NAELA Journal, Volume 10, No. 1
Spring 2014


When Worlds Collide:
State Trust Law and Federal Welfare Programs

By Ron M. Landsman, Esq., CAP

About the Author
Ron M. Landsman, Esq., CAP, is principal of Ron M. Landsman, P.A., Rockville, Md. As Editor for Quality Control, he is a member of the NAELA Journal Editorial Board.
Mr. Landsman would like to thank the following individuals for their kind assistance in sharing their knowledge, experience, and insights with him in preparing this article: Tom Cholis, Managing Director, Chevy Chase Trust; Robert Fleming, CELA; David Lillesand, Esq.; William Meyer, Esq.; Mary O’Byrne, Esq.; Rene Reixach, Esq.; Prof. Mary Radford; Nell Graham Sale, CELA; Kevin Urbatsch, Esq.; and Neal Winston, CELA.


I. Introduction

“Special needs trusts,”1 which enable people with assets to qualify for Supplemental Security Income (SSI)2 and Medicaid,3 are the intersection of two different worlds: poverty programs and the tools of wealth management. Introducing trusts into the world of public benefits has resulted in deep confusion for public benefits administrators.


Trusts traditionally involve wealth and its management. SSI and Medicaid are public benefit programs for poor people. Even if adjusted for inflation, the asset limits for SSI eligibility4 — the easiest door to Medicaid eligibility — or a year’s SSI income5 is of the same order of magnitude as just the fees for most private bank or trust firms.6 The one valuable asset permitted — a personal residence — is eschewed as an asset in wealth management trusts.7 SSI and Medicaid administrators and beneficiaries alike would have no reason to be familiar with trusts solely by involvement with SSI or Medicaid.

However, the federal agencies that administer SSI and Medicaid — the Social Security Administration (SSA) and the Centers for Medicare & Medicaid Services (CMS) — had no choice but to address how trusts would fit into SSI and Medicaid eligibility requirements given Congress’s authorization of special needs trusts. The confusion arising from the merger of trust law with public benefits is sharply drawn in the agencies’ attempts to define what it means for a trust to be for the sole benefit of the public benefits recipient. Public benefits administrators have focused on the distributions a trustee makes rather than the fiduciary standards that guide the trustee. The agencies have imposed detailed distribution rules that range from the picayune to the counterproductive and without regard, and sometimes contrary, to the best interests of the disabled beneficiary.8

This article critiques the agencies’ treatment of sole benefit. It finds that the agencies, unfamiliar with trust law, overlooked state trust law as the source for understanding what it means for a trust to be for the sole benefit of a specific beneficiary. It is divided into five substantive parts:

• Part II reviews the history of Congress’s treatment of trusts regarding public benefits through its decision to bring trusts inside public benefits programs;

• Part III details CMS’s and SSA’s interpretations of the new public benefits trusts, especially their definitions of “sole benefit” and “solely for the benefit of”;

• Part IV analyzes sole benefit as a matter of state trust law, which Congress had chosen as the mechanism for implementing its policy;

• Part V reviews the reasons why CMS’s and SSA’s very different view of sole benefit would not be entitled to deference from the federal courts under the Skidmore doctrine; and

• Part VI outlines an approach CMS and SSA might take to achieve the goals they sought in monitoring the use of trusts.


II. Congress Brings Trusts Inside the Public Welfare System

Congress first legislated on trusts and Medicaid in 1986 to stop the use of trusts to avoid Medicaid’s resource limits by elders needing long-term nursing home care. It then enacted the “Medicaid qualifying trust” (MQT) provision under which a trustee of a discretionary first-party trust would be deemed to exercise discretion to make any payments permitted under the terms of the trust.9 All trust income and principal would be available if trustee discretion permitted payment for the benefit of the elder. The common view among Elder Law attorneys is that the statute was ineffective, although case law suggests otherwise.10


Nonetheless, after something of an onslaught of publicity about Medicaid planning,11 Congress in 1993 enacted a new law, as part of the Omnibus Budget Reconciliation Act of 1993 (OBRA ’93), to address the use of trusts in Medicaid planning, replacing the 1986 act.12 Under the new rules, trust assets of the Medicaid-planning settlor or his or her spouse were deemed available if there were “any circumstances” under which payment could be made to or for the benefit of the settlor.13 This rule applied without regard to the purpose for which the trust was established or any limitations in its terms.14 At the same time, Congress exempted three specific trusts from the new trust rules: two to protect resources (and the income they generate) and one to solve an eligibility problem related to nontrust income.15 Congress also, for the first time, encouraged Medicaid planning by exempting from its antitransfer rules gifts to a trust for any disabled person under age 65.16


The decision to exempt some trusts from the Medicaid trust rules and to actively encourage donors17 to qualify for Medicaid by funding trusts for children or grandchildren with disabilities reflected a sea change by Congress. All along, Congress’s goal had been to stamp out every vestige of Medicaid planning by individuals for themselves,18 though not for others.19 What Congress did by exempting special needs trusts from the new rules and providing an exemption from the antitransfer rules for funding trusts for others with disabilities was the opposite of its previous treatment of such trusts. Individuals with disabilities were now expressly allowed to keep assets in trust while they obtained or maintained Medicaid benefits. This was new.20


These new rules exempted two kinds of resource trusts for people with disabilities,21 those with a single beneficiary and those operated by nonprofits, known as pooled trusts, with many disabled beneficiaries, each with his or her own account.22 The most significant requirement for both types of trusts is that upon the death of the beneficiary, Medicaid programs must be reimbursed for benefits they paid for the beneficiary — before the trustee could make any distributions to heirs or legatees.23 In both types of trusts, a parent, grandparent, legal guardian, or court may establish the trust or trust account.24 Aside from these elements, individual and pooled trusts have some differences provided by statute. Pooled trusts, but not individual trusts, also may be established by the beneficiaries themselves.25 There is no age limit for pooled trusts, but individual trusts must be established before the beneficiary turns age 65,26 and the nonprofit may retain funds rather than reimburse Medicaid.27 Other differences reflect the different nature of pooled trusts. These must be operated by a nonprofit entity,28 all participants must be disabled and each must have his or her own account.29


Regarding transfers of assets, Congress added to the existing exemptions30 transfers “to a trust (including a trust described in subsection (d)(4)) established solely for the benefit of” the individual’s disabled child and “to a trust (including a trust described in subsection (d)(4)) established solely for the benefit of” any disabled individual under age 65.31 “Solely for the benefit of” was used three times, once to describe exempt pooled trusts32 and twice, in parallel provisions, to describe the trusts to which exempt transfers could be made. The term sole benefit also appears, twice, both times regarding transfers to or for “the sole benefit of the individual’s spouse.”33


Congress extended the OBRA ’93 trust rules to SSI in 1999; it reintroduced an anti­transfer rule for SSI, which had been dropped in 1993.34 The SSI provisions are similar, but not identical, to the prior Medicaid provision.35 Whether Congress intended different treatment is not clear, but that is beyond the scope of this article other than with respect to sole benefit.36


III. CMS and SSI Implement the Trust Provisions

A. CMS: Transmittal 64

To implement the OBRA ’93 trust provisions, CMS37 amended its State Medicaid Manual,38 writing or adding Sections 3257–3259 in Transmittal 64.39 To a large extent, CMS only restated the statutory language. It also addressed the unique situation of 42 U.S.C. § 1396p(d)(4)(B) trusts, acknowledged the state law nature of trusts, and attempted to define sole benefit and “solely for the benefit of.”


