Saturday, August 27, 2011

Federal Court voids Restrictions on Pooled Trusts

UPDATE: After I posted the article below, the Pennsylvania Department of Public Welfare appealed the decision in Lewis v. Alexander to the United States Third Circuit Court of Appeals. That appellate court entered its decision on June 20, 2012. Here is a link to its opinion.

The Third Circuit Court affirmed the lower court in part and reversed in part. Essentially the Third Circuit agreed that Pennsylvania could not impose its desired limitations on special needs trusts. It upheld the lower court's determination that Section 1414's 50% repayment provision, "special needs" provision, expenditure provision, and age restriction were all preempted by federal law. However, the Third Circuit did conclude that the enforcement provisions of Section 1414 could be used to enforce provisions not otherwise preempted by federal law. 

Pennsylvania then appealed the Third Circuit's decision to the United States Supreme Court which denied certiorari on January 14, 2013, thus leaving the Third Circuit's decision intact.  

Special needs trusts” allow money to be set aside to provide for the special needs of a person who requires or may someday require Medicaid without affecting the beneficiary’s entitlement to government benefits. A pooled trust is a type of special needs trust that has the purpose of providing disabled persons with a financial resource that can be used for a variety of their needs and managed inexpensively by pooling large numbers of accounts.
In 1993 Congress enacted rules governing the effect of trusts on eligibility for Medicaid (Omnibus Budget Reconciliation Act of 1993, Pub. L. 103-66). As a general rule, the assets transferred by an individual to a trust are still considered to be available to them if any portion of the trust principal can be paid out to them.  The trust rules were updated in 1999 to clarify and conform SSI and Medicaid trust rules (Foster Care Independence Act (Pub. L. 106-169)).
Congress created several exceptions from normal trust treatment for certain trusts established by disabled individuals.  It exempted these disability trusts from Medicaid's available resource provisions, and from the transfer penalty provisions that apply to Medicaid long term care services (provided that funds placed in a pooled trust established for someone age 65 or older may be subject to a transfer penalty). These exceptions established the statutory basis for what government regulations refer to as “exception trusts.” The law regarding exception trusts is set out in 42 U.S.C. §1396p(d)(4)
The two notable types of exception trust in use in Pennsylvania are:
(1) §1396p(d)(4)(A) Trust. This is often referred to as a (d)(4)(A) trust. It is a trust containing the assets of an individual under age 65 who is disabled and which is established for the benefit of such individual by a parent, grandparent, legal guardian of the individual, or a court.  The State must be paid back all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual.
(2) §1396p(d)(4)(C) Trust  - which is commonly referred to as a pooled trust. It contains the assets of a number of individuals who are disabled. The pooled trust must be established and managed by a non-profit association which must maintain a separate account for each beneficiary of the trust (but, for purposes of investment and management of funds, the trust pools these accounts). To the extent that amounts are remaining in a trust beneficiary’s account at death the balance of the account may be retained by the trust and used to benefit its other beneficiaries. Any remaining amounts that are not retained by the trust must be paid to reimburse the State up to the total amount of medical assistance it paid on behalf of the beneficiary. 
In Act 42 of 2005, Pennsylvania enacted some questionable limitations on the use of pooled trusts. Section 1414 of Act (62 Pa. Stat. Ann. §1414) imposes restrictions based on (1) the disabled individual’s age; (2) the characteristics of the individual’s needs in relation to disability; (3) what expenditures trusts can make to improve the disabled individual’s quality of life under the trust instruments; and (4) what percentage of any funds remaining in their trust accounts after their deaths can be retained by the trust to assist other disabled individuals. The Act also included a “death penalty” provision that allowed for the termination of an entire pooled trust for all beneficiaries if the trustee violated the Act as to any one beneficiary.

