file for SMP benefits, an applicant must present an application
to the Veterans Affairs office.
are now available on line, but supporting documentation must
be sent separately to the VA.
For information on the different offices, see www.vetsresource.com
may obtain free assistance with filling out the application from
accredited veterans service
organizations. Organizations or individuals, including attorneys,
are not permitted to charge fees for assisting a client with the
application process. However, if the claim is denied or approved
for less benefits than expected, the
claimant may hire a paid representative to assist in the appeal.
An advisor may also charge for planning and advice.
benefits that will not be addressed include claims for dependency
and indemnity compensation and VA health care.
purpose of determining VA pension benefits, the assets in a
self-settled special needs trust must be considered in
determining eligibility for a VA pension. Department of Veterans
Affairs, Office of the Regional Council, Washington, DC, VAO Pg.
Cp. Rec. 33-97.
Special Needs Trusts.
general, if absolutely discretionary and not created for a spouse,
such trusts may be established either as intervivos
trusts or as testamentary trusts with no public benefits consequences
if administered properly.
As previously noted, however, for Medicaid purposes, a special
needs trust created for the benefit of a spouse can only be
established pursuant to the deceased’s spouse’s last will and
testament (i.e., a testamentary special needs trust for the benefit
of the surviving spouse).
basic element of asset preservation planning for a spouse is the
establishment of a testamentary special needs trust for the
surviving spouse in anticipation of the death of the predeceasing
In order to plan effectively and accomplish a flexible result,
particularly if circumstances change or the anticipated
consequences do not come to fruition, it may be necessary for
both spouses to execute a last will and testament containing
testamentary special needs trust provisions for the surviving
spouse, and then to retitle assets and/or coordinate appropriate
beneficiary designations, and perhaps change those arrangements
from time to time, in order to protect the presumptive surviving
spouse prior to the death of the presumptive predeceasing spouse.
general, a third party trust does not need to be established for the
"sole benefit" of a beneficiary, and can include a number
of beneficiaries. Consequently, more tax planning opportunities are
available, including the ability to distribute IRA and other
qualified distributions among a number of beneficiaries in order to
avoid the income tax "trapping" problem that can exist in
the case of a "sole benefit" special needs trust.
U.S.C. §1396p(d)(4)(A) [SSA §1917(d)(4)(A)]
are the so-called (d)(4)(A) disability
trusts which may be established by a parent, a grandparent, a legal
guardian, or the court, with assets of a Medicaid beneficiary who is
under 65 years of age.
POMS make it clear that to "establish" a (d)(4)(A) trust means to take the physical
action to sign the trust.
A legally competent disabled adult may then transfer his/her own
assets into the trust, or another individual acting under a
validly created power of attorney may transfer the assets, but
the disabled individual may not "sign" the trust.
In the case of a trust established through the actions of a
court, the creation must be by court order, effectively having
the judge sign the trust or ordering a party to sign the trust
under court order. If a court only allows or ascents to a trust
signed by a third party (other than a parent, grandparent or
guardian), then the trust will be invalid.
The POMS also address the use of a power of attorney, i.e.,
stating that a power of attorney which has been validly created
according to state law by a parent or grandparent may be used by
the independent agent to establish a trust for the beneficiary on
behalf of the parent or grandparent. POMS SI 01120.203B 19.
type of trust does not give rise to a Medicaid transfer penalty, and
the assets in the trust are protected as long as they are used to
provide for the "supplemental needs" of the beneficiary and
not for support.
transferred for the beneficiary might be funds received from an
inheritance or a personal injury settlement. The excess resources
could be transferred to a (d)(4)(A) trust
without incurring a Medicaid penalty. The beneficiary’s eligibility
for Medicaid and SSI would not be affected.
The income will
be attributable to the beneficiary for income tax purposes, in most
instances, but as long as it is used to provide for the beneficiary’s
"special needs," no disqualification for Medicaid or SSI
Upon the death of
the beneficiary, however, the remainder must be made available to the
state Medicaid agency for reimbursement of medical assistance. This
is the so-called "pay-back requirement."
Attached as Exhibit
"B" is a form of (d)(4)(A) trust.
Remember that for
all forms of special needs trusts based on disability, the definition
of "disability" is the same definition contained in the
Social Security Act for determining eligibility for SSI or SSDI. 42
U.S.C. §1382c(a)3A. If a special needs trust
is being considered before the beneficiary has been determined to be
disabled by the Social Security Administration, consider obtaining an
advisory opinion from an experienced Social Security Disability
attorney as the foundation to proceed in drafting the special needs
trust. The POMS provide that if there has not been a determination of
disability, the case can be sent for a medical determination after
the trust has been established. POMS SI 01150.121.
trust of this type may be helpful to deal with a tort recovery, an
inheritance or any other unanticipated payment. Although certain
payments might be deemed to be income rather than assets, an
irrevocable assignment of child support or alimony payments made
directly to a trust as a result of a court order are
not income, as long as the assignment is irrevocable.
POMS SI 01120.200G.1.d.
POMS clarify that special rules apply to trusts established with
the assets of an individual on or after January 1, 2000.
POMS SI 01120.201B.7.
There is an example of a disabled SSI recipient over age 18
who receives child support, which is assigned by court order
directly into the trust. Since the child support is the SSI
recipient's income, the recipient is the grantor of the trust,
and the trust is a resource unless it qualifies as a self-settled
special needs trust. POMS SI 01120.201C.2.b.
This clarifies that child support is the recipient's income
and must be diverted to a first party special needs trust rather
than a third party special needs trust. The same reasoning would
presumably apply to alimony.
under a structured settlement received after age 65 do not disqualify
the trust from self-settled special needs treatment, so long as the
structure was in place prior to age 65.
