What is a Special Needs Trust and What is Its Purpose by homers

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									I. Fundamentals of Special Needs Trusts
A. What is a Special Needs Trust and what is its Purpose?
What is the     A Special Needs Trust is a trust established for the benefit of an individual
Purpose of a    with a serious mental or physical disability who is receiving needs-based
Special Needs   public benefits. These benefits may include, among others, governmental
Trust?          medical insurance through Medicaid (AHCCCS in Arizona), Medicaid long-
                term care benefits (ALTCS in Arizona), or Supplemental Security Income
                payments. The trust is typically drafted in a manner to ensure that the trust
                assets will not be deemed to be an available resource under these public
                benefits programs. The trust makes it clear that the purpose of the trust is to
                provide for the supplemental needs of the beneficiary that are not covered by
                government welfare programs, (which only cover the beneficiary‟s most
                basic needs), and in general to enhance the beneficiary‟s quality of life. For
                example, the trust can pay for supplemental habilitation, long-term care,
                education and recreation.

                The trust may be either a “grantor” or “non-grantor” trust. (Note: we are not
                necessarily following the Internal Revenue code definitions!) The federal
                and state law that applies to each of these kinds of trusts is very different and
                therefore, it is important for the planner to determine the source of the funds
                for the trust. If the disabled person‟s own funds are used to fund the trust, it
                is a “grantor trust”. The most common source of funding for the “grantor
                trust” is a personal injury settlement award, where the settlement funds are
                insufficient without the public benefits to pay for a lifetime of care needs for
                the injured/disabled person. In addition, unfortunately, sometimes a grantor
                special needs trust is required to shelter funds inherited directly by the
                disabled person due to poor planning, to ensure that the person does not lose
                their public benefits.

                If someone else is establishing and funding the trust with their own funds for
                the benefit of the disabled person, the trust is a “non-grantor trust”. The most
                common source of funding for the “non-grantor trust” is through the estate of
                a deceased parent of a disabled child, when the parent has set up the trust in
                advance as part of their estate plan.

                The laws regarding the availability of resources and the treatment of
                distributions from the “grantor trust” are generally much harsher than for the
                “non-grantor trust”. However, care must be taken in drafting in either case to
                ensure that the intent is clear and that eligibility for the applicable public
                benefits programs is retained or achieved.
                                                                         Continued on the next page
A. What is a Special Needs Trust and what is its Purpose? (continued)
What is the     It should be noted that the administration of these trusts to ensure continuing
Purpose of a    eligibility can be as, if not more, complex than the drafting of the trust.
Special Needs   Therefore, legal counsel is frequently utilized even after the trust has been
Trust? –        drafted to:
continued           1. Seek court approval of the trust, if necessary;
                    2. Advise the client with regard to reporting/accounting requirements to
                       the court and the public benefits programs; and,
                    3. Advise the client about how trust distributions can be made without
                       disqualifying the beneficiary from his public benefits.

                Legal practice in this area is considered highly specialized due to the
                complexity of the eligibility rules of the public benefits programs pertaining
                to the establishment and maintenance of special needs trusts.




                                            2
B. What are the Various Types of Public Benefits that Can Be Protected with
a Special Needs Trust?
Public Benefits   Public benefits that can be protected by appropriately-drafted grantor or non-
That Can Be       grantor special needs trusts include:
Protected by
                        Supplemental Security Income (cash benefit)
Appropriately-
Drafted                 Medicaid (AHCCCS in Arizona) (medical insurance)
Grantor or
                        Medicaid long-term care (ALTCS in Arizona) (long-term care
Non-Grantor
                         coverage)
Special Needs
Trusts

Supplemental      Supplemental Security Income, or “SSI”, is a needs-based cash benefit of the
Security          Social Security Administration for individuals who are disabled, blind or
Income (SSI)      over the age of 65.

                  In order to qualify for SSI, an individual must:
                  1.    Be over the age of 65, disabled or blind: Disability for a sighted adult
                        is defined under 20 CFR §404.1505 as “the inability to engage in any
                        substantial gainful activity by reason of any medically determinable
                        physical or mental impairment which can be expected to result in death
                        or which has lasted or can be expected to last for a continuous period of
                        not less than 12 months.”       In the case of children, according to the
                        Social Security Handbook “for purposes of entitlement to SSI disabled
                        child benefits, an individual under age 18 is considered disabled if he or
                        she has any medically determinable physical or mental impairment(s)
                        which results in marked and severe functional limitations, and which
                        can be expected to last for a continuous period of not less than 12
                        months. No individual under the age of 18 who engages in substantial
                        gainful activity can be considered disabled.” There are different rules
                        for determining disability for individuals who are statutorily blind.
                        Statutory blindness is defined as “central visual acuity of 20/200 or less
                        in the better eye with the use of a corrective lens.” Individuals who are
                        statutorily blind do not have to be unable to perform substantial gainful
                        activity and there is no time requirement for the blindness.
                                                                          Continued on the next page




                                               3
B. What are the Various Types of Public Benefits that Can Be Protected with
a Special Needs Trust? (continued)
    Supplemental       2.   Have income under 100% of the Federal Benefit Rate (In 2005, $579
    Security                for a single individual, $869 for a couple): SSI defines income as
    Income (SSI) –          “anything received by an individual that can be used to obtain food,
    continued               clothing or shelter.” (20 CFR §416.1102)1 The first $20 of unearned
                            income is disregarded in the eligibility determination. After the
                            unearned income disregard is applied, every dollar of unearned income
                            received by an SSI recipient reduces the SSI benefit by $1.00. Effective
                            07/01/04, interest and dividends do not count in the income eligibility
                            determination. (42 USC §1382a(b)(23))
                            Example 1: If an SSI recipient receives the maximum monthly SSI
                            benefit of $579 and receives a cash gift of $50, his SSI benefit would be
                            reduced to $549.
                            Example 2: If an SSI-eligible individual receives Social Security
                            retirement in the amount of $230 per month and has no other income,
                            the SSI benefit would be $369.
                            Earned income also affects SSI cash benefits, but unlike unearned
                            income, the reduction is not dollar for dollar. SSI looks at the gross
                            earned income amount (exception: for self-employment, net income is
                            used) and applies additional deductions, if applicable, in the following
                            order:
                             1.   Student Child Earned Income Deduction (Up to $1,410 per
                                  month, but not more than $5,670 per year in 2005) (20 CFR
                                  §416.1112(c)(3))
                             2.   The $20 disregard unless already applied against unearned
                                  income, (20 CFR §416.1112(c) and §416.1124(c))
                             3.   $65 Work Expense Deduction (20 CFR §416.1112(c)(5))
                             4.   Impairment-Related Work Expenses (IRWE): The reasonable
                                  cost of certain impairment-related services and items that a person
                                  with a disability needs in order to work may be allowed as a
                                  deduction from earned income, even if those items and services
                                  are also needed for normal daily activities. The deduction cannot
                                  be applied if the disabled person is paying the expense in-kind (by
                                  performing a service or giving food, clothing or shelter) or if the
                                  expense could be, has been, or will be paid by any other source
                                  such as Medicare, Medicaid, other insurance or another
                                  individual. (20 CFR §416.1112(c)(6) and §416.976)
                                                                                   Continued on the next page

1
  The Social Security Administration has proposed a rule that would eliminate clothing from the definition of
income. SSA has indicated that this rule is likely to be approved and implemented by the end of 2004.