In Transmittal 64 CMS said that a trust is “for the sole benefit” of a person “if the trust benefits no one but that individual, whether at the time the trust is established or at any time in the future.” Conversely, a trust or transfer is not for someone’s sole benefit if it “provides for funds or property to pass to a beneficiary who is not” in one of the three categories to whom exempt transfers can be made.40 However, a trust can still make a post-mortem disposition: “[T]he trust may provide for disbursal of funds to other beneficiaries, provided the trust does not permit such disbursals until the State’s [reimbursement] claim is satisfied.”41 CMS added that, to be “for the sole benefit of” an individual, a trust “must provide for the spending of the funds involved for the benefit of the individual on a basis that is actuarially sound based on the life expectancy of the individual involved.”42 Presumably, this provision made sure that no one else would receive any benefit from the trust. But this restriction does not apply to trusts that include a payback to the state Medicaid agency,43 i.e., if the state Medicaid agency is entitled to payback, sole benefit does not require the funds be dispersed to or for the benefit of the beneficiary during his or her anticipated life expectancy. If a parent or grandparent funding a trust for a disabled child or grandchild wants to enjoy the exclusions under (c)(2)(B)(iii) or (iv), respectively, in which payback is not otherwise required, he or she can satisfy sole benefit by adding payback in lieu of “actuarially sound” language.


B. SSI: Program Operations Manual System (POMS)

With Congress’s extension of the Medicaid trust rules to SSI,44 the SSI unit of SSA also had to address the meaning of sole benefit. Like CMS, SSA properly acknowledged that trusts are creatures of state law.45 Unlike CMS, SSA had no reason to defer to the states since SSI is exclusively a federal program. Also unlike CMS, SSA was not implementing its own statute; the exceptions to its antitrust rules are by statutory cross-reference to the same trusts exempted under the Medicaid statute.46 Again unlike CMS, SSA attempted to provide directions to staff about specific state trust law issues. Unlike CMS, SSA addressed not only sole benefit, which is in the federal statute, but also a range of state trust issues.


With respect to sole benefit, SSA was loyal to the principle of congressional intent, inferring different meanings where Congress used slightly different words, and distinguishing “for the benefit of” from “for the sole benefit of.” In language redolent of Transmittal 64, SSA explained that a trust is established for the benefit of an individual

if payments … from the … trust are paid to another person … so that the individual derives some benefit from the payment (emphasis added).47


A trust is for the sole benefit of an individual

if the trust benefits no one but that individual … at any time for the remainder of the individual’s life (emphasis added).48


After painstakingly making this distinction, SSA without explanation disregarded it and said that individual special needs trusts “for the benefit of” a disabled individual under (d)(4)(A) also must be for that person’s sole benefit.49 Sole benefit precluded a provision that would “provide benefits to other individuals or entities during the disabled individual’s lifetime,”50 but it then provided as an “[e]xception to the sole benefit rule for third party payments” any “[p]ayments to a third party that result in the receipt of goods or services by the trust beneficiary.”51


In 2012, SSA added an example to POMS to show that reimbursing family members for travel expenses to visit the trust beneficiary was not for the sole benefit of the beneficiary.52 SSA reconsidered in the face of vigorous protests from charities and special needs trust attorneys first by removing the example53 but ultimately substituting rules54 that limit payment for third party travel to two narrow exceptions.55


IV. The Proper Meaning of Sole Benefit Trust Comes From the State Law of Trusts

A. State Trust Law Provides a Clear, Comprehensive Meaning That Conforms to Congressional Intent

Congress chose to use trusts, creatures of state law, as the mechanism for coordinating private assets and means-tested public benefits56 and granting special treatment for certain federal programs for beneficiaries of trusts and for the donors of such trusts. These trusts all have to be for the “sole benefit” of the trust beneficiary. There is no general federal law of trusts, nor is sole benefit a term of art in state trust law,57 but familiar state trust law principles provide an interpretation that conforms precisely to Congress’s intent in providing special treatment for beneficiaries of trusts established “solely for” their benefit, and the donors to such trusts.58


The notion of benefit or beneficial interest is fundamental in the law of trusts. Adding “sole” or “solely for” addresses another fundamental trustee duty, the duty to be impartial in managing the trust for the benefit of all beneficiaries. Together, these provide a definite and definitive meaning of what Congress sought to achieve in using trusts as part of the public benefits system: the needs and welfare of the person with a disability have absolute priority over those of any other beneficiary in all aspects of the trustee’s management of the trust.


The beneficiary is one of the three essential elements of a trust.59 Beneficiaries are the individuals, usually named in the trust document, to whom the trustee owes the duty of loyalty. “Who the beneficiaries of a trust are depends on the manifestations of the settlor’s intent.”60 It is the individual(s) selected and named — whether by name, or class, or some other characteristic61 — by the settlor as the one(s) he or she intends to benefit and to whom the trustee owes all of his or her duties.


A beneficiary gets the benefit of the trust through the trustee’s use of trust assets for his or her benefit. The trustee may give the beneficiary cash, may purchase goods or real property (e.g., an automobile, home, or computer) for his or her use, or may pay others to provide services for the beneficiary. The fact that the trustee pays someone else to do something for the beneficiary does not make the service provider a beneficiary of the trust, and that payment is not a benefit of the trust. Even naming a specific person to provide services to the trust, trustee, or beneficiary does not mean the settlor intended to give that person a beneficial interest in the trust; therefore, getting paid for providing those services is not considered getting a benefit from the trust.62 A fortiori, someone not named in the trust who is paid to provide services to the beneficiary is not, by the fact of payment alone, getting a benefit under the trust.63


A special needs trust always has at least two beneficiaries: the current life beneficiary with a disability and whoever enjoys the benefit of the property, if any remains, after the death of the life beneficiary.64 The trustee is not to discriminate between them unless the settlor has directed the trustee to do so.65 Treating the beneficiaries with due regard for their respective interests66 requires nonfavoritism in procedure67 and results.68 Most of the cases on the duty of impartiality involve successive beneficiaries, in which one (or more) receives income for life and the other(s) later get the principal. The trustee’s duty is to “preserve a fair balance between them.”69 Where there are inherent differences in what each beneficiary is entitled to, as with income to one and remaining principal to the other, the trustee cannot treat them exactly the same, but the duty imposes on the trustee an obligation to consider the interest and needs of each in all of the decisions to be made.70 To say a trust is for the sole benefit of one individual or is established “solely for [his or her] benefit” means that the duty of impartiality has been suspended and that, between the life beneficiary and any remaindermen, the trustee is to consider only the interests and needs of the sole benefit beneficiary and is to give no weight to the interests or needs of the remaindermen.


Trustees may have broad discretion in meeting the duty of impartiality, but that hardly negates there is such a duty; eliminating the duty by making a trust for the sole benefit of one beneficiary reflects a real and substantial shift in the trustee’s obligations and in the resulting management and use of trust assets.71 The trustee should not, as would otherwise be the case, consider an investment strategy designed to ensure growth of principal so that there will be something to pass on to the remainderman, nor may the trustee stint on distributions to meet needs not met by other sources or resources to ensure that there is a remainder to be distributed. The remainderman is a beneficiary,72 one to whom the trustee may owe some duties. All of the beneficiaries have some interests in common — that the trustee be prudent, competent, loyal, and conscientious — and any of the beneficiaries may enforce those duties. The sole benefit requirement addresses only impartiality, not the other obligations a trustee has to all the beneficiaries.


