Q. My brother created a trust a few years back, naming our sister as one of his beneficiaries and me as the Trustee. He recently died and we now have a problem: our sister receives public benefits (Medi-Cal and SSI) and the receipt of an inheritance would cause her to lose those benefits. Is there a way to change the trust to make some other arrangement for her that will allow her the benefit of the bequest, but also permit her to keep her public benefits?
A. Very likely, yes! The goal would be to reform your brother’s trust to direct your sister’s share into a Special Needs Trust (“SNT”). If properly set up and managed, the assets in the SNT would permit her to continue receiving her public benefits, even while the SNT pays for items which are not covered, or not fully covered, by her Medi-Cal and SSI: Examples: automobile, computer, nicer apartment, furniture, and vacations.
But the problem, of course, is that your brother’s trust leaves the bequest to your sister directly, and not into an SNT, and he is no longer alive to change it. While this is indeed a public benefits problem for her, there may now be a remedy!
Decanting Into A New Trust: A brand new California law just became effective this year (2019), called the “Uniform Trust Decanting Act”. While we normally think of “decanting” as referring to the transfer of wine from one container to another in order to separate it from older sediment and rejuvenate the wine in the newer container, this vintner’s term has a similar meaning in the world of trusts: Decanting a trust allows the trustee to transfer assets from an existing trust with unwanted provisions into a new trust with more favorable provisions.
To use the new Decanting Act you should engage a knowledgeable attorney to create a new trust which contains the desired SNT provisions for your sister’s share. Your attorney would then give your sister and all other beneficiaries 60 days notice of the proposed change. If there is no objection, then after the 60 day notice period you would adopt the new trust as your brother’s trust, and then move the assets from his old trust into the new one with the SNT provisions. Alternatively, you might just propose an Amendment as to just your sister’s share, leaving all other trust terms the same. This procedure would protect your sister’s share while allowing her to maintain her eligibility for Medi-Cal and SSI. The beauty of decanting is that it can be handled without court involvement and without the corresponding expense and uncertainty of a court proceeding.
Judicial Modification: If any beneficiary objects, then you have the more traditional option of petitioning the superior court for an order reforming the trust to include the necessary SNT provisions. Before January 1 of this year, this was the traditional approach in situations like yours. Now, with the new Decanting Act, it can be used as a “back up” if any beneficiary objects.
A further note on the new Decanting Act: using it to create a SNT for a beneficiary receiving public benefits is merely one use. It can also be used to modify other provisions of an older trust: Examples: to update tax provisions, clarify ambiguities, change successor trustees, re-designate the place of trust administration, and — in some cases — to unwind an unnecessary A – B Credit Shelter Trust.
This new procedure should certainly be considered in your situation.
Special Comments For Elder Law and Special Needs Trust Attorneys:
1) The “Self-Settled” SNT Issue: When considering Decanting into a newly created Special Needs Trust, timing is critical if the goal is to achieve the benefit of a SNT while avoiding the requirement of a post-mortem “pay back” to Medi-Cal. Basically, the decanting in this context should be completed prior to the time that the beneficiary vests as to principal: Decanting prior to vesting would likely permit the creation of the SNT to be characterized as a Third Party SNT (without the need for post-mortem payback provisions), while decanting afterward may require that the SNT be characterized as a First Party SNT (i.e., as a “self-settled SNT”) with the requirement that it contain payback provisions. See, Kroll v New York State Dep’t of Health (App Div 2016) 39 NYS3d 183, aff’d (Oct. 5, 2016) NY Slip Op 06499. Whether this New York case will govern similar proceedings in California, or other states, is presently undetermined. That said, the careful practitioner desiring to decant to a SNT without needing to include “payback” provisions would be wise to observe its holding, whenever possible, until the law in California on this point is clarified. To be even more cautious, I would recommend that — if time permits — the Decanting be handled pursuant to the Notice provisions of the Act, rather than via the Consent provisions, so as to render it less likely that the creation of the SNT will be considered the volitional act of the target beneficiary.
2) The Problem for Over-Age 65 Beneficiaries: If the Decanted SNT is later characterized by Medi-Cal or SSI as a “First Party Self-Settled SNT”, that is a big problem for a beneficiary age 65 years or older. Reason: a beneficiary over age 65 cannot self-settle a SNT under any circumstance. See, 42 USC 1396p(d)(4)(A). The only option for this beneficiary is to join and fund a Pooled Special Needs Trust, as authorized by 42 USC 1396p(d)(4) ( C). However, even this option has been clouded by a recent appellate decision out of Iowa, called Cox and Cox vs. Iowa Dept of Human Services, decided November 30, 2018, wherein the funding of a Pooled SNT by a married couple — both of whom were over age 65 — was determined to be a transfer for less than fair market value, resulting in a transfer penalty disqualification for medicaid for each spouse. That Iowa decision notwithstanding, the rule in California has long been that a person of any age may join a Pooled SNT without jeopardy to their Medi-Cal eligibility. See, 22 Cal Code Regs §50489.9 ( c). Indeed, the California Dept. Of Health Care Services acknowledges as much on its own website. See Special Needs Trust notice, wherein it recites that a person of “any age” may join a Pooled SNT. See CEB, Special Needs Trusts, Planning, Drafting and Administration, at §12.9.
However, there still remains concern as to SSI eligibility under Federal Social Security Law for the over-age 65 SNT beneficiary where the decanted SNT is deemed a “Self-Settled” First Party SNT. The concern is that SSI (unlike Medi-Cal) may impose a transfer penalty of up to 3 years upon funding a Pooled-SNT by the over-age 65 beneficiary. See CEB, Special Needs Trusts, Planning, Drafting and Administration, at §12.10.