A (d)(4)(A) trust must be established for the
"sole benefit" of a beneficiary.
U.S.C. §1396p(d)(4)(B) [SSA §1917(d)(4)(B)
are the so-called "Miller trusts" or "qualified income
trusts" which apply most frequently in an income-cap state. This
trust consists solely of pension, social security, and other
retirement income, plus accumulated income on those trust amounts.
A (d)(4)(B) trust must provide that any
sums remaining in the trust on the death of the beneficiary will
first be used to repay the state for Medicaid expenditures.
The trust becomes the assignee of all periodic income of the
beneficiary, and the income so assigned does not count toward
Medicaid income eligibility, but is still treated as available income
for the purpose of calculating the beneficiary’s duty to contribute
to the cost of care as required under 42 CFR § 435.725(c). The same
regulation directs that the cost of care contribution be reduced by a
personal needs allowance, payments to a community spouse (to the
extent necessary to bring the community spouse’s income up to the
MMMNA level), and Medicare Part B premiums, among other items.
Mechanically, a (d)(4)(B) trust should be operated so that each
month it receives all of the beneficiary’s income, and immediately
makes payment to the nursing facility or the care provider, the
beneficiary (for his or her personal needs amount), and the spouse.
Within a few days of the receipt of the monthly income, the trust
account may be virtually emptied.
There is no requirement that personal needs be paid for directly
from the trust account, nor that any unused personal needs
Because the trust must provide for repayment of the state’s Medicaid
contributions at the beneficiary’s death, there is good reason to
maintain the trust balance at the lowest possible level.
Although Indiana is a "spend down" state and not an
income-cap state, for certain waivered services (such as the
developmental disabilities or DD waiver and the support services or
SS waiver), the so-called SIL (special income level) test applies.
The SIL is equal to the personal needs allowance used for the SS and
the individual fails the SIL-test (i.e., the income is more than
the SIL), the individual is ineligible for the waiver.
If the individual is married, the spousal impoverishment rules
Depending on the situation as explained in ICES Manual
§3301.20.04, regular or spousal post-eligibility budgeting is
used, and the amount of the personal needs allowance varies by
SIL (or maximum income) for waived services is $2,022 as of
January 1, 2009 (which did not change for 2010). This is equal
to 300 percent of the maximum benefit payable under the SSI program,
and increases annually when SSI increases in January of each year. In
the case of an individual with a large monthly income who may be
diverted from a nursing home to the home under the home diversion
waiver, if the Medicaid recipient’s income level is greater than the
SIL, the individual would be ineligible for Medicaid for the purpose
of the home diversion waiver. In other words, the individual could be
eligible for Medicaid in the facility, utilizing the spousal
impoverishment rules, but lose eligibility when he returns home under
the diversion waiver because of the excess monthly income. Utilizing
the (d)(4)(B) trust can avoid this result.
Exhibit "C" is a form of (d)(4)(B)
trust. See also Regan, Morgan and English, Tax, Estate &
Financial Planning For the Elderly, Section 10.13([b]) p.10-133 et seq
U.S.C. §1396p(d)(4)(C) [SSA §1917(d)(4)(C)]
are the so-called "pooled trusts" or "non-profit
association trusts" such as the SWIRCA (Southwestern Indiana
Regional Council on Aging, Inc.) Pooled Trust.
This trust may be established with the beneficiary’s assets by a
parent, grandparent, a legal guardian, or the court, or by the
beneficiary himself or herself, using his or her own assets.
As in the case of the (d)(4)(A) trust, this trust shelters the
assets belonging to the person who is disabled, and should not affect
the beneficiary’s Medicaid eligibility as long as the trust is used
for supplemental needs and not for support.
As in the case of the (d)(4)(A) trust, the income will normally be
attributable to the beneficiary for income tax purposes, but will not
affect the beneficiary’s eligibility for Medicaid as long as it is
used to provide for the beneficiary’s "special needs" and
not to provide for the beneficiary’s support.
As in the case of a (d)(4)(A) trust,
there is no transfer penalty, except for transfers of a beneficiary’s
own assets if the beneficiary is 65 years of age or older.
As in the case of the (d)(4)(A) and (d)(4)(B) trust, there is a
"payback requirement" to the state Medicaid agency for
reimbursement for medical assistance except to the extent that the
remaining assets stay in the trust.
Attached as Exhibit "D" is a copy of the SWIRCA
(Southwestern Indiana Regional Council on Aging, Inc.) Pooled Trust
Declaration, and attached as Exhibit "E" is a copy of the
SWIRCA Pooled Trust Joinder Agreement.
SSI (d)(4)(A) elements.
addition to the statutory requirements of 42 U.S.C. §1396p(d)(4)(A), there are special SSI
Prior to August 15, 2002, some SSA Regional Counsel took the
position that inter-vivos or post mortem
payment of taxes, trustee fees, or other administrative expenses
violated the Medicaid repayment requirement. The POMS were amended to
make clear the "sole benefit" requirement is not violated
if certain administrative expenses are paid during the life of the
disabled beneficiary, and certain others are paid after death but
before the repayment of Medicaid.
prohibited and allowable administrative expenses are found in
POMS SI 01120.203B.3.
In general, taxes and reasonable fees may be paid. Payment of
debts owed to third parties, funeral expenses (the "stinking
dead body rule"), and payments to residual beneficiaries are
regional offices have published regional instructions relating to
what is necessary to have a valid irrevocable trust under state law.