This understanding of sole benefit squares perfectly with Congress’s intent in providing for individuals with disabilities who themselves seek to enjoy the benefit of earned, inherited, or otherwise acquired assets while using SSI and Medicaid. The same is true for those who qualify for Medicaid while committing their resources to the benefit of another person with a disability, as the antitransfer exceptions permit. Congress’s purpose was to make certain that the person with a disability received the beneficial enjoyment of the assets, and that is achieved by sole benefit, properly understood as a modification of the duty of impartiality.


B. Sole Benefit, Although It Derives Its Meaning from State Law, Is an Independent Federal Requirement that Preempts Contrary State Law

If state law provides a useful, functional definition of sole benefit that promotes federal policy, the next inquiry is how, if at all, that definition attaches to the federal statutory term. Federal law controls, but Congress did not oust state law entirely — rather the contrary, it adopted state law as the means for achieving its ends.


The Third Circuit in Lewis v. Alexander treated the interplay as a matter of preemption. The court analyzed which provisions of state law were pre-empted by the federal statute. This is not the only, or perhaps even the best, way to analyze the conflict between state and federal law,73 but it provides a framework for analyzing sole benefit. Here, as it has in many areas, Congress has provided a benefit within the context of state law. There is no general federal common law74 and no general federal law of property, trusts, or estate law.75 State law controls absent a specific federal statute, policy, or interest that requires otherwise.76 The Supreme Court noted recently, “In most fields of activity … this Court has refused to find federal preemption of state law in the absence of either a clear statutory prescription, or a direct conflict between federal and state law.”77 Where Congress operates through state law, “the basic assumption [is] that Congress did not intend to displace state law.”78 Application of preemption resulting in a state law being unenforceable is limited to specific points of conflict.


In Lewis v. Alexander, this question of how much state law was abrogated was central to resolving Pennsylvania’s attempt to regulate — a cynic might say strangle — pooled special needs trusts. The Third Circuit’s answer can be summarized as “not very much.”


[T]here is no reason to believe [Congress] abrogated States’ general laws of trusts or their inherent powers under those laws. … [W]e reject the conclusion that application of these traditional powers is contrary to the will of Congress. After all, Congress did not pass a federal body of trust law, estate law, or property law when enacting Medi­caid. It relied and continues to rely on state laws governing such issues.79


To the extent Congress specified what was permitted as a condition to Medicaid eligibility, the state was not free to add additional requirements.80 Reviewing the five specific provisions challenged by plaintiffs in the Third Circuit,81 the court found that the state could not limit pooled trust retention82 to less to 50 percent,83 special needs trust expenditures to needs related to the individual’s disability,84 participation in pooled trusts to those who could not meet their needs without the trust,85 or pooled trust participation to those under age 65.86 Congress addressed each of these and made no allowance for states to limit or modify what it, Congress, would allow.


Like the four provisions struck down, the sole benefit requirement was plainly delineated by Congress and is not one that the states can modify. It is an independent element of what Congress requires for those who want to use federally funded Medicaid benefits: Preemption precludes the states from adding more to the requirement. As a practical, functional matter, it means that the remainder beneficiaries have no standing to challenge disbursements for the life beneficiary as in derogation of their rights as remaindermen, and that the life beneficiary can require the trustee to disregard the remaindermen’s interests. The trustee can and should favor the beneficiary with a disability. The court in Lewis did not have occasion to address the meaning of sole benefit since the state had only added to its own statute a sole benefit provision similar to that in the federal statute, and the meaning of neither was at issue.87


The court upheld the fifth provision challenged, subjecting pooled special needs trusts to petitions for termination by the attorney general. It said that the state may subject special needs trusts, like all trusts, to court jurisdiction. The threat of termination is just one of the arsenal of general trust law provisions “for protecting the trust and the interests of its beneficiaries.”88 Congress’s decision to draw on state trust law as the mechanism for implementing its Medicaid policy carries a certain tension, the court noted. If Congress has defined sole benefit trusts, the court asked, what about the other duties imposed on trustees?


There is necessarily some tension between this conclusion [that state trust law and the states’ powers under it are not abrogated] and the bar on states adding requirements. For example, even application of the trustee’s traditional duty of loyalty — to administer the trust solely in the interests of the beneficiaries89 — could be considered an extra requirement.90


The court later said:

Pennsylvania’s general trust law contains numerous provisions for protecting the trust and the interests of its beneficiaries. For example, Pennsylvania law imposes duties of loyalty, impartiality, prudent administration, and prudent investment.91


Sole benefit, understood as a modification of the duty of impartiality, would, under the Third Circuit’s preemption analysis, conflict with the duty of impartiality. Because the duty of impartiality is only a default rule, however, it presents a preemption conflict only in the limited sense of precluding an option trust settlors might otherwise prefer but are denied if they want to enjoy using both resources and Medicaid or SSI.


The difference between the federal agencies’ understanding of “for the sole benefit of” and that suggested by state law is vast. The question for a court asked to enforce the federal agencies’ interpretation is whether it should defer to the agencies or, instead, review the statute, legislative history, and other authorities to come to its own independent conclusion. The following section addresses the standards for undertaking that task.


V. On the Sliding Scale of Deference to Agency Determinations,
Neither CMS nor SSA has Earned the Right to Substantial Deference
for Its Definition of Sole Benefit


A. Absent Careful Use of Rulemaking Authority, Deference is a Function of an Agency’s Competence in the Specific Area

Judicial deference to action of an agency under a statute it administers ranges “from great respect at one end … to near indifference at the other.”92 At one end is almost total deference to agency exercise of legislative rulemaking authority given by Congress within the agency’s jurisdiction.93 It is just such authority that the Supreme Court typically has relied on in cases involving CMS and Medicaid94 and SSA and SSI.95 A court should defer to an agency that has engaged in legislative rulemaking under its statute if “the agency’s answer is based on a permissible construction of the statute.”96 The agency’s answer does not have to be compelling, or the only permissible reading, or even the one the court finds most reasonable, as long as it reflects “a reasonable accommodation of conflicting policies that were committed to the agency’s care by the statute.”97 Such regulations are “given controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute.”98 This degree of deference is warranted where the agency enjoyed, and exercised, specific rulemaking authority.99


Here, CMS does not enjoy and thus could not exercise the kind of specific rulemaking authority it has in determining what constitutes income or resources. The Court in Blumer put substantial reliance on CMS’s authority under 42 U.S.C. § 1396a(a)(17), in which Congress required state plans to utilize:

reasonable standards … which … provide for taking into account only such income and resources as are, as determined in accordance with standards prescribed by the Secretary, available to the applicant or recipient … .


