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Court of Appeals Affirms Recognition of Social Security Disability Income Assigned to a First Party Special Needs Trust for Purposes of Nursing Home Share of Cost Calculations
Posted On 7/9/2009
This Alert examines a case involving the use of a Special Needs Trust (SNT). SNTs can be very useful in allowing individuals to keep the benefit of some assets and yet still qualify for Medicaid or other resources. Unfortunately, the Court of Appeals in this case held that the SNT could not be used to shelter the individual’s Social Security Disability Income (SSDI). The case illustrates the importance of seeking assistance from a qualified estate planning and elder law attorney when planning for clients with current or future special needs (of themselves or their beneficiaries).
In Wong v. Doar (571 F.3d 247, 2009 U.S. App. Lexis 13311, June 22, 2009), the U.S. Court of Appeals for the Second Circuit held that Social Security Disability Income (SSDI) payments assigned to a Medicaid recipient's first party (d)(4)(A) Special Needs Trust (SNT) count as income for purposes of calculating the amount the Medicaid recipient must contribute towards the cost of his nursing home care.
Mr. Wong is a disabled person under the age of sixty-five. He resides in a nursing home in New York City due to his permanent disabilities. A (d)(4)(A) SNT was established for Mr. Wong using litigation settlement proceeds. The New York Medicaid agency asserted that the SSDI payments Mr. Wong was assigning to his SNT were countable income that should be included as part of Mr. Wong's “share of cost” or liability for his monthly nursing home costs. Mr. Wong argued that the SSDI payment he assigned to his SNT were exempt from consideration towards his share of cost liability. The parties did not dispute the fact that Mr. Wong was eligible for Medicaid and continued to be eligible for Medicaid after he commenced the transfer of his SSDI payments to his SNT.
Under New York law, a nursing home resident on Medicaid is permitted to retain no more than $50 per month in income. The remainder of the Medicaid recipient's income (subject to certain deductions) must be turned over to the nursing home to help defray the cost of the nursing home care being provided.
Generally, the determination of whether assets or income placed into a trust is available to pay for the cost of a Medicaid recipient's care depends upon whether the trust is revocable or irrevocable. For revocable trusts, the entire corpus and income of the trust counts in determining an individual's eligibility for Medicaid.
Irrevocable trusts are a different story. Although the rules vary depending on the state in which the Medicaid recipient resides, the principal of an irrevocable trust will not be considered available with respect to determination of the Medicaid recipient's eligibility determination so long as there are no circumstances under which the trustee can distribute principal in favor of a Medicaid recipient who was also the creator of the irrevocable trust (first party trust). The ability of the Trustee to distribute or not distribute trust income or principal either to the Medicaid recipient or to some other beneficiary at the sole discretion of the Trustee will not satisfy this standard. There cannot be any circumstances under which the trustee may distribute principal to the Medicaid recipient. Of course any income which can be distributed to the Medicaid recipient will be considered in determining his Medicaid eligibility.
First party SNTs described in 42 USC § 1396p (d)(4)(A) are an exception to these general trust rules. These (d)(4)(A) SNTs are designed to enhance the quality of life of an individual with disabilities, and the trustee of the (d)(4)(A) SNT can pay for things that are not covered by government assistance. The assets of a (d)(4)(A) SNT do not count when determining the Medicaid eligibility of the beneficiary. Moreover, assets and most types of income transferred into a (d)(4)(A) SNT by a person under age sixty-five are not subject to the Medicaid transfer of asset penalty provisions. The New York Medicaid agency took the position that (d)(4)(A) SNTs are not excluded from post-eligibility determinations such as how much income one must contribute towards the cost of his care.
The District Court's ruling in favor of the New York Medicaid agency was upheld by the U.S. Court of Appeals for the Second Circuit. The court held that, to the extent that an individual can assign his income directly into a (d)(4)(A) SNT and it is not directly received by the beneficiary of the (d)(4)(A) SNT, the income should not be countable by Medicaid. This would most likely occur when a Medicaid recipient assigns his or her interest or dividend income to his or her (d)(4)(A) SNT – or the Medicaid recipient is awarded monthly annuity payments or similar periodic payments as part of the settlement of a lawsuit and the Medicaid recipient assigns such payments to the Trustee of his or her (d)(4)(A) SNT. The assignment of these types of payments by the Medicaid recipient will not be subject to the Medicaid transfer of asset penalty provisions since transfers to a (d)(4)(A) SNT by someone under age sixty-five are exempt.
Unfortunately, the sole source of income for many Medicaid recipients is SSDI, which is not assignable. A Medicaid recipient should not have a significant amount of interest or dividend income since he or she is generally permitted to have no more than $2,000 in countable resources. This ruling clarifies that the Medicaid recipient with a (d)(4)(A) SNT who is having his or her nursing home cost paid for by Medicaid cannot use the (d)(4)(A) SNT to shelter his or her Social Security income from the requirements to make share of cost payments to the nursing home.