Archive for the ‘Special Needs Planning’ Category

A Plain English explanation of why Medicare can (and should) grab part of your worker’s comp or court settlement . . . and what to do about it!  Give me five minutes!

I proudly told my 94 year-old Mom and 15 year-old son that I had just been awarded something called a “Medicare Set-aside Certified Consultant” designation by the International Commission on Health Care Certification. My mother exclaimed, “I am SOOO proud of my son!” My son raised an eyebrow, gave me a knowing nod and exclaimed, “Dude!” They both then wondered, “But what does THAT mean? What is Medicare secondary payer?” I think I explained it to my mother. After 5 minutes, my son said, “That’s OK, Dad . . . .”

This “plain English” explanation is for folks like them.

The Case of Theodore Cleaver

Theodore Cleaver was seriously injured in a work-related accident. Four years later his worker’s comp lawyer managed to secure a lump sum worker’s comp settlement of $450,000. Also of some relief to Theodore was that he was determined to be disabled by Social Security and was covered by Medicare starting about two years ago – which was a great help with his serious and ongoing medical bills.

The Case of Kitten Anderson

Five years ago Kathy (“Kitten”) Anderson received life threatening injuries after being side-swiped by a tractor-trailer rig owned by a national trucking line. Her personal injury attorney is about to settle the case for $1.5 million. Kitten never applied for Social Security Disability and is not on Medicare as a result (but fortunately she had a group health plan for most of the time). Kitten is 64 and will suffer from accident-related side effects for the rest of her life (which will likely be shortened as a result of her injuries).

What Do Theodore and Kitten Have In Common?

Medicare! Theodore is on it, and Kitten will be soon. Federal law has required for many years that Medicare is always (well . . . almost always) the payer of last resort for medical and surgical bills. If some other company or insurer is legally on the hook and can be reasonably expected to pay soon, Medicare will not pay until the other legally obligated party has paid up. Think: No double-dipping.

Conditional Medicare Payments

If the other party cannot be reasonably expected to pay soon – perhaps there is ongoing litigation in which the other party is denying any liability – Medicare will pay for covered medical expenses that are injury-related for an otherwise eligible person. Medicare, however, will insist on being paid back once the parties settle the case and figure out how much of the settlement represented compensation for past medical expenses. In fact, Medicare can be as tough as the IRS when it comes to getting itself paid back. These interim payments are called “conditional payments” because they are . . . well . . . paid on the condition that Medicare will eventually get paid back if any later funds surface that represent payment for medical expenses.

Medicare paid a great deal on behalf of Theodore while he was waiting for his worker’s comp case to settle. Those “conditional” Medicare payments were certainly welcomed by Theodore and his doctors, but if Medicare is not handled carefully and correctly Theodore could lose future Medicare coverage, lose a great deal of his Social Security Disability Benefits, and possibly be ineligible for Medicaid if he needs to go to a nursing home. The problems don’t stop there. If Theodore’s worker’s comp attorney and his employer’s worker’s comp insurance carrier don’t handle Medicare correctly, Medicare can come after them for the repayment of the conditional payments. In fact, the insurer could be on the hook for double! Nobody happy.

Commutation: A Fancy Word For ‘Looking Ahead’

What both Theodore and Kitten need to be concerned with is that Medicare will not pay for any future medical services if some other entity has paid, or will be paying, for those services. Both Theodore and Kitten have received settlements that contain at least some money meant to pay for future medical expenses.

The Medicare Secondary Payer Act not only gives Medicare the authority to seek (how about “take”?) reimbursement for conditional payments already paid, but to set-up systems to insure that it does not pay for future medical care that has been paid for in advance by some other party at the time of a workers comp or personal injury settlement.

No one knows what the future holds, particularly with regard to medical care. Once a defendant or an insurance company has been found liable for future medical care related to an injury the insurance company/defendant can (A) make payments for future medical services for the next several decades until either Theodore or Kitten have died, or (B) try to come to some sort of agreement on a lump sum they can pay to cover future medicals, and then ride off into the sunset never to look at Theodore or Kitten again. Any sane defendant/insurance company will opt for Option B. Option B is referred to as a “commuted payment” and the whole process a “commutation of medicals.”

