SPECIAL NEEDS AND DISABILITY TRUSTS

Those who have known me for several years realize that I write articles in two instances:  first, when I have participated in a seminar, and reduce my lecture notes to writing; and second, whenever I have been asked the same question dozens of times, and need to relate some of my thoughts on the subject.

Based on that criteria, an article on special needs trusts could have been written years ago.  However, I avoided writing about special needs trusts for several reasons.  First, the law changes constantly, and I do not want to update my articles on a quarterly basis (and I generally do not do so).  Second, there are other lawyers who prepare more special needs trusts than I, and I assume they probably know more about the subject than I do.  Finally, there are no easy answers in estate planning for relatives who are disabled.  

With those qualifications in mind, I will discuss the topics of “How to Avoid Becoming Disqualified for Benefits” and “Medicaid Recovery”.  After these sections, I will mention what some of my clients have done (the section labeled “Miscellaneous”).  The final part of this article is a questionnaire, which should be completed, in order to assist your estate planner, and to force you to think about what sort of inheritance you want your child to receive.

HOW TO AVOID BECOMING DISQUALIFIED FOR BENEFITS

Let me begin with finances, because that’s the major concern of all parents.  Since most children who are disabled, regardless of age, are receiving some sort of disability payment from social security disability or from DHS, the question is, will my child be able to inherit anything from me, and if so, how much?  The general rule of thumb is that persons receiving disability payments can own no more than $2,000 in property, and can generally earn (W-2 earnings) no more than $810 a month.  In some instances, the child can own a car, a home, and other “exempt” assets.  In other instances, the child cannot own anything. If the parents leave resources for the child via a special needs trust, the child may be disqualified from receiving benefits, if the trust provides for things other than food, clothing and shelter.  

At this point, let me state that there are solutions available for disabled children, and there are answers to the conflicting provisions of the law.  But every estate planner, including me, needs to know specific information about the child in question.  I have attached a questionnaire, which should be completed in full (or at least those portions that are applicable to your situation), and given to the estate planner, before you consider available options.

If an inheritance is left to a disabled person who is receiving government assistance, the person may become disqualified from receiving government benefits if the inheritance is given in the wrong manner, or too much money or property is given. To avoid disqualification, you should consider the safe harbor Congress created in 1993, as part of the Omnibus Budget Reconciliation Act:  the safe harbor permits gifts to disabled persons, if the gifts are made through the conduit of a Special Needs Trust. The trusts must be carefully drafted to comply with the requirements of the Social Security Administration Program Operating Manuals (POMs), and should be clear as to the types of distributions the trustee may make, so that the trustee does not unknowingly disqualify the beneficiary from public benefits.   

 Here is the resource for the safe harbor: the Omnibus Budget Reconciliation Act of 1993 contains a provision, at 42 U.S.C. Sec.13996p (d)(4)(A),  that permits people who receive disability benefits from Social Security to retain eligibility for Medicaid, in the form of a Special Needs Trust (which is also known as a (d)(4)(A) trust, or a disability trust)..  The trust will contain the following provisions: 

  1. When the trust is established and funded, it must solely benefit a disabled person who is under 65 years of age,;
  2. The trust must be established by the beneficiary’s parent, grandparent, guardian or a court (presumably an aunt, uncle, or sibling could establish such a trust, which would not be subject to the pay-back rules mentioned in paragraph 6);
  3. The trust must contain only the beneficiary’s money;
  4. The trust must be irrevocable;
  5. Under the provisions of the trust, the beneficiary must not be permitted to invade any portion of the trust;
  6. The trust must provide that upon the beneficiary’s death, the Medicaid program will be paid back for funds expended after the establishment of the trust.

If a trust meets these requirements, and for the purpose of determining Medicaid and SSI (Supplemental Security Income) eligibility, income and undistributed corpus will not considered as being available resources (assets) for the beneficiary,.  These trusts are known as Special Needs Trusts, Medicaid Disability Trusts, or (d)(4)(A) Trusts.   

Most of these trusts contain lots of “boiler-plate” language, which prohibits the trustee from making any distribution which would disqualify the beneficiary from receiving government benefits. The trusts generally permit distributions for things which are not covered by the government, such as, dental care, telephone services, and the like (there are probably close to 30 categories of distributions the Trustee can make, without disqualifying the beneficiary from receiving government payments).  When the disabled child dies, the remaining balance of the funds in the trust must be paid to DHS.  