The mandate for the transfer and trust rules to be in state plans, in the next subsection, provides in its entirety that state plans shall:

comply with the provisions of section 1396p of this title with respect to liens, adjustments and recoveries of medical assistance correctly paid, transfers of assets, and treatment of certain trusts; …


42 U.S.C. § 1396p itself has nine specific grants of rulemaking authority to the secretary,100 but none concern what constitutes a trust “for the sole benefit” of a person or established “solely for [his or her] benefit.”101 The agency can define income and resources, and as CMS has noted,102 all of the normal rules may apply to income or assets going into or out of a trust, and as to that the agencies may well have rulemaking authority, but there is no similar clear and specific grant of such authority respecting trusts.


SSA would appear to stand on no better footing. Whatever rulemaking authority SSA has, it has no authority to make rules respecting the Medicaid program. When Congress added Medicaid-like trust rules into the SSI statute in 1999, it enacted those rules directly into Title XVI,103 but the special needs trust exclusions were only by cross-reference to the Medicaid statute.104 The secretary’s general rulemaking authority may be relevant,105 but it is not at all clear it extends to what the Medicaid statute means. In any event, the secretary has not utilized it. Like CMS, SSA says the usual asset and income rules apply to what goes in or comes out of a trust, but again, that is a distinct question.106


Absent agency exercise of rule-making authority, judicial deference depends on the quality of the action taken by the agency, as set out in Skidmore:


The fair measure of deference to an agency administering its own statute has been understood to vary with circumstances, and courts have looked to the degree of the agency’s care, its consistency, formality, and relative expertness, and to the persuasiveness of the agency’s position. … The weight [accorded to an administrative] judgment in a particular case will depend upon the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade, lacking power to control.107


This directive can be broken into perhaps five distinct areas of inquiry:

1. Care and thoroughness. Whether the agency action reflects consideration of all the factors that contribute to the meaning and the consequences of different choices.

2. Consistency. Whether the agency had come to similar decisions on similar facts, and different decisions on distinguishable facts.

3. Formality. Whether the agency procedure, even if short of full rulemaking, reflects a procedure that guarantees careful consideration.

4. Relative expertness. Whether the subject of the decision, even if within the agency’s nominal jurisdiction, is one to which the agency brings greater expertise than courts or others.

5. Validity of reasoning and persuasiveness. The ultimate basis for deference is the power of the reasoning.


B. Application of the Skidmore Factors Suggests Deference Is Not Appropriate

Three of the five factors warrant extended consideration.

1. Formality

This is the first of the three areas in which a Skidmore factor suggests that a court should not defer to CMS or SSA. Neither agency has utilized its rulemaking authority. Transmittal 64 and POMS both reflect a lower degree of formality than notice-and-comment rulemaking. POMS has been cited by the Supreme Court to support its statutory interpretations108 and is frequently cited by the federal appellate courts, but mostly it appears to confirm the courts’ conclusions based on other sources rather than to persuade the contrary to other authorities.109


2. Relative Expertise in State and Federal Law

Here, too, a Skidmore factor suggests, now much more strongly, that a court should not defer to either agency. Federal welfare officials have no professional expertise in state trust law. State courts have declined to defer to their state Medicaid agencies when they go outside of their specific area of competence to deal with substantive state law of property or other matters.110 The forays of SSA, in particular, into trust law reveal such serious miscomprehension that a court should be chary of deferring to its views. In using state trust law to achieve its policy, Congress has introduced a notion foreign to state trust law, something not understood by the agencies exactly because of their lack of expertise, so that even the federal nature of the issue does not translate into agency expertise.


a. State Trust Law

SSA uses words and phrases from trust law but ascribes its own, different meaning to them. If this only concerned nomenclature, it might be a minor problem solved by keeping clear the different meanings and their uses.111 But it goes beyond that: SSA attributes meaning to trust terms used in the federal statute that results in misconstruing Congress’ intent and frustrating Congress’ purpose.


i. Benefit and Beneficial Interest

SSA’s most serious deviation from accepted trust law is the meaning it gives to “benefit” from a trust. SSA says that the beneficiary must derive some benefit under its definition of “for the benefit of” and defines “solely for the benefit of” to mean that no one else can receive any benefit from the trust. It then provides an exception to this definition by allowing payments to a third party for goods or services for the benefit of the beneficiary.112 State trust law, by contrast, defines benefit in functional terms: it is the beneficial enjoyment of trust assets or income, for which one is not required to perform a service or deliver a good. The beneficiary is the one to whom the trustee owes its duties in the use of trust assets and income.


SSA’s definitions only make sense if what SSA means is that any payment by a trustee is a benefit of the trust to the person who receives the payment. This looks like nothing so much as SSA’s old “name on the instrument” rule.113 From that perspective, a trustee’s $20 payment to a cabdriver to take the beneficiary to a doctor’s office for an exam gives the cabdriver a trust benefit. Such a payment is saved from violating “sole benefit” by the POMS exception allowing payments to third parties for the purchase of goods or services for the beneficiary. A definition that accommodates the central purpose of the thing it defines only as an exception to its general rule does not have a well-grounded general rule.


Like the Ptolemaic system,114 SSA’s definitions are a jerry-built approximation of the real thing and must in time lead to inaccurate, not to say bizarre, results. This happened for example in a state Medicaid agency’s attempt to deal with a trustee’s payment of compensation to a mother to remain home to care for her seriously disabled son.115 Following SSA’s theory, payments to the mother were treated as giving her a benefit of the trust, in violation of the sole benefit rule, and since she was doing what mothers (or at least parents) are expected to do, it was not shoehorned into the permissible exception. A traditional analysis under state trust law of sole benefit, as a guide to trustees, might permit payments to parents, but it would do so only when to do so were in the best interests of the beneficiary.116


ii. Revocability

SSA has applied state trust law inconsistently and often incorrectly in determining when trusts are irrevocable. It asserts as a “general principle of trust law that if a grantor is also the sole beneficiary of a trust, the trust is revocable regardless of language in the trust to the contrary,” and a trust that does not name specific individuals as beneficiaries is always revocable.117 The modern rule, found in Restatement of the Law (Third), Trusts, is to the contrary: A trust is not for a sole beneficiary when the settlor “names heirs, next of kin, or similar groups to receive the remaining assets [after the beneficiary’s] death”; therefore, the trust is not revocable per se. But SSA requires state-by-state analysis and finds that the rule survives absent an express judicial decision to the contrary, often overlooking statutory reversal, resulting in “unrelenting and incorrect application of the [Doctrine of Worthier Title].”118


This error, combined with its failure to appreciate the significance of third-party creators, can lead to anomalous results that violate long-standing state law. Parents who sought to avoid SSA’s finding of revocability by having the trust name themselves as contingent beneficiaries could run afoul of the deeply established rule that no one can make a will for another person. Such a plan of distribution could easily deviate from state intestacy law depending on who survived, if anyone remarried and had later-born children, and the state’s anti-lapse statute.


iii. Establishment

“Establish” is not a term of art in the law of trusts. Historically, a trust came into existence when the owner of property conveyed the beneficial interest to another. The question often requiring resolution was when, if ever, those duties arose, viz., whether the conveyance itself defined the duties, whether a mere declaration by the settlor/trustee could cause enforceable duties to come into existence, or whether later acquired property could be subject to duties previously declared. A person could not establish a trust of someone else’s property — that is, convey a beneficial interest to another — any more than he or she could sell it to another and convey good title. Because the trust arose from the transfer of one’s own property, the person who transferred the property was the settlor who “established” the trust, and perforce that was the person who determined the terms of the trust. Similarly, because a trust involves obligations respecting property, a trust could not come into existence until a trustee was in possession of property.


