Medicaid Liens, Recoveries and Supplemental Needs Trusts

See: ARKANSAS DEPARTMENT OF HEALTH AND HUMANSERVICES ET AL. v. AHLBORN

Medicaid Liens and Recoveries. Do Liens Need to be Settled Prior to the Establishment of the Supplemental Needs
© 2002 by Jay J. Sangerman, Esq.

April 30, 2002

Please note that laws, rules, regulations and procedures differ from State to State and even among counties within the same State. Therefore, it is important to check the laws of the jurisdiction in which the trust is being created, as well as the jurisdiction in which the beneficiary resides and/or intends to reside in the future. The information contained herein is based upon statutes and caselaw, conversations with Centers for Medicare and Medicaid Services (HCFA) and personal experience in representing families and law firms in these matters.

Updates of this outline and other information on Supplemental Needs Trusts and their Relationship to Structures can be found at www.sangerman.com.

Introduction.

This outline is intended to address the interaction between "structured settlements" and Supplemental Needs Trusts, also known as Special Needs Trusts. The issues discussed in this outline are directed to the preservation of the social policy inherent in the federal and state laws pertaining to Supplemental Needs Trusts funded with the net proceeds from tort actions and the preservation of the use of structured settlements in these matters.

This outline will focus on the satisfaction of Medicaid liens for medical services paid by Medicaid programs and latter recovered in personal injury litigation. The outline will also focus on Medicaid's remainder interest in the Supplemental Needs Trust upon the death of the trust beneficiary or earlier termination of the Supplemental Needs Trust. The latter issue is important because various Medicaid districts are concerned that structured settlement are being used as an attempt to limit Medicaid's remainder interest in the Supplemental Needs Trust upon the death of the beneficiary or earlier termination of the trust.

The Law Establishing the Supplemental Needs Trust.

The Supplemental Needs Trust discussed in this outline is a trust funded with funds belonging to the Trust beneficiary, or funds to which the beneficiary is legally entitled. These funds are generally derived from a personal injury or medical malpractice matter. Funds may also be from an inheritance (where proper estate planning had not been undertaken) or where the individual has funds and seeks to become Medicaid eligible. There are also other types of Supplemental Needs Trusts not discussed in this outline, which are trusts used in estate planning for a disabled individual and "pooled trusts" which are managed by a non-profit association. Further information on the full range of Supplemental Needs Trusts and tort settlements can be found at www.sangerman.com.

The Supplemental Needs Trusts discussed in this outline are commonly known as "first party trusts" or "payback trusts." Federal laws (established as part of OBRA '93) and state laws enacted pursuant to the federal law require that:

1. The beneficiary is disabled pursuant to federal law as defined in section 1614(a)(3) of the federal Social Security Act, i.e., one who would qualify for Social Security Disability payments if the person is of age and had worked a sufficient period of time.

2. The beneficiary of the Trust is under the age of sixty-five years at the time the Trust is established.

3. The Trust cannot receive additional funding after the beneficiary is sixty-five years or greater of age. (In fact, some states, such as Pennsylvania, require such language to be included in the trust agreement.).

4. The Trust is established by a parent, grandparent, legal guardian, or court of competent jurisdiction.

5. The Trust is established for the sole benefit of the beneficiary.

6. Upon the death of the trust beneficiary, or earlier termination of the Trust, the State will receive all amounts remaining in the trust up to the total value of all medical assistance paid on behalf of such individual.

The federal law, described above, is found at 42 U.S.C.A. § 1396p(d)(4).

Question: Are periodic payments from a structured settlement paid as of age sixty-five disallowed additions to a Supplemental Needs Trust? Perhaps appropriate drafting language will take care of any issues that may arise. Upon inquiry of various Medicaid districts, the position is that so long as the "structure" has been established prior to the beneficiary's sixty-fifth birthday and is required to be paid into the Trust, that these ongoing payments are deemed transferred into the Trust prior to age 65. Therefore, it may be useful to include in the order establishing the Trust, or if no order, then into the settlement documents that the "structure" shall be paid into the Trust and, upon termination of the Trust, pursuant to the terms of the Trust.

The Social Security Administration in its Procedural Operations Manual at SI 01120.200, SI 01120.201, SI 01120.203 and EM-00067, sets forth how a Supplemental Needs Trust is evaluated for purposes of Supplemental Security Income:

To qualify for the special needs trust exception, the trust must be established for the benefit of a disabled individual under age 65. This exception does not apply to a trust established for the benefit of an individual age 65 or older. If the trust was established for the benefit of a disabled individual prior to the date the individual attained age 65, the exception continues to apply after the individual reaches age 65.

