(This is the first of a 4-part blog post on the subject of the assignment of various types of income to a special needs trust. The upcoming posts discuss the assignment of alimony, child support, annuities, IRAs and other retirement benefits to a special needs trust. This first post discusses the public policy background of special needs trusts and income assignments, and identifies the various types of income which are assignable and non-assignable under the law.)
I. Public Policy / Background.
Special needs trusts are estate planning devices that are specifically permitted under federal and state Medicaid law, which further New Jersey’s public policy regarding the rights of the disabled. N.J.S.A. 3B:11-36; see, J.P. v. Division of Medical Assistance and Health Services, 392 N.J. Super. 295 (App. Div. 2007).
Special needs trusts may be “first party” trusts (“d(4)(a) trusts”), which contain the assets of the disabled beneficiary; or “third party” trusts (sometimes referred to as “supplemental benefits trusts”), which contain the assets of a third party (usually a parent or grandparent). The legal requirements differ for establishing each type of trust, and care must be taken to establish the special needs trust to comply with applicable law, so that the assets of the trust are not considered “available” to the disabled beneficiary, thus rendering the beneficiary ineligible for Supplemental Security Income (“SSI”), Medicaid, or other public benefits based upon need.
A. Asset Transfers to a Self-Settled Special Needs (“(d)(4)(a)”) Trust
The transfer of the disabled individual’s own assets into a qualifying self-settled special needs trust (which contains the disabled person’s own assets, rather than the assets of a third party) does not render that individual ineligible for public benefits. 42 U.S.C. §1396p(c)(2)(B)(iv); 42 U.S.C. §1382b(c)(1)(C)(ii). Once transferred, the assets contained in that trust are exempt from being counted as a “resource,” for purposes of determining eligibility for public benefits. 42 U.S.C. §1396p(d)(4)(a); State Medicaid Manual, HCFA Transmittal No. 64, §3259.7A; 42 U.S.C. §1382b(e)(5).
Pursuant to federal law, as amended on August 10, 1993 by the Omnibus Budget Reconciliation Act of 1993, Public Law No. 103-66, placing an individual’s funds directly into a special needs trust may permit that individual to obtain eligibility for public benefits, because those assets are not counted in determining eligibility. That statute begins with the general provision that, when the assets of an individual are placed in a trust, those assets are countable:
For purposes of determining an individual’s eligibility for … benefits under a State plan established under this subchapter, subject to paragraph (4), the rules specified in paragraph (3) [regarding trust assets being considered “available” and countable resources of the individual] shall apply to a trust established by such individual.
However, the above-quoted provision includes an exception to the general rule, found in paragraph (4) of that subsection. According to paragraph (4), when the assets of an individual are placed in a certain type of trust (a “(d)(4)(A)” or “self-settled special needs” trust), those assets are not “countable” resources:
This subsection [regarding treating trust assets as countable assets of the individual] shall not apply to any of the following trusts:
(A) A trust containing the assets of an individual under age 65 who is disabled … and which is established for the benefit of such individual by 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.
On June 5, 1996, in a HCFA Memorandum entitled “Treating Disability Trusts under Transfer of Assets, Trust Estate Recovery, and Third Party Liability Rules,” HCFA confirmed to all state Medicaid directors that special needs trusts, including those established by a court on behalf of or at the behest of an individual, are covered by the Medicaid trust rules, including the provisions exempting a trust from the general rules that cause the trust to be considered as available resources. See also Waldman v. Candia, 317 N.J. Super. 464 (App. Div. 1999).
This exception to trust countability is also acknowledged in the Social Security Program Operations Manual System (“POMS”) Section SI 01120.203, Exceptions to Counting Trusts Established on or After 1/1/01, which states that “sections 1917(d)(4)(A) and (C) of the Social Security Act (the Act) (42 U.S.C. §1396(d)(4)(A) and (C)) set forth exceptions to the general rule of counting trusts as income and resources for the purposes of Medicaid [and SSI] eligibility.”
The federal law permitting assets to be placed in a self-settled special needs trust without affecting an individual’s Medicaid/SSI eligibility is echoed by our New Jersey state law and Medicaid regulations, N.J.S.A. 3B:11-36 et seq., and N.J.A.C. 10:71-4.11 (g)(1)(i-xviii).
Thus, according to both federal and state law, placing a disabled individual’s assets in a special needs trust is specifically recognized as a permissible method by which to protect the individual’s eligibility for SSI, Medicaid or other public benefits based on need.
B. Third Party Asset Transfers to a Special Needs Trust
According to POMS §SI 01120.200.D.2, “if an individual does not have the legal authority  to revoke or terminate the trust or  to direct the use of the trust assets for his/her own support and maintenance, the trust principal is not the individual’s resource for SSI purposes…. If a trust is irrevocable by its terms and under State law and cannot be used by an individual for support and maintenance (e.g., it contains a valid spendthrift clause), … it is not a resource.” POMS §SI 01120.200.B.16 defines a Spendthrift Clause as one that “prohibits both involuntary and voluntary transfers of the beneficiary’s interest in the trust income or principal … [so that] the beneficiary’s creditors must wait until money is paid from the trust to the beneficiary before they can attempt to claim it to satisfy debts.”
II. TRANSFER OF INCOME STREAMS.
A more complex issue arises when considering transferring an income stream into a special needs trust.
The most common types of income streams include alimony and child support payments; personal injury/structured settlements; pensions; annuities; and individual retirement accounts.
According to the Social Security POMS, as a general rule, “additions to trust principal made directly to the trust are not income to the grantor, trustee, or beneficiary.” POMS §SI 01120.200.G; §SI 01120.201.J.In addition, a “legally assignable payment … that is assigned to a trust, is income for SSI purposes unless the assignment is irrevocable…. If the assignment is revocable, the payment is income to the individual legally entitled to receive it.” Id.
According to the POMS, the following payments are not assignable by law and, therefore, may not be paid directly to a trust:
- Temporary Assistance for Needy Families (“TANF”);
- Railroad Retirement Board-administered pensions;
- Veterans pensions and assistance;
- Federal employee retirement payments (CSRS, FERS) administered by the Office of Personnel Management;
- Social Security title II and SSI payments; and,
- Private pensions under the Employee Retirement Income Security Act (“ERISA”) (29 U.S.C.A. §1056(d)). POMS §SI 01120.201.J.1.c; §SI 01120.200.G.1.c.
In New Jersey, workers’ compensation benefits are similarly non-assignable. J.C. v. DMAHS, No. A-5632-07T2, A-6297-07T2 (N.J. Super. Ct. App. Div. Feb. 8, 2010) (citing N.J.S.A. 34:15-29).
However, income that is legally assignable and is assigned to an irrevocable trust is not income, for SSI purposes. POMS §SI 01120.201.J.1.d.Thus, many types of streams of income, such as alimony and child support; annuities; individual retirement accounts; and personal injury/structured settlements, may be assigned to an SNT.
(Upcoming blog posts discuss the assignment of alimony, child support, annuities, IRAs and other retirement benefits to a special needs trust. The entire article, including all footnotes which are omitted in the blog posts, can be found on my website by clicking here.)
(Thank you, Mrs. Bremer, for your excellent work on this and the upcoming blog posts in this series.)
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