If the beneficiary receives too much income, and is no longer qualified to receive government benefits, the beneficiary might consider creating a Miller trust, which in effect takes all excess income and assigns it to a special needs trust; when the beneficiary dies, whatever is left in the trust will be paid to DHS.

In sum, consider using a special needs trust as a means of allowing your child to continue receiving government benefits.

MEDICAID RECOVERY

This portion of the article deals with disabled children who are receiving payments through Medicaid (not through Supplemental Security Income (SSI), Social Security Disability Income (SSDI), or other government programs). One of the requirements of the Omnibus Budget Reconciliation Act of 1993 is that states are required to recover the costs of nursing homes and other long-term care services from the estates of Medicaid beneficiaries. Simply put, states must attempt to be reimbursed for money spent through Medicaid programs, after the disabled child dies.  

Every state is required to adopt its own set of rules, and delineate in what instances the state agencies will seek recovery of Medicaid payments that have been made to deceased beneficiaries.  The concept of Medicaid recovery is explained in greater detail in a web article published by AARP, at http://research.aarp.org/health/d16443_estate_1.html.  

Each state has its own set of rules.  Rather than give you a synopsis of the Oklahoma Rules, I have reproduced them in this article (this portion of the article is in blue).  

The web address where this information is located is rather long, but here it is: http://www.policy.okdhs.org/317_ch_35/317_35_19/317_OHCA_CHAPTER_3531735194_Medicaid_recovery.htm).  You should go to this website for updates.

Oklahoma Estate Recovery Rules

(a) General overview. The Omnibus Budget Reconciliation Act of 1993 mandates the state to seek recovery against the estate of certain Title XIX recipients who received medical care on or after July 1, 1994, and who were 55 years of age or older when the care was received. The payment of Title XIX by the Oklahoma Health Care Authority on behalf of a recipient who is an inpatient of a nursing facility, intermediate care facility for the mentally retarded or other medical institution creates a debt to the Authority subject to recovery by legal action either in the form of a lien filed against the real property of the recipient and/or a claim made against the estate of the recipient. Only Title XIX received on or after July 1, 1994, will be subject to provisions of this part. Recovery for payments made under Title XIX for nursing care is limited by several factors, including the family composition at the time the lien is imposed and/or at the time of the recipient’s death and by the creation of undue hardship at the time the lien is imposed or the claim is made against the estate. (See OAC 317:35-5-41(c)(6)(H) for consideration of home property as a countable resource.) State Supplemental Payments are not considered when determining the countable income. The types of medical care for which recovery can be sought include: 

(1) nursing facility services, 

(2) home and community based services, 

(3) related hospital services, 

(4) prescription drug services, 

(5) physician services, and 

(6) transportation services. 

(b) Recovery through lien. The Oklahoma Health Care Authority (OHCA) may file and enforce a lien, after notice and opportunity for a hearing, (DHS will conduct hearings) against the real property of a recipient who is an inpatient in a nursing facility, ICF/MR or other medical institution in certain instances. 

(1) Exceptions to filing a lien. A lien may not be filed on the home property if the client’s family includes: 

(A) a surviving spouse residing in the home, or 

(B) a child or children age 20 or less lawfully residing in the home, or 

(C)  a disabled child or children of any age lawfully residing in the home, or 

(D) a brother or sister of the recipient who has an equity interest in the home and has been residing in the home for at least one year immediately prior to the recipient’s admission to the nursing facility and who has continued to live there on a continuous basis since that time. 

(2) Reasonable expectation to return home. A lien may be filed only after it has been determined, after notice and opportunity for a hearing, that the recipient cannot reasonably be expected to be discharged and return to the home. To return home means the recipient leaves the nursing facility and resides in the home on which the lien has been placed for a period of at least 90 days without being re-admitted as an inpatient to a facility providing nursing care. Hospitalizations of short duration that do not include convalescent care are not counted in the 90 day period. Upon certification for Title XIX for nursing care, DHS provides written notice to the recipient that a one-year period of inpatient care shall constitute a determination by the Department that there is no reasonable expectation that the recipient will be discharged and return home for a period of at least three months. The recipient or the recipient’s representative is asked to declare intent to return home by signing the Acknowledgment of Intent to Return Home/Medicaid Recovery Program form. Intent is defined here as a clear statement of plans in addition to other evidence and/or corroborative statements of others. Should the intent be to return home, the recipient must be informed that a one-year period of care at a nursing facility or facilities constitutes a determination that the recipient cannot reasonably be expected to be discharged and return home. When this determination has been made, the recipient receives a notice and opportunity for hearing. This notification occurs prior to filing of a lien. At the end of the 12-month period, a lien may be filed against the recipient’s real property unless medical evidence is provided to support the feasibility of his/her returning to the home within a reasonable period of time (90 days). This 90-day period is allowed only if sufficient medical evidence is presented with an actual date for the return to the home. 