However, any additions to or augmentation of a trust after age 65 are not subject to this exception. Such additions may be income in the month added to the trust, depending on the source of the funds (see SI 01120.201J.) and may be counted as resources in the following months under regular SSI trust rules. (Additions or augmentation do not include interest, dividends or other earnings of the trust or portion of the trust meeting the special needs trust exception.)

Emphasis added.

On June 5, 1996, Sally Richardson, then the director of the Medicaid Bureau of HCFA, wrote to all State Medicaid Directors her department's position on Supplemental Needs Trusts and third party liability rules pertaining to these trusts. Her position memorandum is herein referred in this outline as the "Richardson Memorandum." State courts have referred to this memorandum in decisions pertaining to Supplemental Needs Trusts.

Must the Medicaid Lien be Paid Prior to the Establishment of the Supplemental (Special) Needs Trust and, if so, How Much of the Lien?

Among the issues pertaining to Supplemental Needs Trusts, probably no topic has been so hotly argued as the issue of whether the Medicaid lien must be paid prior to the establishment of the Trust. To many, it seemed reasonable that, if the purpose of the Supplemental Needs Trust was to defer payments for medical expenses until the death of the disabled individual, reimbursement to Medicaid for any Medicaid paid prior to the establishment of the Trust should be similarly deferred until the death of the trust beneficiary. In fact, in the early days after OBRA '93, which created the law for payback Supplemental Needs Trusts, some courts allowed the deferral of the Medicaid lien. The highest courts in some States have addressed this issue and, based, in part, upon the Richardson Memorandum, and the law set forth below, have stated that Medicaid must be reimbursed prior to the establishment of the Supplemental Needs Trust. The federal and state theory is that Medicaid has a right of indemnification and subrogation against medical expenses paid by third parties for which Medicaid had already paid.

If Medicaid must be repaid prior to the establishment of the Supplemental Needs Trust, then how much of the Medicaid lien needs be paid prior to the establishment of the Supplemental Needs Trust. Neither the Richardson Memorandum, nor the federal law, imposes as a absolute requirement that the entire lien be paid – only that the State seek appropriate reimbursement prior to the establishment of the Supplemental Needs Trust.

(a) Federal Law.

1. Collection of the Lien.

Under the federal law, a Medicaid recipient must assign his/her rights to the recovery of medical expenses paid by Medicaid. The Medicaid recipient must assist Medicaid, as a condition of eligibility, in seeking recovery of payments from third parties. The federal law, at 42 U.S.C. §1396k, states:

For the purpose of assisting in the collection of medical support payments and other payments for medical care owed to recipients of medical assistance under the State plan approved under this title, a State plan for medical assistance shall--

(1) provide that, as a condition of eligibility for medical assistance under the State plan to an individual who has the legal capacity to execute an assignment for himself, the individual is required--

(A) to assign the State any rights, of the individual or of any other person who is eligible for medical assistance under this title and on whose behalf the individual has the legal authority to execute an assignment of such rights, to support (specified as support for the purpose of medical care by a court or administrative order) and to payment for medical care from any third party;
- - - - - -
(C) to cooperate with the State in identifying, and providing information to assist the State in pursuing, any third party who may be liable to pay for care and services available under the plan, unless such individual has good cause for refusing to cooperate as determined by the State agency in accordance with standards prescribed by the Secretary, which standards shall take into consideration the best interests of the individuals involved; and
(b) Such part of any amount collected by the State under an assignment made under the provisions of this section shall be retained by the State as is necessary to reimburse it for medical assistance payments made on behalf of an individual with respect to whom such assignment was executed (with appropriate reimbursement of the Federal Government to the extent of its participation in the financing of such medical assistance), and the remainder of such amount collected shall be paid to such individual.

