Many third-party and self-settled special needs trusts (SNTs) contain “termination on ineligibility and distribute to family members” clauses. These clauses, called “early termination provisions”, are common trust provisions. When used in special needs trusts, the “early termination provisions” cause the trust to terminate before the death of the disabled beneficiary in order to prevent the government agency, which had found the trust to be disqualifying, from continuing to use the existence of the trust to deny benefits.

In June 2010, the Social Security Administration (SSA) issued a new SSA Program Operations Manual System (“POMS”) section regarding early termination provisions in trusts. The new POMS section, which will affect all beneficiaries of SNTs who receive Supplemental Security Income (SSI) benefits, significantly changes existing law. The new POMS section becomes effective on October 1, 2010, but applies retroactively to all trusts created on or after January 1, 2000.

Under the new POMS section, all SNTs that were established on or after January 1, 2000 and contain early termination provisions will be rendered ineffective, resulting in the assets in the trust becoming countable as a resource under SSI, unless the SNTs provides as follows:

1. Upon early termination (i.e., termination prior to the death of the beneficiary), the State(s), as primary assignee, must 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 Medicaid plan(s);
2. No person or entity other than the trust beneficiary may benefit from the early termination (i.e., After reimbursement to the State(s), all remaining funds must be disbursed to the trust beneficiary); and,
3. The early termination provision must give the power to terminate the trust to someone other than the trust beneficiary.

Here’s a common situation that would be effected by the new POMS section. Assume that a disabled child is the beneficiary of a special needs trust that was established after January 1, 2000 with assets of the child. The trust contains an early termination clause that states that, upon early termination, all assets remaining in the trust will be distributed to the beneficiary. Under the new regulations, the special needs trust would be a countable resource because, upon early termination, the document does not allow for reimbursement first to the State(s) for providing medical assistance to the trust beneficiary.

Many, if not most, early termination provisions in existing SNTs will not meet the requirements set forth in the new POMS section. As a result, all SNTs should be reviewed by qualified legal counsel and amended, if appropriate.

The new POMS section can be found here – https://secure.ssa.gov/apps10/poms.nsf/lnx/0501120199!opendocument