In certain states, the trust must specify a particular person or
entity as the residual beneficiary. While "children,"
"issue," or "descendants," is specific enough,
"heirs" or "my estate" are not sufficient terms.
states, any residual beneficiary, even an unborn child, is adequate
for the purpose of establishing irrevocability. In others, as long as
the trust names a residual beneficiary other than an unborn child,
then the trust would be considered to be irrevocable. If the residual
beneficiary is an unborn child or children, and the grantor has no
child or children, and there is evidence that the grantor is unable
to have children, then the trust might be considered to be revocable.
states, if a specific person or entity is designated, it would also
be permissible to name in addition an estate or heirs to establish a
sufficient residual beneficiary.
Be careful of
structured settlements, particularly if parents may be receiving
annuitized payments in addition to the amount used to fund the
child’s (d)(4)(A) trust. Since structured settlement annuities may be
liquidated, they have been treated as a resource in some cases, even
if the amount of the deemed income to the parent would not adversely
affect the child’s SSI eligibility.
There are a
number of definitional provisions in the POMS, such as the
"fiduciary," the "trustee," and the "trust
beneficiary," etc. See POMS SI 01120.200B.
Needs Trust ("SNT") Basics.
for persons with disabilities in order to preserve eligibility for
Social Security Act does not recognize an SNT per se for SSI
purposes, but instead distinguishes trusts that are not an available
resource to the beneficiary for the purpose of determining eligibility
is no federal statutory authority for a third party special needs
However, authority is found in the POMS at SI 01120.200.
SSI purposes, a discretionary trust is "a trust in which the trustee
has full discretion as to the time, purpose and amount of all
beneficiary has no control over the distributions, the trust is
not counted as an available resource for SSI eligibility.
Distributions from an SNT for a beneficiary receiving
"needs-based" benefits may trigger both tax and public
"If an individual (claimant, recipient, or deemor) has legal authority to revoke the
trust and then to use the funds to meet his food or shelter
needs, or if the individual can direct the use of the trust
principal for his/her support and maintenance under the terms of
the trust, the trust principal is a resource for SSI
purposes." POMS SI 01120.200D.1.a.
Medicaid trust rules are somewhat different:
trust income and principal would be considered to be
"available" if either the income or the principal under
any circumstances could be used for a particular purpose.
Much more flexibility is available for third party created
Self-settled trusts, whether created by the individual or his
or her spouse, someone with authority to act on behalf of the
individual (i.e., under a power of attorney), or a court or
administrative body, will give rise to particular transfer
penalties, depending on whether the trust is revocable or
irrevocable, and when distributions are made from the trust to
third parties other than the creator.
In the case of third party created trusts, it is generally
safer to avoid criteria such as "support" or
"health" and instead to refer to specified
"special needs" or "supplemental care"
criteria and to include very clear and specific language that the
beneficiary’s needs-based benefits shall not be affected by trust
trusts will generally be considered available for SSI purposes unless
created prior to January 1, 2000, in which case such grandfathered
trusts, if irrevocable and discretionary, in most cases will not be
considered to be available until funds are distributed.
needs" (d)(4)(A) trusts for disabled persons under age 65, and
(d)(4)(C) "pooled trusts" for disabled persons of any age,
are exempted for both Medicaid and SSI purposes.
is required if the disabled person’s assets are used to fund
these trusts, and persons over 65 who fund a pooled trust will
incur a Medicaid and SSI transfer penalty.
A (d)(4)(A) or "under 65" trust may be created using
the disabled person’s own assets by certain persons other than
the disabled person (such as a parent or the court), while the
disabled person himself or herself may transfer his or her own
assets to a (d)(4)(C) or "pooled trust," subject to
transfer penalty implications if an individual’s own assets are
transferred to a pooled trust and the individual is 65 years of
age or older.
"needs-based" benefits, "income" is cash, or anything
that can be used for food or shelter.
will be noted later, "income" for SSI purposes is not the
same thing as "taxable income" for income tax purposes.
"Income" for SSI purposes included in-kind support and
maintenance ("ISM"), which includes providing for food or
shelter either directly or indirectly rather than providing cash that
can be expended for food or shelter.
Clothing was included as an item of in-kind support and
maintenance until March 9, 2005, when the Social Security
Administration published final regulations amending the income and
resource rules for the SSI Program. Consequently, a special needs
trust can now purchase clothing without being deemed to have provided
for tax purposes requires an entirely distinct analysis.
income" for trust beneficiaries, however, can either be a direct
distribution to a beneficiary or payments made to another person for
the benefit of the beneficiary.
if the trustee of an SNT pays the telephone bill of the
beneficiary out of trust income, the beneficiary has received a
benefit and will be deemed to have received "taxable
The beneficiary did not receive "income" for
benefits purposes because the beneficiary received neither cash
nor food or shelter.
SNT that is the designated beneficiary ("DB") of a
retirement plan or account will be subject to the trust income rules
found in I.R.C. §§ 641, et seq.
income not distributed is taxed at compressed rates (for 2010,
35 percent after only $11,200 of income).
If the DB received the retirement proceeds directly, the
highest bracket of 35 percent in 2010 for both single and
married taxpayers filing jointly would not be reached until the
beneficiary received $373,650.
A trust which is not a "grantor trust" is treated as
a separate tax entity and discretionary distributions of income
pass through to the beneficiary to the extent distributed.
death of the participant, distributions of qualified dollars are
generally taxed as income in respect of a decedent ("IRD"),
taxed to the beneficiary when received, with taxation being
accelerated if the right to receive the income is transferred by the
beneficiary or the decedent’s estate.
distributions from retirement plans are considered wholly or
partially distributions of principal for trust accounting
purposes, while for income tax purposes distributions are
To avoid problems, the trust should allow the trustee to
distribute discretionary amounts of income and principal to avoid
trapping the income at the trust level and subjecting the
distributions to higher tax rates. However, this would be
problematic in the case of a (d)(4)(A)
or (d)(4)(C) trust which must be established for the "sole
benefit" of the disabled beneficiary and which may require
the accumulation of income to preserve benefits.
