Pooled Trusts for Beneficiaries with Special Needs

Counsel must consider many issues when planning for individuals with disabilities. Among them is whether the individual is receiving, or will one day need, public assistance benefits. Some of these public assistance benefits, such as Medicaid and Supplemental Security Income (SSI), require that the individual’s assets not exceed certain resource and income guidelines.

While public assistance programs, referred to in this Note as means-tested government benefits, often provide the recipient with substantial services, they do not provide much financial assistance. This sometimes forces the recipient to live below the poverty level. Outright gifts of financial assistance to the recipient, however, can jeopardize the recipient’s eligibility for certain means-tested government benefits.

Special needs trusts (SNTs) are frequently used to preserve an individual’s assets in trust while maintaining the individual’s eligibility for means-tested government benefits. However, sometimes traditional SNTs are not appropriate depending on the individual’s circumstances, including, for example, situations when the individual is over age 65 and has limited assets to justify the expense of a traditional SNT. In these cases, pooled trusts are sometimes used. Counsel should be aware of the availability of pooled trusts and understand how they work and when they may be appropriate or beneficial. This Note provides an overview of pooled trusts, including their essential features, requirements, and benefits.

Special Needs Planning

The three main types of trusts used for means-tested government benefits planning are:

• Third-party SNTs, which are funded with the assets of someone other than the beneficiary with a disability.
• First-party SNTs, which are funded with the assets of the beneficiary with a disability.
• Pooled trusts.

Administering a first-party or third-party SNT for the benefit of a single beneficiary is relatively expensive. For example, if an SNT has less than $50,000 in assets, counsel may have a difficult time finding a fiduciary willing to administer the trust. In addition, first-party SNTs are not available when the SNT beneficiary is over age 65. Therefore, third-party or first-party SNTs may not be appropriate for individuals:

• Over age 65.
• With no appropriate family member to serve as trustee.
• With assets having sufficient value to disqualify them from means-tested government benefits but not of sufficient value to justify the expense and complexity of a traditional first-party or third-party SNT.

Pooled trusts are an alternative to both first-party and third-party SNTs that are less expensive to the trust beneficiary. Pooled trusts allow multiple beneficiaries with limited assets or who are over age 65 to pool and invest assets so that they can maintain eligibility for means-tested government benefits while continuing to benefit from the enhanced quality of life that an SNT can provide to a single beneficiary (see Pooled Trusts, below).

Pooled Trusts

A pooled trust provides a beneficiary with a disability with an alternative to using a traditional first-party or third-party SNT. A pooled trust:

• Is established and administered by a nonprofit organization.
• Pools the assets of all trust beneficiaries for investment purposes.
• Creates subaccounts for each beneficiary under the master trust representing the amount of assets being held for that beneficiary’s benefit. The subaccounts are governed by a joinder agreement and are pooled together and invested and managed as a single fund to maximize investment returns.

The nonprofit organization also acts as the trustee and advocate for the beneficiary in making investment and distribution decisions. (42 U.S.C. § 1396p(d)(4)(C) and see Lewis v. Alexander, 685 F. 3d 325, 332-334 (2012).)

A pooled trust may be a first-party trust (also referred to as a self-settled trust) or a third-party trust. Pooled trusts are governed by a master trust instrument, which typically lays out the standards regarding:

•  Trust administration.
• Asset investment and distribution.
• Whether there are applicable payback provisions, such as Medicaid repayment provisions for first-party pooled trusts (see Payback to Medicaid, below).

(42 U.S.C. § 1396p(d)(4)(C).)

A pooled trust is a:

• First-party pooled trust if the trust is:
  • created by the individual with a disability or a parent, grandparent, guardian, or court; and
  • funded with the individual with a disability’s own assets.

(See First-Party Pooled Trusts, below.)

• Third-party pooled trust if the trust is:
  • created by family members or persons other than the individual with a disability; and
  • funded with assets that do not belong to the individual with a disability.

