Third-Party Trusts

While a 3rd Party SNT is not required to comply with the same Federal requirements that self-settled SNTs and PTs must meet, a 3rd Party SNT must still be carefully drafted to protect the trust beneficiary’s public assistance benefits.  However, this is not a requirement that the government imposes on the trust, per se. It simply means that the trust must be drafted so that the trust assets are not considered to be available resources under the trust beneficiary’s more general public assistance eligibility rules.

Federal law imposes resource limits on people who receive SSI and Medicaid, which means there is a limit on the amount of property that someone may own and still be eligible for benefits.  Certain assets are excluded, such as a home, one vehicle, and household goods, but the resource limit is only $2,000.00 for a single person.  See 42 U.S.C.A. § 1382(a)(1)(B) for the imposition of a resource limit and 42 U.S.C.A. § 1382(a)(3)(B) for the actual amount of that limit. This $2,000.00 resource limit was established on January 1, 1989 and has not been changed to reflect changes in the consumer price index.

The SSA Policy Operations Manual System (POMS) also confirms this resource limit at SI 01110.003 where the limit is established in sub-paragraph A. and the amount is established in sub-paragraph B.  The POMS are used by SSA employees to interpret policy and determine eligibility for SSI and other Social Security benefits.  The POMS also defines what a resource is at SI 01110.100B.1.  Accordingly, a resource is cash and any personal and real property that someone has the right or authority to convert to cash or is not legally restricted from using for support and maintenance.  As it should be, this POMS section is consistent with the definition of resources in Federal law at 20 C.F.R. § 416.1201(a).

Since an asset will count as a resource if it can be converted to cash or used for support and maintenance, it is critical for a 3rd Party SNT to be drafted so that the trust assets are not available to the trust beneficiary.  In other words, the trust document cannot give the beneficiary any right to access the trust assets or require the trustee to make distributions of income or principal.  By contrast, the trust document must direct the trustee to use the trust to make distributions for the beneficiary’s special needs while giving the trustee total discretion in determining when and how to make those distributions.  This is confirmed at SI 01120.200D.2. where the POMS explains that a trust is not an available resource if the individual has no legal authority to revoke the trust or direct the use of trust assets for support and maintenance.

Giving the trustee total discretion is also necessary with SNTs and PTs so that trust assets do not count as an available resource to the trust beneficiary.  However, this is essentially the only feature that 3rd Party SNTs share with SNTS and PTs.  This means that 3rd Party SNTs can provide additional advantages because they are not required to comply with the requirements for SNTs and PTs.

Assuming that any given special needs trust has sufficient funds, vacations and travel expenses are appropriate expenses that can improve a beneficiary’s quality of life.  However, paying the travel expenses of other people from SNTs and PTs is restricted by the POMS to situations where the trust beneficiary’s safety or medical well-being is at stake.  This means that a SNT or PT would be limited in many cases to paying for only the trust beneficiary’s travel expenses.  By contrast, a 3rd Party SNT can potentially pay travel expenses for both the trust beneficiary and friends or family members.  Because the sole benefit rule does not apply to 3rd Party SNTs, paying travel expenses for one or two other people can be appropriate when doing so is more generally in the best general interests of the trust beneficiary.

Another example of 3rd Party SNTs providing more options is the ability to name multiple trust beneficiaries.  Unlike SNTs and PTs, which can only have one beneficiary, someone who establishes a 3rd Party SNT can name as many beneficiaries in any order as they want.  For example, a family member receiving SSI or Medicaid can be named as the primary beneficiary, with one or more family members named as residual beneficiaries to receive any remaining amounts upon the death of the primary beneficiary. Likewise, the family member receiving SSI or Medicaid could also be named as a beneficiary along with one or more family members who would all have current rights under the trust document.

As long as the trust document is drafted so that trust assets are not considered to be available resources for the trust beneficiary receiving SSI or Medicaid, the other trust beneficiaries can be provided for in any manner that the trust creator prefers. In other words, the trust would operate as a 3rd Party SNT for the beneficiary receiving SSI or Medicaid, but it would operate as a more standard trust for all the other beneficiaries.  This is why 3rd Party SNTs can be incorporated into more traditional estate plans; they facilitate planning that accommodates and protects the needs of all family members.

