SPECIAL NEEDS TRUST FAIRNESS ACT BECOMES LAW

William Sweeney

Individuals with disabilities can now create their own self-settled trusts

The central purpose of a Special Needs Trust ("SNT") is to set aside assets for a disabled beneficiary without elimination of the beneficiary’s eligibility for "needs based" public benefits such as SSI or Medicaid. A SNT can accomplish this because the Social Security Administration does not count the SNT asset(s) as assets of a SSI or Medicaid recipient.

For a number of years it was uniformly assumed under the law that an individual who qualified for means-tested government benefit programs such as Medicaid and Supplemental Security Income (SSI) was in all instances mentally incapable of managing his/her own financial and other affairs and therefore the laws which applied to the establishment of SNT always required that such vehicles were established by other persons (other than the special needs person) in favor of the special needs individual.

As we are all aware, there are certainly many instances in which the special needs person is not able to manage their finances. In other words, there are times in which the prior legislation and the thinking behind such made sense. On the other hand, there are a great many examples of disabled individuals who are fully competent to make decisions for themselves and do not require that others make decisions and arrangements for them.
The requirement that someone act on behalf of a disabled person to establish a SNT was viewed by many as an oversight in the prior law, OBRA-93. Such is also not consistent with other laws relating to disabled persons. For example, under the ABLE Act from 2014, special needs individuals are permitted to establish their own savings accounts and disabled persons have been permitted to transfer funds to a "pooled" first-party SNT administered by nonprofit organizations for quite some time. It is altogether fitting and long-overdue that federal legislation with regard to SNTs in general now be corrected to bring it into conformity with practical realities and these other legal arrangements.

On Dec. 13, 2016, President Obama signed the 21stCentury Cures Act (H.R.34 — 114th Congress (2015-2016)). Section 5007 of the Act, titled "Fairness in Medicaid Supplemental Needs Trusts" incorporates language from the Special Needs Trust Fairness Act of 2015 by adding two words ("the individual") to an existing statute. With the stroke of a pen, more than two decades of unfair treatment to individuals with disabilities was ended by now allowing those with capacity to create their own self-settled SNT, without having to go to court. Prior to enactment of this new law, individuals with disabilities who didn’t have a living parent or grandparent couldn’t create their own self-settled SNT without going to court.

Consequently, as of December 13, 2016, an adult with a disability who is under age 65 may establish his or her own (d)(4)(A) SNT. This new law allows people with disabilities to create their own self-settled first-party SNTs without having to rely on others.

Background

In 1993 Congress enacted The Omnibus Budget Reconciliation Act of 1993 (OBRA-1993) as part of a Medicaid overhaul. This law, 42 U.S.C. Section 1396p d(4)(A), permitted a parent, grandparent, guardian or court to establish a self-settled SNT for an individual with disabilities under the age of 65 with the individual’s own assets. Self-settled SNTs have become an important planning tool for many individuals with disabilities who are receiving certain government benefits and then receive funds as a result of an inheritance, personal injury lawsuit or otherwise.

But for the ability to create a self-settled SNT, those individuals would lose their much-needed government benefits, including Supplemental Security Income (SSI) and Medicaid, which pay for basic living and medical expenses. OBRA-1993 provided that assets contained in a properly drafted self-settled SNT don’t disqualify the individual with disabilities from continuing to receive those government benefits. The assets contained in the SNT may be used to improve the quality of life of the individual with disabilities without sacrificing the government benefits. As a tradeoff however, on the death or earlier termination of the self-settled SNT, Medicaid must be repaid for the cost of care it provided to the individual.

Unfortunately, OBRA-1993 failed to provide a mechanism for individuals with disabilities who had capacity to independently establish a self-settled SNT. There’s no apparent reason for this oversight other than perhaps the drafters didn’t contemplate that some individuals with physical disabilities do have the requisite mental capacity to create their own trust. In fact, 42 U.S.C. Section 1396p d(4)(C), enacted as part of OBRA-1993, allows for accounts in a pooled SNT to be established by the individual with disabilities himself.

The pooled SNT basically served the same function as the self-settled SNT except that a non-profit association must manage the pooled trust and the individual with disabilities can’t select the trustee of the trust. This distinction, between a pooled SNT and a self-settled SNT set up by the individual himself, existed for over 23 years and made no sense. The inability to set up their own self-settled SNT was especially cumbersome for individuals who didn’t have living parents or grandparents and didn’t need guardians. Such individuals had to hire a lawyer to commence potentially costly and time consuming court proceedings so that a court could establish the self-settled SNT on their behalf. Many disability advocates felt that the law was discriminatory and didn’t grant capable individuals the independence to make their own decisions in establishing trusts.

Issue Resolved

The passage of the 21st Century Cures Act finally resolved this issue that someone act on behalf of a disabled person to establish a SNT. The 21st Century Cures Act includes within the larger piece of legislation the Special Needs Trust Fairness Act. This part of the new law is actually quite short and simple. The words "the individual" are inserted after "for the benefit of such individual by" in Section 1917(d)(4)(A) of the Social Security Act (42 U.S.C. 1396p(d)(4)(A)). Importantly, this change does not have retroactive effect and applies only to trusts established on or after the date of enactment of this new law. But this seemingly simple and small change in wording has in reality made a very large change in how SNTs can be written and administered in the future.

If the person is on Medi-Cal, it may require some explanation to DHCS as its policy manuals still do not list individuals. It is expected that both the SSA and DHCS will issue directives explaining the new law to personnel, but if relying on this law, it is recommended that you provide an explanation as to why a person can now establish his or her own (d)(4)(A) SNT.

The tests and requirements for legal competency to establish a trust or other legal arrangement of any kind (whether SNT, regular trust or any other type of legal vehicle) still remain and have application in this context of SNTs. If a person is legally competent to open financial accounts, to manage their investments, to sign other legal papers and otherwise act on their own behalf, then there is no reason they should not be permitted under all applicable laws to establish a self-settled SNT.

Distinct from Third-Party SNTs

Self-settled SNTs shouldn’t be confused with thirty-party SNTs, which are trusts funded with assets from family members or other sources, and not with the individual with disability’s own assets. Third party SNTs are a common estate-planning tool used to improve the quality of life of the individual with disabilities. Unlike self-settled SNTs, assets held by third-party SNTs don’t have to be used to repay the Medicaid program for the cost of care provided to the individual with disabilities. Instead, the assets can pass to other family members on death of the individual with disabilities.

Conclusion

If you or anyone you know is a person who qualifies for means-tested government benefit programs, such as Medicaid and Supplemental Security Income (SSI), and is about to receive an inheritance, it is time to plan to avoid the loss of the beneficiary’s eligibility. If you wish to gain more information please contact me for a free consultation. I will spend time with you to answer your questions. From my office in Southern California, I represent families in all California counties, including Southern California Counties such as Imperial County, Los Angeles County, Orange County, San Bernardino County, and San Diego County. I also represent parties residing outside of California that have probate matters affecting real and/or personal property in California..

To schedule a consultation, call me toll free at 800-575-9610 or locally at 760-989-4820. I enjoy meeting in person whenever possible, but am also available via Skype and email or through my online contact form.

Disclaimer: This article is intended to provide general information. The content of this publication is for informational purposes only. Neither this publication nor its author is rendering legal or other professional advice or opinions on specific facts or matters. No attorney-client relationship is created by this advisory, nor by any response to the information herein, unless and until a conflicts review has been conducted by William K. Sweeney, and a written agreement containing all terms of representation has been signed.

Copyright © 2017, William K. Sweeney, Attorney at Law. All rights reserved.