(See Third-Party Pooled Trusts, below.)

First-Party Pooled Trusts

First-party pooled trusts are established under OBRA-1993 and can only be created by the individual with a disability, a parent, grandparent, guardian, or a court to hold the beneficiary’s own assets (42 U.S.C. § 1396p(d)(4)(C)). The primary distinction between first-party and third-party pooled trusts is that a first-party pooled trust must contain payback provisions because it holds the beneficiary’s own assets. This means that, when a beneficiary dies, to the extent the pooled trust does not retain the assets in the deceased beneficiary’s subaccount, the trust pays to the state an amount equal to the amount of medical assistance paid on behalf of the beneficiary under the state’s Medicaid program (42 U.S.C. § 1396p(d)(4)(C)(iv) and see Lewis v. Alexander, 685 F. 3d 325, 334 (2012)).

Third-Party Pooled Trusts

Third-party pooled trusts were established under state common law before OBRA-1993. The primary distinction between first-party and third-party pooled trusts is that there are no payback obligations on the death of a beneficiary because third-party trusts are not funded with the beneficiary’s own assets. The remaining funds in the deceased beneficiary’s subaccount pass under the joinder agreement without Medicaid liens. In many instances, the joinder agreement may require that the remaining funds in the beneficiary’s subaccount be retained by the master trust to cover administration costs.

Pooled Trust Features

No Age Restrictions

Unlike with first-party SNTs, which are restricted to use by individuals who are under age 65, there are no express age restrictions for individuals wanting to join a pooled trust. The absence of express age restrictions implies that an individual who is 65 or older may transfer assets to a pooled trust (see Lewis v. Alexander, 685 F. 3d 325, 351 (3d Cir. 2012)). However, certain transfer penalties may apply for individuals over 65 transferring assets to a pooled trust as they are not exempt transfers under the Medicaid rules. (42 U.S.C. § 1396p(c)(1)(C)(i), (c)(2)(B)(iv), (d)(4)(A), and (d)(4)(C).)

No Transfer Penalties if Under Age Sixty-Five

Both Medicaid and SSI have transfer of asset penalties to discourage individuals from giving away assets to qualify for benefits. Under SSI rules, gift transfers for less than fair market value disqualify a beneficiary from eligibility for SSI benefits for up to 36 months (42 U.S.C. § 1382b(c)(1)(A) and see SSA POMS SI 01150.110).

The SSI rules provide an express exemption for transfers that fund a pooled trust, but only if the benefits recipient is under age 65 (42 U.S.C. § 1382b(c)(1)(C)(ii)(IV) and see SSA POMS SI 01150.121(A)(3)). The implication is that any SSI recipient that is age 65 or over who transfers assets to a pooled trust will trigger a 36-month period of ineligibility for SSI benefits (see SSA POMS SI 01150.110(C)(1)).

Requirements to Create a Pooled Trust

The assets held in a pooled trust are not considered available resources for an individual and therefore do not affect an individual’s eligibility for SSI and benefits under the federal Medicaid statute if the pooled trust meets certain requirements, including that:

• The individual is disabled (see Beneficiary with a Disability, below).
• The trust is established and managed by a nonprofit association (see Nonprofit Association, below).
• The beneficiary is given a separate account, referred to as a subaccount (see Separate Account, below).
• The separate account:
  • is for the sole benefit of the beneficiary (see Sole Benefit, below); and
  • is created by an appropriate party (see Separate Account Created by Appropriate Party, below).
• Surplus funds not retained by a first-party pooled trust must be paid back to Medi-Cal (see Payback to Medicaid, below).

(42 U.S.C. §§ 1382b(e)(2) and 1396p(d)(4)(C).)

Beneficiary with a Disability

To avoid being included as an available or countable resource, a pooled trust should only be used for an individual with a disability. An individual is generally considered to have a disability if they cannot engage in any substantial gainful activity because of any medically determinable impairment, which can be expected to result in death, or which has lasted or can be expected to last for a continuous period of at least 12 months (42 U.S.C. § 1382c(a)(3)).