                                                      4
B. What are the Various Types of Public Benefits that Can Be Protected with
a Special Needs Trust? (continued)
Supplemental        5.   One-half of the remainder (20 CFR §416.1112(c)(7))
Security            6.   Blind Work Expenses (BWE): Ordinary and necessary expenses
Income (SSI) –           needed by a blind individual in order to work may be allowed as a
continued                deduction from earned income. Allowable expenses may include
                         transportation to and from work, including guide dog purchase
                         and upkeep, computer training or other job improvement training
                         and items that enhance job performance, such as a reader, Braille
                         instruction, meals consumed at work, and even FICA and self-
                         employment taxes. (20 CFR §416.1112(c)(8))
                    7.   Any income used to fulfill a Plan to Achieve Self-Support
                         (PASS), a self-financed plan to return to gainful employment
                         pursuant to §1612(b)(4)(A) and (B) of the Social Security Act.
                         (See also 20 CFR §416.1112(c)(9), §416.1124, and §416.1180).

                   If an SSI recipient receives food, clothing or shelter from someone else,
                   Social Security considers this “in-kind support and maintenance”
                   (ISM). “Shelter” includes expenses for rent, mortgage, property taxes,
                   fuel, utilities, water, sewerage, and garbage collection services (20 CFR
                   §416.1130(b)). ISM is treated as income to the recipient in the month
                   received and can reduce the monthly SSI benefit amount. If the ISM
                   includes both food and shelter, the SSI benefit will be reduced by the
                   value of the one-third reduction (VTR), which is 1/3 of the maximum
                   SSI benefit amount plus $20 ($213 in 2005), regardless of the actual
                   value of the ISM (20 CFR §416.1131). Otherwise, the SSI benefit is
                   reduced by the lesser of the actual proven value of the ISM and the
                   presumed maximum value (PMV), which is 1/3 of the maximum SSI
                   benefit amount plus $20 ($213 in 2005) (20 CFR §416.1140).
                                                                    Continued on the next page




                                          5
B. What are the Various Types of Public Benefits that Can Be Protected with
a Special Needs Trust? (continued)
Supplemental          Example 1(PMV): An individual receiving the full SSI benefit of $579
Security              has a special needs trust, which is excluded as a resource. The trust
Income (SSI) –        now begins making a disbursement each month directly to the electric
continued             company to pay the individual‟s electric bill. SSI considers this ISM
                      and applies the PMV of $213 to reduce the SSI payment to $366;
                      however, the individual provides proof that the actual disbursement is
                      only $100 per month, so the SSI payment is reduced by $80 ($100 ISM
                      minus the $20 general income deduction) instead of the PMV, making
                      the SSI payment $499.

                      Example 2 (VTR): A disabled adult receiving the full SSI benefit of
                      $579 living in her parents‟ home does not pay rent or pay for food and
                      does not contribute toward the household operating expenses. Since
                      she gets both food and shelter from someone living in the household,
                      SSI deducts the VTR, a full $213, regardless of the actual value of the
                      ISM, so the SSI payment is reduced to $366. However, she could be
                      eligible for the full SSI benefit if she begins making payments to her
                      parents for her food and shelter.

                 3.   Have resources under $2,000 (single individual) or $3,000 (married
                      couple): Certain resources, such as the home, automobile (in most
                      circumstances) and household goods and personal effects do not count.

                 For SSI purposes, the income and resources of people who are responsible
                 for the welfare of an individual are considered in determining the eligibility
                 and payment amount for SSI in a process called “deeming”. “Responsible
                 relatives” include a spouse, or the parents, in the case of a minor child. The
                 resources and income of person sponsoring an immigrant may also be
                 deemed available to the immigrant applicant. Deeming is an important
                 concept for two reasons. First, the receipt of a personal injury award by the
                 client may affect that client‟s child‟s or spouse‟s SSI benefits and thus their
                 AHCCCS benefits. Second, the assets and income of the client‟s parent or
                 spouse may affect the client‟s eligibility for benefits. The calculations for
                 determining the amount of deemed income and resources are complex and
                 differ depending on the relationship of the parties involved. The basic
                 deeming steps can be found at 20 CFR §416.1160(c) (See Exhibit A for
                 parent-to-child and spouse-to-spouse deeming worksheets)

                 Individuals who are SSI eligible are automatically eligible to receive
                 Medicaid medical insurance through the Arizona Health Care Cost
                 Containment System (AHCCCS).




                                             6
B. What are the Various Types of Public Benefits that Can Be Protected with
a Special Needs Trust? (continued)
Arizona Health   Medical insurance can be a very important benefit for a severely mentally
Care Cost        and/or physically disabled individual, because he or she may not be eligible
Containment      for private medical insurance due to a preexisting medical condition.
System           Fortunately, the AHCCCS medical insurance programs base eligibility on
(AHCCCS)         income rather than a resource test, with the exception of insurance linked to
                 SSI or Arizona Long Term Care Benefits (see below), and the AHCCCS
                 Medical Expense Deduction program. Therefore, with the exceptions
                 named, if the individual has his own funds, but limited fixed or earned
                 income, the individual will not lose his AHCCCS medical insurance.
                 Interest and dividends do not count in the income eligibility determination
                 (42 USC §1382a(b)(23)); however, distributions made from a trust to or for
                 the benefit of an AHCCCS recipient may affect income eligibility for
                 AHCCCS programs. (See Exhibit B for Federal Poverty Levels)

                 In order to qualify for AHCCCS health insurance, individuals must meet the
                 following general eligibility requirements:
                 1. Valid application: The request for benefits must be submitted on an
                    official AHCCCS form and be signed by the appropriate individual.
                 2. Residency: The individual must be a current resident of Arizona with
                    the intent to remain permanently or indefinitely.
                 3. Citizen/Immigration status: The individual must be a U.S. citizen or a
                    Medicaid-qualified legal immigrant.
                 4. Social Security Number: The individual must have a verified Social
                    Security Number or must apply for a Social Security Number.
                 5. Potential benefits: The individual must take necessary actions to obtain
                    all potential income to which he or she may be entitled.
                 6. Assignment of third-party liability: The individual‟s rights to any
                    medical insurance coverage are assigned to AHCCCS to ensure that
                    AHCCCS is the payor of last resort.
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                                             7
B. What are the Various Types of Public Benefits that Can Be Protected with
a Special Needs Trust? (continued)
Arizona Health The medical insurance provided by AHCCCS is managed care and therefore
Care Cost      choice in providers is limited. However, the coverage is substantial and
Containment    includes, but is not limited to, the following:
System                 Doctor‟s visits                   Dialysis
(AHCCCS) –             Specialist care                   Pregnancy care
continued              Medical transportation            Podiatry services
                       Prescriptions                     Immunizations
                       Lab and x-rays                    Physical exams
                       Hospital services                 Behavioral health
                       Emergency care                    Family planning
                An individual can qualify for medical insurance through AHCCCS in any of
                the following ways:
                     SSI-related: If an individual qualifies for SSI, he or she is
                      categorically eligible for AHCCCS medical insurance. (42 CFR
                      §435.120)
                     Arizona Long Term Care System (ALTCS)-related: If an individual
                      qualifies for Arizona Long Term Care benefits (see below), he or she
                      will also receive full AHCCCS “acute care” medical insurance
                      coverage.
                     Supplemental Security Income Medical Assistance Only (SSI MAO)
                      and AHCCCS Care: An individual can qualify for AHCCCS medical
                      insurance if he or she has income under 100% of the Federal Poverty
                      Level, currently $776 for an individual. There is no resource limit.
                      (AAC § R9-22-1501 through §R9-22-1505)
                                                                    Continued on the next page