Medicare takes a keen interest in commuted payments because the law prevents it from paying for services that someone else has already paid for.

Looking Back – Looking Ahead

My friend and colleague John Campbell, a great elder law and Medicare Set-aside Certified Consultant in Denver, has come up with a great explanation. The Medicare secondary payer process is like the Roman god Janus. Janus was a two-faced fellow, sometimes thought of as the god of new beginning, as well as doorways and arches. He looked back, and he looked forward.

Medicare does the same. It looks back to collect conditional payments already made for services that are later paid for by another, and it looks ahead to insure that it is not paying for services that were covered in a commuted payment for future medicals.

The law requires all parties to a workers’ compensation, a personal injury, or medical malpractice settlement to make “reasonable” provision for the interests of Medicare. There is a fair amount of guidance for workers’ comp parties to rely upon when satisfying themselves that they have looked after the “reasonable” interests of Medicare. There is very little to rely upon in the area of personal injury or medical malpractice . . . other than government statements that they expect everyone to look out for Medicare’s best interests. The penalties for being wrong are drastic.

As mentioned above, the collection process can be brutal. If settlement funds representing conditional payments are paid or spent before Medicare has been reimbursed, Medicare will come after the Medicare beneficiary (Theodore or Kitten), the lawyers, the insurance companies . . . just about anyone who has had anything to do with the settlement. Medicare will look for the deep pockets.

The Cummutation Clawback

If Medicare believes that it has paid for services that were also the subject of a commuted or settled amount, Medicare will stop paying for any injury-related medical care until an amount equal to the entire settlement has been expended on injury-related services that Medicare would ordinarily pay for. That can be an absolute catastrophe for an injured individual with high medical costs and no other source of payment. Think of it as being smashed by Janus’ Big Hammer. The personal injury/workers’ comp attorney who messed it up can think of it as malpractice!

The Settlement Dilemma

If settlements represented nothing more than payments for medical expenses already incurred and for future medical expenses (and you make the added assumption from Never-Never Land that Medicare covers all medical expenses), the situation would not be too difficult:  Call Medicare, find out how much it has paid in conditional payments, then set aside the rest of the settlement and use it to pay for medical services (remember, Medicare would have paid for everything in this make-believe place). When the money is gone, show Medicare how the money was spent and then Medicare kicks back in.

In the real world, however, settlements often represent several different elements. In the workers’ comp arena the injured worker is paid for lost wages (“indemnity”), in addition to medical expenses. In the personal injury/medical malpractice arena settlements often represent compensation for pain and suffering, lost income, and punitive damages . . . in addition to past medical expenses and future medical expenses.

If Medicare’s interests have not been reasonably considered and provided for, Medicare will consider the WHOLE settlement as compensation for conditional payments, and then when those have been covered, anything left will be applied to future medical expenses before Medicare will pay a dime.

To add to the nightmare, if the plaintiff is also depending on Medicaid, Medicaid will consider the whole settlement as available and not pay anything as long as the individual is holding the settlement. Good planning would prevent this.

Allocation Magic

The trick is to carefully (and reasonably) allocate the settlement among indemnity or lost wages and income, pain and suffering, punitives, and medical expenses (past and future). If Medicare believes that it has not been reasonably considered, it will ignore the whole allocation and treat it as all for medicals.

The process involves careful negotiation with Medicare regarding what represents amounts paid by Medicare as conditional payments, and preparing detailed allocation reports showing that a reasonable medical plan of future care has been considered and money allocated (set aside) to pay for those future medical costs. The process is multi-disciplinary and involves attorneys familiar with the legal ramifications and the process, medical personnel who understand the process and who can prepare allocation reports, and insurance professionals if the settlement is going to be paid out as an annuity (periodic payments over time, also known as a “structured settlement”).

