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By Deborah M. Beers, Esq. Buchanan Ingersoll & Rooney PC Washington, D.C.
A 42 U.S.C. §1396p(d)(4)(A) “special needs trust” (“SNT”) is a trust established with funds of a disabled individual under the age of 65 by a parent, grandparent, legal guardian or a court if the State will receive all amounts remaining in the trust upon the death of the individual up to the total amount of medical assistance provided to the individual during his or her lifetime. If all of the relevant requirements are met, the assets of the SNT will not be counted when determining eligibility for Medicaid. This type of trust, which is considered “self-settled,” is distinct from an SNT settled by a third party that is subject to spendthrift provisions. In re Corn is a decision of the Supreme Court of Arkansas, in which a divided panel held that non-probate assets (life insurance and bank accounts) passing to a disabled individual could be used to establish an SNT pursuant to an order of a court.
James S. Corn brought an action in the Pulaski County Circuit Court of Arkansas seeking to establish an SNT pursuant to 42 U.S.C. §1396p(d)(4)(A). Corn was disabled in that he suffered short-term memory loss as a result of a head injury. His disability entitled him to receive Social Security Disability (SSD), Supplemental Security Income (SSI), and made him automatically eligible for Medicaid. He would not be eligible, however, if he had assets of more than $2,000. To prevent disqualification for benefits, Corn's partner, Ms. Yelvington, now deceased, established an SNT for him in her estate planning documents.
Yelvington also designated Corn, individually, as a beneficiary on life insurance policies and her bank accounts in the amount of approximately $260,000. If the assets passed directly to Corn, he would be ineligible to receive SSI benefits. In order to prevent this, Corn attempted to create an SNT by court order.
In his petition to the lower court, submitted while Yelvington's estate was in probate and before Corn had received any funds from her life insurance policies or bank accounts, Corn attached a copy of the proposed “James Corn D(4)(A) Special Needs Trust” and stated that the trust met all of the criteria for the establishment of an SNT including:
(1) that Corn is under the age of 65; (2) that he is disabled pursuant to the provisions of the Social Security Act; (3) that the trust will be funded with Corn's assets; (4) that Corn is the sole beneficiary of the trust; (5) that the trust will be established by the court as allowed under the statute; (6) that the trust contains the requisite payback language to the State of Arkansas for benefits paid for the primary beneficiary's care under the Medicaid program; (7) that the trust is irrevocable; (8) that the trust contains a spendthrift clause; and (9) that Corn cannot direct the trustee to use trust principal or income for his support and maintenance.
At a hearing held on June 2, 2015, Corn's attorney stated that when Yelvington set up the SNT for Corn, she unintentionally left out a number of assets that would pass directly to Corn. Counsel for Corn also refused to disclose the value of the assets in the SNT or the assets passing through Yelvington's probate estate. This appeared to anger the Circuit Court, which stated:
I can tell you that what my concern has started to be in these cases. You know, I've had some of these where there's $40,000 in the special needs trust; I've had some where there's $30,000; I've had others that had already been set up prior to me seeing them. But I'm starting to have a public policy issue with them because people out here who are making $30,000 a year and paying taxes, their tax money is going to help provide these benefits that your client is trying to keep. And, at the same time, if I'm helping him protect 200-something thousand dollars over here so that he can keep those benefits that poor people are having to pay for, that becomes an issue for me.
The circuit court denied Corn's petition on the same day that it was presented and Corn filed a motion for reconsideration and brief in support on June 11, 2015. The motion for reconsideration was denied on July 10, 2015. In its order denying Corn's motion for reconsideration, the circuit court found that the establishment of the trust would be against Arkansas “public policy” and that there was insufficient evidence presented to support that a special-needs trust should be established.
On appeal the Supreme Court of Arkansas reversed. First, the Supreme Court found that Arkansas public policy was not violated because, “although a state's participation in the federal Medicaid program is voluntary, states that choose to participate must comply with the requirements of the federal Medicaid statute.” In this case, as noted above, the requirements of 42 U.S.C. §1396p(d)(4)(A) were allegedly met. In addition, the Supreme Court concluded that such trusts advanced the public policy of assuring that the State will be reimbursed for funds expended through Medicaid for medical assistance, which “increases the availability of funds for the future medical assistance to other needy persons.”
Part of the concern with Corn's trust appears to have been that the funds at issue did not themselves arise from a court proceeding, such as a tort claim or a probate proceeding. These were non-probate assets brought to the courts by Corn himself. However, the Supreme Court noted that:
[T]here is no logical reason that the disabled person cannot be the grantor and petition the court to establish the trust, as long as the trust has not been signed by the trustee and funded before submission to the court. If all the requirements to create a trust have not been completed, the trust is not established. Even though the grantor is the disabled person, the court can entertain the petition and establish the trust by court order, so long as the creation of the trust has not been completed before the petition is submitted to the court. In this way, the expense of a guardianship proceeding can be avoided for a person who is disabled, but not otherwise in need of a guardian.
The circuit court's determination that Corn's SNT was against public policy was based in part on the state's policy against self-settled trusts being used to qualify individuals other ineligible for Medicaid assistance. However, the Supreme Court noted that “[t]he difference between the trusts in these cases and the case at hand is that those cases did not include payback provisions to the State.”
The Supreme Court also rejected the lower court's determination that there was insufficient proof of Corn's disability because, in part, there was “no guardianship” or other indication of disability. In its order denying Corn's motion for reconsideration, the circuit court stated that, while Corn testified that he was disabled, “no one presented written substantiation that [Corn] was disabled or receiving Social Security benefits.” The Supreme Court found, however, that “through his testimony at the hearing and by attaching letters from the Social Security Administration to his motion for reconsideration, Corn provided the circuit court with sufficient evidence of his disability.”
Therefore, the Supreme Court concluded that the Circuit Court erred “in ruling that the establishment of a D4A trust is against Arkansas public policy and that … there was insufficient evidence of Corn's disability.” The circuit court's order was reversed and the case remanded for a determination of whether the proposed trust met the requirements in 42 U.S.C. §1396p(d)(4)(A).
This case serves as an important reminder of how even a carefully crafted estate plan can be thrown into flux where asset titling and beneficiary designations are not reviewed and updated to be consistent with the desired dispositive plan. While the Supreme Court of Arkansas ultimately gave relief to Corn here, if the circuit court's decision had stood, this inattention to titling and designations could have temporarily cost Corn his eligibility for benefits and ultimately placed him in a worse position than if he had not inherited at all due to the lower reimbursement rates allowed to providers through the Medicaid system.
For further discussion of special needs trusts, see Fleming & Morgan, 816 T.M., Planning for Disability.
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