In authorizing parents and grandparents to “establish” a trust, respectively, of their child’s or grandchild’s assets, Congress introduced a new notion into trust law – authorizing a person to establish a trust for management of another’s property.


SSA has tried to find the meaning of “establishment” in state trust law without recognizing that Congress has created an authority that has no basis there since Congress had introduced a practice not found in state trust law. Where a person establishes a trust with his or her own assets, he or she is the grantor, as SSA says; the trust comes into existence when the trustee receives property subject to the obligations imposed by the grantor and spelled out in a trust document. SSA, focusing on what trust law accepted as a result of its premises, treats the person whose assets fund the trust as the grantor, and treats the trust as established only when assets are delivered to the trustee. And since it was the act of funding the trust that brought it into existence, the disabled beneficiary whose assets fund a special needs is the grantor, SSA reasons, so the trust does not meet all of the requirements of Section 1396p(d)(4)(A).


This misapplies state trust law. State trust law focuses on funding by the owner because that is the only person who can establish the rules of the trust governing his or her property. In the situation created by Congress, where parents are to establish a trust to hold their child’s assets, the obligation that arises when the trust is funded is not determined by the funding but by the trust document executed earlier by the parents as settlors and accepted by the trustee. In most states, the terms of the document control.119 Thus, it is the parents who create the trust document who are the settlors, not the child whose assets later fund the trust.


SSA gets out of this conundrum by another jerry-built solution: looking for authority in state law for the creation of a trust without property, what it calls a “dry” or “empty” trust, by which it means an unfunded inter vivos trust.120 Absent express authorization of “dry” trusts, SSA treats the parent-created trust as inadequate under 42 U.S.C. § 1396p(d)(4)(A).121 SSA has found that some states do and some states do not, citing and relying on indistinguishable state court decisions that all require a trustee have title to property.122

These misunderstandings of state trust law are not minor deviations from an other­wise sound approach. They concern essential features of trusts — creation, beneficial interests, and revocability. Having gotten them so wrong, SSA frankly cannot be trusted to construct a system that remains true to what Congress intended in adopting trusts to promote public benefit programs. Moreover, the fundamental incomprehension of what a trust is carries over to the problem of finding meaning in a trust for the sole benefit of a person as a matter of federal law.


b. Sole Benefit as a Feature of Federal Law

Even if the meaning of “sole benefit” is a question of federal law, the federal agencies can still claim no special expertise. Special needs trusts are a recent exception in the public benefits arena, and understanding sole benefit does not draw on any existing agency experience. The meaning of sole benefit does not involve a close reading of a highly complex statute with hundreds of moving parts, each of which affects dozens of others. Both agencies have the authority and the competence to address what kind of state property entities are available as resources or income and, for example, what kind of entities constitute income and what kind constitute resources, how they are counted or excluded, how they interplay with one another, and deeming from one to another; these are the kinds of statutory questions that CMS and SSA are uniquely qualified to answer. Both agencies correctly claim to continue to have primary authority to define and address the status of income and resources as they go into or come out of trusts,123 but that is a different matter from interpreting the law of trusts or addressing how trusts should operate, which is what sole benefit properly concerns.


Nor does interpretation involve a close reading of specific legislative history and Congress-agency interchange to interpret an otherwise opaque statute.124 CMS first addressed the issue in the wake of Congress’s enactment of OBRA ’93, and it has hardly visited the issue since. Special needs trusts were introduced into SSI with no history of agency action or reaction. The strongest argument in favor of the CMS/SSA definition is that Congress carried over much of the Medicaid statue to SSI after CMS had promulgated its informal State Medicaid Manual provision.


3. Validity of Reasoning and Persuasiveness

To address the validity of the agencies’ reasoning requires, first, considering what question they were trying to answer. Congress’s primary goal, inferred from the statutory structure, was to ensure that the person with a disability received the benefit of the resources set aside in trust. Much of what has been said above reflects the failure of CMS and SSA to understand how this operates in the context of a trust relationship. Three additional points merit discussion.


First, the definitions of sole benefit and “solely for the benefit of” add little to the statutory terms. They are the regulatory equivalent of saying the same thing, only louder.125 Where the statute says “solely for the benefit of,” both CMS and SSA say “the trust benefits no one but that individual … .”126 It is difficult to see what the definition adds; it provides no operational direction, no indication of what the trust document should say that the statute does not already address, and no guidance to trustees on what they can or cannot do.


Second, CMS provided the one real elaboration on the basic definition of sole benefit, its dog-in-the-manger127 requirement for actuarially sound distributions.128 This addition is neither well reasoned nor persuasive. In requiring minimum required distribution–type distributions, CMS is telling trustees to make distributions even when doing so is not required to pay for any goods or services the beneficiary needs or wants. This can, if it has any effect at all, only result in reducing trust resources prematurely and unnecessarily, wasting resources and potentially leaving the beneficiary with inadequate resources later in life.129


CMS’s offer of payback as an alternative to actuarially soundness suggests that one of its reasons for requiring actuarial soundness was to protect beneficiaries from trustees who are also remainder beneficiaries. Payback would reduce if not eliminate an interested trustee’s incentive to preserve funds. Perhaps unsophisticated family member trustees are swayed by payback that forecloses effective self-interest, but imposing the requirement on disinterested professional trustees suggests SSA does not fully understand or appreciate what trustees do.


Third, the agencies’ definition of sole benefit fails to address trustee duties. A trust that does not relieve the trustee of his or her obligations to remainder beneficiaries under the duty of impartiality can only result in underserving the beneficiary with a disability. Without an express waiver in the trust document, a trustee must take into account both the lifetime and remainder beneficiaries’ interests. The conscientious trustee might well decline to spend trust funds when it threatens the remainder beneficiaries’ ultimate share. Both CMS and SSA, unsophisticated as they are in their understanding of trusts, are silent on this crucial aspect of trust administration. In their discussion of sole benefit, they have failed to understand the nub of the problem (i.e., the need to relieve a trustee of a duty of impartiality between the life and remainder beneficiaries) and instead focused their efforts on a proxy, requiring distributions for the life beneficiary.


The elements for discarding Skidmore deference are present. These issues are outside the normal agency purview, the agencies’ analyses have pervasive errors with respect to the state trust law they attempt to analyze, and their own definitions fail to fully serve Congress’s purpose and are not supported by solid reasoning.


VI. A Practical and Effective Approach to
Special Needs Trust Regulation That Utilizes Trustees as Partners

The task for CMS and SSA is to use their authority to develop standards and guidelines that utilize, rather than thwart, competent, responsible, properly trained trustees as their partners in making special needs trusts an effective tool in serving the needs of people with disabilities. If this were done properly, capable trustees would be the allies of the federal and state agencies in the efficient use of limited private resources. Beneficiaries would live better, more rewarding lives to the extent that resources can make a difference, at lower cost to Medicaid, with a greater possibility of more funds recovered through payback.


As a threshold matter, the agencies would appear to have somewhat different authority but common areas of concern. Even before getting to the substance of supervision of special needs trusts and trustees, CMS and SSA should resolve between themselves whether, as the court held in Lewis, there is a single, nationwide rule for special needs trusts rooted in federal law except to the extent it relies on state law operation. Related, it would be a rare but impressive moment if the two sister agencies could coordinate or even combine their efforts to develop a single, uniform approach for special needs trusts.