The Richardson Memorandum states that the placement of funds derived from a third-party settlement into an SNT is a violation of the individual's duty to cooperate. In relevant part, the Richardson Memorandum states:

Federal law at section 1902(a)(25)(A) of the [Social Security] Act requires States to take all reasonable measures to ascertain the legal liability of third parties to make payments which Medicaid would otherwise have to make. A third party is defined in the regulations at 42 CFR 433.136 as an individual, entity, or program that is or may be liable to pay all or part of the expenditures for medial assistance furnished under the State plan. Where such a legal liability exists, section 1902(a)(25)(B) requires a State to seek reimbursement for medical assistance payments already made.
All individuals, at the time of application and as a condition of eligibility for Medicaid, must assign to the State their rights to payment for medical care from any third party and, subject to several exceptions, must cooperate with the State in its pursuit of any third party who might be liable for such payment as required by section 1912(a)(1) of the Act and 42 CFR 433.145 of the Medicaid regulations.
Thus, if an individual is already Medicaid eligible at the time he or she receives a third party settlement or judgment, the State has claim to any portion of the proceeds which were intended to pay for medical care for the individual that is covered by Medicaid. If the individual negotiates with the third party to place these amounts in a trust or otherwise fails to help make the amounts available to the State, then that individual has violated a condition of eligibility in section 1912 which requires the individual to cooperate with the Sate in obtaining payments for medial care fro a third party. The individual would lose eligibility, regardless of the trust provisions and exceptions in sections 1917(d)(4)(A) and (C) [,which are those provisions in the federal law providing for the creation of payback Supplemental Needs Trusts].

See also Sullivan v. County of Suffolk, et. al., in which the U.S. Court of Appeals for the Second Circuit held that the Medicaid lien needed to be paid prior to the establishment of the Supplemental Needs Trust; Norwest Bank of North Dakota, N.A. v. Doth, U. S. Court of Appeals for the Eighth Circuit.
2. Compromise of the Lien.
The federal law, at 42 CFR 433.139 (f), states that if the reduction in the Medicaid lien would be "cost effective," then the State can reduce the amount of the Medicaid lien. "Cost effective" may mean that the underlying tort litigation cannot be settled unless the Medicaid lien against the proceeds is reduced. 42CFR 433.139 (f) states:

(f) Suspension or termination of recovery of reimbursement. (1) An agency must seek reimbursement from a liable third party on all claims for which it determines that the amount it reasonably expects to recover will be greater than the cost of recovery. Recovery efforts may be suspended or terminated only if they are not cost effective.
(2) The State plan must specify the threshold amount or other guideline that the agency uses in determining whether to seek recovery of reimbursement from a liable third party, or describe the process by which the agency determines that seeking recovery of reimbursement would not be cost effective.
(3) The State plan must also specify the dollar amount or period of time for which it will accumulate billings with respect to a particular liable third party in making the decision whether to seek recovery of reimbursement.

(b) State Applications of the Federal Laws.

Set forth below are some examples from various States pertaining to their rules and regulations on the collection of liens against personal injury recoveries. As will be noted, some States have enacted statutes, while other states relay upon caselaw. In New York State, there have been bills presented to the legislature, seeking legislation to prevent the collection of any Medicaid lien in situations where funds are placed into Supplemental Needs Trusts until the death of the plaintiff/beneficiary of the trust. The last proposed bill failed to pass last year.
1. Collection of the Lien.

New York.
The Court of Appeals of the State of New York has ruled that:

a. Medicaid can enforce its full lien against the proceeds of personal injury actions;
b. Where a Supplemental Needs Trust is being established, the Medicaid lien must be paid prior to the establishment of the Supplemental Needs Trust;
c. All settlement proceeds (not just those allocated to medical expenses) are available to satisfy Medicaid liens; and
d. The Medicaid lien is payable irrespective of the age of the plaintiff. Some of the litigation had involved the issue of whether a minor's award in a personal injury matter can have a lien placed against it.

Set forth below are some of the "key" cases in New York State:
a. Cricchio v. Pennisi, 90 N.Y.2d 296, 660 N.Y.S.2d 679, amended sub nom. Link v. Town of Smithtown, 1997 N.Y. LEXIS (N.Y., July 1, 1997), which stated:

