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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).

Filed Under: General, Medicare, Medicare Secondary Payer, Special Needs Planning Tagged With: , ,

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Stop The VA Annuity ScamA scam common in many parts of the country has come to central North Carolina. Veterans (and widows of veterans) are being duped into funneling hundreds of thousands of dollars into totally inappropriate (even disastrous) annuities. The come on? “I can qualify Mom for another $1,056 a month in veterans benefits and you’ll be able to afford the assisted living facility.”

Often a seminar is hosted by an assisted living facility and led by a “veterans’ benefits specialist” who is nothing more than annuity salesman (and usually from out of town). Sometimes the family of someone recently admitted to a facility will receive a telephone call with the enticement of another $1,056 or more monthly.

Some of the folks I have spoken to tell me that the annuities being offered have 10 or more years of substantial surrender charges. Often the sales people (er . . . “specialists”) are quite aggressive (understandable given the HUGE commissions they make).

A Few Plain Facts About Veterans Benefits

  • Veterans benefits impose NO transfer penalties like Medicaid does.
  • A veteran must not have assets in excess of certain levels.
  • A veteran can actually transfer the excess assets to another person and instantly qualify for benefits.
    • Transferring to another person might not be too smart, though.
    • What if that person dies, divorces, gets sued, goes bankrupt?
    • What if the veteran later needs Medicaid (which DOES impose transfer sanctions)?
  • There are a number of different strategies involving how assets are titled, or perhaps the use of a trust, that do NOT involve an inappropriate annuity!

The worst cases involve the veteran (or widow) being counseled to transfer most of his or her money to a child (at this point the veteran is qualified for benefits, but he or she won’t be told that) and THEN having the child purchase the “special” annuity. Buried in the fine print, the annuity will have huge surrender charges for many years.

I have nothing against appropriate use of annuities. I have everything against the use of a totally unnecessary annuity that will tie up a greatOld POW - Veteran deal of a veteran’s money (nearly all, in fact) for many years, and pay an annuity sales person tens of thousands of dollars in commissions.

I am also bothered by assisted living facilities that host these seminars and give sales people access to their residents. I hope that the involvement of the assisted living facility is simply misguided, but well-meaning. In any event, there are plenty of knowledgeable sources who would be happy to present at a facility without trying to steer the attendees into an expensive and unnecessary annuity.

AARP has an excellent article on this. I don’t always agree with “Everything AARP,” but I agree with almost everything they have written regarding veterans annuity scams in assisted living facilities. I take some exception to the article’s condemnation of trusts, because the use of a trust might be totally appropriate. Their point about a trust causing potential Medicaid problems is very well taken, however. The important take away is to make sure that anyone recommending and preparing a trust understands the complex trust rules of BOTH the VA and Medicaid.

Again, I have nothing against wise use of annuities. If you are thinking of buying one, buy from someone locally who you know and trust. You’ll know where to find them if things go wrong. Meanwhile, the presenter who sells the annuities as part of the traveling road show will be back in Vegas!

Filed Under: Medicaid, Nursing Homes, Veterans

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What do Halloween and Medicare Advantage Open Enrollment Periods have in common?

A. They both are spooky.Sick Pumpkins

B. They happen at about the same time.

C. They leave many people in the dark.

D. Too much of either can make you sick.

E. All of the above.

The correct answer, of course, is:  E.   All of the above.

By the end of this brief post you will understand what a Medicare Advantage Open Enrollment Period is. We are currently in it. This year (enrollment for 2012) it runs from October 15 through December 7. You will also understand the differences between Medicaid Parts A, B, C and D and the importance of a Medigap policy.

First let’s take a look at what Medicare Advantage is and how it is different from “Original” Medicare. If you bear with me to the end, I’ll even mention a few neat tricks (or treats?).

Original Medicare

Medicare, as originally set-up and as it remains currently, has two principal parts (in fact, I read somewhere that Medicare was actually patterned after Blue Cross and Blue Shield). Part A provides hospital and other inpatient facility benefits . . . which is why it is called “Hospital Insurance” (imagine!). Part B covers other medical expenses (physician and other provider services, various diagnostic and screening services and durable medical equipment –like walkers and heavily advertised motorized chairs).

