Second Circuit Rules That Income Received By An Institutionalized Person And Then Placed Into A Special Needs Trust Is Countable By Medicaid

On June 22, 2009, the United States Court of Appeals for the Second Circuit affirmed a federal district court’s ruling in Wong v. Daines, 582 F.Supp. 2d 475 (2008), holding that income received by an institutionalized person and then placed into a special needs trust is countable in determining the extent of Medicaid benefits to which the institutionalized person is entitled, based upon the federal Medicaid Manual and corresponding state regulations.  The appeals court ruled that the regulations permitted Medicaid to count the Social Security disability benefits received by the plaintiff each month which he placed into a special needs trust as income in calculating the amount of the Medicaid benefits payable.

Plaintiff Sai Kwan Wong is a permanently disabled Medicaid recipient under the age of 65 who resides in a nursing home. He is the recipient of monthly Social Security disability insurance (SSDI) benefits. After receiving the SSDI benefits each month, he placed the benefits in a special needs trust of which he is the beneficiary. A special needs trust is a discretionary trust established for the benefit of a person with severe and chronic or persistent disability and is intended to provide for expenses that assistance programs such as Medicaid do not cover. The Medicaid agency, though finding him eligible for Medicaid benefits, considered the income placed in the special needs trust in determining the amount of Medicaid benefits payable, relying upon the rules set forth in State Medicaid Manual Section 3259.7 and state regulations, which govern special needs trusts. Plaintiff claimed that the rules effectively prevent Medicaid recipients such as Wong from using special needs trusts to shelter their monthly SSDI benefits from Medicaid, thereby conflicting with the federal statute authorizing the creation of special needs trusts. As a result, plaintiff brought an action on behalf of himself and a class of similarly situated individuals challenging the above-referenced federal and state regulations.  The United States District Court for the Southern District of New York entered summary judgment in favor of the defendants, New York City’s Human Resource Administration, New York State’s Department of Health, and the Unites States Department of Health and Human Services.  Plaintiff appealed.

On appeal, the Second Circuit Court of Appeals held that the rule, State Medicaid Manual Section 3259.7, did not conflict with the federal statute authorizing the creation of special needs trusts. The federal statute, 42 U.S.C.A. § 1396p(d), defines a Special Needs Trust as one

containing the assets of an individual under age 65 who is disabled (as defined in section 1382c(a)(3) of this title) 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 . . . .

The State Medicaid Manual Section 3259.7(B)(1) instructs that:

Income placed in a [Special Needs Trust] is income for SSI purposes although it is not counted as available in determining Medicaid eligibility. Thus, such income is also subject to the post-eligibility rules . . . . [A]ll income placed in a [Special Needs Trust] is combined with countable income not placed in the trust for post-eligibility purposes.  State Medicaid Manual Section 3259.7(C)(5)(b)

The appeals court held that the effect of State Medicaid Manual Section 3259.7 is that income placed in a Special Needs Trust is not considered in determining whether plaintiff was eligible for Medicaid, but is considered in determining the extent of the Medicaid benefits to which an eligible individual is entitled. Relying on State Medicaid Manual Section 3259.7, defendants properly counted the income an institutionalized individual places in a Special Needs Trust when determining how much of the individual’s income he must contribute to the cost of his care.

Happily, there appear to be two positive results from the Wong v. Daines decision which may possibly benefit Medicaid applicants. First, State Medicaid Manual Section 3259.7 makes it clear that income that passes through an individual’s hands and is placed in a special needs trust in the month that the individual receives the income may not be counted for Medicaid eligibility determinations.  The other positive outcome of this case is that to the extent an individual’s income is assignable to the trust and therefore is not directly received by the disabled recipient, then the income can be assigned to a special needs trust and should not be counted by Medicaid.  For disabled persons under age 65 that should be no problem because transferring the income stream to a special needs trust will not cause any transfer penalties.

The Second Circuit opinion may be found here – Wong v. Daines