This generally occurs when an individual cannot earn over an established monthly amount called the substantial gainful activity amount (the SGA amount) due to a physical or mental impairment. The SGA amount is determined annually by the Social Security Administration (SSA). (20 C.F.R. §§ 416.905 and 416.971 to 416.976 and see Social Security Administration (SSA): Substantial Gainful Activity.)

Nonprofit Association

A pooled trust must be established and managed by a nonprofit association (42 U.S.C. § 1396p(d)(4)(C)(i)). The SSA defines a nonprofit association as an organization established and certified under a state nonprofit statute (SSA POMS SI 01120.203(D)(3)).

The pooled trust instrument usually consists of an overarching master trust and joinder agreements that contain provisions specific to the individual beneficiaries. The nonprofit association establishes the master trust instrument and the individual trust accounts within the master trust are established through the actions of either the individual with a disability or someone on their behalf through a joinder agreement. (SSA POMS SI 01120.203(D)(1).)

Separate Account

A pooled trust must maintain a separate account, or subaccount, for each beneficiary but may pool the individual accounts together for aggregate investing and management purposes (42 U.S.C. § 1396p(d)(4)(C) and see SSA POMS SI 01120.203(D)(4)). The named account beneficiary does not have direct access to the account funds, and instead must request distribution from the trust administrator.

Once the individual with a disability has joined the pooled trust, they will typically receive periodic account statements from the pooled trust’s financial manager similar to an account statement from a financial institution.

Sole Benefit

Each separate account must be created solely for the benefit of the individual with a disability (42 U.S.C. § 1396p(d)(4)(C)(iii) and see SSA POMS SI 01120.203(D)(5) and SSA POMS SI 01120.201(F)(2)).

Distributions can be made to third parties only if they are solely for the benefit of the beneficiary. Distributions to third parties are generally considered solely for the benefit of the beneficiary if the distributions are for:

• The receipt of goods or services by the beneficiary.
• Certain travel necessary for the beneficiary’s health and safety.

(See SSA POMS SI 01120.201(F)(3).)

Distributions for administration expenses are an exception to the sole benefit rule. The trust may provide for reasonable administration expenses and costs, which include:

• Reasonable costs associated with investment, legal, or other services rendered on behalf of the beneficiary with regard to the trust.
• Reasonable compensation for a trustee to manage the trust.

In evaluating whether compensation is reasonable, counsel should consider the time and effort involved in providing the services and the prevailing rate of compensation for similar services considering the size and complexity of the trust. (See SSA POMS SI 01120.201(F)(4).)

Separate Account Created by Appropriate Party

To qualify for the pooled trust exception regarding available or countable resources, an individual’s trust account within a pooled trust’s master trust must have been established through the actions of:

• The individual with a disability acting on their own behalf (in the case of a first-party pooled trust).
• Another individual with the legal authority to act on behalf of the individual with a disability, which may include their:
  • parent;
  • grandparent;
  • legal guardian; or
  • agent under a power of attorney.
• A court.

(42 U.S.C. § 1396p(d)(4)(C) and see SSA POMS SI 01120.203(D)(1), (2), (6).)

In the case of a trust account established through the actions of a court, the creation of the trust account must be required by a court order for the pooled trust assets to qualify for the available or countable resources exception in 42 U.S.C. § 1396p(d)(4)(C). Court approval of an already executed pooled trust account joinder agreement is not sufficient for the trust account to qualify for the exception. (See SSA POMS SI 01120.203(D)(7) and see Joining a Pooled Trust, below.)

An employee of a pooled trust may not create an account for the beneficiary. If so, the assets in that subaccount are not considered an excluded resource. (For example, see SSA POMS PS 01825.006 California, F. PS 14-039.)

