Phrase “Other obligations” made Special Needs Trust invalid

How the Phrase “Other Obligations” Made Special Needs Trust Invalid

Christopher W. G was denied Supplemental Security Income when his conservator initially filed an application on January 25, 2022. Reconsideration was denied on August 17, 2022. The conservator requested a hearing which was conducted on June 6, 2023. After the hearing, “the ALJ issued an unfavorable decision finding Plaintiff’s countable resource in the form of a special needs trust made him ineligible for SSI benefits.” The ALJ’s decision became the Commissioner’s final decision on June 7, 2024.

On August 12, 2024, the conservator filed an action, CHRISTOPHER. W. G., by and through his Conservators Gary G. and Kathleen G., Plaintiff, v. FRANK BISIGNANO, Commissioner of Social Security, in the United States District Court, Central District of California. In his Complaint, the conservator challenged the ALJ’s decision. After reviewing the trust, the District Court held the decision below.

42 U.S.C. § 1396p(d)(4)(A) provides:

This subsection [which generally provides that self-settled trusts are either disregarded and counted, or are penalized] shall not apply to any of the following trusts: … A trust containing the assets of an individual under age 65 who is disabled (as defined in section 1382c(a)(3) of this title) and which is established for the benefit of such individual by the individual, a parent, grandparent, legal guardian of the individual, or a court if the State will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State plan under this subchapter. (Emphasis added).

The ALJ’s decision on August 24, 2023, found that the trust did not comply with the payback requirement in 42 U.S.C. § 1396p(d)(4)(A) because the State’s right to reimbursement  followed “payment or provision has been made for expenses of administration and other obligations payable by the Trust.” The ALJ and District Court Judge agreed that administrative expenses are permissible. However, the “clause allowing for payment of administrative expenses and “other obligations” language is vague enough to permit payment of prohibited expenses prior to Medicaid payback (POMS SI 01120.203(E)(2)).”

The District Court first determined that the Commissioner’s decision must be upheld if it is supported by “substantial evidence and is not clearly erroneous or contrary to law.” The Judge then rejected Plaintiff’s argument that any ambiguity regarding intent was clarified by a statement of intent and purpose in the SNT. Agreeing the phrase “other obligations” is vague, the Court held:

As the ALJ observed, Article II, paragraph 7 permits payment of “inheritance, estate, or other death taxes.” (AR 17.) The SNT does not specify these payments may be made only after reimbursing the state. Instead, the language “and other obligations” in the payback provision authorizes these payments be made prior to reimbursing the state. Contrary to Plaintiff’s argument, the statement of intent and purpose does not provide a different interpretation. Thus, the ALJ reasonably concluded the SNT fails to require reimbursement to the state of “all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State plan.”

The Court got it wrong

Both the ALJ and the District Court focused on the phrase “other obligations” and ignored the longer phrase “other obligations payable by the Trust.”  The SNT did not require or permit payment of obligations of the beneficiary. It was limited to obligations of the trust. An “obligation is a legal duty, by which a person is bound to do or not to do a certain thing.” See Obligation at www.thelawdictionary.com. The District Court quoted the ALJ as agreeing that “that the payment of enumerated administrative expenses are permissible.” If administrative expenses can be paid, then payment of other debts owed by the trust, as opposed to the beneficiary, should also be permitted. In this regard, it is worth noting that POMS SI 01120.203.e authorizes payment of state and federal taxes and “Reasonable fees for administration of the trust estate, such as an accounting of the trust to a court, completion and filing of documents, or other required actions associated with termination and wrapping up of the trust.” Since the Trustee has a fiduciary obligation to everyone with an interest in the trust corpus, this language in the POMS could easily describe the other obligations payable by the Trust.

The Parties went about this the wrong way

When SSI determines that a trust is countable, a manual notice (denial) is required. See SI 01120.204. The notice must cite each reason the trust does not meet the exception or other requirements. The following description of how the notice should be formatted appears at POMS SI 01120.204.C.3: For example, “Section ______ of the trust does not comply with Program Operations Manual System (POMS) SI ______.” This means that by August 17, 2022, the Plaintiff should have known why the trust was countable and how to fix it. Rather than wasting three years in litigation, the conservator should have had the trust amended or reformed to remove the phrase “other obligations.” Taking that approach would have caused the trust beneficiary to receive more than $30,000 in SSI benefits (from the date of denial through the date of the District Court decision), three years of Medicaid eligibility and would have avoided attorney’s fee and expenses associated with litigation. Sometimes its easier to walk around and go through the backdoor instead of wasting time trying to kick in the front door.