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Special Needs Trust Planning for 65 and Over

A Pooled Trust (also known as a (d)(4)(C) trust) is a special needs trust created by Social Security legislation in 1993 which allows individuals with disabilities to maintain their public benefits while setting aside funds to pay for their needs. The trust is managed by a non-profit organization as trustee. A Pooled Trust Company provides you with enhanced investment opportunities by combining your assets with other individuals. However, your assets are accounted for separately. Funds such as an otherwise disqualifying inheritance or settlement can be transferred to a pooled trust account for the disabled person. Accounts in a pooled trust may be established by the parent, grandparent or legal guardian of the individual with a disability, by the individual with a disability or by a court.

Assets in the Pooled Trust are used for the sole benefit of the individual with a disability to improve his or her quality of life. These assets are combined (or “pooled”) for investment purposes, so the trustee can have greater investment options. The trustee maintains separate accounts for each beneficiary. Any remaining funds when the beneficiary passes away are placed in the Trustee’s charitable residual account to benefit others with disabilities.

Congress has favored the use of pooled trusts since 1993 when it exempted them from the normal Medicaid long-term care resource and transfer restrictions. (Note that funds placed in a pooled trust account established for someone age 65 or older may be subject to a transfer penalty)*. The federal law governing pooled trusts is set out in 42 U.S.C. §1396P(d)(4)(c).

Act 42: Pennsylvania Attempts to Limit Pooled Trusts

In Act 42 of 2005, Pennsylvania enacted several questionable restrictions on the operation of pooled trusts. Included in Section 1414 of Act 42 (62 Pa. Stat. Ann. §1414) was a provision that a pooled trust could retain no more than 50% of the amount remaining in the account of a deceased beneficiary. This was contrary to the federal law which allows the trust to retain 100%. This and several of the other limitations in Act 42 were later struck down in Federal Court.  See Lewis v. Alexander, (685 F. 3d 325, 3rd Cir., June 20, 2012).

SB 428 as amended was passed by the legislature and has now been signed into law by Governor Corbett as Act 186 of 2014. Such Act does not actually change the enforceable law. It simply cleans up Pennsylvania law on pooled trusts by deleting the 50% state reimbursement requirement that has been thrown out by the Federal Court. Regarding state reimbursement, Pennsylvania law will now provide that “any money remaining in a beneficiary’s account upon the death of the beneficiary that is not retained by the trust will be paid to the Commonwealth, up to the total amount of Medical Assistance paid on behalf of the beneficiaries.”

*The issue for those beneficiaries who are over the age of 65 years and receive a settlement or inheritance has been a baffling situation for planners and trustees alike. In addition to the requirements of 42 U.S.C. § 1396p(d)(4)(C), the Centers for Medicare and Medicaid Services “CMS’ sent out a Regional Bulletin to Region I on May 12, 2008, which stated that transfers by individuals age 65+ “may” incur a penalty. Although the CMS used the word “may”, the State has, implemented new requirements for a Pooled SNT for individuals age 65+. The State is now requiring that individuals with disabilities age 65+, who transfer funds into Pooled SNTs, prove that the transfers were not penalty transfers. The beneficiaries must demonstrate they will receive or are expected to receive fair value for their transfers.

A beneficiary can always use the excess funds to purchase a residence or a vehicle. However, if unnecessary, a beneficiary still may have several options remaining.

Should a beneficiary transfer less than $380.00 monthly into the Pooled SNT, there is no penalty, as this amount represents less than a one (1) day penalty. However, if the beneficiary transfers or assigns $380.00 or more monthly into the Pooled SNT, he or she must expend the excess, in its entirety, within six months to avoid a penalty. The beneficiary must indicate how the funds will be used. He or she must have a definite plan, which must be approved by the Department of Social Services, and the beneficiary must receive fair value for these transferred funds.

Finally, if the beneficiary transfers an asset (generally a one-time transfer of a larger amount) into a Pooled SNT with the intent of expending the asset during his or her lifetime, the Department of Human Services will not impose a penalty. Again, the beneficiary must have a definite plan, approved by the Department, regarding how he or she will use the asset, and the beneficiary must receive fair value for it. Part of the plan must include a time frame, so that the Department can determine, based on the beneficiary’s life expectancy, whether the plan is actuarially sound.

If a beneficiary can access the funds for their own benefit, then a court can order that the Department of Human Services may not impose a penalty as the transfer will not be a transfer for less than fair market value thereby overcoming the requirement that a beneficiary must be under the age of 65 prior to establishing said trust.