Medicare has a fairly detailed system for reviewing workers’ comp allocations. There is no similar system for reviewing personal injury/medical malpractice settlements . . . which has lulled many attorneys and their clients into believing nothing needs to be done with those types of personal injury settlements. What an expensive mistake. The agency that runs Medicare (Centers for Medicare and Medicaid Services or CMS) has repeatedly cautioned that Medicare’s interests must be taken into account. As government budgets tighten, look for aggressive collection techniques.

Often, if not usually, the best way to insure proper future administration is to drop the commuted medical settlement amounts into a trust, and turn it over to a competent third party administrator who can handle proper payment of “otherwise Medicare covered” medical expenses and make the necessary reports to Medicare.

But Wait! There Is More!

If the individual receiving the settlement plans to finance future care with the settlement, Medicare AND Medicaid (and perhaps even Supplemental Security Income or SSI) then there is the added complexity of continuing to qualify in spite of receiving the settlement. At that time the only alternative is to fund a trust that qualifies in such a way to keep Medicare’s Lord Janus happy, while at the same time qualifying as a Medicaid/SSI special needs trust.

And So . . .

That, Mom and Bobby, is why I became a Medicare Set-aside Certified Consultant. There are very few attorneys who understand the whole process and can also address the special needs issues involving disabled clients. It also makes me feel even more socially useful because I am helping other attorneys and their injured clients, as well as doing my bit to prevent duplicate payments by Medicare (we all have an interest in the continued financial viability of that program).

According to conventional wisdom you should always name your spouse as beneficiary of an IRA. Let’s smash some traditional pumpkins (I am writing this in October, after all). Read on to understand why it might be a great idea to name a trust as the beneficiary of an IRA and what some of the trade-offs of doing so are.

Standing on Tradition: Naming The Spouse As IRA Beneficiary

There really is a good reason for naming the spouse as IRA beneficiary . . . much of the time. As I have written, the beauty of an IRA is that the longer money can be allowed to languish in an IRA, the more it will grow without being burdened by taxes. Because of that, the usual thinking is to try and take out as little as possible. On the other hand, there are all sorts of tax rules about when someone MUST take distributions and how much those distributions must be. Remember the rule:

SOMEDAY, SOMEHOW, SOMEONE WILL PAY TAXES ON THE IRA.

Why Naming A Spouse The IRA Beneficiary Is So Slick (Usually)

If a spouse “inherits” an IRA, she can treat it as her own. This means she does not have to begin distributions until she is 70 ½. When she does begin taking distributions she can use a special table that assumes she has a husband 10 years younger (heh, heh, heh) even though she may have just become a widow. That means MUCH smaller mandatory distributions because they are being spread out over her life and the life of Mister-Make-Believe-Ten-Years-Younger-Romeo.

The special spousal rules for inherited IRAs also say that she can name the kids as beneficiaries and upon her death they will have separate IRAs they can take out over their life expectancies (although I have found – quite nonscientifically – that most IRAs inherited by adult children quickly become new cars or tuition payments!).

On The Other Hand . . .

Sometimes naming a spouse as IRA beneficiary is a bad idea. There may be reasons that outweigh the usual good tax reasons for naming a spouse. For example, I often encounter couples concerned about protecting assets for a surviving spouse in case he or she ever needs to go into a nursing home. An IRA left directly to a spouse will be a countable asset for Medicaid purposes. There may be other good asset protection motives involved, as well.

The solution may be to name a trust as the beneficiary of the IRA. That way, IRA assets may be protected while remaining available to benefit the surviving spouse.

There are a number of ways a trust can be designed, depending upon what the client and I are trying to accomplish. Much of how a trust will be treated depends upon whether it is something the IRS calls a “designated beneficiary.”

Is A Trust A Designated Beneficiary?

