Funding the Trust

An asset is not subject to the trust’s terms and conditions until it is transferred to the trust; funding is critical.[1] The transfer of property to a trust requires a transfer of legal title to the trustee.[2] The transfer of real property requires recording in the appropriate property records.[3] Trust law provides that property may be added to an existing trust from any source in any manner that is not prohibited by the trust instrument so long as the trustee accepts the property.[4] However, if the applicant’s funds were used to form all or part of the trust corpus, then Medicaid will treat the trust as a self-funded trust and 42 U.S.C. § 1396p(d)(3) and/or (d)(4) will apply.[5]

A trust may be funded by Will if the trust is identified in the Will and its provisions are set forth in a written trust instrument. The trust may be one that was executed with the Will or that was previously established, including one created in the Will of someone who predeceased the testator. A device or bequest to a trust is not invalid because the trust is amendable or revocable, or because the trust was amended after the execution of the Will or the testator’s death.[6] However, unless the Will provides otherwise, the devise or bequest lapses if the trust is revoked.[7] It should be noted, however, that funding of this type does not meet the testamentary trust exception to the Medicaid Trust rules found in 42 U.S.C. § 1396p(d)(2)(A).[8]

A trust under a testator’s Will may be named as the beneficiary of a qualified retirement account, an individual retirement account or a life insurance policy so long as the Will is admitted for probate in solemn form.[9] Interestingly, the designation of a trust under a Will is not treated as a designation of the testator’s estate as beneficiary and does not cause the assets to be treated as part of the testator’s estate for non-tax purposes.

Although assets within a special needs trust are exempt, they are countable until transferred to the trust. The effect of this rule was visible in Wong v. Doar, 571 F.3d 247 (2nd Cir. 2009), where Wong attempted to transfer his Social Security Disability Income to a special needs trust. Because Social Security payments are not assignable,[10] they were paid to Wong each month before he could transfer the income to the trust. Upon receipt, the income counted in determining Wong’s patient liability before they were transferred to the trust; transfer to the trust did not alter this result.[11] A similar result was reached in Reames v. Oklahoma Health Care Auth., 411 F.3d 1164 (10th Cir. 2005).

If there is a Medicaid lien, it must be repaid before a special needs trust is funded. In Sullivan v. County of Suffolk, 174 F.3d 282 (2nd Cir. 1999), the Court held that a State’s right to reimbursement is not altered by the payback provisions within 42 U.S.C. § 1396p(d)(4).[12] This result is consistent with Wong and Reames to the extent it the holding suggests that the transfer of funds into a special needs trust does not alter property rights which attach to those funds when they are conveyed to the trust. Section (d)(4) does not divest the State of its reimbursement right in a third party recovery.

Notes:

1. This is the rule when an asset is transferred during the transferor’s life. O.C.G.A. § 53-12-400(b). If the transfer is by will, then the asset is subject to the trust on the date of the testator’s death.

2. O.C.G.A. § 53-12-25(a).

3. Id.

4. O.C.G.A. § 53-12-26. Additions to trust principal made directly to an exempt trust are not income to the grantor, trustee or beneficiary for SSI purposes. POMS SI 01120.200.G.1.b; POMS 01120.201.J.1.b. Additions to a countable trust are either income or a conversion of resources, depending on the source. POMS SI 01120.200.G.2.b and G.1.d.

5. 42 U.S.C. § 1396p(d)(2)(A). Subsection 1396p(d)(2)(B) limits application of the Medicaid trust rules to the portion of the trust attributable to the applicant’s assets.

6. O.C.G.A. § 53-12-101(a).

7. O.C.G.A. § 53-12-101(c).

8. POMS SI 01120.201.B.6.

9. O.C.G.A. § 53-12-120.

10. A non-assignable income stream cannot be paid directly to the trust; accordingly, it is subject to the SSI and Medicaid income rules. POMS SI 01120.200.G.1.c; POMS SI 01120.201.J.1.c. If income can be assigned, and if the assignment is irrevocable, then the income is not subject to the SSI and Medicaid income rules. POMS SI 01120.200.G.1.d; POMS SI 01120.201.J.1.d.

11. The Wong decision is poorly worded, reaching the correct conclusion for the wrong reason. The District court appears to have reached the correct result, since it found that nothing prevents the Department from counting SSDI income before it is placed in the trust. The appellant decision focuses on a challenge to Transmittal 64, § 3259.7 of the State Medicaid Manual without acknowledging the specific language applicable to Wong’s situation: “Funds entering and leaving these trusts are generally treated according to the rules of the cash assistance programs, [and the Medicaid program] as appropriate.” That provision goes on to distinguish income received and then placed into the trust from income irrevocably assigned to the trust. “When the right to income placed in the trust actually belongs to the trust and no the individual the income does not count under SSI rules as income received by the individual.” Footnote 13 to the appellate decision acknowledges the anti-alienation provisions of the Social Security Act, but reaches the remarkable conclusion that they are not relevant because Wong failed to invoke them. The court then appears to drop the ball by concluding “we have no difficulty concluding that SMM 3259.7 is persuasive in its post-eligibility treatment of SSDI income placed in § 1396p(d)(4)(A) Special Needs Trusts.” As the language quoted above points out, it is incorrect to say that income can be counted when it is inside the trust; the correct analysis is that it is counted before it goes into the trust and that placing it inside the trust changes nothing.

12. This result was modified somewhat by Ark. Dep’t of Human Servs. v. Ahlborn, 547 U.S. 268 (2006), where the Supreme Court interpreted the anti-lien provisions to prohibit collection against that portion of a recovery unrelated to medical expenses.

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