Richard F - ElderLawAnswers



Richard F. Meyer, Esq.

William J. Browning, CELA

Browning & Meyer Co., LPA

8101 N. High Street, Ste. 370

Columbus, OH 43235

(614) 471-0085/Fax:(614) 430-8132

elderlaw.us

March 11, 2008 Teleconference

Pooled Trusts

I) Introduction

Do you really want to establish a pooled trust? Pooled trusts are being considered by many lawyers as an avenue to pursue estate planning for Medicaid clients due to the passage of the Deficit Reduction Act in 2005 (DRA). Pooled trusts have a great allure, although the establishment of these trusts pursuant to this code section is daunting and the possibilities of litigation are relatively high. Some additional key questions for establishing a pooled trust should also be pondered: (1) who is the charity, (2) the charity’s needs and agenda, (3) federal requirements, (4) state statute and regulatory requirements, and (5) do I want to be responsible for the trust administration?

In our office, after several years of thought and research, we initiated an effort to proceed with a pooled trust with an established charity. The actual legal time in research and drafting the document is approximately 175 hours. The breadth of this research was due in part to our decision to not include a payback clause. The political hours in working with the charity exceeded 500 hours. It is difficult to estimate the political burden as it depends very much upon the charity and the size of the trust that you wish to establish. If you would like the charity to make annual contributions to the trust in addition to volunteer time, then the effort is increased significantly. Finally, the time regarding establishing the appropriate procedural and backroom administrative efforts, which again are necessary for a sizeable pooled trust, have totaled approximately 210 hours.

It should be noted, no shortcuts were taken and we attempted to consider all possible options and every consideration to ensure that the trust will remain viable for decades. It is unlikely that we will ever recoup the time expended in creating the trust. Others have taken a more profitable short-term route, which involved obtaining copies of others’ trusts through administrators, establishing a trust with a payback clause to avoid potential for litigation as well as the need for careful trust drafting, and finally establishing an “in house” charity. In the short-term, these trusts are likely more profitable for the lawyer, although the likelihood of the trust sustaining over a long period of time diminishes with this approach. Clearly, if the goal is entirely attorney-profit driven, one course of action is more beneficial than the other. If the goal is more altruistic, then the additional efforts in the established charity would be required.

II) In House Charity vs. Established Charity

Established charities, such as a local city foundation, church-based charities, fraternal organizations, or charities established through universities all contain a certain internal process or structure. Whether it be a board of directors or through a delegate process, these charities have certain benefits that must be considered.

First and foremost, an established charity is, by its nature, driven by its mission. Whether it be the burn units for the Aladdin Shrine, or raising funds for the disabled community through Knights of Columbus or the for Arc of Indiana, they are established organizations, which is both a benefit and a detriment. The first step is introducing the concept of a pooled trust and educating the organization as to the benefit and the goal of the trust. If you are already a member and involved in the hierarchy of an established charity, this is somewhat easier. The second step involves moving the charity towards a decision. This is usually done through a motion or some other process within the organization.

A) Federal Legislation – The Non-Profit Requirement: 42 U.S.C. § 1396p(d)(4)(C)(i)

In addition to the absence of a payback clause, OBRA 93 requires a non-profit entity to be at the helm of the pooled trust. The statute’s language broadly states:

(i) The trust is established and managed by a non-profit association.

Though appreciated for brevity as far as federal legislation goes, the non-profit requirement exudes ambiguity. As far as establishment, the non-profit acts as the declarant of the master pooled trust document. Management of the pooled trust, however, poses significant questions without legitimate statutory or regulation based answers. For instance, to what extent can the non-profit delegate management of the pooled trust’s assets, especially for investment and oversight purposes, if at all. Also, what types of behavioral standards are to apply to the non-profit in its management of the pooled trust (e.g., is a non-profit that manages a pooled trust subject to derivate suits by trust beneficiaries).

While these and other questions remain unanswered, most non-profits, if not all, delegate a majority of management functions to outside third parties in the name of both efficiency and cost savings. The delegation of these functions must be done with prudent foresight and with the trust beneficiaries best interests in mind.