If you have the required work history you can signup for Medicare Part A and Part B (if it hasn’t been done automatically upon going on to Social Security) three months before the month of your sixty-fifth birthday, the month of the birthday, and three months following. If you are working and receiving group health benefits at work, you can delay signing up for Part B without a premium penalty for up to eight months after terminating employment. If you miss one of these sign up periods, be prepared to pay an extra 10% for every twelve month period you go without Part B. Take a look at a downloadable chart comparing the various sign-up periods on this site.

Part A is free (unless you didn’t have enough work credits for Social Security . . . but even then you can “buy-in” to Part A). Part B is not free. It costs $96.40 for most folks in 2011 ($99.90 in 2012). Part B premiums are more for others depending on income. And for the first time in a few years, premiums will go up in 2012.

Medicare expects you to chip in with coinsurance and deductibles. In fact, without extra help, the coinsurance and deductibles can get pricey (very). That is why, if you decide to go with “original Medicare” a good Medigap or Medicare supplemental policy is highly advisable (in fact, not purchasing a policy to save a few dollars is foolish). If you sign-up within six months of signing-up for Part B, the Medigap insurer must charge you the same premium it charges everyone else. If you wait too long, they can ask all sorts of nosey questions about your health and charge you accordingly. You may read more about Medigap insurance elsewhere on this site. We also have a great downloadable chart comparing the different types of Medigap plans (look at the second page).

Part C or Medicare Advantage

Congress decided to set up a mechanism to allow private insurers to join the Medicare party and provide coverage as an alternative to Medicare Advantage Card“Original Medicare.” Part C of Medicare provides for Medicare Advantage plans that are in lieu of Part A and Part B. The plans must provide all of the basic Medicare Part A and Part B services – but they can also offer other services that Original Medicare does not cover (perhaps dental, hearing aids, and other exotic benefits like gyms) – and they can (and do) charge various amounts for their plans. The federal government then pays the plans a fixed amount per plan participant. There are several delivery models to choose from (notably health maintenance organizations, preferred provider organizations, and private fee for service plans).

Medicare Advantage plans are gaining in popularity. I’m coming around, but I have been suspicious of them. Often folks sign-up beguiled by extra services only to discover they are paying more for the core services they really need.

Now this is really important: Some Medicare Advantage Plans offer a Part D drug benefit – but not all do. Understand what is being offered, because it could have serious consequences later if you decide to switch out of a Medicare Advantage Plan that doesn’t offer a drug benefit.

Generally, you can sign up for an Advantage plan when you first become eligible to sign-up for Medicare. Once in an Advantage plan you’re generally stuck with it until the next Open Enrollment Period although you can bail out of an Advantage plan anytime between January 1 and February 15 as long as you go back to original Medicare. If you had a Part D drug plan with your Advantage plan (discussed below) make sure you sign up for a new Part D plan when you make that switch. You will not have to wait to an Open Enrollment Period to make a switch if you move out of the coverage area, go on Medicaid.

Check out the downloadable chart illustrating the various Advantage plan sign-up periods as well as a discussion of the different types of Advantage plans.

No one may sell a Medigap policy to an Advantage plan enrollee. Remember, the idea behind Medicare Advantage is that it is all “bundled.”

Medicare Part D

Medicare Part D is the drug benefit that has been around a few years. This is the home of the famous “donut hole.” Like other Medicare plans you can sign-up in the seven month window beginning three calendar months before the month of your sixty-fifth birthday and ending three calendar months after the month of your sixty-fifth birthday.

Really important: Do NOT go more than 63 days during ANY period of time after you first become eligible for Medicare without being in a Part D plan or having other “creditable coverage.” If you do, you’ll pay a premium penalty of about $.32 for every month that you went without coverage when you try to sign-up again. If your other drug coverage is “creditable coverage” you’ll know – they have to tell you in writing if it is.

Generally speaking, if you’re in a Part D plan, you’ll be stuck with it until the next Open Enrollment Period rolls around, and at that time you can make changes effective for the first of the year. There are exceptions, however, in case you move out of the coverage area, lose other “creditable coverage” or move to a nursing home.

I have not left out Part D drug plans . . . you may download a Part D enrollment period chart on this site.

So Here We Are . . .

In the middle of the 2012 Open Enrollment Period. If you are happy with your coverage, ignore all the commercials. If you are in an Advantage plan and not very happy, or if you are in original Medicare and are thinking about an Advantage plan, then do some comparison shopping. Do not take the first sales pitch that comes along.

Here is a Neat Trick: Go to www.medicare.gov/find-a-plan for a great comparison shopping tool. It works for both Part C Advantage plans and for Part D drug plans. It is easy to use.