The recoupment of Medicaid funds from responsible third parties is accomplished by Federal directives that the State plan include assignment, enforcement and collection mechanisms (42 USC § 1396k [a] [1] [A]; § 1396a [a] [25] [I]). Specifically, as a condition of eligibility, an applicant must assign to DSS any rights he or she has to seek reimbursement from any third party up to the amount of medical assistance paid (42 USC § 1396k [a] [1] [A]; 42 CFR 433.146 [c]; Social Services Law § 366 [4] [h] [1]; 18 NYCRR 360-7.4 [a] [6]). Additionally, a Medicaid recipient must "cooperate with the State in identifying, and providing information to assist the State in pursuing, any third party who may be liable to pay for care and services available under the plan," unless good cause exists for his or her refusal to cooperate (42 USC § 1396k [a] [1] [C]; see also, Perry v Dowling, 95 F3d 231, 234 [2d Cir 1996]).
New York's statutory scheme provides that DSS "shall be subrogated, to the extent of [its] expenditures ... for medical care furnished, to any rights such person may have to medical support or third party reimbursement" (Social Services Law § 367-a [2] [b]). To enable the public welfare official to enforce its substantive right to pursue repayment from responsible third parties (see, Matter of Costello [Stark] v Geiser, 85 NY2d, at 108-109, supra ), the New York Legislature enacted Social Services Law § 104-b, which authorizes DSS to place a lien for public assistance on personal injury claims and suits against third parties to the extent of the expenditures made on the recipient's behalf. Once the statutory notice and filing requirements are met, the public welfare official's lien attaches to any verdict, judgment or award in any suit respecting such injuries, "as well as [to] the proceeds of any settlement thereof" (Social Services Law § 104-b [3]). The lien continues "until released and discharged by the local public welfare official" (§ 104-b [7]).
. . . . . . . . . . . .
This recoupment hierarchy follows necessarily from the assignment and subrogation scheme. (emphasis added). As the Medicaid recipient's assignee (see, 42 USC § 1396k; Social Services Law § 366 [4] [h] [1]), DSS obtains all of the rights that the recipient has as against the third party to recover for medical expenses, including the ability to immediately pursue those claims against the third party. Because the injured Medicaid recipient has assigned its recovery rights to DSS, and DSS is subrogated to the rights of the beneficiary (Social Services Law § 367-a [2] [b]; Matter of Costello [Stark] v Geiser, 85 NY2d 103, supra), the settlement proceeds are resources of the third-party tortfeasor that are owed to DSS. Accordingly, the lien on the settlement proceeds attaches to the property of the third party, and thus does not violate the statutory prohibition against imposing a lien against a beneficiary's property until after his or her death (emphasis added) (see, Social Security Act § 1917 [a] [ 42 USC § 1396p (a)]; Social Services Law § 369 [2] [a]). The flaw in plaintiffs' theory that the lien cannot be satisfied until the recipient's death is that it fails to appreciate this critical distinction between the assets of a responsible third party and assets belonging to the Medicaid recipient.

b. Robin K. Calvanese v. Anthony J. Calvanese et. al. Suffolk County Department of Social Services, Respondent; Patricia Callahan, Appellant. 93 N.Y.2d 111; 710 N.E.2d 1079 (1999). The Court held that all settlement proceeds were available to satisfy Medicaid liens, and that transfer of settlement funds from a tort recovery to a supplemental needs trust could be made only after the liens were paid.
c. Arvil Samerson et al., Respondents, v. Mather Memorial Hospital et al., Defendants, 90 N.Y.2d 870; 684 N.E.2d 271; 661 N.Y.S.2d 822 (1997). The Medicaid lien must be established prior to the establishment of the Supplemental Needs Trust with settlement proceeds before satisfying a Medicaid lien.
d. Gold v. United Health Services Hospitals, Inc. ______________________________. Irrespective of the age of the plaintiff/beneficiary of the Trust, the Medicaid lien must be paid prior to the establishment of the Supplemental Needs Trust irrespective of the age of the plaintiff. The court stated:

Florida
Florida has a Medicaid third-party liability act (409.910) which is not dissimilar to the New York caselaw and, in part, states:

(1) It is the intent of the Legislature that Medicaid be the payor of last resort for medically necessary goods and services furnished to Medicaid recipients. All other sources of payment for medical care are primary to medical assistance provided by Medicaid. If benefits of a liable third party are discovered or become available after medical assistance has been provided by Medicaid, it is the intent of the Legislature that Medicaid be repaid in full and prior to any other person, program, or entity. Medicaid is to be repaid in full from, and to the extent of, any third-party benefits, regardless of whether a recipient is made whole or other creditors paid. Principles of common law and equity as to assignment, lien, and subrogation are abrogated to the extent necessary to ensure full recovery by Medicaid from third-party resources. It is intended that if the resources of a liable third party become available at any time, the public treasury should not bear the burden of medical assistance to the extent of such resources.
(6) When the agency provides, pays for, or becomes liable for medical care under the Medicaid program, it has the following rights, as to which the agency may assert independent principles of law, which shall nevertheless be construed together to provide the greatest recovery from third-party benefits:

(a) The agency is automatically subrogated to any rights that an applicant, recipient, or legal representative has to any third-party benefit for the full amount of medical assistance provided by Medicaid. Recovery pursuant to the subrogation rights created hereby shall not be reduced, prorated, or applied to only a portion of a judgment, award, or settlement, but is to provide full recovery by the agency from any and all third-party benefits. Equities of a recipient, his or her legal representative, a recipient’s creditors, or health care providers shall not defeat, reduce, or prorate recovery by the agency as to its subrogation rights granted under this paragraph.