If a trust benefits only real live (as in “beating hearts living”) people then the trust will be a “designated beneficiary.” If a trust says “Mom is the primary beneficiary, then the kids” that will suffice. If the trust says “Mom may receive some, but not necessarily all benefits, then when Mom dies the North Carolina Zoo takes” the trust will not be a designated beneficiary.

If a trust is NOT a “designated beneficiary” of an IRA, then the IRA must be distributed within five years if the owner dies before 70 ½. If an IRA is not huge, being forced to completely distribute it within five years is not necessarily bad.

If the owner dies after age 70 ½, however, then the trust can take distributions over what would have been the deceased owner’s life expectancy had he been alive each year. That actually will be a bit faster than if he had been alive and married because the rules use different tables that calculate distributions as if the deceased owner were still alive and single. On the other hand, for older spouses about the same age, there may not be too much difference. The difference is if Mom had inherited directly she would have used a table that pretended there was the “Ten Year Younger Romeo” (slower distributions to account for the younger Romeo’s added life expectancy) but the trust is stuck with using a single person’s table (faster).

Bottom line: If a trust fails the “designated beneficiary” rule it means the IRA must be distributed over five years if the owner died before age 70 ½ and over the owner’s life expectancy (pretending he is alive and single) if he dies after age 70 ½.

Should Everything Be Distributed To Mom?

If we set up a trust to qualify as a “designated beneficiary” the next issue is to decide whether to make the trustee pay out to Mom all of the distributions the IRS says the trust MUST take from the IRA (this is called a “conduit trust”), or to let those IRA distributions accumulate inside the trust (where they are protected).

If the trust is a conduit trust, Mom gets all IRA distributions and she pays all income taxes (probably at her low tax rate). Also, if a trust is a conduit trust the IRA distributions can be stretched out a little bit more than if the trust was an accumulation trust. It also means that if Mom goes to the nursing home on Medicaid, all of those IRA distributions will be paid to the nursing home before Medicaid kicks in.

If the trust gives the trustee the right to accumulate IRA distributions and to decide whether to pay some, all, or none of the IRA distributions through to Mom, the IRA will be distributed to the trust slightly faster, but the assets will be safe from nursing home expenses. To the extent the trustee decides not to distribute to Mom (maybe she is in a nursing home on Medicaid) the IRA distributions being held in the trust will be subject to income taxation at much higher rates than Mom would have paid had the trustee passed the IRA distributions on to Mom. On the other had, if they were paid out to Mom, everything would be gone!

Get Help!

This is a complex topic. The purpose of this brief article was to give an overview of the possible advantages of naming a trust as IRA beneficiary. Sometimes it is a great idea, and other times it may be a really bad idea. Bring it up with your attorney or financial advisor and see what she says.

A Sole Benefit Trust is an often neglected yet important type of Special Needs Trust that can be useful in planning for certain categories of individuals with disabilities. For example, a “Sole Benefit Trust” can be a useful solution for a disabled grantor who wishes to protect funds intended for a loved one with disabilities when the grantor has her own need to protect Medicaid or SSI eligibility. Which type of Sole Benefit Trust to use, however, depends upon the Medicaid and SSI status of the beneficiary. This article will help make that choice.

Taking a few minutes to follow the discussion presented in this article will open up a potentially powerful planning tool for situations in which a special needs trust might not otherwise be a workable option. Perhaps the best way to approach an understanding of Sole Benefit Trusts is to recognize that the federal scheme approaches Special Needs Trusts from two perspectives, that of the grantor, and that of the beneficiary. From the beneficiary’s perspective, when are trust assets available for Medicaid or SSI qualification purposes? From the grantor’s perspective, what types of trusts can be funded without incurring SSI or Medicaid transfer sanctions? Bear in mind, the grantor may not care about transfer sanctions because he has no intention of applying for any benefits. But if he might be applying for Medicaid within the next 5 years, he may care deeply.