Section 1414 (b) of Act 42 reads as follows:
(b)        A special needs trust shall comply with all of the following:
(1)        The beneficiary shall be an individual under the age of sixty-five who is disabled, as that term is defined in Title XVI of the Social Security Act (49 Stat. 620, 42 U.S.C. § 1381 et seq).
(2)        The beneficiary shall have special needs that will not be met without the trust.
(3)        The trust shall provide:
(i)         That all distributions from the trust must be for the sole benefit of the beneficiary.
(ii)        That any expenditure from the trust must have a reasonable relationship to the needs of the beneficiary.
(iii)      That upon the death of the beneficiary, or upon the earlier termination of the trust, the department [the Department of Public Welfare, commonly referred to as DPW] and any other state that provided medical assistance to the beneficiary must be reimbursed from the funds remaining in the trust up to an amount equal to the total medical assistance paid on behalf of the beneficiary before any other claimant is paid: Provided, however, That in the case of an account in a pooled trust, the trust shall provide that no more than fifty percent of the amount remaining in the beneficiary’s pooled trust account may be retained by the trust without any obligation to reimburse the department.
(4)        The department, upon review of the trust, must determine that the trust conforms to the requirements of Title XIX of the Social Security Act (42 U.S.C. § 1396 et seq.), this section, any other State law and any regulations or statements of policy adopted by the department to implement this section.
Two Pennsylvania pooled trusts and related plaintiffs filed suit seeking to enjoin DPW from enforcing the provisions of Section 1414 that restrict Medicaid eligibility and require a minimum 50% state reimbursement from pooled trusts.  After many years of litigation, a federal district court has agreed with the plaintiffs that much of Section 1414 is unenforceable because it is more restrictive than what is permitted under federal Medicaid law.  (Lewis v. Alexander, 2011 U.S. Dist. LEXIS 95109, U.S. District Court Eastern District of PA, Case 2:06-cv-03963-JD Document 73 Filed 08/23/11).
The Lewis Court held that the following provisions of Section 1414 are unenforceable because they are in conflict with and more restrictive than controlling federal law:
·       The Special Needs requirement of Section 1414(b)(2) - which requires that the beneficiary shall have special needs that will not be met without the trust;
·       The Age requirement of Section 1414(b)(1). The Court concluded that disabled persons age 65 and older are permitted to form pooled special needs trust accounts;
·       The Expenditure restrictions in Section 1414(b)(3) which require that all distributions from the trust “must have a reasonable relationship to the needs of the beneficiary.” This means that funds in special needs pooled trusts can be used broadly for purposes beyond the treatment of specific disabilities. (However, the Court did okay the restriction in subsection (b)(3) that requires that expenditures “must be for the sole benefit of the beneficiary” as being consistent with federal law;
·       The Fifty-Percent Pay-Back provision of Section 1414(b)(3)(iii) which provides that a pooled trust can keep only fifty percent of the remainder left in a pooled trust account after the death of a beneficiary without an obligation to reimburse the state for that beneficiary’s Medicaid expenses. The Court held that pooled trusts are permitted to elect to keep the entire amount remaining in a beneficiary’s account at death;
·       In addition, the Court negated Section 1414(c) of Act 42. Section 1414(c) is the “death penalty section” that authorizes the cancellation of an entire pooled trust on the basis of one violation of the provisions of 1414(b).

The Court enjoined DPW from applying or enforcing subsections (b)(1), (b)(2), (b)(3)(ii), (b)(3)(iii), or (c) of 62 Pa. Stat. Ann. § 1414.

It should be noted that only the above cited provisions of Act 42 were held to be preempted by federal law and thus unenforceable.  Other provisions of Section 1414 remain valid. The following provisions of the Act are still enforceable:

  • ·       Subsection (a) which provides that “[a] special needs trust must be approved by a court of competent jurisdiction;”

  • ·       Subsection (b)(3)(i)’s sole benefit requirement;

  • ·       Subsection (b)(4) which empowers DPW to review trusts to ensure that they conform with state and federal law;

  • ·       Subsection (d) requires that liens and claims in favor of the DPW be satisfied before a pooled trust can be funded;

  • ·       Subsection (e) which provides that “[u]pon the death of the beneficiary or upon earlier termination of the trust, the trustee shall notify and request a statement of claim from the [DPW], addressed to the secretary;” and,

  • ·       Subsection (f), which contains definitions of the terms “pooled trust,” “special needs,” and “special needs trust.”

The Court’s decision in Lewis is a significant victory for the concept of Pooled Trusts and for individuals with special needs. Its clarification that disabled persons age 65 and older are permitted to form pooled special needs trust accounts provides elder law attorneys and their clients with a potential additional planning tool.
Planners should be careful to note, however, that dicta in the Lewis case seems to confirm that transfers to a pooled trust established for an individual over age 65 can incur a transfer penalty. This is in accord with CMS policy that funds placed in a pooled trust established for an individual age 65 or older may be subject to a transfer of assets penalty. See CMS State Agency Regional Bulletin No 2008-05 (May 12, 2008).

Here is a link to the Court's opinion: 
Pooled Trusts operating in Pennsylvania include: 
The Achieva Family Trust, 412-995-5000, 
The ARC Community Trust of Pennsylvania, 1004 West 9th Ave., King of Prussia, PA 19406, Phone: 610-265-4788,;

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