7. No release or satisfaction of any cause of action, suit, claim, counterclaim, demand, judgment, settlement, or settlement agreement shall be valid or effectual as against a lien created under this paragraph, unless the agency joins in the release or satisfaction or executes a release of the lien. An acceptance of a release or satisfaction of any cause of action, suit, claim, counterclaim, demand, or judgment and any settlement of any of the foregoing in the absence of a release or satisfaction of a lien created under this paragraph shall prima facie constitute an impairment of the lien, and the agency is entitled to recover damages on account of such impairment. In an action on account of impairment of a lien, the agency may recover from the person accepting the release or satisfaction or making the settlement the full amount of medical assistance provided by Medicaid. Nothing in this section shall be construed as creating a lien or other obligation on the part of an insurer which in good faith has paid a claim pursuant to its contract without knowledge or actual notice that the agency has provided medical assistance for the recipient related to a particular covered injury or illness. However, notice or knowledge that an insured is, or has been a Medicaid recipient within 1 year from the date of service for which a claim is being paid creates a duty to inquire on the part of the insurer as to any injury or illness for which the insurer intends or is otherwise required to pay benefits.
(9) The department shall deny or terminate eligibility for any applicant or recipient who refuses to cooperate as required in subsection (8), unless cooperation has been waived in writing by the department as provided in paragraph (8)(f). However, any denial or termination of eligibility shall not reduce medical assistance otherwise payable by the department to a provider for medical care provided to a recipient prior to denial or termination of eligibility.

Colorado

130 CMR 520.007

(3) If medical assistance is furnished to or on behalf of a recipient pursuant to the provisions of this article for which a third party is liable, the state department has an enforceable right against such third party for the amount of such medical assistance, including the lien right specified in subsection (4) of this section. . . . .
(4)(a) When the state department has furnished medical assistance to or on behalf of a recipient pursuant to the provisions of this article for which a third party is liable, the state department shall have an automatic statutory lien for all such medical assistance. The state department’s lien shall be against the amount of the judgment, award, or settlement in a suit or claim against such third party and shall be payable after deducting from the judgment, award, or settlement for the recipient’s attorney fees and reasonable litigation costs incurred in the preparation and prosecution of the action or claim.
(b) No judgment, award, or settlement in any action or claim by a recipient to recover damages for injuries, where the state department has a lien, shall be satisfied without first satisfying the state department’s lien. Failure by any party to the judgment, award, or settlement to comply with this section shall make each such party liable for the full amount of medical assistance furnished to or on behalf of the recipient for the injuries that are the subject of the judgment, award, or settlement.

The Colorado statute explicitly states that any statutory lien pursuant to Section 26-4-403(4) must be satisfied prior to funding of the trust and approval of the trust. 8.110.5
.

New Jersey

The New Jersey statute was enacted last year. This statute sets forth exactly what must be included in the drafting of the Supplemental Needs Trust. As to the Medicaid lien, the statute states:

If the Trust is established with funds from the proceeds of a settlement or judgement subsequent to the brining of a legal cause of action, Medicaid’s claim for its expenditures that are related to the cause of action shall be repaid immediately upon the receipt of such proceeds and prior to the establishment of the trust.

N.J.A.C. 10:71-4.11.

2. Suggestions to Consider When Seeking to Compromise the Medicaid Lien.

It does not appear that the law is absolute that the full amount of the Medicaid lien must be paid. In fact, some States have an automatic reduction in the Medicaid lien. HCFA, in fact, only states that states must seek recovery, not state that States must obtain the full amount of the Medicaid lien. The examples set forth below are essentially techniques which this author has found useful in negotiating the Medicaid lien, most of which has been done in New York State.

a. General Issues to Consider.

1. The parties to the litigation should consider that the Medicaid lien only gets larger until such time as the case settles and the Supplemental Needs Trust is established. Therefore, in cases where there are significant on-going medical expenses being paid for by the Medicaid program, it may be disadvantageous to both the plaintiff and the defendant to delay in settlement. The extra recovery a plaintiff may receive by delaying may, in fact, result in less net payment (after the Medicaid lien) to the plaintiff.