Payback to Medicaid

A first-party pooled trust master trust instrument may provide for retention of any percentage of the subaccount’s assets after the beneficiary dies, even up to 100% of the subaccount’s assets, without disqualifying the pooled trust account from qualifying as an excluded resource under the Social Security Act (42 U.S.C. § 1396p(d)(4)(C), SSA POMS SI 01120.199(F), and, for example, see SSA POMS PS 01825.006 California, X. PS 14-039).

However, to continue to qualify for the pooled trust exception regarding available or countable resources, a first-party pooled trust instrument must contain specific language that provides that, after the beneficiary’s death, to the extent that the trust does not retain the funds in the beneficiary’s subaccount, the states that have provided medical assistance to the beneficiary must be listed as the first payees and have priority over payment of other debts and administrative expenses, except as listed in SSA POMS SI 01120.203(E) (see Allowable Administrative Expenses, below). The trust instrument must contain express, specific payback language that is consistent with the payback requirements. An oral trust cannot meet this requirement. (42 U.S.C. § 1396p(d)(4)(C)(iv) and SSA POMS SI 01120.203(D)(2), (E).)

Allowable Administrative Expenses

On the death of the beneficiary, the pooled trust may pay allowable administrative expenses from the beneficiary’s subaccount before reimbursing the state for medical assistance. Allowable administrative expenses include:

• Taxes due from the trust to any state or federal government because of the death of the beneficiary.
• Reasonable fees for administration of the trust, such as an accounting of the trust to a court, completion and filing of documents, or other required actions associated with terminating and wrapping up the trust.

(SSA POMS SI 01120.203(E)(1).)

Prohibited Expenses and Payments

On the death of the beneficiary, the pooled trust must reimburse the state that provided medical assistance to the beneficiary before paying any prohibited expenses or payments. Prohibited expenses include:

• Taxes due from the estate of the beneficiary other than those arising from inclusion of the pooled trust in the estate.
• Inheritance taxes due for residual beneficiaries.
• Payment of debts owed to third parties (except those reasonable fees allowed for administration of the pooled trust itself).
• Funeral expenses.
• Payments to residual beneficiaries.

(SSA POMS SI 01120.203(E)(2).)

Early Termination of Pooled Trusts

Generally, a beneficiary’s subaccount in a pooled trust terminates at the beneficiary’s death. However, some pooled trust joinder agreements may include early termination provisions without losing the protections otherwise provided by the pooled trust.

If a pooled trust contains a provision for the early termination of the beneficiary’s subaccount before the beneficiary’s death, for the trust to be an excludable resource under the Social Security Act:

• On early termination, the state must receive all amounts remaining in the account up to an amount equal to the total amount of medical assistance plan payments on behalf of the individual under the state’s Medicaid Plan.
• Other than state and federal taxes, as well as administrative fees, accruing from the termination of the account, all remaining funds must be disbursed to the trust beneficiary.
• The early termination clause must give the power to terminate the trust early to someone other than the beneficiary.

(See SSA POMS SI 01120.199(F)(1).)

A pooled trust with an early termination clause continues to be excluded as a countable resource if it allows for transfer of the beneficiary’s assets from one pooled trust to another pooled trust and the early termination clause contains limiting language precluding disbursements other than to the new trust or for administrative expenses. (See SSA POMS SI 01120.199(F)(2) and, for example, SSA POMS PS 01825.006 California, F. PS 14-039.)

Usefulness of Pooled Trust

Pooled trusts may be useful when traditional first or third-party SNTs do not work for a potential beneficiary. For example, counsel should consider a pooled trust if:

• There are insufficient assets to make the creation and administration of a first or third-party SNT worthwhile or cost-effective (see Cost-Effectiveness, below).
• There is not a trustworthy person or affordable professional to serve as trustee (see Lack of Trustee Options, below).
• An individual with a disability wanting to create a first-party SNT is age 65 or older (see No Age Restrictions, above, and Lewis v. Alexander, 685 F.3d 325, 350-51 (3d Cir. 2012)).