(3) Undue hardship waiver. When enforcing a lien or a recovery from an estate (see (C) of this Section) would create an undue hardship, a waiver may be granted. Undue hardship exists when enforcing the lien would deprive the individual of medical care such that his/her life would be endangered. Undue hardship exists when application of the rule would deprive the individual or family members who are financially dependent on him/her for food, clothing, shelter, or other necessities of life. Undue hardship does not exist, however, where the individual or his/her family is merely inconvenienced or where their life style is restricted because of the lien or estate recovery being enforced. Decisions on undue hardship waivers are made at DHS State Office, Family Support Services Division, Health Related and Medical Services Section.   

INSTRUCTIONS TO STAFF 317:35-19-4

The OHCA Legal Division staff will receive notification on all undue hardship waiver decisions. 

(4) Filing the lien. After it has been determined that the recipient cannot reasonably be expected to be discharged from the nursing facility and return home and the recipient has been given notice of the intent to file a lien against the real property and an opportunity for a hearing on the matter, a lien is filed by the Oklahoma Health Care Authority, Third Party Liability Unit, for record against the legal description of the real property in the office of the county clerk of the county in which the property is located. A copy of the lien is sent by OHCA to the client or his/her representative by certified mail. The lien must contain the following information: 

(A) the name and mailing address of the recipient, recipient’s spouse, legal guardian, authorized representative, or individual acting on behalf of the recipient, 

(B) the amount of Title XIX paid at the time of the filing of the lien and a statement that the lien amount will continue to increase by any amounts paid thereafter for XIX to the recipient, 

(C)  the date the recipient began receiving compensated inpatient care at a nursing facility or nursing facilities, intermediate care facility for the mentally retarded or other medical institution, 

(D) the legal description of the real property against which the lien will be recorded, and 

(E) the address of the Oklahoma Health Care Authority. 

(5) Enforcing the lien. The lien filed by the OHCA for Title XIX correctly received may be enforced before or after the death of the recipient. But it may be enforced only: 

(A) after the death of the surviving spouse of the recipient or until such time as the surviving spouse abandons the homestead to reside elsewhere; 

(B) when there is no child of the recipient, natural or adopted, who is 20 years of age or less residing in the home; 

(C) when there is no adult child of the recipient, natural or adopted, who is blind or disabled as defined in, OAC 317:35-1-2 residing in the home; 

(D) when no brother or sister of the recipient is lawfully residing in the home, who has resided there for at least one year immediately before the date of the recipient’s admission to the nursing facility, and has resided there on a continuous basis since that time; and 

(E) when no son or daughter of the recipient is lawfully residing in the home who has resided there for at least two years immediately before the date of the recipient’s admission to the nursing facility, and establishes to the satisfaction of the DHS that he or she provided care to the recipient which permitted the recipient to reside at home rather than in an institution and has resided there on continuous basis since that time.   

INSTRUCTIONS TO STAFF 317:35-19-4

(6) Dissolving the lien. The lien remains on the property even after transfer of title by conveyance, sale, succession, inheritance or will unless one of the following events occur: 

(A) The lien is satisfied. The recipient or recipient’s representative may discharge the lien at any time by paying the amount of lien to the OHCA. Should the payment of the debt secured by the lien be made to the county office, the payment is forwarded to OHCA/Third Party Liability, so that the lien can be released within 50 days. After that time, the recipient or the recipient’s representative may request in writing that it be done. This request must describe the lien and the property with reasonable certainty. By statute, a fine may be levied against the lien holder if it is not released in a timely manner. 

(B) The client leaves the nursing facility and resides in a property to which the lien is attached, for a period of more than 90 days without being re-admitted to a facility providing nursing care, even though there may have been no reasonable expectation that this would occur. If the recipient is re-admitted to a nursing facility during this period, and does return to his/her home after being released, another 90 days must be completed before the lien can be dissolved. 