                                           8
B. What are the Various Types of Public Benefits that Can Be Protected with
a Special Needs Trust? (continued)
Arizona Health
Care Cost          Medical Expense Deduction (MED):           An individual who has
                    catastrophic medical expenses can qualify for AHCCCS medical
Containment
                    insurance if his or her income is under 40% of the Federal Poverty
System
                    Level after allowable medical expenses and SSI-related deductions are
(AHCCCS) –
                    applied. The applicant or other household member must be
continued
                    responsible to pay the medical expenses in order to allow deduction.
                    Resources must be under $100,000, including home equity, with no
                    more than $5,000 being liquid assets. (AAC §R9-22-1427 through
                    §R9-22-1432)
                     The Medical Expense Deduction program allows a three-month
                     certification period for each approved application. This means that an
                     eligible individual cannot be discontinued from the program for the
                     first three months after the approval. However, from the time that the
                     individual is approved for the Medical Expense Deduction program,
                     AHCCCS is responsible for paying his medical bills, therefore, those
                     bills can no longer be allowed as a deduction from income after the
                     three-month certification period. As a result, the individual is usually
                     discontinued from the program for income exceeding the limit upon
                     the expiration of the three-month certification period.
                   AHCCCS Freedom to Work (FTW): A disabled working individual
                    under age 65 who does not qualify for any other Medicaid programs
                    and is paying Social Security and Medicare taxes can qualify for
                    AHCCCS medical insurance if he or she has earned income below
                    250% of the Federal Poverty Level. The unearned income of the
                    applicant and the income of responsible relatives are not counted in
                    the income eligibility determination. There is no resource limit. An
                    FTW-eligible individual may also receive ALTCS benefits if he or she
                    meets the medical criteria. Acute care FTW recipients and FTW
                    recipients receiving ALTCS services at home are required to pay a
                    premium of up to $35 per month. ALTCS FTW recipients who reside
                    in a medical institution are required to pay “share of cost” instead of a
                    premium, but are allowed to keep a personal needs allowance equal to
                    50% of their gross earned income (Ticket to Work and Work
                    Incentives Improvement Act of 1999 (PL 106-170), 20 CFR §411,
                    ARS §36-2929 and §36-2950, AAC §R9-28-1301 through §R9-28-
                    1324)
                                                                     Continued on the next page




                                           9
B. What are the Various Types of Public Benefits that Can Be Protected with
a Special Needs Trust? (continued)
Arizona Health
                   AHCCCS Benefits for Families/Parents/Children: There are several
Care Cost
                    different medical insurance programs for families with children:
Containment
System              1. AHCCCS for Families with Chidren (AFC/1931): Families that
(AHCCCS) –             include deprived dependent children can be eligible for AHCCCS
continued              medical insurance if family income after budgeting is below 100%
                       of the Federal Poverty Level. A child is considered deprived if at
                       least one parent is absent, deceased, unemployed or
                       underemployed. The child must be living in the home of an adult
                       specified relative. Eligibility is determined using the income of
                       the following individuals if residing in the household:
                         Parent(s) of the dependent child
                         All dependent children of that parent
                         Spouse of the parent
                         Additional parent of dependent children
                         All dependent children of the additional parent
                        There is no resource limit. (42 USC §1396u-1, §1931 of the
                        Social Security Act, AAC §R9-22-1420)
                    2. Sixth Omnibus Budget Reconciliation Act (SOBRA): Individuals
                       who are under age 19 or pregnant whose families are determined
                       ineligible for 1931 due to excess income may be eligible for
                       AHCCCS medical insurance under SOBRA. Income limit ranges
                       from 100% to 140% of the Federal Poverty Level. The income
                       limit is determined by the number of responsible relatives, whether
                       the applicant is pregnant and the number of expected babies. (See
                       Exhibit C) Eligibility is determined using only the income of the
                       applicant and responsible relatives. When an applicant child
                       marries, the parents are no longer considered responsible relatives.
                       There is no resource limit. (PL 98-270, AAC §R9-22-1421)
                    2. Transitional Medical Assistance (TMA): Families discontinued
                       from 1931 coverage due to excess income can remain eligible for
                       AHCCCS medical insurance if the family income is under 185%
                       of the Federal Poverty Level. There is no resource limit and a 12-
                       month limitation on the period of coverage.
                                                                    Continued on the next page




                                         10
B. What are the Various Types of Public Benefits that Can Be Protected with
a Special Needs Trust? (continued)
Arizona Health         3. KidsCare: For individuals who are under age 19 who are
Care Cost                 determined to be ineligible under Medicaid and have no creditable
Containment               health insurance. KidsCare is the State Children‟s Health
System                    Insurance Program (SCHIP) under Title XXI of the Social
(AHCCCS) –                Security Act and is not a Medicaid program. The income limit is
continued                 200% of the Federal Poverty Level. The total gross income of all
                          household members linked by marriage or children in common is
                          considered in the eligibility determination. All income received
                          by household members is counted except for income excluded
                          under 20 CFR §416, Appendix to Subpart K. There are no income
                          deductions under this program. There is no resource limit.
                       4. AHCCCS Health Insurance for Parents: Uninsured parents of
                          KidsCare- or SOBRA-eligible children automatically qualify for
                          AHCCCS medical insurance as long as they meet general
                          eligibility requirements.
                 For family-related programs other than KidsCare and AHCCCS Health
                 Insurance for Parents of KidsCare-eligible children, there are various
                 deductions from income used in determining eligibility.




                                           11
B. What are the Various Types of Public Benefits that Can Be Protected with
a Special Needs Trust? (continued)
Arizona Long   The Arizona Long Term Care System (ALTCS) is Arizona‟s Medicaid long-
Term Care      term care program. ALTCS is a division of AHCCCS. ALTCS provides
System         long-term care services and AHCCCS “acute care” medical coverage to
(ALTCS)        individuals who are over age 65, blind or disabled, qualify medically as
               determined by the Pre Admission Screening (PAS), and who meet the
               financial criteria.
               In addition to providing AHCCCS Medical Insurance, ALTCS also provides:
                    Nursing Home Care provided in a licensed nursing facility,
                       Intermediate Care Facility for the Mentally Retarded (ICFMR), a
                       freestanding hospice, a residential treatment facility for person under
                       21 or a psychiatric hospital for persons age 65 or older;
                    Home and Community-based Services (HCBS) provided in the home.
                       These in-home services are intended to help you to remain in your
                       home. HCBS services include, but are not limited to:

                          Home Health Nursing               Mental Health Services
                          Habilitation                      Homemaker Services
                          Adult Day Care                    Attendant Care
                          Personal Care                     Respite Care
                          Medical Transportation            Home Health Aids
                          Home Delivered Meals              Hospice

                      Home and Community-based Services (HCBS) may also be provided
                      in a supervised alternative residential setting, such as an Adult Foster
                      Care Home, Assisted Living Home, Group Home or a Level I, II, or
                      III Behavioral Health Center.
                                                                        Continued on the next page




                                           12
B. What are the Various Types of Public Benefits that Can Be Protected with
a Special Needs Trust? (continued)
Arizona Long   Medical Eligibility:
Term Care      In order to be medically eligible, an applicant must be determined to be at
System         risk of institutionalization. The levels of care, from highest to lowest, are as
(ALTCS) –      follows:
continued            1.   Acute level of care: Individuals who are in a hospital, intensive
                          rehab or other acute care unit who are in need of total care.
                          Individuals at this level of care are not eligible for ALTCS.
                     2.   Skilled nursing level of care: Individuals who are in need of care
                          comparable to that received in a nursing facility. (Although
                          someone who needs substantial assistance with his activities of
                          daily living is deemed to be in need of skilled nursing care even
                          though someone less qualified than a nurse could provide the
                          care.)
                     3.   Supervisory level of care: Supervisory care is appropriate for
                          individuals who are able to perform their daily activities with
                          minimal assistance. Children are a good example of supervisory
                          care. A child can perform their daily activities, but needs some
                          direction from the parents. For example, parents may have to tell
                          a child, “Don‟t forget to brush your teeth.” “You have to put on
                          your shoes after you put on your pants.” etc. Individuals at this
                          level of care are not eligible for ALTCS.
                     4.   Independent level of care: Individuals who can perform all of
                          their daily activities without assistance. Individuals at this level
                          of care are not eligible for ALTCS.
               The Pre Admission Screening (PAS) is designed to determine whether the
               applicant is at risk by examining the individual‟s recent functional and
               medical condition. This may be achieved by asking questions of the
               applicant and significant others, reviewing available records and observing
               the applicant‟s behavior during the PAS interview. The PAS criteria are
               different depending on whether the applicant is elderly and/or physically
               disabled (EPD) or developmentally disabled (DD). An individual is
               considered DD if he or she has one or more of the following diagnoses,
               diagnosed prior to the age of 18:
                           Autism,
                           Mental retardation,
                           Seizure disorders,
                           Cerebral palsy, or
                           For individuals under age 6, at risk of having a developmental
                              disability.
                                                                       Continued on the next page