PLR 200620025 lays the groundwork as to how inherited IRAs can
be transferred to trusts during lifetime. The IRS held that
transferring an inherited IRA to a grantor trust will neither (i) be considered a sale or exchange
resulting in the immediate recognition of income, nor
(ii) result in taxable income being triggered under
I.R.C. §691(a)(2). Further, the IRS ruled that the required
minimum distributions, as described under I.R.C. §401(a)(9), paid to a trust for the benefit of a
disabled beneficiary, are to be calculated using the disabled
the expected needs of the SNT beneficiary are less than the minimum
required distribution ("MRD") from the retirement plan or
account, then the SNT may not be the most desirable beneficiary.
to avoid tax at the trust level may eliminate eligibility for SSI
Distributions not made will be taxed at the trust level at the
In such cases, the retirement plan might better be payable to
a beneficiary who is not disabled and for other assets, such as
insurance, to be paid or distributed to the SNT.
If there are other beneficiaries in addition to the disabled
beneficiary, then the IRD distributions may be distributed to the
non-disabled beneficiary as a means of avoiding tax without
affecting the disabled beneficiary’s eligibility for SSI or
insurance is an excellent funding vehicle for a special needs trust
because of the absence of income tax and Indiana inheritance tax
including the following provisions in special needs trusts, and in particular
first party or "self-settled" trusts:
language prohibiting the beneficiary from terminating the trust.
Do not include language in a self-settled special needs trust
permitting the termination of the trust by the trustee or anyone during
the lifetime of the beneficiary, to avoid the problem of allowing
payments to a third party other than the beneficiary, thus
violating the "sole benefit" requirement for special
The trust must be administered properly, as well as being
properly drafted and funded. Improper distributions from a
properly drafted and funded trust can cause the loss or reduction
of public benefits. See the comments which follow regarding
"In-Kind Support and Maintenance" and the presumed
maximum value rule.
A "spendthrift clause" is advisable, since if a
beneficiary can sell his or her beneficial interest in the trust,
the interest would be treated as a resource. POMS SI
Since there appears to be no federal restriction on naming a
family member as contingent beneficiary of the guaranteed portion
of a structured payment upon the death of the primary
beneficiary, then unless state law precludes doing so, it may be
possible to avoid a payback to the Medicaid program since the
structured payment would then be paid to the family member and
not to the trust. Consider purchasing a commutation rider to
provide funds to pay any applicable taxes.
The payback is not limited to Medicaid expenditures made after
the trust was established, and if more than one state has made
payments, the funds remaining in the trust may be required to be
paid pro rata. POMS SI 01120.203B.1.h.
Taxes due from the estate of the beneficiary, other than those
arising from the inclusion of the trust in the estate and
inheritance taxes due for residual beneficiaries, are not
permitted prior to reimbursement of the state for medical
assistance. POMS SI 01120.203B.3.b.
Use the words "for the sole benefit of" in the
self-settled special needs trust document.
For an additional discussion of SSI implications of particular
trust provisions, see John J. Campbell, Basic Strategies for
SSI Planning (NAELA Journal, Volume 1, 2005), 311, et seq.
of Distributions for Benefit Purposes.
Security Income ("SSI") is a federal program administered by
each state to provide a minimum level of monthly income. See 20 C.F.R.416.101, et seq.
XVI of the Social Security Act specifies who is
eligible, the amount of cash payments, and the conditions under which
payments can be made.
The purpose of the SSI program is to provide a basic level of
income. If you are receiving income from another source, your SSI
benefit will be cut dollar for dollar. While the SSI program’s
benefits are meager, in most states SSI recipients are automatically
eligible to receive Medicaid. SSI recipients will also be eligible
for food stamps in most states and in some cases for special programs
for the developmentally disabled.
In most states SSI recipients are categorically eligible for most
other essential needs-based public benefits, including Medicaid.
for SSI does not automatically qualify a beneficiary for Medicaid
in so-called § 209(b) states, such as Indiana, but the rules for
obtaining Medicaid eligibility are very similar to the SSI rules.
Most of the comments in this section of this outline will
focus on SSI eligibility with distinctions concerning Medicaid
being addressed in a few areas.
is a "needs-based" benefit requiring disability and
imposing resource and income limitations.
must be age 65 or older, blind, or disabled, and have income and
resources within specified limits.
The resource test establishes eligibility; income test
determines the size of the benefit that the recipient will
SSI amount is set annually at the federal level and supplemented by
certain states (but not Indiana) to meet basic needs for food and
is anything an individual receives in cash or in kind that can be
used to meet the individual’s needs for food and shelter.
In 2010, the maximum SSI benefit is $674.00, without a state
supplement adjustment, which is expected to cover food and
shelter ($1,011.00 for a couple).
of anything not specifically exempted which can be applied, either
directly or indirectly, by sale or conversion, to meet basic needs of
food and shelter, will be treated as income.
there is no specific exemption for a boat, receipt as an
inheritance would result in assumption that it could be sold or
converted and the value would count as income in the month that
it is received.
For every dollar more than (i) $20
per month of "unearned income" paid to an SSI recipient,
and (ii) one-half of earned income above $65 per month, his or
her benefits will be reduced dollar for dollar.
