SPECIAL NEEDS TRUSTS IN OREGON West Coast Trust Meeting June 9, 2006 Penny L. Davis, The Elder Law Firm Portland, Oregon

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1 SPECIAL NEEDS TRUSTS IN OREGON West Coast Trust Meeting June 9, 2006 Penny L. Davis, The Elder Law Firm Portland, Oregon I INTRODUCTION A. Government Benefits. Many people with disabilities rely upon government benefit programs for monthly cash benefits, medical coverage, food, and housing. Each program has its own eligibility requirements. Some of the most common programs are described below. It is important to identify which government benefits are involved and whether those benefits are based on financial need when planning for people with disabilities and when administering trusts for disabled beneficiaries. B. Why Special Needs Trusts? SSI, Medicaid, and other government benefit programs based on financial need are intended to provide for the recipient s basic needs. The limited benefits are not sufficient to pay for things that are important for the person s quality of life, such as communication, advocacy, transportation, and recreation. Special needs trusts (sometimes called supplemental needs trusts or SNTs ) were developed through case law as a means for families to provide a supplemental source of funds to improve the disabled trust beneficiary s quality of life without having the trust assets be available and used for basic support. Various types of SNTs are now recognized by federal and state law. II GOVERNMENT BENEFITS NOT BASED ON FINANCIAL NEED A. Social Security Retirement Benefits. Social Security retirement benefits are the monthly cash payments made under the national pension plan. A recipient must be at least age 65 (or age 62 for early retirement with reduced benefits) and either have done enough paid work to qualify for insured status or be entitled to benefits based on a wage earner s account. B. Social Security Disability Insurance (SSDI) Benefits. SSDI benefits are monthly cash benefits paid to people under age 65 who are unable to do any type of work due to a physical or mental disability. A recipient must have done enough paid work to qualify for insured status or, in some cases, be entitled to benefits based on a parent s work record. C. Social Security Dependent Benefits. A dependent child who is under age 18 (or under age 19 if a full-time student in elementary or high school) and who is not married may receive monthly cash payments from the Social Security program based on a parent s work record if the parent is receiving Social Security retirement benefits or SSDI benefits or has died. D. Medicare. Medicare is the federal health insurance program for people age 65 and older, who have received SSDI benefits for at least two years, or who are disabled due to end Page 1 - Special Needs Trusts in Oregon

2 stage renal disease or ALS. Medicare now has three parts: Part A, Hospital Insurance; Part B, Medical Insurance; and the new Part D, which covers prescription drugs. There are premiums for Part B and Part D, and there are deductibles and co-payments for all three parts. III GOVERNMENT PROGRAMS BASED ON FINANCIAL NEED A. Supplemental Security Income (SSI). SSI is a federal program that makes monthly cash payments to people who are over age 65 or blind or disabled and who have little or no income and limited resources. The disability standard for adults is the same one used for SSDI benefits. The disability standard for children under age 18 is based on severe functional limitations. See 42 USC 1381 et seq; 20 CFR et seq. B. Medicaid. Medicaid is a joint federal-state program that provides medical assistance for people who meet the applicable income and resource limits. People who are eligible for SSI or for certain other government benefits are automatically eligible for Medicaid. Higher income limits are used for people who need long term care services (i.e., in-home services or care in a nursing facility, residential care facility, assisted living facility, or adult foster home). The eligibility requirements and the services provided vary by state. Oregon s medical assistance program is administered by the state Department of Human Services (DHS). See 42 USC 1396; 42 CFR et seq; ORS et seq; OAR et seq. C. Frequent Changes. There are frequent changes to government benefit programs at both the federal and the state levels. Some changes are predictable, such as the income eligibility increases tied to the annual Social Security COLA. Other changes in laws, rules, and agency interpretations are not predictable. It is important to check the figures, rules, and policies that are in effect when making decisions that may affect eligibility for or the amount of benefits paid by a government benefit program. IV FINANCIAL ELIGIBILITY FOR SSI AND MEDICAID A. Income and Benefit Amount, 20 CFR et seq and et seq. 1. Benefit Amount. The SSI federal benefit rates for 2006 are $603 per month for an eligible single person and $904 per month for an eligible couple. The figures change each year on January 1st. If an SSI recipient has other countable income, the amount of the monthly benefit will be reduced. For example, an eligible person who receives SSDI benefits of $500 per month will receive $123 in SSI benefits (the calculation includes the $20 unearned income disregard). 2. Countable Income. Countable income can be earned or unearned, in cash or in-kind. Gifts and inheritances are counted as unearned income. Payments made by third parties to providers for food or shelter are counted as in-kind income. Payments made by third parties to providers for expenses other than food or shelter are not counted as in-kind income. Page 2 - Special Needs Trusts in Oregon