                                           13
B. What are the Various Types of Public Benefits that Can Be Protected with
a Special Needs Trust? (continued)
Arizona Long   EPD PAS criteria (AAC §R9-28-304):
Term Care
System         The EPD scoring threshold for the total of both functional and medical
(ALTCS) –      assessments is 60 points.
continued
               The functional assessment reviews:
                          Activities of Daily Living (ADLs)
                          Continence
                          Vision
                          Orientation to person, place, and time
                          Behavior patterns such as wandering, aggression, self-
                              injuries, suicidal or disruptive

               Activities of Daily Living (ADLs) include:
                Mobility – purposeful movement within the applicant‟s residence
                Transfer – the ability to move between two surfaces i.e. bed, wheelchair,
                  and chair
                Bathing – washing, rinsing, drying body parts, transfer in/out of tub
                Grooming – tending to appearance of hair, teeth, hands/face, nails
                Dressing – putting on and removing articles of clothing
                Eating – putting food and fluids into system
                Toileting – managing elimination of urine and feces

               The medical assessment focuses on:
                Medical condition – determines an applicant‟s medical conditions,
                  including allergies, whether acute, chronic or historical; if these
                  conditions impact ADLs and if medical or nursing treatments are
                  required.
                Services and treatments – identifies all services and treatments an
                  applicant receives or needs.
                Physical measurements, hospitalization history, and ventilator
                  dependency


                                                                    Continued on the next page




                                          14
B. What are the Various Types of Public Benefits that Can Be Protected with
a Special Needs Trust? (continued)
Arizona Long   DD PAS criteria (AAC §R9-28-305):
Term Care
System         The DD scoring threshold for the total of both functional and medical
(ALTCS) –      assessments is 40 points.
continued
               The functional assessment differs by age group.
               Ages 12 and older reviews:
                   Activities of Daily Living (ADLs)
                   Communication skills, including expressive verbal communication
                      and clarity of communication
                   Cognitive abilities, including associating time with an event and
                      action and remembering an instruction
                   Behavior patterns including aggression, verbal or physical
                      threatening, self-injurious behavior and resistive or rebellious
                      behavior.
               Ages 6 through 11 reviews:
                   Activities of Daily Living (ADLs)
                   Communication skills, including expressive verbal communication
                       and clarity of communication
                   Behavior patterns including aggression, verbal or physical
                       threatening, running or wandering away, and disruptive behavior

               Ages 3 through 5 reviews:
                   Developmental milestones that measure functional growth
                   Toileting, dressing and orientation to familiar settings
                   Communication, including clarity of communication
                   Behavior patterns including aggression, verbal or physical
                       threatening, and self-injurious behavior.

               Ages 6 months through 3 years reviews:
                   Developmental milestones that measure functional growth

               Ages 0 through 6 months reviews:
                   No functional assessment is completed, but the assessor includes a
                       description of the child‟s development in the PAS narrative
                       summary.
                                                                 Continued on the next page




                                        15
B. What are the Various Types of Public Benefits that Can Be Protected with
a Special Needs Trust? (continued)
    Arizona Long      The medical assessment focuses on:
    Term Care          Medical condition – determines an applicant‟s medical conditions
    System               whether acute, chronic or historical; if these conditions impact ADLs and
    (ALTCS) –            if medical or nursing treatments are required.
    continued
                       Services and treatments – identifies all services and treatments an
                         applicant receives or needs, including medication.
                       Sensory functioning – identifies whether the applicant is blind, deaf
                       Physical measurements
                       Current placement, ventilator dependency and eligibility for services
                         through DES Division of Developmental Disabilities (DES/DDD)

                      Financial Eligibility:
                      Single individuals: Total gross income must be at or below 300% of the
                      Federal Benefit Rate ($1,692 in 2004, $1,737 in 2005). Effective July 1,
                      2004, interest and dividends are excluded from the income determination
                      pursuant to 42 USC 1382 a(b)(23). 3Countable resources must be below
                      $2,000. Only the applicant‟s income and resources are counted. For a child
                      under age 18, the income and resources of the parents are not considered in
                      the eligibility determination.
                                                                                     Continued on the next page




3
 ALTCS uses the SSI definition of income but has eliminated clothing from the definition in anticipation of the
upcoming SSI rule change


                                                      16
B. What are the Various Types of Public Benefits that Can Be Protected with
a Special Needs Trust? (continued)
Arizona Long   Financial Eligibility, continued:
Term Care      Married individuals:
System
(ALTCS) –         Income: Total gross income must be at or below 300% of the Federal
continued         Benefit Rate ($1,692 in 2004, $1,737 in 2005). A married individual is
                  income eligible if either of the following is true:
                   Half of the combined income of the applicant and spouse is below the
                     income limit, OR
                   The income of the applicant only under “name-on-the-check” rules is
                     under the income limit.
                  (NOTE: Individuals whose income exceeds the limit, but would
                  otherwise be eligible, can be eligible with the creation of an income-only
                  trust if their income is less than the average private pay rate for nursing
                  home care in their home county ($4,188.72 in Maricopa, Pima and Pinal,
                  $3,893.53 in the rest of the state.))
                  Resources: The applicant's spouse may retain half of the total countable
                  resources of both spouses, except that the half retained cannot exceed the
                  maximum of $95,100.00 effective 01/01/05, $92,760 in 2004, and the
                  spouse may keep a minimum of $19,020.00 effective 01/01/05, $18,552
                  in 2004 even if half is less than $19,020.00 effective 01/01/05, $18,552
                  in 2004. In addition to the half that the spouse retains, the applicant is
                  still permitted to retain $2,000.00. Under most circumstances, if both
                  spouses in a marriage are applicants then each is limited to $2,000.00 in
                  resources.

               Certain resources, such as the home, automobile (in most circumstances) and
               household goods and personal effects do not count.




                                          17
B. What are the Various Types of Public Benefits that Can Be Protected with
a Special Needs Trust? (continued)
Other Public   Food stamps: The Food Stamp Program provides low-income households
Benefits       with coupons or electronic benefits they can use like cash at most grocery
               stores to ensure that they have access to a healthy diet. Distributions from a
               trust to or for the benefit of the trust beneficiary are counted as income.
               Pursuant to 7 CFR §273.8(e), funds held in an irrevocable trust are excluded
               from the resource determination only if all of the following criteria are met:
                    The trust is not likely to cease during the certification period and no
                      household member can revoke the trust or change the name of the
                      beneficiary during the certification period;
                    The trustee is either a court, or an institution, corporation or
                      organization which is not under the direction or ownership of any
                      household member, or is an individual appointed by the court who has
                      court imposed limitations on the use of the funds which meet the
                      requirements in this section;
                    Trust investments made on behalf of the trust do not directly involve
                      or assist any business or corporation under the control, direction or
                      influence of a household member; AND
                    For a grantor trust, the trustee uses the funds solely to make
                      investments on behalf of the trust or to pay the educational or medical
                      expenses of any person named by the household creating the trust, OR
                      the trust is a non-grantor trust established by a non-household
                      member.
               Temporary Assistance to Needy Families (TANF): TANF provides cash
               assistance and jobs administration services to qualified families that include
               dependent deprived children. Due to an alignment of eligibility criteria,
               Arizona‟s TANF program‟s treatment of trusts and trust income mirrors the
               food stamp rules.
               HUD: The Office of Housing and Urban Development (HUD) provides
               rental assistance and Section 8 housing to qualified families. Revocable
               trusts are counted as a resource. Trusts which are not revocable by or under
               the control of any member of the tenant family are not considered assets
               (HUD Handbook 4350.3, section 3-14). Pursuant to 24 CFR §5.609(a),
               distributions from a trust to or for the benefit of any member of the tenant
               family are counted as income, except that amounts received by the family
               that are specifically for, or in reimbursement of, the cost of medical expenses
               for any family member are not counted as income (24 CFR §5.609(c)(4)).
               Income earned by a trust that is not distributed (e.g. trust income that is
               reinvested) is not counted.
                                                                      Continued on the next page




