Ruling by the 3rd Circuit Outlaws State Restrictions On Special Needs Trusts, Holding State Law Is Prempted By Federal Law

In a recent precedential decision, the United States Court of Appeals for the Third Judicial Circuit held that laws passed by the State of Pennsylvania designed to regulate special needs trusts (SNT) which placed greater restrictions on the SNTs than were contained in federal law governing SNTs “transgress[ed] federal intent” and were preempted by federal law. Lewis v. Alexander, Docket No. 11-3439 (3rd Cir., June 20, 2012)

In 2005, Pennsylvania passed a law designed to regulate a type of special needs trust called a “pooled trust.”  A “pooled trust‟ is a SNT in which a non-profit organization serves as trustee to manage assets belonging to many disabled individuals, with investments being pooled, but with separate trust accounts being maintained for each disabled person. The new Pennsylvania law mandated that assets in pooled trusts would be countable in determining a trust beneficiary’s Medicaid eligibility unless the following rules were met: (1) The beneficiary would have to be under the age of 65 and have special needs that would not be met without the trust; (2) Trust expenditures would have to bear a reasonable relationship to the needs of the beneficiary; and, (3) Upon the death of a pooled trust beneficiary, the state could seek reimbursement for the cost of medical care provided to the beneficiary from up to 50% of the funds retained by the pooled trust. None of these restrictions were contained in the federal law governing SNTs or pooled trusts.

A group of pooled trust beneficiaries and several pooled trusts challenged the Pennsylvania law in federal court. On plaintiffs’ motions for summary judgment and class certification, the United States District Court for the Eastern District of Pennsylvania ruled that the age limitation, expenditure restrictions and reimbursement rule were preempted by federal law. The district court also granted plaintiffs’ motion for class certification, certifying a class consisting of all disabled individuals who are or will be eligible for Medicaid and for whom pooled special needs trust accounts that comply in all respects with the federal Medicaid Act were established but who had been or will be denied Medicaid due to the Pennsylvania regulations. The State of Pennsylvania appealed.

On appeal, the 3rd Circuit upheld the majority of the district court’s ruling, holding that the district court was correct in its determination that the State’s 50% repayment provision, “special needs” provision, expenditure provision, and age restriction are all preempted by federal law. The appeals court found that “Congress’ intent was … to shelter special needs trusts from having any impact on Medicaid eligibility.”  However, the court also concluded that the enforcement provision of the Pennsylvania law, when used to enforce provisions not otherwise preempted by federal law, was a reasonable exercise of the State’s authority to regulate trusts.

The federal district court case is attached here – Lewis v. Alexander – federal district court case

The decision filed by the United States Court of Appeals for the 3rd Judicial Circuit is annexed here – Lewis v. Alexander -3rd Circuit Court of Appeals Decision

Brief of the Amici Curiae is annexed here – Lewis v. Alexander – Amicus Brief

UPDATED ON JANUARY 16, 2013U.S. Supreme Court denied certiorari in Lewis V. Alexander, refusing to hear an appeal filed by the State of Pennsylvania which challenged a ruling by the U.S. Court of Appeals for the Third Circuit. The Third Circuit ruled that, under federal law, pooled trusts established by people over the age of 65 are not countable resources for Medicaid purposes. The circuit court also determined that states may not place restrictions on the amount of funds retained by a pooled trust when a Medicaid beneficiary dies nor may they dictate what types of expenditures a pooled trust can make so long as they are for the sole benefit of a person with disabilities.