Cost-Effectiveness

State law generally provides that any irrevocable trust with a principal value of less than a certain amount is uneconomical and can be terminated.

Because investing assets and administering a trust is generally time consuming and expensive, a pooled trust may be the best option for an individual with a disability who owns less than $100,000 of investable assets. Pooled trusts invest low-value individual subaccounts as part of the pooled trust principal and under the terms of a single master trust instrument. The size of the pooled trust’s principal and the uniformity of administration among the participating beneficiaries justifies the cost of administration and investment.

Lack of Trustee Options

One of the key decisions in drafting any SNT is selecting a trustee. In some situations, having a family member serve as the trustee may not be a good idea. There may be a well-founded desire not to burden another family member with the ongoing responsibility of the trusteeship. Family members may also lack the necessary expertise and make unintentional but costly mistakes that affect the beneficiary’s eligibility for means-tested government benefits.

In this case, the family may turn to a professional trustee, such as a bank or trust company, for assistance. Most institutional (corporate) trustees will not accept a trust with a principal value lower than $500,000 or $1,000,000 and many institutional trustees do not act as trustee for SNTs at all. The requirement of a high minimum trust principal rules out an institutional trustee for many families.

A private professional fiduciary may be a good choice. However, these fiduciaries may have required minimum trust principals or fee structures which are prohibitive, as well. There are resources available online for finding additional information on professional fiduciaries (see, for example, Professional Fiduciary Association of California).

Even if there is a suitable initial trustee, trustee succession can pose a problem if the initial trustee stops acting. Pooled trusts eliminate the concerns of finding a suitable trustee and can provide stability of ongoing administration. The nonprofit organization administering the pooled trust should likely endure beyond the lifetime of any one individual trustee. Trustees of pooled trusts have expertise in SNT issues, including government benefit eligibility rules and services available in the community for individuals with disabilities.

While using a pooled trust provides many advantages regarding trustee selection and qualification, there may be some drawbacks. For example:

• When using a pooled trust, the trust is managed by someone who is not a family member or friend and who does not know the beneficiary personally. The pooled trust trustee may not be as attentive to the beneficiary’s needs as a family member would be.
• The administrative costs associated with joining a pooled trust, including annual fees, one-time application fees, and sometimes investment advisor fees, can be prohibitive. However, these fees are generally not as substantial as the fees associated with administering a stand-alone SNT. Counsel should contact the nonprofit association managing the pooled trust to determine these fees.

Choosing Among Various Pooled Special Needs Trust Options

Counsel may help an individual with a disability choose among pooled trust options. The available pooled trusts may have different:

• Administrative styles.
• Asset management skills.
• Investment philosophies.
• Fee schedules.
• Cultures.

Certain pooled trusts may not accept individuals with certain disabilities as beneficiaries. Certain pooled trusts may specialize in, for example, managing litigation recoveries. Geographic proximity may also be an issue. Some pooled trusts are national, while others are regional.

Counsel may consider several items when deciding on a pooled trust, including:

• Legal requirements for SSI and Medicaid. Counsel should review the master trust instrument to make sure that it meets all requirements to protect the beneficiary’s means-tested government benefits.
• Age or other member requirements. Counsel should examine the master trust instrument to see if it accepts beneficiaries who are age 65 and over, if necessary. Counsel should also make sure that the pooled trust can pay for nursing home care if necessary, and, in the case of a minor beneficiary, whether the pooled trust will retain the funds in the minor beneficiary’s subaccount after the beneficiary reaches age 18. Certain pooled trusts may restrict access to beneficiaries with certain types of disabilities, like developmental disabilities.
• Solid SNT management. Counsel should investigate the nonprofit and its administrative team’s reputation and experience. A team of experts typically runs a pooled trust since most nonprofits have little experience administering a trust or investing assets. Counsel should make sure that the administrative team has the requisite depth of expertise. The longevity of the pooled trust may also be an indicator of solid management.
• Financial stability. Counsel should consider the financial stability or viability of the nonprofit running the pooled trust. A great deal of financial information may be obtained from reviewing the nonprofit’s IRS Form 990, Return of Organization Exempt From Income Tax (see Candid: Where can I find an organization’s Form 990 or 990-PF?).
• Costs and fees. Both counsel and the beneficiary should understand the pooled trust’s fees so that there are no surprises after joining. The fees are paid from the beneficiary’s pooled trust subaccount. Fees and costs generally include:
  • initial set-up fees;
  • administration fees, which may be a flat fee or a percentage of the assets under management;
  • additional financial management fees; and
  • special fees for preparing tax returns or making distributions within a short time frame.
• Distribution method. Pooled trusts vary greatly when it comes to making distributions. The pooled trust may, among other things:
  • retain a trust administrator to make distribution decisions;
  • require all requests to be approved by a committee;
  • allow distributions for only certain items; and
  • take a long time to make requested distributions.