                                           18
B. What are the Various Types of Public Benefits that Can Be Protected with
a Special Needs Trust? (continued)
Other Public   VA Non-Service Connected Need-Based Payments: Pursuant to 38 USC
Benefits –     §1522, cash benefits that are not related to a service-connected disability
continued      shall be discontinued if it is reasonable that some part of the “corpus of the
               estate” of the veteran be consumed for the veteran‟s maintenance. Pursuant
               to VA ruling VAOPGCPREC 33-97, VA considers that “Assets transferred
               by a legally competent claimant, or by the fiduciary of a legally incompetent
               one, to an irrevocable “living trust” or an estate-planning vehicle of the same
               nature designed to preserve estate assets by restricting trust expenditures to
               the claimant‟s “special needs,” while maximizing the use of governmental
               resources in the care and maintenance of the claimant, should be considered
               in calculating the claimant‟s net worth for improved-pension purposes.”
               This author is uncertain how VA treats non-grantor trusts.




                                           19
C. Advantages and Disadvantages of Special Needs Trusts
Advantages of   The biggest advantage to creating a special needs trust is that it is the only
Special Needs   way to preserve cash over the long term for the beneficiary‟s life-time needs
Trusts          and preserve public benefits at the same time. A special needs trust is
                appropriate when neither public benefits nor the available funds for the
                disabled person are sufficient to meet the beneficiary‟s needs. A special
                needs trust can be utilized in many ways to enhance the quality of life for the
                beneficiary without affecting his AHCCCS/ALTCS eligibility or reducing
                his or her SSI eligibility. For example:
                     A home can be purchased with the trust funds; however, there are
                       issues that must be considered before such a purchase (see
                       Disadvantages, paragraph 3, below).
                     If the disabled person owns a home, improvements and repairs to the
                       home can be made. The trustee could therefore hire a plumber,
                       painter or other contractor to make any necessary repairs to the house.
                       If the trust beneficiary enjoys completing home improvement projects
                       on their own, the trustee could purchase tools for them. The trustee
                       could also use trust funds to hire someone to take care of the lawn,
                       pool, etc., or use trust funds to install a burglar alarm and/or
                       monitoring/response system in the disabled person‟s home.
                     If the disabled person is interested in attending school or taking
                       classes, the trust could pay their tuition, purchase their books or
                       computer and supplies and arrange for transportation with trust funds.
                     If the disabled person enjoys reading, the trustee could purchase
                       books, enroll them in a book club or subscribe to magazines that cover
                       the interests of the disabled person.
                     Trust funds can be used for entertainment purposes such as trips to
                       ballgames, movies, plays, museums and amusement parks.
                       Entertainment also includes the purchase of a television, radio, VCR
                       and tapes, DVD player and movies, CD or sound system and
                       installation of cable or a satellite dish. If the protected person has a
                       hobby, supplies could be purchased related to the hobby. The
                       entertainment items purchased must be for the benefit of the disabled
                       person and must be appropriate to the disabled person’s ability to use
                       the item. It would not be appropriate to use funds from the trust to pay
                       for a trip to Disneyland for the entire family when the disabled person
                       is in a coma and obviously would not be able to enjoy or participate in
                       such a trip, but trust funds could be used for a vacation or to visit
                       friends or relatives (make sure the airline tickets cannot be converted
                       to cash) and the trust could pay for someone other than the person‟s
                       spouse or a parent of a beneficiary under the age of 18 to go with the
                       disabled person on the trip if they are not able to travel alone.
                                                                     Continued on the next page



                                            20
C. Advantages and Disadvantages of Special Needs Trusts (continued)
Advantages of   Allowable trust disbursements, continued:
Special Needs       Trust funds could be used to purchase and maintain a car or other
Trusts –             vehicle for the disabled person if they wish to drive or for bus passes
continued            if they do not want to or cannot drive. Payments for car repairs, gas,
                     oil changes and upkeep may be paid by the trust.
                    Items such as dry cleaning, cleaning supplies, paper products,
                     vitamins, telephones, cell phones, furniture, wall hangings, paintings,
                     bedding, blankets and other items not considered food or shelter could
                     be paid with trust funds.
                    Medical services not covered by insurance or AHCCCS/ALTCS could
                     be paid from trust funds such as dental bills, glasses, prescriptions,
                     physical, occupational or other therapies, massages, chiropractic
                     services, and durable medical equipment such as wheelchairs,
                     walkers, hospital beds, etc.
                    Home care and personal care services not covered by any other
                     program could be paid from the trust such as hair cuts, manicures,
                     companion services, home cleaning services, attendant care, etc.
                     (ALTCS will typically only cover 20 to 40 hours per week of
                     attendant care services.)
                    If the disabled person is in a nursing home, a companion (who is not a
                     relative) could be hired to visit them and take them shopping or to
                     events. If the disabled person cannot directly communicate their
                     needs or wants, it is sometimes helpful to hire an independent case
                     manger to evaluate the person and determine what types of services or
                     programs could benefit the disabled person and enhance their quality
                     of life. Trust funds could be used to pay for this evaluation.
                    Professional fees for services provided by the trustee, attorneys,
                     accountants, financial planners, care managers and other
                     professionals, if related to the trust or to guardianship or
                     conservatorship. The trustee can also charge for his or services as
                     trustee if the trustee is not a professional but the trustee should discuss
                     this with an attorney before making any such distributions.
                                                                        Continued on the next page




                                            21
C. Advantages and Disadvantages of Special Needs Trusts (continued)
Advantages of   Allowable trust disbursements, continued:
Special Needs       The purchase of a prepaid burial plan for the beneficiary that is funded
Trusts –             by an irrevocable life insurance policy or other irrevocable financial
continued            vehicle or a revocable life insurance policy to fund a burial plan for
                     the beneficiary with a face value that does not exceed $1,500 after
                     deducting the value of burial plot items such as the plot, a burial
                     container, perpetual care, and gravesite opening and closing. (Note:
                     ARS §36-2934.01(B)(7)(ii) states that the face value cannot exceed
                     $1,500, but ALTCS MS 906.7.C.3 provides that the equity value after
                     deducting allowable burial plot items must be less than $1,500. In the
                     case of life insurance assigned to fund burial, the cash surrender value
                     is the equity value.)
                    For individuals who are receiving ALTCS and are not receiving SSI,
                     disbursements for food and shelter can be made in amounts that when
                     combined with other income do not exceed the ALTCS income limit
                     (in 2005, $1,737); however, receipts proving how the funds were used
                     must be provided to ALTCS.




