Most special needs trust are “self-settled” or “third party” trusts as described above. There is, however, a hybrid variety used when the grantor is the person seeking Medicaid eligibility and wants to establish a trust for someone else.[1] This hybrid trust is known as a sole benefit trust. See 42 U.S.C. § 1396p(c)(2)(B)(i)[2] and (c)(2)(B)(iv). The Medicaid rules permit applicants to make unlimited gifts to or “for the sole benefit of” disabled children or spouses. Therefore, some individuals with countable resources choose to establish a sole benefit trust for a child (or other family member) with disabilities while, at the same time, securing Medicaid eligibility for himself or herself.[3] Some states are restrictive in their interpretation of the “sole benefit” requirement. In many ways they look like a hybrid of self-settled and third party trusts; they may be taxed and treated as third-party trusts, but require a payback provision like a self-settled trust (at least in some states). A CMS letter dated June 27, 2006, indicates that a pay-back clause is irrelevant and that the proper inquiry is whether the trust is structured so that all trust income and principal is paid to the beneficiary during the beneficiary’s actuarial lifetime. In Georgia, although the Department takes the view that a sole benefit trust must be actuarially sound, it recognizes that trusts meeting the criteria in 42 U.S.C. § 1396p(d)(4) are a “sub-set of sole benefit transfers to trust” See CMS Letter from Ginna Hain to Mary O’Byrne, dated June 27, 2005. Trusts meeting the criteria in Section 1396p(d)(4) need not be actuarially sound.[4]
In most cases, it should not matter whether the sole benefit trust is making actuarially sound payments because the focus is on the grantor’s eligibility rather than that of the beneficiary. Still, where the beneficiary is on SSI, actuarially sound distributions could cause a loss of (or reduction in) SSI benefits. To prevent that from happening, the trust could be drafted to require distributions to a third party that result in the receipt of goods or services by the beneficiary and could further provide that distributions should only be made for goods and services other than food and shelter.[5]
Notes:
1. R. Mason, Sole Benefit Trusts Are Not Solely One Kind of Trust (2011) (to be published in the Voice, a publication of the Special Needs Alliance).
2. Some States take the position that spousal transfers, whether they are direct or in a sole benefit trust, cannot exceed the Community Spouse Resource Allowance. See, e.g., Burkholder v. Lumpkin, 2010 U.S. Dist. LEXIS 11308 (N.D. Ohio 2010), where Ohio successfully penalized a transfer beyond the CSRA to a spouse who then paid down her home mortgage. Burkholder is a result oriented misreading of Section 1396r-5 and appears to be wrong since payment of an applicant’s debt, or the spouse’s debt, is permitted under the spend-down rules. A more principled reading of that section would recognize that transfers between spouses are exempt and any asset limitation imposed through 42 U.S.C. § 1396r-5 relates to a Community Spouse’s ability to retain countable assets exceeding the CSRA; in other words, while Section 1396r-5 may or may not limit the CSRA, it does not re-write the clear text of section 1396p(c)(2)(B) which expressly exempts spousal transfers from the penalty rules.
3. See POMS SI 01120.201.F.2 (describing a “Trust Established for the Sole benefit of an Individual”).
4. This issue is most critical when the beneficiary is receiving SSI because actuarially sound distributions could create an income stream that would render the beneficiary ineligible. Under those circumstances, it is preferable to retain funds inside the trust.
5. See POMS SI 01120.201.F.2.