Unearned income includes cash from any source as well as
assets which are not exempted, and can include other benefits
(such as Social Security Disability).
Cash paid directly from the trust to the individual will
always count as income and will reduce the SNT beneficiary’s
benefits dollar for dollar.
trustee’s payment to a third party not providing a disabled
beneficiary with food or shelter does not cause disqualification or
diminution of benefits.
of an individual’s bills (including supplementary or other
medical insurance premiums) by the trust directly is not income,
unless the payment results in the beneficiary receiving an asset
as a result of the payment that can be used for food and shelter.
A payment for food or shelter is countable income called
"In-Kind Support and Maintenance" ("ISM").
Receipt, or the right to receive, ISM (i.e., actual food and
shelter), will result in a reduction of SSI benefits on a dollar
for dollar basis, up to a presumed maximum value
The PMV is the limit on the amount of ISM that can be charged.
Any food or shelter received is presumed to be worth a maximum
The amount of the PMV is equal to one-third the federal
benefit rate ("FBR") in effect for the month in which
ISM is received for an individual or an eligible couple, plus $20
(unless the $20 disregard has already been applied to an unearned
The PMV rate for the year 2010 is $244.66 (less $20 if
applicable for a reduction to $224.66 if the $20 disregard has
already been applied).
The PMV rule allows a trustee
discretion to make distributions for shelter costs with the
result that paying the beneficiary’s rent will cause a reduction
of the beneficiary’s SSI by only $224.66 per month.
I.e., if an SNT receives a $12,000 retirement distribution and
pays the SNT beneficiary’s rent of $1,000 per month directly for
the full year, the trust has no retained income and the
beneficiary would receive $12,000 of taxable income for the
entire year; for SSI purposes, however, the PMV is limited to
$244.66, less the disregard, if applicable, for the particular month,
and if the beneficiary was receiving $674 per month, the
beneficiary’s benefits would be reduced to $449.34 ($674 -
$224.66 = $449.34). Note, however, that prepayment of rent,
particularly if refundable, may be deemed to give rise to a
resource, and even if acceptable for SSI purposes, may be treated
as a resource for Medicaid purposes.
If the actual value of the ISM is less than the PMV, only the
actual value is counted as ISM. For example, if a third party
pays the household’s electric bill, which was $100, only $100 is
counted as ISM. The $100 amount is divided equally among all the
household members. If the household has four members, only $25 of
ISM is counted for the SSI eligible individual.
Refer to POMS SI 01120.200F and SI 00835.901.
ownership or purchase of home:
the trust is not a resource for SSI purposes, and purchases and
holds a residence as a home for the beneficiary, the residence is
not a resource to the beneficiary, nor would it be a resource if
the beneficiary moves from the house. The trust holds legal title
and, therefore, the beneficiary is considered to be living in
his/her own home based on having an "equitable ownership
under a trust." If the trust is a resource to the individual,
the home is still subject to exclusion.
A beneficiary does not receive In-Kind Support and Maintenance
("ISM") in the form of rent-free shelter while living
at home in which he/she has an ownership interest. Payment of
rent by the beneficiary will not affect his/her SSI payments.
Since purchase of a home by the trust establishes an equitable
ownership for the beneficiary, the purchase results in receipt of
shelter in the month of purchase that is income in the form of
ISM which will be valued at no more than the PMV.
Even though the beneficiary has an ownership interest, and if
living in the home, does not receive ISM in the form of rent-free
shelter, purchase of the home or payment of the monthly mortgage
payment by the trust is a disbursement from the trust to a third
party that results in the receipt of ISM in the form of shelter.
If the trust, which is not a resource, purchases the home
outright and the individual lives in the home in the month
purchased, the home would be income in the form of ISM and would
reduce the individual’s payment by no more than the PMV in the
month of purchase only, regardless of the value of the home.
If the trust, which is not a resource, purchases the home with
a mortgage and the individual is living in the home in the month
purchased, the home would be ISM in the month of purchase. Each
of the subsequent monthly mortgage payments would result in the
receipt of income in the form of ISM to the beneficiary living in
the house, each valued at no more than the PMV.
If the trust pays for other shelter or household operating
costs, these payments would be income in the form of ISM in the
month of payment.
If the trust pays for improvements or renovations to the home
(e.g., renovations to the bathroom to make it handicapped
accessible or installation of a wheelchair ramp, or assistance
devices, etc.), the individual does not receive income.
Disbursements from the trust for improvements increase the value
of the resource, and unlike household
operating expenses do not result in ISM.
For additional information, refer to POMS, SI 01120.200F.
SSI criteria in the case of SNTs may be more restrictive than the
Medicaid criteria, Ramey v. Rizutto,
72 F.Supp.2d 1202 (D.C. Colo. 1999), aff'd Ramey
v. Reinertson, 268 F.3d 955 (10th Cir.
2001), held that an individual who is eligible for SSI under the
federal social security regulations cannot be denied Medicaid
benefits by the application of more restrictive state laws or
Medicaid Income Differences.
generally follows the federal SSI definitions with certain deductions and
exclusions which may include:
earned income of a child under 14 is excluded.
Up to $10 of defined irregular or infrequent income is disregarded
if the total amount of irregular or infrequent income earned in a
month does not exceed $10.
Expenses allowed to be deducted from gross income from
self-employment to determine self-employment earnings under IRS rules
are deducted for Indiana Medicaid purposes.
Earned income of $65 per month, plus impairment related work
expenses for individuals in the disabled category, plus one-half of
the remaining earned income, is excluded.
Funds from rents, scholarships, or fellowships, for tuition and
mandatory books and fees at an educational institution or for
vocational rehabilitation or technical training shall be deducted.