As part of that process, the agencies ought to come to recognize the limit of their ability to manage special needs trusts. Even aside from their many errors, the agencies went fundamentally astray in focusing on benefit as a measure of each transaction rather than as a guide to trustee conduct. By focusing on who received payment, a familiar cash benefits idea, they came up with a rule that is both too narrow and too broad.


Consider whether a trustee should pay a parent to provide necessary daily care for a severely disabled child, as in Hobbs v. Zenderman.130 Who benefits when a trust pays a mother a little more than minimum wage to stay home and care for her seriously disabled 7-year-old son? Under the CMS/SSA standard, as applied by a state Medicaid agency, this benefitted the mother. This was the result even though the independent corporate trustee with probate court approval concluded that paying the mother was preferable to paying substantially more while the mother worked outside the home for less.131 The trustee was denied the opportunity to exercise its discretion and purchase the care for the child the least expensive way possible. Plainly, the definition can be too narrow when it asks, “Who gets paid for caring for a disabled 7-year-old?” and does not permit payment on facts such as these.


But by the same token, it is too broad when it asks only, “Who gets paid for caring for a disabled 7-year-old?” Who benefits when a trust pays for certified nursing aides for 24-hour care for the seriously disabled 7-year-old oldest daughter of a family of five, with a stay-at-home mother and a highly compensated father? The CMS/SSA standard would see this as the child’s “sole benefit,” even though the parents and the other two children plainly benefit as well. The parents are relieved of a huge burden, while the younger children might feel like they get their mother back. The trustee might well conclude that the disabled child’s funds should be preserved while the family provides some of the care. A definition that always permits such payments is plainly too broad.


The proper question is not, “Who was paid to do the necessary work?” but “Is this the most cost-efficient way to take care of the child’s needs, taking all of the facts and circumstances into account?” This is how state trust law typically handles these issues, under the best interests of the beneficiary standard. A trustee might answer the question differently depending on the situation of the family. Is the mother home with a housekeeper because the family does not need her income and she elected to be an at-home mother? Does the trust have sufficient assets and scheduled income from a structure to pay for full-time aides now and still have sufficient funds to meet needs potentially 80 years in the future? These are decisions best left to a trustee to make on a case-by-case basis.


SSA’s recent effort to address using special needs trusts funds for travel to allow beneficiaries to visit with relatives, discussed above,132 illustrates the limit on what an agency can do through general rules. Consider the following scenario. The Washington, D.C., parents of a severely autistic child, living in a specialized Florida facility, would like to visit him, and the facility’s staff agrees that maintaining family ties is extremely beneficial for the boy. The options are to pay the cost for a round trip for one of the parents to visit the boy in Florida, perhaps including other travel costs such as car rental, hotel, and meals, or to pay the cost for two round trips for the boy and an aide to go to Washington, along with wages and other expenses for the aide.


For the trustee, the issue is the child’s best interests, including both current and future needs. Assuming the cost of the parents visiting is less, the trustee can consider whether trust funds are necessary. If the family is relatively affluent and could or would go even without a trust contribution to the costs, the trustee could reasonably decline to pay the costs, based in part on the need to preserve assets for the child’s long-term needs. If the family could not afford such a trip without financial support from the trust, the trustee must weigh the long-term benefits of providing family contact against the child’s future needs. But the standard would not be the formalistic “Who used the service?” but the real and practical one of “What is best for the child?”


Trustees of special needs trusts are subject to state trust laws that provide numerous protections for the beneficiary and for compliance with the terms of the trust. State probate court judges and state legislatures have established well-developed protections for beneficiaries of trusts, including accountings, removal, surcharge, penalties, fines, and in some circumstances even penal sanctions. This is where the supervision of trusts should be managed, not with public benefits eligibility workers with little or no experience in how trusts are managed or with sweeping policies in federal policy manuals that cannot take into account all of the facts of individual situations.


Sole benefit refers to the standard that guides the trustee, not to specific transactions. That is the level at which CMS and SSA can and should operate. Aside from clearing up the errors arising from failing to recognize the centrality of the role of the trustee133 and the proper use of state trust law,134 the agencies should address trustee standards and duties, perhaps where the problems are the most complicated. Few problems are more vexing than providing a home and caregiving for a disabled child whose family is poor and cannot afford appropriate accommodations and care. These and other complicated problems would benefit from a process in which the agencies get the benefit of trustees’ experience in the real world of special needs trusts.

1 The term is not well defined but generally refers to trusts designed to allow their beneficiaries to enjoy their benefits while also qualifying for means-tested public benefit programs such as Supplemental Security Income (SSI) and Medicaid. See Stuart D. Zimring et al., Fundamentals of Special Needs Trusts § 1.02, 1-3 – 1-4 (Lexis Nexis 2013); see also Ron M. Landsman, Special Needs Trusts, in A Practical Guide to Estate Planning, ch. 14, 197–198 (Jay Soled, ed., ABA 2012). In its first published discussion implementing federal legislation approving trusts that coordinate with public benefits eligibility, the Centers for Medicare & Medicaid Services (CMS) stated that a trust under 42 U.S.C. § 1396p(d)(4)(A) (2013) was “often referred to as a special needs trust.” State Medicaid Manual, “Transmittal 64,” General and Categorical Eligibility Requirements, § 3259.7A, http://www.sharinglaw.net/elder/Transmittal64.htm (accessed June 6, 2013) [hereinafter Transmittal 64].

2 Created in 1972, SSI is the federal cash benefit program for low-income people who are aged (65 or older), blind, or disabled. Social Security Act, tit. XVI, § 1601, added Oct. 30, 1972, Pub. L. 92-603, tit. III, §301, 86 Stat. 1465; 42 U.S.C. §§ 1381-1383f.

3 Medicaid, created in 1965, is the joint federal-state program providing medical and remedial services to the elderly and disabled poor. It is roughly parallel to Medicare, an exclusively federal program providing medical services to the elderly and disabled who get employment-based benefits through Social Security. Social Security Act, tit. XIX, §1901, added July 30, 1965, Pub. L. 89-97, tit. I, § 121(a), 79 Stat. 343; 42 U.S.C. §§ 1396-1396w-5. Medicaid’s great significance is in providing long-term remedial residential services, something not available from either Medicare or private health insurance.

4 Congress set a fixed asset limit of $1,500 for SSI eligibility in 1972 and raised it in increments of $1,000 from 1985 until it reached $2,000 in 1989. 42 U.S.C. § 1382(a)(1)(B), (3)(B). Had Congress increased that limit with the consumer price index from 1989 through April 2013, when the Consumer Price Index for All Urban Consumers (CPI-U) rose 92 percent, the SSI resource level of $2,000 would still be only $3,840. These calculations are based on data published at U.S. Dept. of Labor, Bureau of Labor Statistics, ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt (accessed May 28, 2013).

5 The maximum “federal benefit rate” in 2014 is $721 per month. See Soc. Sec. Adm., SSI Federal Payment Amounts for 2014, http://www.ssa.gov/oact/cola/SSI.html (accessed Nov. 26, 2013).