To begin the analysis of Sole Benefits Trusts, it is important to remember that the term “Special Needs Trust” (SNT) is actually a general umbrella term that covers a number of distinct types of trusts established for beneficiaries with disabilities. The best known types are self-settled special needs trusts and community or “pooled” trusts. Also common are third party special needs trusts funded one or more third parties. As will be reviewed below, each has unique characteristics, but they share the common feature that from the beneficiary’s perspective the assets in those trusts are not countable for public benefits purposes.

The term “Sole Benefit Trust” (SBT) is best understood as a subcategory of SNT that from the Grantor’s perspective does not create a transfer sanction when funded. SBT, in the remainder of this article, refers to this subcategory of SNT.

A quick review of all types of SNTs will help set the stage for understanding SBTs.

Self-settled SNTs

A Self-settled SNT is a trust established by a parent, grandparent, court or guardian for the benefit of a person with disabilities under age 65. People use the term “self-settled” because these trusts are usually funded with property of the trust beneficiary. As will be discussed below, however, “self-settled” may be a misnomer because the trust can receive contributions from other donors. A trust of this type is also often referred to as a “D4A Trust” (after the subsection (d)(4)(A) of 42 U.S.C. 1396p, the federal statute authorizing the trust).

From the beneficiary’s perspective, of prime importance is that the assets in a trust of this type are not deemed available for benefit eligibility determinations. The trustee must apply the assets for the exclusive benefit of the beneficiary, but she has great discretion as to the amount and timing of distributions as long as they do not constitute one of a fairly short list of SSI-disqualifying types of distributions. These trusts also are sometimes known as “payback trusts” because upon the death of the beneficiary the trust must first reimburse Medicaid for benefits paid during the beneficiary’s life (to the extent assets are available) before other remainder beneficiaries may receive any distributions.

Community Trusts

From the beneficiary’s perspective, Community trusts, also called “pooled trusts” or D4C Trusts (after subsection (d)(4)(C) of the authorizing statute) consist of multiple trust subaccounts for disabled beneficiaries and are established and maintained by nonprofit associations. These trust typically are used where the limited amount of the beneficiary’s funds so not justify the expense and complexity of establishing a stand alone D4A SNT. Upon the death of a beneficiary a community trust may, at state option, retain a significant portion of remaining subaccount assets to be applied to trust related purposes. Although at the time of passage of the federal law authorizing SNT’s it was believed that pooled trust accounts were an available option for disabled beneficiaries over age 65, there is currently considerable debate about this. A number of states, based on transmittals issued by the Centers for Medicare and Medicaid Services (CMS), now penalize transfers into pooled trust accounts made by beneficiaries over age 65. I refer to D4C Trusts and D4A Trusts collectively as D4 Trusts.

Third Party Trusts

A third party SNT is a trust established by an individual other than the beneficiary (or one of her surrogates) and funded with assets not owned by the beneficiary. A Third Party SNT is often a trust established by a parent or grandparent or other benefactor that simply contains language allowing great discretion to the trustee with respect to distributions and avoids any language mandating distributions that would disqualify the beneficiary from SSI or Medicaid. In fact, there may even be beneficiaries other than the beneficiary with disabilities.

From the beneficiary’s perspective, the assets are simply not available unless or until the trustee distributes to the beneficiary. The effectiveness of such a trust rests simply on the fact that trustee discretion precludes the assets from being deemed available to the beneficiary under SSI or Medicaid “availability” analysis.

From the grantor’s perspective, Third Party SNTs offer the estate planning advantage that there is no payback provision; assets remaining on the death of the beneficiary may be distributed to other named beneficiaries. However, if a grantor is a potential applicant for SSI or Medicaid, unless the Third Party SNT complies with a statutory exception, funding the trust will incur transfer sanctions.