B) Choosing a Non-Profit - Charity

Attorneys considering a foray into the world of pooled trusts encounter a massive number of questions in the early stages of trust creation. One particular question pertains to the non-profit requirement. Should the attorney make use of an established non-profit or use one of the attorneys own making? The following takes into account the main considerations that should enter the equation when facing this question.

1) Use of Established Non-Profit

a) Known Reputation

Joining forces with a well known and established non-profit entity allows the elder law attorney to forego a substantial amount of leg-work in developing a full functioning pooled trust. The general public, depending on the non-profit chosen, may already recognize the non-profit’s name and be familiar with its works and goals. This cuts down on marketing costs to the trust creator. Further, clients’ apprehension of depositing funds into a pooled trust, which subsequently means a loss of rights to use such funds in the client’s discretion, will be eased with the knowledge that a well-known non-profit with a proven track record runs the program. An established charity may also have the pre-existing personnel and infrastructure which assist in the implementation of the pooled trust.

Of course, use of a known non-profit poses certain drawbacks as well. A well-known non-profit carries greater bargaining power to the table and an elder law attorney on the other side may find his freedom in organizing the trust to his or her specifications slightly stifled. Control over the trusts future and everyday operations may also be sacrificed to the idiosyncrasies and particularities of the chosen non-profit. Thus, an elder law attorney who, in creating a pooled trust, desires to maintain substantial control and direction over the trust might find partnership with an established non-profit burdensome. Is the trust charitably centered or attorney centered?

b) Litigation Benefits

Teaming with a non-profit, as opposed to starting from scratch, also means additional litigation support. In the event a state Medicaid agency or local Social Security branch decides to challenge the validity of a pooled trust, an established charity’s deeper pockets will prove undoubtedly useful. Instead of diverting funds from trust beneficiary’s accounts, a non-profit may be willing to foot a portion of the litigation expenses in defending the pooled trust from such an attack. Otherwise, a pooled trust, particularly a newly established pooled trust, may stumble out of the blocks when having to mount a defense with little funding to cover costs.

A governmental agency’s point of attack may range from failure to mechanically comply with federal or state requirements (e.g., non-profit not in the picture, the trust is not entirely for the sole benefit of the beneficiary, or even that the trust is created by an improper entity;[1]) to a policy argument of the impropriety of allowing the trust to maintain all amounts remaining in a deceased trust beneficiary’s account to the state’s detriment. As a large number of states informally require some mandatory payback portion of a deceased beneficiary’s trust account[2], litigation is likely to focus on pooled trusts that retain all such amounts for trust purposes (e.g., furthering charitable programs or covering administrative expenses).

Only one reported decision deals with the validity of a pooled trust’s ability to retain remaining trust beneficiary amounts in full.[3] In In the Matter of Stephen Siegal,[4] the Nassau County Department of Social Services objected to use of a pooled trust that provided for full retention by the trust of a deceased trust beneficiary’s account.[5] Specifically, the Department of Social Services claimed that transfer into such a pooled trust ran “contrary to the clear intent of both the federal and State statutory schemes.”[6] The trial Court in New York, however, quite simply disagreed.[7] Deferring to the plain meaning of statutes involved[8], the Siegal Court easily reached the conclusion that pooled trusts were legislatively designed to permit full retention of trust amounts remaining after the death of a trust beneficiary.[9] In fact, the court noted that the applicable language requiring amounts “not retained by the trust”[10] be paid to the State and used “for the benefit of disabled individuals”[11] was clear enough to render application of rules of statutory construction wholly unnecessary.[12]

While the Siegal case provides bolstering supportive authority for any challenged pooled trust, a large portion of the pooled trust waters remain uncharted. New York did not have in existence any mandatory pooled trust payback regulation at the time of the Siegal litigation. Thus a clash between a state’s mandatory payback requirement and a pooled trust’s full remainder retention provision seems inevitable. Though the clash pits state regulation against federal legislation, a one sided battle, such litigation will still place financial burden on the pooled trust and a well established non-profit will prove instrumental in softening that financial blow.

2) Creating Your Own 501(c)(3)

Instead of partnering with an established non-profit organization, an elder law attorney may choose to start from scratch. While providing the attorney with ample freedom and discretion in creating and running the pooled trust, creating a new non-profit for the purpose of establishing and maintaining a pooled trust carries significant disadvantages.