According to 42 U.S.C. §1396p(d)(2)(A), an individual is considered to have established a trust if the individual’s assets were used to fund the trust and any of the people listed below established the trust:

1)    the individual himself or herself;

2)    the spouse of the individual;

3)    any person, including a court, who has the legal authority to act on behalf of the individual or on behalf of the spouse of the individual; and,

4)    any person, including a court, who is acting at the direction or request of the individual or spouse of the individual.

Although not repeated verbatim, the language from the Federal statute is tracked closely in the POMS at section SI 01120.200H.1.a.  Similar language will always be found in the controlling Medicaid law and regulations for each State. The only exception to the above list is when a trust is created by Will.  In other words, if an individual creates a trust through his or her Last Will and Testament, the trust will not be considered to have been created by the individual.  You will find more information about this exception under the next heading on how 3rd Party SNTs are established.

One question that people frequently ask is whether someone can transfer resources to a trusted friend or family member who is not considered to be the individual.  Following the transfer, the friend or family member will then establish a 3rd Party SNT for the benefit of the individual.  While this may seem like a good idea initially, taking such a course of action will not protect someone’s public benefit eligibility because SSI and Medicaid both have transfer rules.  Transferring resources without receiving fair market value in exchange will result in a penalty period, which is a period of time during which public benefit eligibility will be denied. The length of the penalty period will depend on the total amount of the resources that are transferred, but SSI has a maximum penalty period of 36 months.  Medicaid, however, has no such limit on how long the penalty period can last.  See 42 U.S.C. §1382b(c)(1)(A)(i) and POMS SI 01150.110A. for SSI transfer penalties.  See 42 U.S.C. §1396p(c)(1)(E) for Medicaid transfer penalties.

In addition to being living trust or testamentary trust, 3rd Party SNTs can be established as either revocable trusts or irrevocable trusts.  “Revocable” means that the grantor can change his or her mind and terminate the trust or make changes to it.  “Irrevocable” means the trust is permanent because the grantor has given up the ability to terminate the trust or make changes to it.  All testamentary trusts are irrevocable because they are not established until after the grantor’s death when it is impossible for the grantor to take any action to change or revoke the trust.  Likewise, a revocable trust will also become irrevocable by operation of law upon the grantor’s death because the grantor will no longer be able to change or revoke the trust.

As mentioned above, a trust created by Will is a specific exception to when the government considers an individual to have established a trust.  While this exception applies no matter whose Will establishes the trust, it is worth noting that the exception also applies when a trust is established through the Will of a spouse.  In other words, a spouse can create a testamentary 3rd Party SNT for a surviving spouse even though he or she could not have created a 3rd Party SNT while alive. This offers a powerful planning opportunity to provide care and protect the public assistance benefits of a surviving spouse.

Third parties are therefore free to establish 3rd Party SNTs for trust beneficiaries who receive SSI and Medicaid with no requirement to reimburse the State upon the death of a beneficiary.  The freedom that a grantor has to direct the use of trust property upon the death of a trust beneficiary lends itself perfectly to incorporating 3rd Party SNTs into more traditional estate plans. The other alternative is to do nothing, which means that a family member’s SSI and Medicaid will be jeopardized when they receive an inheritance by means of a probated Will or an intestate estate.  An intestate estate is one in which the decedent died without a Will and so the State’s intestate statutes determines the heirs at law.

Some people solve this problem by creating a Will that disinherits the family member who receives public assistance while leaving their share of the estate to other family members who are expected to provide care.  However, this is not a good solution because it is natural for things to change over time.  There is no guarantee that other family members will be able to provide care in the future whether it is due to caregiver fatigue, health issues, or death.  Also, any share of the estate left to a caregiver is potentially at risk because it will belong to the caregiver family member and not to the family member receiving public assistance benefits.  This means that the funds will be subject to any judgments against the caregiver, any future ex-spouses, and other creditors of the caregiver.

Trusts are complicated legal documents, and there are many considerations that can go into deciding on what type of trust best meets someone’s needs.  The Center always recommends that someone consult with legal counsel to determine their objectives and how to best achieve those objectives. However, when someone’s objectives have been determined or when a cost effective solution is appropriate, the value of the Center’s Community Trust has proven itself time and time again.  The Community Trust is a Third Party Pooled Trust that offers all the benefits of a 3rd Party Trust while taking advantage of the Center’s economies of scale. Clicking on National Community Trust will take you to a link where you can download the documents and consider them for your use.