                                           22
C. Advantages and Disadvantages of Special Needs Trusts (continued)
Disadvantages   There are a number of downsides to creating a special needs trust:
of Special         1. The up-front costs associated with the creation of the trust: The
Needs Trusts          attorney‟s fees associated with creating the trust must be considered.
                      In addition, in most grantor trust cases, court approval will be
                      required. These considerations can preclude the use of a special needs
                      trust in a case with a very small personal injury award.
                   2. Ongoing costs of managing the trust: If the trust was created by
                      obtaining court approval, annual accountings are normally required.
                      In addition, larger trusts may require the services of a private
                      fiduciary or investment firm to manage the trust funds. Legal services
                      may also be required for the ongoing administration of the trust.
                   3. Restrictions on the use of the funds: Trust distributions for food or
                      shelter are counted as income for both SSI and ALTCS. In addition,
                      distributions made to purchase clothing are counted as income for
                      SSI. For SSI, payments are considered to be in-kind support and
                      maintenance (ISM) and will result in a reduction of the SSI payment
                      by the greater of the actual value of the distribution or 1/3 of the
                      maximum SSI benefit ($213 in 2005). An Arizona statute exists
                      which provides additional restrictions on the use of special needs trust
                      funds (see section II B of this outline). The trust funds cannot be
                      used to make gifts or loans and the trust must pay the monthly share
                      of cost assessed by ALTCS against any income assigned to the trust
                      (except structured settlement annuities). The statute also requires that
                      a home or a car purchased with trust funds must be titled to the trust
                      or the trust must hold a lien on the home or car. This is a problem
                      because assets titled to the trust are subject to recovery by AHCCCS,
                      whereas assets outside of the trust are not subject to a claim if the
                      individual is under the age of 55. In order to avoid this, the home or
                      vehicle would need to be purchased in the disabled person‟s name
                      before the trust is funded. ARS §36-2934.01(J) provides that any
                      violation of the trust invalidates the trust and the trust assets are
                      considered available to the beneficiary, without regard to whether the
                      violation was intentional or due to fraud on the part of the trustee.
                   4. AHCCCS reporting requirements for changes in trust disbursements:
                      When the trust is first created and each year thereafter, AHCCCS
                      requires that the trustee indicate on the Special Treatment Trust
                      Anticipated Disbursements Form (form DE-312) all of the income to
                      be received by the trust and the disbursements to be made from the
                      trust for the next year. When the trust is first created, the trustee must
                      also sign the Acknowledgement of Responsibilities as Trustee for a
                      Special Treatment Trust (form DE-522), which lists the trust dos and
                      don‟ts that are delineated in the statute.(See attached Exhibit D.)
                                                                        Continued on the next page



                                            23
C. Advantages and Disadvantages of Special Needs Trusts (continued)
Disadvantages    AHCCCS reporting requirements, continued:
of Special             If a disbursement needs to be made that has not previously been
Needs Trusts –         disclosed to AHCCCS, the trustee will need to submit a new
continued              Anticipated Disbursements form to AHCCCS and will need to wait
                       45 days after the submission of the new form before making the
                       disbursement. If the disbursement must be made on an emergency
                       basis, for example if the air conditioner in the beneficiary‟s home
                       breaks down in the middle of summer, the trustee can make the
                       disbursement, but must submit a new disbursement form that includes
                       the emergency disbursement within 30 days after disbursing the
                       funds. If the proposed emergency disbursement is in any way
                       questionable as to whether it benefits the beneficiary, the trustee
                       should contact the AHCCCS policy unit directly to find out how
                       AHCCCS will treat the disbursement before disbursing the funds.
                    5. AHCCCS/ALTCS recovery of trust funds: Upon the death of the
                       disabled person or the termination of the trust, AHCCCS/ALTCS has
                       a claim upon the remaining trust funds up to the cost that the agency
                       incurred in providing care to the disabled person during his or her
                       lifetime.




                                           24
II. Creating Special Needs Trusts
A. Determining if a Special Needs Trust is Right for Your Client’s Needs
Deciding          The following are some of the factors to consider in determining whether a
Whether a         special needs grantor trust is appropriate:
Grantor              1. Importance of medical insurance: Does the individual have, or can
Special Needs           he or she obtain, private medical insurance? If not, does the
Trust is                individual have sufficient assets/income so they can self-insure?
Appropriate             What are the medical needs of the individual (the greater the need,
for the Client          the greater the need for insurance)?
                     2. Need for long-term care: If long-term care expenses will be
                        significant, the public benefits become important because the money
                        will be depleted rapidly on care without a trust. If care is being
                        provided in the home, the trust is much more effective because funds
                        can be used to supplement home care provided by ALTCS (typically
                        ALTCS pays for only 20 to 40 hours per week). If care is provided in
                        a long-term care facility, possible uses for trust funds are very
                        limited.
                     3. Importance of providing inheritance: This is not normally a
                        significant consideration, but it should be remembered that with self-
                        settled trusts, ALTCS has a claim against the trust upon the
                        individual‟s death.
                     4. Amount of available funds: With extremely substantial assets, it may
                        not be necessary to rely on public benefits. With only a small amount
                        of money, the costs and hassle of establishing and maintaining the
                        trust may not be worth it, and it may be simpler just to “spend down”
                        the money.

Alternatives to   In some cases, “spending down” the assets may be more appropriate.
Establishing a    Common spend down options include the following:
Grantor
                      Transfers
Special Needs
Trust                 Purchasing excluded resources
                      Purchase of a single premium immediate annuity




                                            25
A. Determining if a Special Needs Trust is Right for Your Client’s Needs
   (continued)
Example 1      The client was convicted for a drug possession charge and sentenced to
               prison. During his imprisonment, he was severely beaten by prison guards
               resulting in the client becoming a quadriplegic, totally dependent on others
               for all of his care needs, and was permanently confined to a wheelchair.
               Although he had a shunt in his brain, he remained cognitively intact for the
               most part. He received a settlement in the total amount of $452,411 (net to
               him) plus an annuity paying him a monthly benefit of $6,630 for life with 15
               years guaranteed. The settlement funds were placed in a special needs trust
               approved by the court and the annuity was also made payable to the special
               needs trust. After a period of medical confinement for rehabilitation,
               ALTCS/AHCCCS provided up to 40 hours a week of attendant care in an
               apartment as well as full medical coverage. Cash disbursements could be
               made directly to the client because he was entitled to a personal needs
               allowance in the amount of $1,692 per month (2004) under the ALTCS
               program, without it affecting his income eligibility or share of cost. These
               funds were used to pay for the apartment.

               Although the client was originally on the SSI program, it was determined
               that maintaining his SSI benefit was not worth it in view of his need for
               additional cash, without the restrictions on distributions that would be
               required by the SSI program. Eventually, a wheelchair van as well as a nice
               home was purchased for the client where he resided until his death. The
               home was purchased in the name of the trust instead of outside of it and
               therefore was subject to estate recovery claims. The client remained on the
               ALTCS program with full medical coverage until his death.

               Without the ALTCS program, his personal injury funds would have been
               rapidly depleted. The trust allowed him to address his supplemental needs
               not being provided for by the ALTCS program. In this case, the special
               needs trust worked perfectly. Even after the AHCCCS estate recovery claim
               was paid, there were significant assets that were passed on to his death
               beneficiary, including several years‟ payments remaining from an annuity.
               In this case, the fact that the home was in the trust didn‟t affect the recovery,
               because there were sufficient other funds to pay the claim.