Tax refunds are excluded.
Home energy assistance is disregarded.
Up to $20 of unearned income is disregarded if infrequent or
irregular, as long as income does not exceed $20.
A general income disregard of $15.50 is deducted each month. In
the case of a categorically blind Medicaid recipient, certain income
specified in an approved plan for self-support is disregarded.
If the Medicaid recipient is under age 18 and living with his or
her parents, the parents’ income is included unless the recipient has
been approved for home and community-based services under an approved
waiver which specifies the exclusion of parental income.
A "spend down" applies for medical expenses which equal
or exceed the excess income.
Loans will generally not be considered as income, but after the
month of receipt, may be treated as a resource.
Payments from contract sales of property, less expenses of
ownership, are counted as unearned income.
ISM applies (defined as any food or shelter received by the
recipient and his or her spouse, or by the child applicant or
recipient and his or her parents because someone pays for it). For
this purposes, shelter means room, rent, mortgage payments, real
property tax, heating, fuel, gas, electricity, water,
sewerage, and garbage collection services.
ISM shall be considered as unearned income and shall be the actual
value of the food or shelter received, not to exceed one-third of the
applicable Indiana income standard.
ISM for shelter or food shall not be considered if the applicant
or recipient and his or her spouse or his or her parents, if he or
she is a child, live in someone else’s household and pay a pro rata
share of shelter or food.
Indiana income standards will increase annually in the same percentage
amount that is applied to SSI benefits under 42 U.S.C. 1382(f).
See 405 IAC
2-3-3, et seq.
Needs Trust Drafting and Administration Issues.
POMS Provisions in the Trust Documents.
trustees are clueless about the proper management of SNTs.
Including specific instructions may help.
Including provisions in the trust agreement that direct the SSA staff
to the 8 - Step Action Chart in the POMS at SI01120.203D.1 can be
helpful in assuring a favorable review and approval of the special
needs trust by SSA.
trust should state that the trustee is to consider the best interest and
needs of the disabled person over all others, including the Medicaid
should be clearly advised that its sole responsibility is to do what
is in the best interest of the principal beneficiary.
Trustee should be encouraged in the trust document to employ social
workers, attorneys, and other experts to aid the trustee in proper
management of the trust.
Alert trustee to the need to purchase pre-need funeral services
and burial plots (possibly through actions of a guardian or
attorney-in-fact and using other available assets), and to avoid the
"stinking dead body rule" if applicable.
Include an escape hatch to amend the trust to conform to its
purposes and changes in the law. Given the lengthy appeals process,
it may make sense to amend the trust to conform to SSA’s demand
rather than to appeal, or to amend and file a new application.
Trustee and others should be advised of the SSI recipient’s duty
to report any changes in income, resources, living arrangements or other
conditions pursuant to 20 CFR § 416.708. Failure to report is fraud
and may result in criminal or civil penalties.
Trustee should assess and be aware of the following issues
concerning the beneficiary and the beneficiary’s family:
sophistication in general and willingness to follow sole benefit
requirements of SNTs.
Unrealistic expectations of financial returns and ability to
deal with investment risks.
Beneficiary and family credit history problems.
Extent of medical involvement - how sick is the beneficiary?
Existence of other resources to support the family and the
distributions should be made with knowledge and awareness of the
income and resource implications.
family may consider giving special instructions to the trustee for
guidance in the administration of the trust for the principal
the beneficiary sign some checks, control certain funds,
complete bank deposit slips, etc., and precisely how much help
does the beneficiary need with money management?
What kind of living conditions is the beneficiary accustomed to?
he/she require or expect his/her own
Is he/she used to a particular kind of bed or mattress?
What kinds of appliances and/or entertainment mechanisms
should he/she have (e.g., color TV with remote, VCR/DVD recorder
and player, stereo, radio, telephone, computer, video games, golf
clubs, bowling ball)?
Does he/she help with the daily or periodic chores, such as
making his/her bed, some cleaning, cutting the lawn, shoveling
What are his/her practices and how much help does he/she need
in the area of personal hygiene?
specific medical issues need to be addressed, such as medications that
he/she takes and who are his/her medical
employed and what are his/her work capabilities?
What foods does
he/she like and what are his/her eating habits?
Does he/she like
to travel, and what are his/her
Is he/she able to
vote, and if so, how much assistance does he/she need?
What are his/her
Are there any
eccentricities that should be considered?
issues in the planning and administration of special needs trusts.
the trust is set up by a third party or whether it is self-settled,
it will typically be a separate taxpayer requiring a taxpayer
identification number and the trustee will be required to file
fiduciary income tax returns.
If it is a non-grantor trust for income purposes, it typically
will not be a "simple trust" because it is generally not
advisable to require the distribution of all income to or for the
benefit of the beneficiary each year. The trustee will generally have
discretion whether or not to distribute the income. Consequently,
SNTs are usually either complex trusts or grantor trusts for income
While a third party SNT is usually treated as a "complex
trust" for income tax purposes, a self-settled SNT is generally
a grantor trust for income tax purposes.
a grantor trust, social security number of the beneficiary may be
used rather than tax number for identification.