3 This concept is central to establishing and administering special needs trusts. 3. Effect of In-Kind Income. When a third party makes a payment for groceries or for rent or basic utilities for the SSI recipient, the SSI recipient receives in-kind support and maintenance. If a third party pays for shelter costs, the amount will be deducted from the beneficiary s SSI benefits, up to a maximum of one-third of the federal benefit rate plus $ CFR Payments by a third party for shelter costs can help the SSI recipient or can hurt the SSI recipient depending on the amount of SSI benefits that the person receives. 4. Medicaid Income Limit. A person who receives SSI benefits is automatically eligible for Medicaid. A person who needs long term care services; who is over age 65, blind or disabled; who is within the resource limits, and whose gross monthly income is no more than 300% of the SSI federal benefit rate (300% of $603 = $1809, for 2006), can qualify for Medicaid assistance. If his or her gross income is above the limit, the person can qualify for Medicaid assistance by creating a Medicaid income cap trust and assigning the income to that trust. B. Resources, 20 CFR et seq. 1. SSI Resource Limits. The countable resource limits for SSI are $2,000 for a single person and $3,000 for a couple. The last time that the resource limits were increased was in Exempt Resources. Certain resources are exempt and are not counted. These include the home, household goods, personal effects, medical equipment, and one automobile. 3. Countable Resources. Any resources that are not specifically excluded by the administrative regulations are counted. These include bank accounts, IRAs, the cash surrender value of most life insurance policies, other real property other than the home, and other vehicles. 4. Medicaid Resource Limits. A person who receives SSI benefits is automatically eligible for Medicaid. The Medicaid resource rules for a single person are similar to the SSI regulations. Some of the rules are different for married couples in which one spouse needs long term care services. C. Impact of Gifts and Transfers. 1. SSI Penalties for Asset Transfers. If the person (or the person s spouse or agent) gives away money or property, or transfers assets for less than fair market value within the preceding 36 months, the person is ineligible for SSI benefits for up to 36 months, depending on the amount that was transferred. See 42 USC 1382b. 2. Medicaid for Long Term Care Penalties for Asset Transfers. DHS is in the process of adopting rules to implement the Medicaid transfer of asset provisions contained in the Page 3 - Special Needs Trusts in Oregon

