Special Needs Trust Termination Provisions under the POMS.
The Social Security Administration has always had rules regarding disbursement of funds from a self-settled special needs trust upon the death of a beneficiary. They have recently added additional provisions regarding the early termination of a self-settled special needs trust during the lifetime of the beneficiary.
1. Termination of Trust Upon the Death of the Beneficiary.
For a self-settled special needs trust to qualify as a valid Section 1396p(d)(4)(A) trust, the trust must contain specific language that provides that upon the death of the individual, the State will receive all amounts remaining in the trust, up to an amount equal to the total amount of medical assistance paid on behalf of the individual under the State Medicaid Plan. The terms of the trust must provide payback for any State that may have provided medical assistance under that State’s Medicaid plan and may not be limited to any particular State, nor to any particular period of time. Thus, medical assistance received by an individual prior to establishing the trust will be subject to the payback provisions of the trust. Section SI 01120.203B.1.h of the POMS
In the event there are insufficient assets in the trust to reimburse all the states in full, they will each receive a proportionate share of the remaining trust assets.
2. Allowable Expenses of the Trust.
(a). Lifetime Expenses.
During the lifetime of the beneficiary, the trustee is permitted to pay fees and trust administration expenses, as long as the trustee is permitted to do so under the terms of the trust agreement. Section SI 01120.203B.3.c of the POMS.
The trust will not violate the “sole benefit rule” if the trust provides for the payment of reasonable compensation for trustees to manage the trust, as well as reasonable costs associated with investment, legal or other services rendered on behalf of the individual with regard to the trust. Section SI 01120.201F.2 of the POMS
Upon the death of the beneficiary, the trustee is not permitted to pay debts owed to third parties, other than provided below, and funeral expenses before the Medicaid lien is fully satisfied. Therefore, the trustee should endeavor to keep all bills current, as well as purchase a prepaid burial contract for the beneficiary when the trust is created.
(b). Allowable Administration Expenses at Death.
Upon the death of the beneficiary, the Trustee is permitted to pay certain administrative expenses prior to reimbursement to the State(s) to satisfy the Medicaid lien. These expenses include:
1. Taxes due from the trust to the State(s) or Federal government because of the death of the beneficiary, and
2. 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. Section SI 01120.203 B.3.a of the POMS.
(c). Prohibited Expenses and Payments at Death.
Under the POMS, the trust is prohibited from paying the following expenses prior to the reimbursement of the State(s) for medical assistance. Section SI 01120.203 B.3.b of the POMS.
1. Taxes due from the estate of the beneficiary other than those arising from inclusion of the trust in the estate,
2. Inheritance taxes due for residual beneficiaries,
3. Payment of debts owed to third parties,
4. Funeral expenses, and
5. Payments to residual beneficiaries.
3. Termination of Trust During the Lifetime of the Beneficiary.
A trust may contain a clause that permits the trust to terminate before the death of the beneficiary. This is known as an “early termination provision.” Such provisions commonly provide for the early termination of a trust when, for example, the beneficiary is no longer disabled or no longer eligible for public benefits or when the trust no longer contains sufficient funds to justify the continued administration of the trust.
For purposes of SSI eligibility, a trust that contains an early termination provision will be considered an available resource unless the trust provides:
(a) Upon the early termination of the trust, the State(s) in which the beneficiary received medical assistance will receive all amounts remaining in the trust at the time of termination up to an amount equal to the total amount of medical assistance paid on behalf of the individual under the State(s) Medicaid Plan(s). Section SI 01120.199 F.1 of the POMS
(b) However, prior to reimbursement of the State(s), the trust may provide for the payment of any taxes due from the trust to the State(s) or Federal government due to the early termination of the trust, as well as reasonable fees and administration expenses associated with terminating the trust. The early termination provisions make reference to Section SI 01120.203 B.3 of the POMS, which give the allowable and prohibited expenses upon the death of the beneficiary. Section SI 01120.199 F.3 of the POMS
(c) After payment of allowable expenses and reimbursement to the State(s), all remaining funds must be distributed to the beneficiary.
(d) The early termination provision may only be exercised by someone other than the trust beneficiary. Section SI 01120.199 F.1 of the POMS
4. 90-Day Remedial Amendment Period.
A trust that was originally approved by the Social Security Administration and upon review is found to be defective, will continue to be exempt if the trust is amended to comply with the newly enacted early termination provision within 90 days. The 90-day period begins on the day the trust beneficiary or representative payee is informed that the trust contains an early termination provision that must be amended. Each previously exempted trust is permitted only one 90-day amendment period. Section SI 01120.199 A.2 of the POMS
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