(7) Capital resources. Rules on the determination of capital resources for individuals related to the aged, blind, or disabled (OAC 317:35-5-41) apply to the proceeds received for the property in excess of the amount of the lien after the lien is satisfied. 

(C) Recovery From Estates from estates. 

(1) If the recipient was age 55 or older when the nursing care was received, adjustment or recovery may be made only after the death of the individual’s spouse, if any, and at a time when there are no surviving children age 20 or less and no surviving disabled children of any age living in the home. Oklahoma Statutes contain stringent time frames concerning when and how claims against an estate in probate are filed and paid. Therefore, timely updating of computer input forms indicating the death of the recipient is crucial to insure the OHCA’s ability to file timely against the estate. 

(2) The estate consists of all real and personal property and other assets included in recipient’s estate as defined by Title 58 of the Oklahoma Statutes. Although county staff ordinarily will not be responsible for inventorying or assessing the estate, assets and property that are not considered in determining eligibility should be documented in the case record. 

(3) After updating of computer input form indicating recipient’s death, a computer generated report is sent to OHCA/Third Party Liability(TPL). This report will serve as notification to OHCA/TPL to initiate estate recovery.

(4)  Undue hardship waivers may be granted for estate recovery as provided in (b)(3) of the section.

MISCELLANEOUS

With the foregoing information in mind, let me mention some techniques my clients have used, in dealing with disabled children.  Their primary concern is, if a special needs trust is created and all of the trust funds are not used for the benefit of their child, the residue of the trust funds must be paid to DHS – and very few of my clients want unused funds to be paid to a government agency.

One solution, which seems to be used more than any other, is for the parents to disinherit the disabled child, in the hope that the siblings or other heirs will use their inheritances to take care of the disabled child.  There are many risks in doing this sort of thing, but this technique does keep the estate from winding up in the hands of DHS.  The drawback to this technique is that all of needs of the disabled child might not be met.

Another technique is to allot a sum of money for the special needs trust (or to buy life insurance to be placed in the special needs trust, when the parents die).  The parents have the satisfaction of providing for the disabled child, and perhaps this is the best of all solutions.  The Trustee of the special needs trust will have the discretion to make payments to or for the benefit of the disabled child, for things not covered by SSI or other government benefit programs (such as vacations, sports equipment, over the counter drugs, etc.). 

A trust is an agreement made between the settlor (grantor, trustor) and the trustee, for the benefit of a beneficiary.  One very important issue a parent must decide is, who will serve as trustee of the special needs trust when both parents die?  Siblings or trusted relatives can certainly serve, but if they are incapacitated, who will be the successor trustee?  Trust companies are willing to serve as trustee, but they charge minimum fees, and if the special needs trust is less than $125,000, the annual fees charged (which are usually no less than $1,250) may make the trust uneconomical.

There are several web based resources that might shed more light on these topics: the National Special Needs Network (www.nsnn.com) is an informational site (apparently penned by a Florida lawyer), which contains some basic information relating to special needs families.  Some states have developed their own special needs network.  These resources may help in the following respects:

  • Applying for estate and federal government programs on behalf of family members with disabilities.
  • Making certain there are adequate funds to provide for family members, and safeguarding assets so that government benefits will not be jeopardized or depleted.
  • Selecting future living accommodations.
  • Designating in writing an advocate/guardian.

The National Institutes of Health (NIH) also provides significant resources and informative links on their website, www.nih.gov, as well as the Social Security web-site, www.ssa.gov, which  offers a comprehensive guide on available programs guidelines and eligibility, and how to apply for benefits. 

Medicaid and Medicare may provide options.  Medicaid is designed for people who satisfy income eligibility requirements and, although the program is federally subsidized, it is administered by DHS.  Medicare, on the other hand, is run by the Social Security Administration and may pay health costs of people older than 65, as well as those younger than 65 who have received Social Security benefits for at least two years.

To develop a comprehensive plan for the care of disabled children, you will probably have to assemble a group of professionals, including lawyers, accountants, health professionals, and/or financial advisers.  I hope this article has at least given you some information you might not have otherwise had. 

QUESTIONNAIRE

When a disabled person receives money as a result of a tort recovery or through equitable distribution or an inheritance, the funds may cause the individual to lose eligibility for public benefits.  This questionnaire will provide basic information for an estate planner.