First are the start up investments, both financial and temporal. A new non-profit must have all the requisite trimmings such as Articles of Organization, approval from proper state authority, a code of regulations, decision structure, and I.R.S. approval (separate application process).

Second, the potentially largest risk of creating a new non-profit is the potential for self-dealing transactions or an overall self-dealing structure. Most pooled trusts contain, at a minimum, three distinct operational aspects. These aspects include trustee governance, investment of trust assets, and distributions to trust beneficiaries. As these are distinct aspects of a pooled trust’s operations, they should be handled by distinct and separate parties.

While creating a new non-profit provides significant drawbacks, it is an option worth considering provided that the establishing attorney places a premium on independence and control and, more importantly, limits his or her role in the various operational functions of the pooled trust through delegation to proper outside third parties.

III) Medicaid Payback Clauses

Many states have informally indicated that they are requiring a payback clause or threatening that they will initiate litigation against the trust. For those who would not have an established charity involved, I would recommend that they consider a payback clause as they are likely unable to afford the probable litigation. In the worst case scenario, a payback clause is not included, the trust is lightly funded, and the state challenges one of the first ten applications where the trust has been utilized. How does the trustee pay the litigator?

A) Federal Legislation: 42 U.S.C. § 1396p(d)(4)(C)

Unlike 42 U.S.C. 1396p(d)(4)(A) and (d)(4)(B), the federal legislation regarding pooled trusts, 42 U.S.C. 1396p(d)(4)(C), does not contain an age limitation or a mandatory payback provision.

The Omnibus Budget Reconciliation Act of 1993 (OBRA 93) granted statutory recognition to the use of pooled trusts in the Medicaid regime. To qualify as a pooled trust pursuant to applicable federal legislation, the trust must exhibit a number of characteristics. One such characteristic governs the use of funds remaining in a trust beneficiary’s account when such beneficiary passes away. Specifically, the legislation states:

To the extent that amounts remaining in the beneficiary's account upon the death of the beneficiary are not retained by the trust, the trust pays to the State from such remaining amounts in the account an amount equal to the total amount of medical assistance paid on behalf of the beneficiary under the State plan under this title [42 USCS §§ 1396 et seq.].[13]

A plain reading of the above legislation grants discretion to the trust on whether to include a payback clause or to retain all remaining funds. Again, no legislative history exists so Congressional intent is silent.

B) The Decision Whether to Include a Payback Clause Regardless of Federal Legislation

Drafters of pooled trusts must make the decision, prior to commencement of trust operations, whether to include a state payback clause in their master trust document or to forego the payback clause and retain all funds remaining in a deceased trust beneficiary’s account. In making the decision a number of considerations come into play. These considerations include:

1) Regulatory Approval with State Law and Regulations on Payback – Obviously a pooled trust containing a payback provision to the state agencies providing medical care to a trust beneficiary will find favor with the SSA and State Agency.

2) State Law/Regulation on Payback – Although the federal language permitting the use of pooled trusts expressly permits trusts to retain all amounts in a deceased trust beneficiary’s account, certain states adopted, by regulation, mandatory payback provisions.[14] Thus if the pooled trust is based in a state that mandates payback, the draftsman and Trustee face the likelihood of challenge.

3) Litigation Probability – The use of pooled trusts in the Medicaid regime still remains novel and very few published opinions exist, however, one case upheld a pooled trusts “right” to retain all remaining funds.[15] Considering the large amount of mandatory payback regulations, state by state litigation may ensue absent some higher authority approving full trust retention of a deceased beneficiary’s remainder account. Accordingly, the costs of protracted litigation over a pooled trust’s Medicaid and Social Security legitimacy may prove burdensome and even fatal to a newly created pooled trust. Inclusion of a state payback provision will most likely avoid such litigation, despite the federal legislations clear wording of the propriety of full trust retention of amounts remaining in a deceased beneficiary’s account. Similarly, audits are more likely if an established charity is not involved.

4) Economic Viability – Maintenance of a pooled trust brings commensurate administrative costs. Such costs include corporate trustee’s fees, accounting fees, investor fees, attorney fees, and distribution governance fees to name the main costs. By including a state payback clause in a master pooled trust document, the trust loses out on monetary sources that may act as a lifeline in the trust’s early years.

