For the past several years, I have represented Thomas Saccone, a retired Newark, NJ firefighter with a severely disabled adult child named Anthony. Anthony lives with his parents, is unable to work, has been found to be totally disabled by the Social Security Administration, and for many years has received Supplemental Security Income (SSI) and Medicaid, public benefits based on need. These public benefits are critical in meeting Anthony’s care needs.

Tom retired in 2000 and was approved for benefits from the Police and Firemen’s Retirement System (“PFRS”), effective December 1, 2000. In order to structure his estate plan to provide for Anthony after Tom’s death without jeopardizing Anthony’s eligibility for needs-based public benefits, Tom executed a Last Will and Testament containing a testamentary special needs trust (“SNT”). Anthony is the sole beneficiary of the SNT.

In August 2008, by way of beneficiary designation, Tom asked the PFRS to pay the survivor benefits to which Anthony would be entitled upon Tom’s death to the testamentary SNT established under Tom’s will in order to protect Anthony’s eligibility for public benefits. Those death benefits included the payment of pension benefits to the retired member’s widow/er and children (the “pension death benefit”).

The PFRS denied the request based on N.J.A.C. 17:4-3.5, as amended eff. 4/3/06, which prohibits a retiree from designating a primary or a contingent beneficiary for the receipt of the retiree’s accumulated pension contributions in the event of the retiree’s death. The pension board said:

[It c]ould not comply with your request to pay a trust, instead all monthly benefits must be paid to a named beneficiary or the check could be sent to ‘in care of’ anyone designated to act as the trustee for the trust.

Thereafter, we appealed the PFRS decision administratively to the Division of Pensions and Benefits, which affirmed the denial, and then to the Appellate Division of New Jersey’s Superior Court, which affirmed the Division’s decision. On Petition for Certification, the New Jersey Supreme Court “summarily reversed” the Appellate Division, and remanded the matter back to the PFRS to decide the case on the merits. (I blogged about the Saccone case in 2010, and my blog post can be found here.)

On remand,  in November 2011 the Board again concluded that Tom was not permitted to designate the trust as a beneficiary of his pension fund death benefits. Tom filed his second Notice of Appeal in this case on November 30, 2011.

Although neither the State nor Tom requested oral argument in the Appellate Division, the Court invited counsel to appear for oral argument recently on short notice to address the effect on the Saccone case of the decision in M.R. v. State of New Jersey, Department of Human Services, Division of Medical Assistance and Health Services,  268 N.J. Super. 586 (App. Div. 1993).  Following is a summary of the oral argument I presented on Tom’s behalf:

• I’d like to begin my remarks by focusing on the M.R. case, which the Court has asked that I address.
• This case really focuses on what’s critical to the Court’s decision: the distinction between 1^st-party SNTs and 3^rd-party SNTs:

1^st-party or self-settled SNTs – trusts containing assets owned by a disabled person which are established (1) to ensure that the disabled individual’s assets are not exploited or wasted, and (2) to preserve the disabled individual’s eligibility for Medicaid, Supplemental Security Income (“SSI”) or other needs-based public benefits. The creation of special needs trusts is authorized by the 1993 Omnibus Budget Reconciliation Act (“OBRA”), 42 U.S.C. §1396p(d)(4)(A).

3^rd-party or estate planning SNTs– trusts created for a disabled person by a third party, such as a parent, and funded with assets owned by the third party. POMS SI 01120.200D(2) states that, if a SNT is established with assets of a third party, the trust principal is NOT a resource. This difference in the source of funding is the rationale for the distinction between 1^st-party SNTs and 3^rd-party SNTs. The difference between 1^st-party SNTs and 3^rd-party SNTs is recognized in SSI regulations. See, POMS Sections SI 01120.200B (17) and L(2)(a); and, SI 01120.202F(4)(a).

• M.R. concerns the Medicaid applicant’s own pension funds, which she attempted to voluntarily waive to qualify for Medicaid; these funds were found to be “available” to her. This is squarely within the Medicaid regulations: assets are “available” if the applicant has the “right, authority, or power to liquidate” them (N.J.A.C. 10: 71-4.1(c)); a voluntary waiver of an available asset, or a voluntary transfer of the applicant’s own assets beyond his/her control, is considered a “transfer of resources” and subjects the applicant to Medicaid ineligibility (N.J.A.C. 10:71-4.7).
• If a Medicaid applicant wishes to transfer his own assets to a SNT, he is required first to pay off any existing Medicaid liens, and the SNT must meet the requirements of 42 U.S.C. §1396p(d)(4)(a) including the inclusion of a “payback” provision, mandating that, upon the death of the beneficiary, any state which has provided medical payments under its Medicaid program for the disabled individual is entitled to be reimbursed from the remaining assets of the trust. However, if a third party wishes to transfer his/her assets to a Medicaid beneficiary, these requirements do not apply. This encourages third parties to set aside funds to benefit the disabled, without jeopardizing the public benefits eligibility of this segment of the population. N.J.S.A. 3B:11-36
• In the present case, the pension belongs to Mr. Saccone, and he’s attempting to assign the benefits to a 3^rd party SNT before they become vested in his son’s estate. This is not a case in which Anthony owns the assets and is trying to place it beyond his own control (as was the case in M.R.)

At the conclusion of oral argument, the Appellate Division asked me to prepare a letter brief providing the Court with federal and state authorities authorizing the creation of 3rd party SNTs. I am now working on that task.

UPDATED ON MARCH 19, 2013: The Appellate Division issued a written opinion which again affirmed the  Board’s decision denying Tom’s request to designate the special needs trust established in his Last Will and Testament as the beneficiary of his public pension death benefits..  We then filed a second Petition for Certification to the New Jersey Supreme Court. On March 13, 2013, the Supreme Court again granted our Petition for Certification, and will consider the case on the merits. I blogged about the recent developments in the Saccone case here.