2. In negotiating with Medicaid, Medicaid will likely want to know not only the amount of the settlement or award, but also, if a settlement, the basis for the settlement and that the amount settled for was appropriate. Therefore, Medicaid may want an explanation of the liability issues, any issues which involved questionable liability and the amount of defendant's insurance coverage.
3. It is generally best to negotiate the Medicaid lien prior to the settlement of the litigation: (i) Medicaid's negotiation of the lien may be dependent upon the amount of the settlement, (ii) the amount of the settlement may be dependent upon the amount for which Medicaid will settle on its lien, or the conditions of settlement, e.g., deferral of all, or part, of its lien and (iii) if, in fact, the argument for the reduction in the Medicaid lien is that the case cannot settle but for a reduced Medicaid lien, then one must bring Medicaid into the settlement issues.

b. Suggestions to Negotiation.

1. Recognize that compromising the lien depends upon the facts and circumstances of the matter. Not every case can be compromised.

2. Some cases will not settle unless the Medicaid lien is reduced. Therefore, for economic self-interest to the State, Medicaid should reduce the lien to enable resolution of the litigation and payment to Medicaid of a compromised Medicaid lien. This is consistent with 42 CFR 433.139 (f), quoted above, which states that economic issues should be considered in lien settlement.
3. Sometimes the Medicaid lien can be deferred in part if the settlement funds are going to be placed into a Supplemental Needs Trust. . Therefore, a Supplemental Needs Trust, if it can appropriately be used, may be an important ingredient in the settlement of the Medicaid lien.
4. If a "life care plan" was used in the litigation, use of the same life care plan to seek a reduction in the Medicaid lien may be helpful. In negotiation with Medicaid, isolate out those expenditures which will likely be paid by Medicaid from those expenditures which will be "private-pay" and, therefore, made from the Trust. In negotiating the lien with Medicaid, one should have a good understanding of the disabled person's disabilities and needs, on the one hand, and what Medicaid may provide, on the other hand. What are those reasonable needs (which are not luxury needs, but basis needs) which will improve the beneficiary's quality of life.

5. Check the State policy on automatic reductions in Medicaid liens.

6. If the amount of the Medicaid lien is in dispute, obtain a full computer print-out of payments made by Medicaid. Determine if such payments are causally related to the injury incurred. If not, then argue that those payments should not be included in the Medicaid lien.
7. Check what payments made by Medicaid are subject to its lien. For instance, where the Medicaid program pays for special education, are those expenditures to be included in the Medicaid lien?

Medicaid's Remainder Interest in the Supplemental Needs Trust.

The federal law, which is set forth at 42 U.S.C.A. § 1396p(d)(4), states that, upon the death of such individual, or earlier termination of the Trust, the state will receive all amounts remaining in the trust up to the total value of all Medicaid paid on behalf of such individual. Therefore, States monitor the Supplemental Needs Trusts in order to maximize the amount of funds in the Trust at the death of the beneficiary to satisfy its remainder interest to the fullest.

Please do not attempt the following: How to Avoid the Medicaid Lien. None of these are recommended and are detrimental to the retention of Supplemental Needs Trusts and to the use of Structured Settlements to be paid into the Trusts.

Various planning techniques have been used in an attempt to preclude Medicaid's exercise of its remainder interest. These techniques are discussed in this outline to caution attorneys and structured settlement brokers not to participate in such techniques. As a result of people who have engaged in these planning techniques, States and Medicaid districts have "tightened" their controls over Supplemental Needs Trust. These planning attempts made have included:

Where a Structured Settlement Is Involved:

1. Deferral of all, or a portion of, the payment from the structure to the Supplemental Needs Trust.

The theory behind this technique is that Medicaid's lien against the Trust is only against the funds in the Trust, and not against the annuity payments not yet made. Therefore, if medical payments are expected to be high and the beneficiary's life expectancy short, there are those who have deferred the annuity so that there are only minimal funds in the Supplemental Needs Trust against which Medicaid could recover.
2. Provide in the annuity contract that the structure, upon the death of the beneficiary, is paid to the estate of the beneficiary or to certain family members.
Sec. 1917(a) of the Social Security Act (42 U.S.C. §1396p) limits recovery upon the death of a Medicaid recipient as follows:

(1) No adjustment or recovery of any medical assistance correctly paid on behalf of an individual under the State plan may be made, except that the State shall seek adjustment or recovery of any medical assistance correctly paid on behalf of an individual under the State plan in the case of the following individuals:
...... . . . . . .