6 For example, the Bank of America trust department fee for a personal trust account, characterized on the website as competitive, has a base fee of $1,000 plus 1 percent per year on the first $1,000,000, with a minimum annual charge of $2,000. Maximum SSI income for 2014 is $8,652. See First Bank & Trust, Trust & Investments, http://www.firstbt.com/trusts-investment (accessed Nov. 29, 2013).

7 Fiduciaries generally accept these [(u)nique assets includ(ing) real estate] into trust accounts to accommodate a client’s entire portfolio of assets. The most common example of this arrangement is a bank placing the family home or property into a trust. On rare occasions, a bank may purchase these types of assets but only if the bank has the appropriate expertise and only in accounts of significant size and sophistication. (Emphasis in original.)

Off. of the Comptroller of the Currency, Comptroller’s Handbook: Asset Management – Unique and Hard-to-Value Assets 1 (Aug. 2012); see also id. at 13 (if a trust holds real property, the trustee “must have in-depth knowledge of prudent real property management, including market knowledge, accounting and legal expertise, diversification of holdings where possible, and careful oversight and monitoring of each asset. … If the real estate does not produce income for the trust, the bank fiduciary must determine whether retaining the property is in the best interests of the trust”). This is of course not the case for revocable inter vivos (“living”) trusts used by the affluent but not wealthy to avoid probate, but the law of trusts has developed largely in the wealth management area.

8 For example, paying family members’ travel expenses to visit the disabled beneficiary, see infra nn. 52–55 and accompanying text, and requiring distributions on an “actuarially sound” basis, see infra nn. 42- 43 and accompanying text.

9 Consolidated Omnibus Budget Reconciliation Act of 1985, Pub. L. No. 99-272, § 9506(a), 100 Stat. 82 (1986), codified at 42 U.S.C. § 1396a(k), repealed, Omnibus Budget Reconciliation Act of 1993 (OBRA ’93), Pub. L. No. 103-66, tit. XIII, § 13611(d)(1)(C), 107 Stat. 627 (1993).

10 There is only one case, out of dozens, finding nonavailability for someone seeking nursing home care. Pollak v. Dept. of Health & Rehabilitative Servs., 79 So. 2d 786 (Fla. App. Dist. 4 1991); cf. e.g. Barham by Barham v. Rubin, 72 Haw. 308, 816 P.2d 965 (1991); Cohen v. Commr. of Div. of Med. Assistance, 423 Mass. 399, 668 N.E.2d 769 (1996). Others, however, allowed young adults disabled in accidents to protect personal injury recoveries. E.g. Trust Co. of Okla. v. St. of Okla. ex rel. Dept. of Human Servs., 825 P.2d 1295 (Okla. 1991).

11 The extra-legislative activity that prompted enactment of the Medicaid provisions of OBRA ’93 is reviewed in Mary F. Radford & Clarissa Bryan, Irrevocability of Special Needs Trusts: The Tangled Web That is Woven When English Feudal Law is Imported into Modern Determinations of Medicaid Eligibility, 8 NAELA J. 1, 6 (2012).

12 OBRA ’93, supra n. 9 at § 13611; 107 Stat. at 622.

13 42 U.S.C. § 1396p(d)(3)(B)(i).

14 42 U.S.C. § 1396p(d)(2)(C)(i), (iii), (iv).

15 These are the so-called (d)(4) trusts, 42 U.S.C. § 1396p(d)(4)(A)–(C). The income trust, 42 U.S.C. § 1396p(d)(4)(B), does not raise “sole benefit” issues and therefore is not relevant here except to the extent its treatment by CMS throws light on CMS’s understanding of trusts generally.

16 This is but one of the ways in which Congress provides advantageous treatment to individuals with disabilities in means-tested programs without means testing the individuals with disabilities. A person seeking Medicaid can transfer a home or other assets to a disabled child of any age without regard to the latter’s wealth, 42 U.S.C. § 1396p(c)(2)(A), (B), and may make such a child the beneficiary, with priority over Medicaid, of an annuity used to “spend down” and qualify the parent for long-term care. 42 U.S.C. § 1396p(c)(1)(F)(ii).

17 The exclusion from the antitransfer rules included, inter alia, gifts to a trust for a donor’s spouse, disabled child of any age, and any disabled person under age 65, 42 U.S.C. § 1396p(c)(2)(i)–(iv), thus allowing, for example, an elderly person to qualify for Medicaid long-term care benefits by funding a trust for a disabled child, niece or nephew, or grandchild.

18 Congress’s other efforts included attempts to make transfers illegal and, when that did not work, to make giving Medicaid legal advice illegal; see Health Insurance Portability and Accountability Act of 1996, Pub. L. No. 104-191, § 217, 110 Stat. 2008 (1996), and Balanced Budget Act of 1997, Pub. L. No. 105-33, § 4734, 111 Stat. 522 (1997), 42 U.S.C. § 1320-7b(a)(6), known popularly as “Granny Goes to Jail” and “Granny’s Lawyer Goes to Jail,” respectively. The former was never enforced; enforcement of the latter was enjoined on First and Fifth Amendment grounds in N.Y. St. Bar Ass’n v. Reno, 999 F. Supp. 710 (N.D.N.Y. 1998).

19 Congress had long accepted that third party trusts (trusts set up and funded with other people’s assets) could be established to permit beneficiaries to enjoy the benefits of both the trust and SSI or Medicaid as was done in, e.g., First Natl. Bank of Md. v. Dept. of Health and Mental Hygiene, 284 Md. 720, 399 A.2d 891 (1979); Lang v. Commonwealth Dept. of Public Welfare, 528 A.2d 1335 (Pa. 1987); and Zeoli v. Commr. of Soc. Servs., 179 Conn. 83 (1979). This was a policy of necessity and prudence: To deny families the opportunity to assist a family member with a disability would drive the assistance underground, hurting the beneficiary and not likely saving much in public funds. Disinheriting the child, leaving the estate to nondisabled siblings with nonbinding instructions regarding care for the disabled child, was by the late 1980s an option of last resort given its shortcomings, to be used only in very small estates or in jurisdictions with problematic laws or administrative practices. See e.g. Ralph Moore, Estate Planning for Families of Persons with Developmental Disabilities 98 (Md. St. Plan. Council on Developmental Disabilities l989).

20 The Spousal Impoverishment provisions set forth in 42 U.S.C. § 1396r-5 and enacted five years earlier had changed the resource rules for spouses of nursing home residents seeking Medicaid, but nursing home residents themselves still, ultimately, had to meet the same strict resource limits. Those changes were preceded by judicial attempts at relief. See In re Rose Septagenarian, 126 Misc.2d 699 (N.Y. 1984). This is similar to the judicial relief that preceded some of what Congress did in OBRA ’93 (i.e., the new income trust, 42 U.S.C. § 1396p(d)(4)(B), which was modeled on the trust approved in Miller v. Ybarra, 746 F. Supp. 19 (D. Colo. 1990), and the parental trusts under 42 U.S.C. § 1396(d)(4)(A), which may in part be drawn from, e.g., Trust Co. of Okla. v. St. ex rel. Dept. of Human Servs., 825 P.2d 1295 (Okla.1991).

21 Congress used the Social Security definition of disability throughout. See 42 U.S.C. § 1396p(c)(2)(A)(ii)(II), (B)(iii), (iv), and § 1396p(d)(4)(A), (C), all referring to 42 U.S.C. § 1382c(a)(3).