                                            26
A. Determining if a Special Needs Trust is Right for Your Client’s Needs
   (continued)
Example 2      The client was permanently and totally disabled as a result of complications
               associated with an epidural while she was giving birth. Although the baby is
               healthy, the mother remains completely and totally disabled. She is living at
               home with 24-hour nursing. A beautiful home has been purchased and the
               client‟s mother and father assist with the care although 24-hour nursing is
               required. The family did not opt for AHCCCS/ALTCS coverage in view of
               the large nature of the award, despite the client‟s extreme care needs. The
               original award received by the client was an annuity that pays $24,000 per
               month for life with 8 ½ years guaranteed as well as a lump sum in the
               amount of $370,860.06. However, in one year early on the medical and
               other administrative expenses in the case were $442,224.07. The income
               was only $315,662.73 and therefore the funds were depleted in the amount of
               $126,562. The geriatric care manager had to attempt to find ways to cut
               costs. Fortunately, there were additional claims against other defendants and
               there is now approximately two million dollars in the conservatorship.
               Initially, the thought was that the allocation of any additional settlements
               reached based on outstanding claims would be primarily made to the parents
               or the baby due to the lost of consortium. However, in view of the
               misprojection in the life care plan and the extraordinary costs, the client
               needed the additional funds.

Example 3      During birth, a child suffered from oxygen deprivation while stuck in the
               mother‟s pelvis. Due to malpractice of the physician during the client‟s
               birth, the client received permanent injuries to her shoulder as well as
               residual seizures, some minimal neurological impairment and has emotional
               problems. A settlement in the amount of $1,475,000 was received, which
               netted approximately $900,000 to the client. The personal injury attorney
               wanted this author to determine whether a special needs trust should be
               established for the disabled child. The child could not qualify for SSI
               because her parents had too much in income and resources, nor did she meet
               the ALTCS medical eligibility requirements. In addition, the child was
               medically insured though the parent‟s employment.
                                                               Continued on the next page




                                          27
A. Determining if a Special Needs Trust is Right for Your Client’s Needs
   (continued)
Example 3 –     The parents were able to care for the child at home with minimal respite and
continued       the child has been going to school. For these reasons, a special needs trust
                was deemed not to be necessary at this particular time. A home for the
                disabled child and her family has been purchased through the child‟s
                conservatorship. However, the bank and the parents had disputes over the
                upkeep of the home and the amount of money the parents should pay as a
                contribution for rent, utilities and upkeep of the home. Their disputes have
                finally been largely resolved. It is possible that when the child reaches the
                age of eighteen, she will not be able to work and will qualify for SSI and
                AHCCCS. If she does not continue to live with her parents, she might also
                have a need for ALTCS benefits if she can medically qualify. For these
                reasons, a special needs trust might be considered when the child reaches age
                eighteen.

Deciding        When an individual is establishing a non-grantor trust for the benefit of a
Whether a       disabled child, for example in an estate plan, , it is almost always a good idea
Non-Grantor     to establish a trust. If the assets are left outright to the individual, a
Special Needs   conservatorship may be required, and he or she may lose needs-based on
Trust is        public benefits. Even if the disabled person doesn‟t need the benefits now,
Appropriate     the funds could prevent them from qualifying at a future date when the
                benefits are needed.

                Some parents believe for these reasons that it is simpler to just disinherit the
                child. The parent assumes that the government will take care of the child‟s
                needs, and that if anything else is needed, other family members will pay for
                it. However, no one knows what the future holds for governmental benefits,
                and even now the governmental programs pay for only the most basic needs.
                A trust fund can be used to enhance and improve the disabled child‟s quality
                of life. In addition, there are no guarantees that other family members will
                “step up to the plate.” They may not have the interest that the parent assumed
                they would have, or the financial ability to provide for the disabled person‟s
                needs.

                A non-grantor special needs trust for a special needs child is a “no-brainer,”
                except in a case where there is so much money the disabled child can “self
                insure.” The more difficult question is how much of one‟s estate to leave in
                the trust. This depends primarily on the needs of the child, but obviously the
                other children must be taken into account also. Some parents want to leave
                more to the disabled child on the theory that the child can‟t provide for him-
                or herself. Other parents can‟t envision how large sums of money can be
                spent on a disabled child (part of that problem can be remedied through
                education of the parent about creative ways to use the funds). Therefore, how
                much to leave to the trust should be thoroughly discussed.


                                            28
B. The Various Types of Special Needs Trusts and How to Establish Them
Establishing a   Once it has been determined that a special needs trust is appropriate for the
Special Needs    client, the trust, whether grantor or non-grantor, should be established with
Trust            the following in mind:
                     If the trust provides for mandatory cash distributions, distributions
                      may affect income eligibility for the public benefits programs (POMS
                      SI 01120.200(D)(1)(a), and may increase the “share of cost” payment
                      that has to be made by the ALTCS recipient.
                     In Arizona, trusts which grant the trustee full discretion over the
                      distribution of the funds will not usually cause disqualification,
                      (POMS SI 01120.200(B)(10), SI 01120.200 (D)(1)(b), ALTCS MS
                      803.04.E) but it is a good idea to include language which limits the
                      trustee‟s discretion to distributions for the beneficiary‟s
                      special/supplemental needs because it clarifies the intent, and insulates
                      the trust in the event legal standards in Arizona change in the future.
                      In addition, assets in discretionary support trusts have been held to be
                      available resources in other states (Clifton B. Kruse, Jr., Third-Party
                      and Self-Created Trusts: Planning for the Elderly and Disabled
                      Client, Third Edition, Chicago, 2001, page 55) Therefore, if the
                      disabled client moves out of Arizona, it may become an issue.
                     For a non-grantor trust, the trust should contain a spendthrift provision
                      to provide creditor protection.




                                            29
B. The Various Types of Special Needs Trusts and How to Establish Them
Grantor Trusts Generally, when an individual‟s own assets are used to fund a trust, any
               portion of the trust which can be distributed to the grantor under any
               standard, even if the trustee has full discretion to make supplemental needs
               distributions, is counted for Medicaid (ALTCS & AHCCCS) eligibility (42
               USC §1396p(d)(3)). 42 USC §1396p(d)(4) provides for two exceptions to
               this rule:
                 Trusts for disabled individuals under age 65 (42 USC §1396p(d)(4)(A)):
                     1. The trust must contain only the assets of the individual.
                     2. The individual must be under the age of 65 and disabled pursuant to
                        42 USC §1382c(a)(3). Disability can be determined by the
                        following:
                          Eligibility for Social Security disability as determined by the
                             Disability Determination Services Administration (DDSA)
                          ALTCS Pre-Admission Screening
                          A diagnosis of Serious Mental Illness (SMI) determined by the
                             Arizona Department of Health Services (ADHS)
                     3. The trust must be established by one of the following:
                         A parent
                         A grandparent
                         A legal guardian of the individual
                         A court
                     4. The trust must provide that upon termination of the trust or the death
                        of the individual (whichever comes first), the state will be repaid
                        from the trust for the cost that it has incurred in providing medical
                        benefits to the individual during the individual‟s lifetime. (Federal
                        statute actually only says upon death, but State law (ARS 36-2934.01
                        (A)(1)) includes termination).
                 See attached Exhibit E for sample trust.
                                                                        Continued on the next page




                                             30
B. The Various Types of Special Needs Trusts and How to Establish Them
   (continued)
Grantor Trusts Pooled trusts (42 USC §1396p(d)(4)(C)):
– continued       1. The trust must be established and managed by a non-profit
                      association.
                  2. More than one individual may be a beneficiary of the trust, but a
                     separate account must be maintained for each beneficiary of the trust.
                     For investment purposes, the trust pools these accounts.
                  3. Each trust account must be established solely for the benefit of an
                     individual who is disabled as defined by 42 USC §1382c(a)(3) by one
                     of the following:
                             The disabled individual
                             A parent
                             A grandparent
                             A legal guardian of the individual
                             A court
                  4. To the extent that amounts remaining in the beneficiary‟s account are
                     not retained by the trust, upon the death of the individual, the state
                     will be repaid from the trust for the cost that it has incurred in
                     providing medical benefits to the individual during the individual‟s
                     lifetime.
                  5. There is no age restriction.
                  6. A transfer penalty will apply to transfers to pooled trusts by
                     individuals over the age of 65.