Counsel should find out the specific procedure used by the pooled trust for requesting distributions. For example, some pooled trusts may require formal requests in writing, while others may accept verbal requests over the phone or requests by email.

• Investment performance. Counsel may want to investigate the pooled trust’s investment performance and oversight. Low-cost pooled trust programs often have poor investment returns. Counsel can ask for an asset allocation model and performance report. Certain pooled trusts hire an investment advisor who ask about risk tolerance and liquidity needs.
• Retained assets. Many pooled trusts require that the nonprofit be allowed to retain some or all of the assets remaining in the beneficiary’s subaccount on the beneficiary’s death. The funds are then either redistributed to other beneficiaries or used to pay general operating costs. Other pooled trusts allow the beneficiary to designate beneficiaries to whom the remaining assets will be distributed after Medicaid is paid. Counsel should find out if the pooled trust allows a beneficiary to select or change their designated beneficiaries.

A pooled trust selection should not be based on costs alone, but on a review of all of the factors listed above and any additional factors that may apply to the individual with a disability.

Joining a Pooled Trust

A pooled trust generally requires the person applying for the subaccount to take specific steps to enroll the beneficiary in the trust. Some pooled trusts ask the applicant to complete an intake form and provide information about the beneficiary and the beneficiary’s specific needs.

The pooled trust administrator prepares a joinder agreement after the applicant submits the intake form and information. The process is different depending on whether the beneficiary has capacity (see Beneficiary with Capacity, below, and Beneficiary Lacking Capacity, below). In addition, certain pooled trusts require the beneficiary to be represented by counsel, to advise the beneficiary regarding the various options before allowing a prospective beneficiary to join (see Role of Counsel, below).

Beneficiary with Capacity

A beneficiary with capacity can generally take the steps necessary to join a pooled trust, including:

• Completing the intake form.
• Signing the joinder agreement.
• Transferring their assets to the trustee to fund them into the master trust.

(42 U.S.C. § 1396p(d)(4)(C) and see Separate Account Created by Appropriate Party, above.)

Beneficiary Lacking Capacity

If the beneficiary lacks capacity, either another individual with legal authority to act on the beneficiary’s behalf or a court must authorize the joinder to a pooled trust (42 U.S.C. § 1396p(d)(4)(C) and see Separate Account Created by Appropriate Party, above).

Role of Counsel

The nature and extent of counsel’s involvement in helping an individual with a disability join a pooled trust varies depending on the circumstances. For example, if the individual is competent or there is a parent, grandparent, or properly appointed agent under a power of attorney, to act on their behalf, the individual may join a first-party pooled trust without a court’s involvement. In these cases, the attorney’s involvement will largely be limited to:

• Helping the individual with a disability (or their agent) choose a pooled trust.
• Reviewing the master trust instrument.
• Helping the individual or agent fill out the application to join the trust.

However, if, for example, a court order is required to direct litigation settlement funds to the pooled trust, counsel’s involvement is generally more extensive. In this case, counsel may need to prepare a court petition and a memorandum of points and authorities and attend a court hearing.