(B) In the case of an individual who was 55 years of age or older when the individual received such medical assistance, the State shall seek adjustment or recovery from the individual’s estate. . . .

Therefore, the theory has been that if the annuity is paid to the estate of the infant plaintiff and, at the time of death, the infant plaintiff is under 55 years of age, that Medicaid cannot recover for Medicaid paid, except to the extent of Medicaid's statutory rights against the Trust. If the annuity is paid to other family members, then there is not even an estate against which Medicaid could possibly seek recovery.
3. The structure pays out for years after the death of the beneficiary in the hope that Medicaid will "forget" the funds due to it.

Other Techniques Attempted:

Have the Supplemental Needs Trust invest in life insurance, annuities or other investments which have beneficiary designations other than the Trust.

Therefore, upon the death of the beneficiary, Trust assets may pass by operation-of-law to individuals and Medicaid's right to reimbursement may be defeated.

Medicaid's Response:

1. Prohibit the structure from being paid to the estate until after Medicaid is reimbursed.
2. Require a commutation provision for the entire structure and the commuted funds to be paid into the Trust, which requires the reimbursement to Medicaid. Some States (such as Colorado) require, or provide in the annuity contract that upon commutation that Medicaid is paid and then remaining funds, if any, are paid to the estate of the beneficiary.

QUESTION: What impact, if any, will the commutation provision have upon the use of structures? How much is the economic loss to the estate of the beneficiary? Are there ways to avoid the economic loss as a result of the commutation provision? What about a IRC ruling that a structure can be commuted upon the death of the beneficiary for the amount of the Medicaid lien and estate taxes?

3. Require language in the Trust stating that no investments can be made with a beneficiary designation other than the Trust.
4. Require that should the Trust terminate earlier than the death of the Beneficiary (e.g., there is no benefit to the beneficiary to have a Supplemental Needs Trust) that the Medicaid restrictions upon the Trust corpus continue until sufficient funds from the structure have been paid into the Trust to reimburse Medicaid fully.
5. Require the use of corporate fiduciaries in order to better protect the corpus of the Trust and guard against abusive or inappropriate expenditures.
6. Require annual accountings. The Richardson Memorandum states:

If the trust meets one of the exceptions, the State can monitor distributions form the trust to be sure that, in the case of a (d)(4)(A) trust [i.e., Supplemental Needs Trust], funds in the trust are used for the benefit of the disabled individual.... Once the disabled individual dies, the State must collect whatever remains in the trust or account [ ], up to the amount of medical assistance paid by the State.

7. Limit the amount that can be distributed from the Supplemental Needs Trust without written prior approval from Medicaid or from the Court

Selected State Statutory and Regulatory Responses:

Colorado

(g) If the trust is funded with an annuity or other periodic payments, the Colorado Department of Health Care Policy and Financing shall be named on the contract or settlement as the remainder beneficiary up to the amount of medical assistance paid on behalf of the individual.
(h) The trust shall provide that, upon the death of the beneficiary or termination of the trust, the Colorado Medical Assistance Program shall receive all amounts remaining in the trust up to the amount of total medical assistance paid on behalf of the individual.
(i) No expenditures may be made after the death of the beneficiary. However, prior to the death of the individual beneficiary, trust funds may be used to purchase a burial fund for the beneficiary.
(j) The amount remaining in the trust and an accounting of the trust shall be due to the CDHCPF within three months after the death of the individual or termination of the trust, whichever is sooner. An extension of time may be granted by the CDHCPF if a written request is submitted within two months of the termination of the trust.
(k) The trust fund shall not be considered as a countable resource in determining eligibility for medical assistance.
(l) Distributions from the trust may be made only to or for the benefit of the individual beneficiary. Payment of attorney fees is not an allowable distribution from the trust. Cash distributions from the trust shall be considered as income to the individual. Distributions for food, shelter or clothing are considered in-kind income and countable toward eligibility.
(n) Prior to the establishment or funding of a disability trust, the trust shall be submitted for review to the CDHCPF, along with proof that the individual beneficiary is disabled according to Social Security criteria. No disability trust shall be valid unless the CDHCPF has reviewed the trust and determined that the trust conforms to the requirements of 15-14-412.8,C.R.S., as amended, and any rules adopted by the Medical Services Board.