               In order for a parent or grandparent to establish a special needs trust, the
               parent or grandparents needs to have power of attorney or other proof of
               authority over the funds. If the disabled individual is not competent to
               execute a power of attorney or the parents or grandparents are not available,
               the creation of the trust must be authorized by the court.
                                                                     Continued on the next page




                                           31
B. The Various Types of Special Needs Trusts and How to Establish Them
   (continued)
Grantor Trusts Pursuant to ARS §14-5401, in order for the court to authorize the creation of
– continued    the trust, it must be shown that the individual is unable to manage his/her
               funds due to a mental or physical impairment. It must also be shown that the
               person‟s assets will be wasted or dissipated unless property managed. A
               “special conservator” may be appointed under ARS §14-5409 to create the
               trust and this is the most common method used.
                 If the trust is established through the court, the court will require the trustee
                 to be bonded and that annual accountings be submitted to the court. It should
                 be noted that the court will not allow trust distributions to replace the duty of
                 parental support (See ARS §14-5425 (A)(3)).

SSI Treatment    In 1999, the Social Security Administration elected to apply the Medicaid
of Grantor       exemptions under 42 USC §1396p when determining eligibility for
Trusts           Supplemental Security Income (SSI). (42 USC §1382(e)) Trusts established
                 with the assets of the disabled individual must contain the payback provision
                 in order to qualify as a special needs trust under SSI. Transfers to this type
                 of trust while the individual is under age 65 do not result in a period of
                 ineligibility.
                 There is no requirement in federal law that the trust be irrevocable; however,
                 SSA‟s Program Operations Manual System (POMS) §SI01120.203 requires
                 that revocable special needs trusts be evaluated under §SI01120.200 to
                 determine if the trust should be counted as a resource. According to
                 §SI01120.200, a revocable special needs trust is counted as a resource if:
                      “The individual has the legal authority to revoke the trust and then use
                        the funds to meet his food, clothing and shelter needs, or
                      “The individual can direct the use of the trust principal for his/her
                        support and maintenance under the terms of the trust.”
                 An irrevocable special needs trust is not considered an available resource
                 even if the trust allows for distributions to the individual. It should be noted,
                 however, that if a trust provides that the estate or intestate heirs are death
                 beneficiaries, and state law under the Doctrine of Worthier Title deems there
                 to be a merger of interests, the trust may not be considered to be irrevocable.
                 In Arizona, the Doctrine of Worthier Title has been abolished; however, it is
                 not advisable to name the “estate” or “intestate heirs” as beneficiaries of the
                 trust. Note that in Thompson v. Barnhart (D. Vt., No. 2-02-CV-141, July 17,
                 2003), a Federal district court ruled that resources in an irrevocable trust
                 providing that any remaining trust funds be distributed in accordance with
                 the disabled beneficiary‟s will or to his “heirs-at-law” are still available even
                 though the State of Vermont had abolished the Doctrine of Worthier Title;
                 therefore, it is advisable to draft the trust naming the specific intestate heirs if
                 the disabled person is incompetent and SSI benefits are a concern.
                                                                            Continued on the next page


                                               32
B. The Various Types of Special Needs Trusts and How to Establish Them
   (continued)
SSI Treatment   Pursuant to 20 CFR §416.1102, the SSI definition of income is “anything
of Grantor      you receive in cash or in kind that you can use to meet your needs for food,
Trusts –        clothing, and shelter.” (emphasis added)          As such, SSI considers
continued       disbursements made from a special needs trust for food, clothing or shelter as
                income in the form of in-kind support and maintenance (ISM) to the
                individual and will reduce the amount of the SSI benefit by a presumed
                maximum value (PMV) of $213 unless actual value of the food, clothing or
                shelter is less than that amount.

                A rule change has been proposed to eliminate clothing from the SSI
                definition of income. The Social Security Administration has indicated that
                this change will be approved by the Office of Management and Budget
                (OMB) and implemented by the end of 2004. Upon the effect date of this
                change, disbursements for clothing will no longer be counted as ISM.




                                            33
B. The Various Types of Special Needs Trusts and How to Establish Them
   (continued)
ALTCS            Pursuant to 42 USC §1383(c), Arizona elected to follow SSI‟s financial
Treatment of     methodology for individuals who are aged, blind or disabled when
Grantor Trusts   determining Medicaid eligibility, so ALTCS policies and related state laws
– continued      cannot be more restrictive than SSI‟s policies. As such, ALTCS has adopted
                 the SSI definition of income and considers disbursements for food and
                 shelter as income; however, ALTCS has removed clothing from their
                 definition of income in anticipation of the federal change, so clothing
                 disbursements made for the beneficiary will not affect ALTCS income
                 eligibility. Transfers to this type of trust while the individual is under age 65
                 do not result in a period of ineligibility.

                 Unlike SSI, under ALTCS policy, a special needs trust can qualify for
                 exclusion regardless of whether it is revocable or irrevocable; however,
                 disbursements must be made for the benefit of the individual in accordance
                 with ARS §36-2934.01.B (see attached Exhibit B). Expenses that are not
                 listed in the statute have to be individually approved by the director of
                 AHCCCS. Recent changes to this statute under SB 1167 (see attached
                 Exhibit C) have made it even more important to be cautious when
                 administering these trusts because the trust is considered to be terminated
                 and the payback provision triggered if an inappropriate disbursement is
                 made. The statute is arguably contrary to 42 USC §1383(c) because it limits
                 the disbursements that can be made for the benefit of the individual, when
                 OBRA „93 only requires that the trust and its disbursements be for the
                 individual‟s benefit.

                 Structured settlement payments that are assigned to a special needs trust are
                 not considered in the ALTCS share of cost determination. Arguably, other
                 payments irrevocably assigned to, and therefore owned by, the trust should
                 not be counted for share of cost; however, ALTCS has taken the view that
                 income assigned to the trust is still owned by the beneficiary and therefore is
                 available for share of cost.




                                              34
B. The Various Types of Special Needs Trusts and How to Establish Them
   (continued)
Non-Grantor   Trusts established with the assets or a parent or other third party, called “non-
Trusts        grantor trusts”, will not disqualify a disabled individual from public benefits
              if they contain provisions designed to avoid disqualification. Generally a
              non-grantor trust will not be counted toward resource eligibility if the trustee
              is given full discretion over the trust funds and the trust does not provide for
              mandatory distributions, but, as noted earlier, supplemental needs language is
              suggested. Language stating that the intent is not to supplant public benefits
              should only be used if it is certain that the beneficiary will always need
              public benefits. For example, if a couple of million dollars is being used to
              fund the trust, you may want some flexibility in the event public benefits
              programs are not needed and use only “supplemental needs” language.
              Furthermore, non-grantor trusts do not have to contain a payback provision
              in order to be excluded from the SSI or AHCCCS/ALTCS resource
              determination.

              A non-grantor special needs trust may be created through a trust in a will
              (testamentary trust) (see Exhibit F for sample trust), a sub-trust in the third
              party‟s trust, or as a stand-alone trust (see Exhibit G for sample trust).

              In a spousal situation with Medicaid (ALTCS) being a concern, it is
              preferable to use a testamentary trust in a will due to Medicaid‟s treatment of
              resources in a grantor trust created by a spouse as being available (42 USC
              1396p (d)(2)(A). Otherwise, when creating a non-grantor trust, this author
              prefers to create a stand-alone special needs trust for two reasons, even if the
              trust will not be funded other than nominally until after death. First, if the
              parent(s) or grandparent(s) die(s), the disabled individual does not have to
              carry around the deceased party‟s will or trust that has nothing to do with
              him or her. Second, if the trust is created as a stand-alone trust, it is easier
              for other individuals to leave money to the trust.




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