The income generated by a grantor trust is taxed to the
All of the income earned by the SNT, whether distributed to
the grantor or not, will be reported as income to the grantor on
the grantor’s individual federal and state returns.
a grantor is treated as the owner of the trust and the trustee is not
the grantor, then the trustee may choose between two approaches for
the name and social security number of the grantor, and the
address of the trust, to all those who pay income to the trust,
or hold accounts for the trust, and obtain an executed Form W-9
from the grantor; or
Furnish the name, address and tax identification number of the
trust to all who pay income to the trust or hold accounts for the
trust who or which will issue an IRS Form 1099 showing the income
or gross proceeds received by the trust, file an IRS Form 1041
and corresponding state income tax return which does not show the
income, but which has an attached statement showing the name,
address and social security number of the beneficiary and the
grantor and the amount of income, deductions and credits.
and as noted previously, the practical result of undistributed income
if the SNT is not a grantor trust is usually an increase in the
income tax liability because of the compressed trust tax rates.
the SNT is treated as a grantor trust, then the income will be
taxed at the grantor’s own tax rates, which will generally be
lower than the rates applicable to trusts.
A non-grantor trust which is not required to meet the
requirements of 42 U.S.C. §1396p(d)(4)(A)
or (C) may also provide for other beneficiaries as permissible distributees of the income.
§642(b)(2)(C), enacted by the Victims of
Terrorism Tax Relief Act of 2001, PL. 107-134, §116(a), provides that
a "qualified disability trust" is allowed a personal
exemption equal to the IRC §151(d) personal exemption for an
qualified disability trust is any trust that meets the
requirements of 42 U.S.C. §1396p(C)(2)(B)(iv),
and as of the close of the tax year the trust must be established
for the sole benefit of a person under age 65 who must be
disabled within the meaning of §1614(a)(3) of the Social Security
Act, 42 U.S.C. §1382(c)(a)(3), for some portion of such year.
A trust shall not fail to meet these requirements merely
because the corpus of the trust may revert to a person who is not
so disabled after the trust ceases to have any beneficiary who is
To maximize these benefits, it is important to give the trust
as much discretion as possible to allocate distributions of
income and principal for the beneficiary in order to take
advantage of the beneficiary’s personal exemptions and standard
Treas. Reg. § 1.643(a)-3 allows the trustee flexibility to
allocate capital gains to income, the only restriction being
consistency. Any distribution of principal made during the year
would carry out the excess capital gain of the beneficiary which
can be excluded from tax through the personal exemption and/or
the standard deduction.
For these arrangements to work, the grantor trust rules must
Qualified disability trust status confers the power to
accumulate $3,650 every year (as adjusted each year after 2010)
in the trust tax-free, and additional expenses that the parents may
be paying out of their own funds can then be paid for by the
trust and are treated as carrying out income to the beneficiary.
To the extent that expenses paid by the beneficiary qualify for
medical expenses, further income tax reduction is possible.
See Sherman, "The Overall Tax Impact of Accumulating
Versus Distributing Trust Income," Estate Planning,
Vol. 27, No. 3, (February 2001).
income tax purposes, the grantor of a trust may be the beneficiary
who furnished the trust funds in a self-settled trust, who may not
necessarily be the individual named as the grantor in the trust
example, a self-settled trust for a beneficiary of a negligence
award may be created by that beneficiary’s parents for the
Although a parent may be called the grantor in the trust
agreement, if the funds of the trust were contributed by the
beneficiary, the grantor trust rules would apply to the
beneficiary who funded the trust.
creating self-settled trusts, practitioners often include provisions
to have the trust treated as a grantor trust:
power to reacquire the trust corpus by substituting property of
an equivalent value pursuant to IRC §675.
Where income is distributed to the grantor or the grantor’s spouse
or held to accumulate for future distributions to the grantor or
the grantor’s spouse without approval or consent of any adverse
party pursuant to IRC §677(a).
An unrestricted power to remove or substitute trustees and to
designate any person, even one related to or subordinate to the
grantor, as a replacement trustee pursuant to IRC §674, Reg. Sec.
Other grantor trust provisions may be found in IRC Sections
673, 674, 675, 676 and 677. Some of these provisions, such as the
power to revoke the trust, would not be appropriate for a
income tax grantor treatment may be different then the estate tax
mere fact that the grantor is subject to income tax on the income
does not necessarily require inclusion in his or her estate for
estate tax purposes.
For estate tax purposes, there is no absolute correlation
between the income tax and estate tax aspects of the grantor
Likewise, if a third party SNT is created for the benefit of a
disabled beneficiary, funds placed in that trust may be subject
to gift tax and may not be eligible for the gift tax annual
exclusion because the transfer involves a gift of a future
interest. However, if the third party grantor who creates or
funds a trust retains a power of disposition of the trust assets
(such as a testamentary limited power of appointment over the
remainder interest), the transfer may be considered an incomplete
gift (see Treas. Reg. §25.2511-2(b) and PLR 9437034).
a parent establishes a third party special needs trust and is
designated as the trustee, and retains the power to accumulate income
for the child’s benefit, or if distributions will be made at the
parents’ discretion which is not covered by an ascertainable
standard, the trust assets would be taxed in the parents’ estate for
federal estate tax purposes.
reserved power to substitute other property of equal value for
property already held in the trust would make the trust a grantor
trust for income tax purposes, but since it is not a power to
alter, amend or revoke, it does not make the trust includable for
estate tax purposes. Rev Rul 2008-22,
2008-16 IRB 696, establishes that the corpus of an irrevocable
trust that a grantor created during life is not includable in his
or her gross estate under IRC §2036 or IRC §2038 on account of
the grantor having retained the power, exercisable in a
non-fiduciary capacity, to acquire property held by the trust by
substituting other property of equivalent value.
Although certain types of economic control over the trust may
make the trust income taxable to the grantor, the trust itself is
not, on that ground alone, includable in the grantor’s estate for
estate tax purposes.
protector - consider designating a person with authority to remove
and replace the trustee if the trustee is not adequately discharging
The trust should not direct that distributions be made for
support, health or maintenance of the beneficiary; likewise,
discretionary support provisions are inappropriate.
practitioners use fully discretionary language with the precatory
special needs language.