5) Trust Beneficiary Confidence – As pooled trusts are still new to the elder law practice, clients experience an understandable level of apprehension when transferring potentially large sums to the trust. When the master pooled trust document does not contain a payback clause, certainty in eligibility may be diminished.

IV) Conclusion

OBRA 93 created a unique planning tool in pooled special needs trusts. The potential benefits of pooled trusts still remain open to creative application. While highly beneficial to the indigent, disabled, and elderly alike, attorneys and planners must exercise utmost prudence and foresight in creating, developing, and maintaining a pooled trust. As set forth in this outline, among the considerations in creating and maintaining a pooled trust are the decision to include a payback clause and the decision to partner with an established non-profit organization or go it alone.

As attorneys, representing the disabled, we seek to protect and advance our client’s interests. A properly established and maintained pooled trust allows for achievement of these goals both for our clients on an individual level as well as for general populations, such as the disabled and the elderly, by incorporating the use of pooled trusts. Careless drafting or a “for profit” appearance increase the likelihood that Congress will eliminate this very special tool.

State Pooled Trust Payback Requirements

Each state listed requires pooled trust payback*

|State |Payback Percentage |Regulation |

|Alabama |90 |Ala. Code § 38-9B-5 |

|Alaska |50 |None |

|Arkansas |None |None |

|California |None |None |

|Colorado |None |40 Colo. Rev. Stat. 15-14-412.9 |

|Connecticut |None |None |

|Delaware |None |Del. Code Ann., Title 12 § 4001 |

|Florida |None |None |

|Georgia |None |None |

|Illinois |None |Ill. Admin. Code tit. 89 §120.347 |

|Indiana |None |None |

|Kansas |100 |Kan. Econ. Emp. Supp. Man. § 5261 |

|Kentucky |None |Ken. Med. Man. § 3259.7B |

|Maine |50 |Me. Med. Elig. Man. § 3330.24(V)(B) |

|Maryland |None |None |

|Massachusetts |100 |130 CMR §§ 520.023(D), 520.0009(I), 515.001 |

|Michigan |None |None |

|Missouri |100 |ARM § 37.2.505 |

|Nebraska |None |None |

|Nevada |100 |MAABD Prog. Man. § 250 |

|New Hampshire |55 |None |

|New Jersey |None |N.J.S.A. 30:4D-6 |

|New Mexico |None |NM Hum. Serv. Reg. 8.281.500.15(D)(3) |

|New York |None |None |

|North Carolina |None |None |

|North Dakota |None |None |

|Oklahoma |70 |OAC 317:35-5-41(d)(9)(F)(iii) |

|Oregon |None |None |

|Pennsylvania |None |Pa. Stat. tit. 62 §1965 |

|South Carolina |20 |SC Med. Pol. Man. |

|South Dakota |100 |SD Admin. Rules §67:46:05:32.03(3) |

|Tennessee |100 |None |

|Texas |None |None |

|Utah |None |BES/PM991 |

|Virginia |None |None |

|Washington |None |WAC § 388-561-0100 |

* See Kathleen Kienitz, CELA, Pooled Disability Trusts: A History and Survey of Their Use in the United States, NAELA News, December 2006/January 2006 for a further and more thorough analysis of this chart.

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[1] See 42 U.S.C. 1396p(d)(4)(A).

[2] See attached “Pooled Trust Payback Requirements” chart.

[3] See In re Siegal, 645 N.Y.S.2d 999 (New York 1996).

[4] Id.

[5] Id. at 1001-02.

[6] Id. at 1002.

[7] Id.

[8] 42 U.S.C. § 1396p(d)(4).

[9] Siegal 645 N.Y.S.2d at 1002.

[10] 42 U.S.C. § 1396p(d)(4)(C)(iv).

[11] Id. § 1396p(d)(4)(C)(iii).

[12] Siegal, 645 N.Y.S.2d at 1002.

[13] See 42 U.S.C. § 1396p(d)(4)(C)(iv).

[14] See attached “Pooled Trust Payback Requirements” chart.

[15] See 645 N.Y.S.2d 999 (Nassau County 1996) (attached).

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