And Here is Another Neat Trick . . .

Beginning December 8, 2011, you can switch out of a Medicare Advantage Plan or Drug Plan anytime as long as you are switching to a 5-Star Plan. Medicare has begun collecting consumer health care provider input to rate plans. 5-Star Plans are the top of the heap. The idea is that the more lowly starred or unstarred plans will be a bit more customer friendly if they know you can walk at anytime. It will be interesting to see how that works.

In a nutshell:

  • Part C Advantage Plans replace Original Medicare Part A and Part B.
  • You may have either Parts A and B or Part C, but not both.
  • If you stick with Original Medicare, you should stick with a good Medigap policy.
  • If you drop (or fail to sign-up for) a Medigap plan anytime after you enrolled in Part B, you may have to pay more premiums based on your health (and may even be denied coverage).
  • You may have a Part D drug plan with either Parts A and B or with Part C (although many Advantage plans have a drug plan “built in”).
  • Do NOT go more than 63 days without a Part D drug plan or other “creditable coverage” if you want to avoid a penalty.

Download these handy charts (they’ll help you through the maze):

Part A and Part B Enrollment Calendar and Medigap Plan Type Grid

Part C (Medicare Advantage) Enrollment Calendar and Plan Type Grid

Part D Drug Plans Enrollment Calendar

 

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Filed Under: General, Medicare Tagged With: , , , , , , , , , ,

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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.

Filed Under: Medicaid, Special Needs Planning, Trusts generally Tagged With: , , , ,

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As an elder law and special needs attorney I get a track-side seat for a pile of planning train wrecks: Here are the best ones . . .

Elder Law Train Wreck # 1This is a column for the contrarians among us who will insist, against mounds of advice, on creating maximum legal havoc. Here are ten great ways to insure a successful train wreck!

Great Idea One: Do not have a will. Let state law determine how assets will be divided (they won’t all go to a spouse if there are any children). Without a will many valuable planning opportunities are missed, thus insuring maximum havoc.

Great Idea Two: Do not have an effective power of attorney. Without a power of attorney, a guardianship may be the only option, which will be expensive and subject the guardian to court supervision and bonding.

Great Idea Three: Sign over all property to the kids if bad results are the goal. Mom may believe she is protecting her property, but she is subjecting the property to the liabilities and risks of the kids (divorce, anyone?), not to mention that some of the kids may be thinking of moving to Rio. Giving the property to the kids can also insure they pay maximum capital gains taxes when they sell the property. Certain types of trusts are a much better alternative, but not as much fun if creating maximum damage is the goal!

Great Idea Four: Skip the health care advance directives. Let everyone argue among themselves to decide who gets to make health care decisions.

Great Idea Five: Do not do any long term care planning. Buying long term care insurance is way too responsible. Also, it is better to wait until there is a crisis (Dad has gone into the nursing home) because at that time there are fewer options and any course of action will likely be more expensive.

Great Idea Six: If there is a disabled child, duck parental responsibilities and avoid taking advantage of the many planning opportunities Elder Law Train Wreck #2available for a special needs child. Disinherit the child and leave everything to the siblings. Maybe “they’ll do the right thing.”

Great Idea Seven: Carry inadequate insurance. This is a real winner! Do not carry a good Medicare supplemental policy so that there will be maximum exposure to whatever Medicare does not cover (which is plenty).

Great Idea Eight: Do not do any planning after a “late” second marriage, especially if there are children from the previous marriages. In this manner a perfect storm of battling families can be hoped for. Also, treasured family assets can be used to pay for the nursing home expenses of old Whatsisname instead of going to the kids.

Great Idea Nine: Do not, under any circumstances, update an old estate plan. Laws may change, but the dedicated Train Wrecker knows that he need never change!

Elder Law Train Wreck #3Great Idea Ten: Never, ever seek good professional advice. With good professional assistance things may go too smoothly. If you absolutely must have some help, limit expenses to less than $100 and buy something online. Or better yet, seek the advice of a neighbor.

Bonus: Do not do anything.

Someone told me not to write this because it would be bad for business (because guess who gets to clean up the wreck?).  “Nope,” I said, “people will do it anyway!”

Filed Under: Advance Directives, General, Insurance, Medicaid, Medicare, Special Needs Planning, Trusts generally, Wills (or Not!) Tagged With: , , , , , , ,