Some practitioners use a fully discretionary trust but
prohibit distributions for food and shelter. In light of the
uncertainty of the future needs of the beneficiary, this may be
overly restrictive in some states.
Some practitioners use a fully discretionary trust that
specifically authorizes the trustee to provide in-kind support if
the trustee deems that the beneficiaries needs
will be better met with a distribution in spite of the
partial reduction in SSI benefits or Medicaid due to the PMV
The following Medicaid rules apply in the State of Indiana for
trusts established after the effective date of OBRA 1993 (August
established with the assets of the Medicaid
applicant/recipient or his or her spouse, unless established
pursuant to a last will and testament, will be subject to the
rules set forth in ICES Manual §2615.75.20.
Pursuant to ICES Manual §26184.108.40.206, trusts established
on or after August 11, 1993 that are not governed by OBRA
1993 must be reviewed for the purpose of determining the
"availability of the trust." This would include
trusts created by will (i.e., testamentary trusts), or by a
third party other than a spouse or someone acting in behalf
of the applicant/recipient and funded with the assets of
another person. In general, if funds from the trust can be
distributed, then they will be presumed to be available.
provision - the trust should contain a provision protecting the trust
assets from the claims of the beneficiary’s creditors.
a (d)(4)(A) SNT is funded with the
assets of a disabled beneficiary, it is a question of state law
whether the spendthrift provision will be effective against the
beneficiary’s creditors other than the state Medicaid program.
However, for public benefits purposes, the SNT with a
spendthrift provision will be effective for SSI and Medicaid
purposes by virtue of the specifically applicable statutory
trustee compensation and payment of fees, taxes and administrative
Senate Bill No. 301, effective July 1, 2009, added I.C.
30-4-3-25.5, which applies beginning October 1, 2009.
Except for federal and state taxes, the trustee of a trust created
to comply with 42 U.S.C. §1396(p)(d)(4)(A) shall not distribute
trust property to any person entitled to payment from the trust
until the Office of Medicaid Policy and Planning has been fully
reimbursed for assistance rendered to the person for whom the
trust was created.
Consequently, accrued and unpaid fees as well as reimbursement
for expenses advanced, which might be reimbursable prior to the
death of the beneficiary, may not in fact be properly payable
after the death of the beneficiary.
by the trustee or court as necessary to comply with applicable
federal and state laws, regulations and policies concerning SNTs.
Depending on the
desirability of doing so, drafting the trust as an intentionally
defective grantor trust, or avoiding grantor trust status in order to
meet the qualified disability trust requirements of I.R.C. §
transfer and related issues.
this presentation will not address such issues in any significant
way, planners should consider the following:
32-18-2-14, concerning transfers deemed to be fraudulent as to
present and future creditors.
I.C. 31-16-17-1, concerning a child’s duty to furnish support
I.C. 35-43-5-7, relating to certain criminal violations for
issues of which planners need to be aware:
assuming liability: Pursuant to the federal guarantor prohibition
under the Nursing Home Reform Act, 42 U.S.C. §§1395i-3(c)(5)(ii), 1396r(c)(5)(ii), facilities
certified for Medicare or Medicaid payments may not include a
financial guarantee as a condition of admission or continued
A child or other person may be liable for a breach of
fiduciary duty (i.e., if a guardian or attorney-in-fact fails to
apply funds to the obligations of the protected person or
Beware of conflicts of interest which may give rise to claims
for breach of fiduciary duty.
trust should be submitted to the SSA for approval. SSI recipients are
under a continuing duty to report any changes in their income,
resources, living arrangements, or other conditions to the SSA. 20
C.F.R. § 416.708. Consider including the following:
name and social security number.
Receipt of personal injury settlement, inheritance, or other
funds, including copies of relevant documents and the trust
agreement, as well as bank statements showing deposit to the trustee's
account and any disbursements to date.
Also include the SSA's POMS sections on trusts and containing
the eight-step action charts to help the claims representative in
analyzing the trust, all of which should be submitted with
supporting documents by certified mail (see POMS SI 01120.203).
Letter and supporting documents should be sent to the local
SSA office providing services to the client or to the SSA
district office pertaining to the representative payee, if there
is a representative payee.
SSA will probably not send a letter approving the trust, but
would definitely send a notice if the trust is not approved.
The trust should also be submitted to the state Medicaid
agency in the case of a self-settled special needs trust.
the federal law requirement that states assert claims against a
recipient’s probate estate, and allows the states to assert claims
against various types of non-probate transfers, see 42 U.S.C.
Indiana allows a preferred claim against the estate of a Medicaid
recipient for any Medicaid benefits received after age 55.
Indiana has adopted an expanded estate definition.
There is a nine month time limit within which to make such a claim
against non-probate transfers. I.C. 12-15-9-0.6.
As of July 1, 2005, I.C. 12-15-9-1(a) was amended to
allow recovery against the estate of the deceased Medicaid
recipient’s spouse following the spouse’s subsequent death.
some court cases have held that such statutes conflict with
federal law. See Hines v. Department of Public Aid,
(Ill. No. 100841, May 18, 2006).
Nevertheless, the Oregon Court of Appeals has held that the
State of Oregon may retroactively apply an estate recovery
statute against a life estate created before the adoption of the
statute, although the case was decided merely on the basis of the
trial court having erred in granting summary judgment. State
of Oregon v. Jack Willingham, State of Oregon Court of
Appeals, May 31, 2006 (Number 0308-08747; A126258).