4 federal Deficit Reduction Act of 2005 in Oregon. Effective July 1, 2006, the look back period will be 60 months instead of 36 months. The period of ineligibility for Medicaid for long term care services will not begin until the person meets the other Medicaid eligibility requirements. 3. Gifts and Transfers That Do Not Cause Ineligibility. Some gifts and transfers for less than fair market value do not result in a period of ineligibility for SSI or Medicaid for long term care. For example, the person may transfer his or her home to the spouse or to a blind or disabled (by Social Security disability standards) son or daughter without penalty. V TESTAMENTARY TRUSTS FOR PEOPLE WITH DISABILITIES A. Discretionary Support Trusts. The trustee of a discretionary support trust has absolute discretion to make (or to refuse to make) payments for the benefit of the disabled beneficiary. The payments can be for basic needs such as food, shelter, and medical care. These types of trusts may not protect the beneficiary s eligibility for government benefits based on financial need. B. Special Needs Trusts. Most special needs trusts limit distributions to special (or supplemental) needs only, and prohibit the trustee from making distributions for food, for shelter, and for medical expenses that are covered by Medicaid. Examples of expenses that the trustee of a special needs trust with this restrictive standard could pay include cell phone equipment and services; computer equipment and services; transportation (bus pass, car maintenance, bicycle, etc.); case management; health care not covered by Medicaid; guardian s fees; travel and recreation; classes; pet and service animal care; subscriptions; television and cable service; tickets to cultural or sports events; hobby supplies; hair and nail care; and clothing. Examples of prohibited distributions include payments made directly to the beneficiary; rent or mortgage and property taxes; water and sewer; gas and electric power; garbage service; and groceries. The special needs trust may authorize the trustee to purchase exempt resources (such as a home or a car) and distribute those to the disabled beneficiary. C. Hybrid or Spigot Special Needs Trusts. Some special needs trusts clearly state that the purpose of the trust is to preserve the beneficiary s continued eligibility for government benefit programs and to provide for special needs, but do not expressly prohibit all distributions for food and shelter. This approach may not protect the beneficiary s eligibility for government benefits, depending on local policies. The trustee of a hybrid special needs trust has to weigh the impact of actual distributions for basic needs on the government benefits received by the beneficiary. D. No Payback Requirements. There are no payback requirements for trusts that are funded with assets that were owned by someone other than the disabled beneficiary. VI TRUSTS FUNDED WITH THE ASSETS OF THE DISABLED BENEFICIARY Page 4 - Special Needs Trusts in Oregon

5 A. Payback Trusts. The Omnibus Budget Reconciliation Act of 1993 specifically allows special needs trusts to be created and funded with assets that are owned by the disabled beneficiary if certain conditions are met. Those conditions are: The trust must be created by a parent, grandparent, legal guardian, or court for the sole benefit of the beneficiary; the beneficiary must be under 65 when the trust is created and funded, and must be disabled according to the SSI and SSDI standard for disability; and any balance remaining in the trust at the death of the beneficiary must be used to pay back the state(s) for the Medicaid benefits received by the beneficiary. Transferring assets to a trust that meets those conditions will not disqualify the beneficiary from receiving SSI or Medicaid benefits. See 42 USC 1396p(d)(4)(A). 1. Parent or Grandparent as Settlor. In order for a parent or grandparent to establish a payback trust, the person must have the legal authority to do so. 2. Legal Guardian or Court as Settlor. The usual process in Oregon is to ask the court to appoint a conservator and to authorize the conservator to create the special needs payback trust. The beneficiary must be financially incapable within the meaning of ORS (3) in order for the court to appoint a conservator. Some judges require the conservatorship to remain open and the conservator to submit annual accountings to the court. 3. Distribution Standard. The principles that apply to distribution standards testamentary SNTs also apply to payback trusts. 4. Using Payback Trusts. Payback trusts are not a planning tool. They are typically used when a person with disabilities receives an inheritance, sells a house, gets a property settlement in a divorce, or receives a settlement in a personal injury case, and needs to qualify for or preserve government benefits based on financial need. B. Pooled Trusts. These trusts are managed by nonprofit organizations and contain assets from a number of people with disabilities. The nonprofit organizations pool the assets for investment and management purposes but maintain a separate sub-account for each beneficiary. The joinder agreement may be executed by the adult disabled beneficiary or by a parent, grandparent, legal guardian, or court. Upon the beneficiary s death, any balance remaining in the sub-account is either retained in the trust for the nonprofit association or used to pay back the state(s) for the Medicaid benefits received by the beneficiary. See 42 USC 1396p(d)(4)(C). The Arc of Oregon administers a pooled trust named the Oregon Special Needs Trust The Elder Law Firm Important Notice: This article or outline contains general information. It does not provide legal advice about a particular situation. Unless otherwise noted, this article or outline has not been updated or revised to reflect changes in statutes, administrative rules, or case law following the date when it was first published. Page 5 - Special Needs Trusts in Oregon