expectancy. In fact, the state may administratively insist that you set the “annuity term” for some period close to the beneficiary’s actuarial life expectancy (as opposed to allowing a faster payout). This option may not be attractive because it will force the trustee to have enough liquidity to meet the distribution obligations (or to distribute “in-kind” with fractional shares of illiquid assets such as real estate).

Second, you could structure distributions along two tiers:  (i) “minimum required distributions”[iii] (MRDs) that are based upon some formula (such as trust balance as of the previous December 31, divided by the beneficiary’s remaining actuarial life expectancy as of that date), and (ii) discretionary distributions that exceed MRDs. This technique can allow the trustee to “dribble” distributions out to the beneficiary and perhaps control the nature of the distributions. Moreover, it gives the trustee the option to more rapidly distribute to the beneficiary if the distributions will not jeopardize benefits (such as SSI).

State Challenges

Regulators may attempt to rein in the use of sole benefit trusts with one of three administratively imposed requirements. If the trust beneficiary is not receiving Medicaid or SSI (she is receiving Social Security Disability Income only) and she doesn’t have excessive creditors waiting to claim against a potential estate, the bureaucratic add-ons make little difference. On the other hand, if the beneficiary is on SSI, Medicaid or has significant creditor issues, these added requirements can pose some concern.

First, some state Medicaid authorities insist on a payback provision. As demonstrated above, there is no legal support for such a position. The authority imposing such a requirement is attempting to treat a sole benefit trust as a D4A trust.

Second, some states require the beneficiary’s estate to be the sole remainder beneficiary.[iv] The ostensible reason for the imposition of this requirement is to ensure that the trust is solely for the benefit of the named beneficiary and cannot benefit any other individual. There are a number of problems with this line of thought. Neither the statute nor the SMM mention this feature. Also, as long as the beneficiary is alive the trust will not benefit anyone else. Finally, mandating the estate as the remainder beneficiary of this type of third party trust simply elevates creditors over other beneficiaries and does nothing to ensure the trust is “solely for the benefit of” the beneficiary while he is alive.

Third, some states require affirmative distribution language that the trust “supplement and not supplant” public benefits.[v] There is no federal statutory or other authority for such a mandate.

If you practice in a state without these extra-statutory, extra-regulatory hurdles, however, you are in a good position to assist a grantor with a sanction-free transfer and an SSI beneficiary with an “unavailable” trust that will be available to other family members upon the death of the beneficiary.

The SSI Challenge

With respect to structuring distributions for an SSI beneficiary, an understanding of the Social Security Supplemental Security Income asset and income rules under POMS will enable you to structure a distribution standard that will not jeopardize SSI.

First, cash received from the trust will reduce SSI benefits dollar-for-dollar.[vi] Second, in-kind distributions that would not constitute resources if retained past the month of distribution will not be income when received.[vii] Third, distributions that constitute in-kind support and maintenance (ISM) because they are food and shelter items (or payments to third parties for such items) will reduce SSI benefits by an amount not to exceed one-third of the federal benefit level ($244.33 in 2015), depending upon the beneficiary’s circumstances.

If the beneficiary is residing in the home of another and receiving food and not paying a pro rata share of those costs her benefits will be reduced $244.33 regardless of the value of the ISM received.[viii] This is called the “value of the one-third reduction” or VTR rule, and obviously the results are not pleasant for a beneficiary receiving less than $244.33 in SSI benefits. Any ISM will eliminate SSI eligibility for that month.

On the other hand, if the beneficiary does not fit the VTR rule, he is under the “presumed maximum value” or PMV rule and any ISM (of any value) received is rebuttably presumed to equal $244.33. The beneficiary with SSI benefits under $244.33 who received some small amount of ISM should avail himself of the ability to rebut the presumption and demonstrate the true value of the ISM. On the other hand, a beneficiary with SSI over $244.33 who has received a side of prime beef and a truckload of caviar may want to go with the presumption which will reduce his benefits by just $244.33.

Suggested SSI Distribution Language

Craft the distribution language as a two-tier scheme. One tier will address the MRD requirement, another tier will address the trustee’s discretionary “excess” distribution.

Now craft further instructions to the trustee that MRD distributions be satisfied (i) first with distributions that do not constitute income to the beneficiary under SSI rules, (ii) and if the MRD has not been satisfied under the preceding, then with distributions that constitute types and amounts of ISM that will not eliminate SSI, and (iii) only then consider making other distributions that could jeopardize SSI.

It should take a singularly uncreative trustee who could not think of any distribution in satisfaction of the “MRD tier” that would not constitute income for SSI purposes. For example, a $100,000 sole benefit trust for a beneficiary with a 20 year life expectancy will be required to make a MRD of about $5,000 in year 1. The trustee could purchase an auto, a very nice gaming system, pay educational expenses or medical expenses and exceed $5,000 very easily.

To Reiterate

If you practice in a state that, with respect to an SBT, does not require payback provisions, an estate as remainder beneficiary, or “supplement rather than supplant” language, you are free to draft an SBT for an SSI recipient along the lines discussed above.

Of course, there is no guarantee you will not be challenged. If you are challenged, however, you may be secure in the knowledge that I will be thinking about you.

Interested in spending 3 days learning about this and all sorts of other interesting trusts, taxation and Medicaid/SSI/VA benefit issues? Some of your colleagues have described the TrustChimp Trust Summit as the best (and most intense) CLE ever attended.

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[i]  Also known by the transmittal number that issued it: “Transmittal 64.”

[ii]  Transmittal 64 does not define “actuarially soundness” in the context of trusts; the definition discussed in section 3258.9B is in the context of annuities.

[iii] A term borrowed from distribution rules applicable to individual retirement accounts.

[iv]  Ten years ago a CMS official also opined to this effect. Letter from Ginni Hain, Division of Eligibility, Enrollment and Outreach, CMS, to Mary E. O’Byrne, Esq. (June 27, 2005).

[v]  See, e.g., Minn. Stat. § 501B.89 (effective 1/1/2016 replaced by identical Minn. Stat. § 501C.1205). Minnesota imposes the “may not supplant” requirement on both D4A and third party trusts. NAELA member Laurie Hanson has successfully “pushed-back” with respect to D4A Trusts. My thanks to Ms. Hanson for discussing this situation with me and providing me with other helpful information. See, also, Kan. Stat. Ann. § 39-709(e)(3).

[vi] POMS SI 01120.200E1.a.

[vii] Id.

[viii] POMS SI 00835.200