Federal Appeals Court Rules That Assets In A Special Needs Trust Are Countable Resources Under Medicaid

In a ruling seen as a major setback for disabled individuals and their families, on September 1, 2009 the United States Court of Appeals for the Tenth Circuit granted summary judgment in favor of the State of New Mexico, affirming a denial of Medicaid benefits and holding that the State could consider a special needs trust established under 42 U.S.C. §1396p(d)(4) to be a “countable resource” in determining Medicaid eligibility. Hobbs v. Zenderman, No. 08-2099 (10th Cir., September 1, 2009)

Steffan Hobbs was severely injured in an auto accident in 2000 when he was six years old. He suffered traumatic brain injury. As a result of his injuries, Hobbs required significant assistance in daily activities such as eating and bathing.

In 2003, Hobbs and his parents entered into a $2.5 million settlement agreement for injuries related to the accident. Under the agreement, $1.1 million was set aside for a special needs trust to benefit Hobbs. A state court approved the creation of “The Steffan Hobbs Medicaid Payback Trust” (the “Trust”). Among other provisions, the  trust agreement provided that:

Expenditures may be made directly to any of [Hobbs’] family members, or any other person who takes [Hobbs] into his or her home or provides special care or attention to him, to compensate such person for the reasonable value of services provided and to reimburse such person for costs associated with shelter, care, or attention.

From the Trust corpus, $750,000 was used to purchase an annuity, which provided monthly income of $2,479.40 to the Trust. The primary outlay from the Trust was payment to Mrs. Hobbs for “extraordinary care provided to Steffan Hobbs.” Mrs. Hobbs helped her son with dressing and bathing, and she monitors him for seizures. She also transports him to and from school and has helped train school personnel to deal with Hobbs’ injury. Trust funds were also used to purchase a 50% interest in the Hobbs’ land and home, home furnishings, homeowner’s insurance, home maintenance and improvement, and life insurance on Hobbs’ parents lives.

In 2003, Hobbs applied for home care services paid by Medicaid. At the time he applied, Hobbs received Supplemental Security Income (“SSI”) and SSI Medicaid. The New Mexico Human Services Department (NMHSD) determined that Hobbs was medically eligible for the Program,  but financially ineligible due to excess resources because:

[U]nder state Medicaid policies, special needs trust funds may not be used, for example, to purchase land and a family home, pay property taxes and insurance on that home, pay for home furnishings (unless related to the beneficiary’s disabilities), purchase farm animals and outbuildings, compensate a parent for taking care of her disabled child, pay the beneficiary’s personal income taxes, or pay advisory fees to the trustee’s affiliates.

Hobbs filed an administrative appeal. After a hearing, the administrative law judge affirmed the Medicaid agency’s denial of benefits, concluding that the Trust payments to Mrs. Hobbs for “providing routine ongoing care” were not “for the sole benefit” of Hobbs. Hobbs then appealed this administrative decision to state court. While the state court case was pending, the Social Security Administration informed Hobbs that his SSI payments would cease because he exceeded the resource limit of $2,000. Because Hobbs was no longer eligible for SSI, he was also found to be ineligible for SSI Medicaid.

Hobbs then filed a federal court lawsuit in the U.S. District Court for the District of New Mexico. Hobbs successfully moved to stay his state court appeal pending the outcome of the federal lawsuit. Both parties then moved for summary judgment. In an order granting summary judgment to defendants, the district court concluded that NMHSD may review the manner in which a special needs trust is administered to determine Medicaid eligibility. Hobbs appealed.

On appeal, Hobbs argued that his special needs trust met the requirements of §1396p(d)(4)(A), excluding it from consideration for Medicaid eligibility. In so arguing, Hobbs read §1396p(d)(4)(A) as obligating States to exempt special needs trusts when making eligibility determinations and thus conferring a right on Medicaid applicants to shield assets held in a special needs trust from being counted as resources. Yet, the appellate court interpreted the text of the statute as leaving the States free to decide whether and under what conditions to recognize such trusts. The Court held that States need not count § 1396p(d)(4) trusts for eligibility purposes, but nevertheless may opt to do so. Thus, the Court affirmed the district court’s decision, concluding that § 1396p(d)(4)(A) does not require States to exempt special needs trusts from Medicaid eligibility determinations.

To be frank, I do not follow the Court’s reasoning in the Hobbs case. Actually, I follow it, but disagree. You would think that, since the assets in a special needs trust established under §1396p(d)(4)(A) cannot be used to pay for health care and other services for which governmental funds are available, the trust corpus should not be countable under federal and state law. To do otherwise and allow a State to count the assets in a trust established under §1396p(d)(4)(A) would utterly eviscerate the numerous federal and state statutes and regulations governing special needs trusts.

Further, the 10th Circuit’s ruling regarding the right of States to count assets placed in a §1396p(d)(4)(A) special needs trust as available resources is directly contrary to the Center for Medicare and Medicaid Services State Medicaid Manual §3259.7(B)(2), which states as follows: 

Resources placed in an exempt irrevocable trust for a disabled individual may or may not count as resources to the individual in determining eligibility, depending on the circumstances.  Resources are counted as resources only during those months in which they are in the possession of the individual, up to but not including the month in which the resources are placed in the trust.  Beginning with the month the resources are placed in the trust, they are exempt from being counted as resources to the individual.