Transfer Sanction Exemptions and the Statutory Basis of Sole Benefit Trusts

The same section of the Social Security Act that authorizes D4 Trusts contains a subsection describing Medicaid transfer sanctions and exceptions to the transfer sanctions. Two of those exceptions apply to transfers to certain trusts benefiting either a grantor’s blind or disabled child of any age or another disabled individual under age 65. Each exception requires the trust to be “solely for the benefit of” the beneficiary and contains the parenthetical “including a trust described in subsection (d)(4) of this section.” Thus, by the literal language of the statute, the exceptions apply to transfers to trusts “solely for the benefit of” certain persons with disabilities, and included in those exemptions are transfers to D4 Trusts. In fact, this is the statutory basis for exempting from transfer sanctions the funding of D4 Trusts; the actual description of D4 Trusts under subsection (d)(4) merely says that from the beneficiary’s perspective the assets are not countable.

With respect to D4A Trusts the parenthetical “including” is significant because it indicates that notwithstanding the term “self-settled” generally applied to D4A Trusts, the statute clearly envisions the ability of individuals other than the beneficiary to make transfers to such trusts (which is contrary to the understanding of many practitioners and regulators). This is significant because the ability of an individual to fund a loved one’s D4A Trust, if handled correctly, can qualify the donor for Medicaid without disqualifying the beneficiary for Medicaid or SSI.

Payback or Actuarial Soundness?

As discussed above, the statutory exemption for transfers to certain trusts contemplates a broad category of trusts “solely for the benefit of” including D4 Trusts as a subcategory. The statute, however, does nothing to describe the meaning of “solely for the benefit of” in the context of non-D4 Trusts. In 1994, the Health Care Financing Administration (what CMS was then called) addressed the meaning of “solely for the benefit of” with the issuance of Transmittal 64 to the HCFA State Medicaid Manual. The State Medicaid Manual is to Medicaid what the POMS is to SSI; namely, the federal policy that implements the federal statute.

Due to less than clear drafting contained in Transmittal 64, there has been rather widespread confusion as to what is required under the Transmittal to have a valid Sole Benefit Trust. Careful analysis of the language of the Transmittal, however, resolves the issue. Section 3257 B.6 of this Transmittal lays out the general requirement that a trust, to be considered “for the sole benefit of” an individual, must require distributions “on a basis that is actuarially sound based on the life expectancy of the individual involved.” However, the immediately following paragraph begins: “An exception to this requirement exists for” D4 Trusts. The grammatical structure and language make it clear that a transfer by a grantor to a trust for a child or other “under age 65” person with disabilities is not a sanctionable transfer for the grantor if the trust either is a D4 trust, or a trust that contains an actuarially sound distribution standard.

What is “actuarial soundness”? Section 3258.9B. of Transmittal 64 describes “actuarial soundness” as a distribution standard that will insure complete distribution of the trust within the beneficiary’s anticipated life expectancy (as determined by tables in the transmittal). Most attorneys meet this requirement by drafting a requirement that trust distributions must be made at least annually in an amount not less than the trust assets divided by the beneficiary’s remaining life expectancy. Significantly, and as demonstrated by the example of actuarial soundness provided by HCFA at section 3258.9.B., the distributions may be made more rapidly. In other words, “actuarial soundness” provides a minimum distribution standard that may be exceeded; in fact, there are situations where the greatest benefit to the beneficiary will be obtained if distributions are made more frequently that annually and much more rapidly than over his lifetime.

From the beneficiary’s perspective, an actuarially sound SBT could be disastrous if the individual is on SSI or Medicaid because the trust assets will be deemed available to the individual to the extent the trustee is required to distribute, and will certainly be available to the beneficiary to the extent the trustee actually distributes. The strategic response to the dilemma is to establish a D4A Trust or a D4C Trust account (employing the usual methods for establishing such a trust) for the disabled beneficiary and then transfer the assets to the D4 Trust. The assets will not be deemed available to the individual, although the tradeoff is that the assets will be subject to the “payback” provisions. Nevertheless, in many cases this may be an acceptable tradeoff where a grantor needing to qualify for Medicaid who wishes to benefit a loved one with disabilities by establishing an SBT.

On the other hand, for a person with disabilities who is drawing Social Security disability income benefits (which are not needs based) an SBT based on actuarial soundness (with additional trustee distribution discretion) would be an excellent choice of strategy.