8.110.5

Pennsylvania

The Department of Public Welfare has a checklist for what must be included in the text of the Supplemental Needs Trust. Among these are the following:
Medicaid must be paid prior to the funding of the Trust.

No early termination of the Trust without reimbursement for Medicaid paid.
Expenditures from the Trust fund must have reasonable relationship to the disability of the beneficiary.
Distributions from the Trust must be for the sole benefit of the disabled beneficiary.

New York

The New York regulations set forth the following obligations upon the Trustee:

(a) notify the appropriate social services district of the creation or funding of the trust for the benefit of an MA applicant/recipient;

(b) notify the social services district of the death of the beneficiary of the trust;
(c) notify the social services district in advance of any transactions tending to substantially deplete the principal of the trust, in the case of a trust valued at more than $100,000; for purposes of this clause, the trustee must notify the district of disbursements from the trust in excess of the following percentage of the trust principal and accumulated income: five percent for trusts over $100,000 up to $500,000; 10 percent for trusts valued over $500,000 up to $1,000,000; and 15 percent for trusts over $1,000,000;
(d) notify the social services district in advance of any transactions involving transfers from the trust principal for less than fair market value; and

(e) provide the social services district with proof of bonding if the assets of the trust at any time equal or exceed $1,000,000, unless that requirement has been waived by a court of competent jurisdiction, and provide proof of bonding if the assets of the trust are less than $1,000,000, if required by a court of competent jurisdiction.
18 NYCRR 360-4.5

New Jersey

Statutes enacted by New Jersey during 2001 limit any expenditure from the Supplemental Needs Trust. The law provides that "[t]he State shall be given advance notice of any expenditure in excess of $5,000.00, and of any amount which would substantially deplete the principal of het trust." 10:71-4.11. As to its remainder interest, the law places the onus, and liability, upon the Trustee to assure its remainder interest. For instance, the New Jersey law states:

The trust shall specifically state that, upon the death of the primary beneficiary, the State will be notified, and shall be paid all amounts remaining in the trust up to the total value of all medial assistance paid on behalf of the beneficiary. The trust shall comply fully with this obligation under the statute to first repay the State, without requiring the State to take any action except to establish the amount to be repaid.

............

No provision in the trust shall permit the estate's representative to first repay other persons or creditors a the death of the beneficiary. Only what remains in the trust after the repayments [to the State] have been made shall be considered available for other expenses or beneficiaries of the estate. The trust may provide for a prepaid burial plan, but shall not state that it will pay for reasonable burial expenses afer the death of the trust beneficiary.

Conclusion

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Jay J. Sangerman's firm, Jay J. Sangerman, PLLC, is a boutique law firm which practices in the areas of trusts and estates and elder law. The firm is listed in The Bar Register of Preeminent Lawyers published by Martindale-Hubbell. The practice includes estate planning, estate administration and estate litigation; supplemental needs trusts; assisting in the settlement of tort claims by maximizing the settlement through effective estate planning; guardianship proceedings; Medicaid planning and eligibility; and hospital discharge planning and nursing home placement. The firm serves as a consultant to insurance companies and attorneys in the settlement of cases, as well as for estate planning upon the anticipated receipt of funds. The firm performs fiduciary accountings for trust departments, executors and trustees and guardians. Our clients include individuals, hospitals and nursing homes, financial institutions and insurance companies. The firm practices law in New York, Florida and New Jersey.

Jay J. Sangerman teaches Estate Planning and Gift Taxation at New York University School of Continuing and Professional Studies. Mr. Sangerman speaks extensively on Estate Planning, Elder Law and planning for disabled adults and children. Mr. Sangerman graduated cum laude from Yeshiva University's Benjamin N. Cardozo School of Law, where he was a member of Law Review, and an Alexander Fellow which provided him the opportunity to be a full_time student clerk to Chief Judge Jack B. Weinstein of the United States District Court, Eastern District of New York. Upon graduation, Mr. Sangerman worked for Fried, Frank, Harris, Shriver & Jacobson, where he handled complex litigation matters. Mr. Sangerman is admitted to practice in New York.

Jay J. Sangerman, PLLC maintains a web page which contains articles pertaining to estate planning, including use of Supplemental Needs Trust

JAY J. SANGERMAN, ESQ.
Jay J. Sangerman, PLLC
171 East 84th Street, Unit 21B
New York, New York 10028
212-922-0711
212-439-0056 - facsimile

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