22 42 U.S.C. § 1396p(d)(4)(C)(ii). A pooled trust is best likened to a 401(k) account or mutual fund; deposits are pooled for investment that everyone shares pro rata, but each participant maintains his or her own account for contributions and withdrawals.

23 42 U.S.C. § 1396p(d)(4)(A), (C)(iv).

24 42 U.S.C. § 1396p(d)(4)(A), (C)(iii).

25 Compare 42 U.S.C. § 1396p(d)(4)(A) with 42 U.S.C. § 1396p(d)(4)(C)(iii).

26 42 U.S.C. § 1396p(d)(4)(A); by contrast, there is no age limit in 42 U.S.C. § 1396p(d)(4)(C).

27 42 U.S.C. § 1396p(d)(4)(C)(iv).

28 42 U.S.C. § 1396p(d)(4)(C)(i).

29 42 U.S.C. § 1396p(d)(4)(C)(iii) requires that “[a]ccounts in the trust are established solely for the benefit of individuals who are disabled … .”

30 Transfers to a spouse or disabled child were previously permitted. The change is noted in 42 U.S.C.A. § 1396p(c)(2)(B) hist. nn., 1993 amends. (West 2012).

31 42 U.S.C. § 1396p(c)(2)(B)(iii), (iv).

32 See 42 U.S.C. § 1396p(d)(4)(C)(iii).

33 42 U.S.C. § 1396p(c)(2)(B)(i), (ii).

34 Foster Care Independence Act of 1999 (FCIA), Pub. L. No. 106-169, tit. II, § 206(a), 113 Stat. 2833 (1999), 42 U.S.C. § 1382b(e).

35 The parallel provisions are 42 U.S.C. § 1396p(d)(1)–(5) and § 1382b(e)(1)–(5), and the subparagraph numbers correspond except that the order of (4) and (5) are switched in the SSI statute. One difference throughout is that the SSI provision does not discuss income or the effect on income. The Medicaid provisions say:

(1) These provisions apply for determinations of eligibility and amount of benefits, an income-related notion; SSI concerns only determinations of resources.

(2)(A) A trust is deemed to be established by an individual if his or her resources fund it at all and if the trust itself was established other than by will by the individual, spouse, or a court or agency acting on his behalf or at his request. SSI dispenses with the list of who may create the trust, and it changes the relevance of the will. While Medicaid reaches trusts established “other than by will,” SSI reaches trusts “if any assets [of the individual or spouse] … are transferred to the trust other than by will.”

(2)(B) For a trust with assets of the individual and anyone else, the Medicaid trust rules apply to the portion of the trust attributable to the individual. SSI casts the notion in terms of assets transferred to the trust.

(2)(C) Same: rules apply without regard to purpose of trust, trustee discretion, restrictions on when or whether distributions may be made or what they may be used for.

(3)(A) Same: resources of revocable trust are available. Medicaid spells out that payments to the individual are income and payments to anyone else are transfers of assets.

(3)(B) For irrevocable trusts, if payments from assets may be made under “any circumstances,” then such assets are available; payments for the individual are income, and for someone else are transfers. If no payments may be made, then funding was a transfer. SSI says only that if payment may be made, the asset is available.

(4) Medicaid has the three exempt trusts. The SSI provision, 1382b(e)(5), cross-references two of them. “This subsection shall not apply to a trust described in subparagraph (A) or (C) of section 1396p(d)(4) of this title.”

(5) Application to be waived where there is undue hardship under standards determined by the Secretary; the SSI provision, 1382b(e)(4), directs the SSA Commissioner to apply the undue hardship waiver.

36 The more complicated issue is whether the Medicaid programs in SSI states — which are required to provide Medicaid to all SSI beneficiaries — are allowed to deny benefits to someone on SSI because the person’s (d)(4) trust does not meet state requirements. Before the SSI trust amendments, both CMS and SSA took the view that these programs were allowed to do so. The one court to look at this issue closely came to the contrary view, in part because neither agency had addressed the question anew since the enactment of the SSI trust rules. Lewis v. Alexander, 276 F.R.D. 421, 440 (E.D. Pa. 2011), aff’d on other grounds, 685 F.3d 325 (3d Cir. 2012). One court held, and others assume, that the trust exemption rules are mandatory. Lewis v. Alexander, 685 F.3d 325 (3d Cir. 2012), aff’g 276 F.R.D. 421, 438 (E.D. Pa. 2011), citing Norwest Bank of N.D. v. Doth, 159 F.3d 328, 330 (8th Cir. 1998); Horowitz ex rel. Horowitz v. Apfel, 143 F. Supp. 2d 240, 242 (E.D.N.Y. 2001), aff’d on other grounds, 29 Fed. Appx. 749 (2d Cir. 2002); Sullivan v. Co. of Suffolk, 1 F. Supp. 2d 186, 190 (E.D.N.Y. 1998), aff’d on other grounds, 174 F.3d 282 (2d Cir. 1999). One court is to the contrary, Keith v. Rizzuto, 212 F.3d 1190 (10th Cir. 2000); see also Wong v. Doar, 517 F.3d 247, 256–257 (2d Cir. 2009) (dicta).

37 The agency responsible for the Medicare and Medicaid programs at the time of Transmittal 64 was named the Health Care Financing Administration. Its name was changed in 2001 to the Centers for Medicare & Medicaid Services (CMS).

38 The State Medicaid Manual is a CMS publication that provides guidance to state Medicaid agencies. CMS, State Medicaid Manual, http://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Paper-Based-Manuals-Items/CMS021927.html (accessed Jan. 14, 2014). The name is something of a misnomer; it is not a model manual. Similar to the Program Operations Manual System (POMS), it is not the product of rulemaking but appears to reflect substantial agency effort to explain and help readers understand its programs.

39 Transmittal 64, supra n. 1.

40 Id. at § 3257(B)(6), para. 3.

41 Id. at § 3257(B)(6), para. 4.

42 Id. at § 3257(B)(6), para. 3.

43 Id. at § 3257(B)(6), para. 4.

44 Congress logically enough did not extend to SSI the qualified income trust provision, 42 U.S.C. § 1396p(d)(4)(B), see supra n. 15 and accompanying text, which was only enacted to codify a court decision that solved a problem unique to Medicaid long-term care. Aside from that, SSI is only designed to provide a floor on income; it made no sense to allow individuals to qualify by artificially lowering their other income through a trust mechanism.

45 POMS SI 01120.199C (“Trusts are often complex legal arrangements involving State law and legal principles that require obtaining legal counsel”); see also POMS SI 01120.203B.1.f (“In the case of a legally competent, disabled adult, a parent … may establish a ‘seed’ trust using a nominal amount of his or her own money, or if State law allows, an empty or dry trust”).

46 See 42 U.S.C. § 1382b(e)(5). But note, the SSI antitransfer provision restates the language of the Medicaid statute. Cf. 42 U.S.C. § 1382b(c)(1)(C)(ii)(III), (IV), with 42 U.S.C. § 1396p(c)(2)(B)(iii), (iv).

47 POMS SI 01120.201F.1.

48 POMS SI 01120.201F.2.

49 Under the special needs trust exception, the trust must be established for and used for the benefit of the disabled individual. SSA has interpreted this provision to require that the trust be for the sole benefit of the individual.

POMS SI 01120.203B.1.e.

50 Id.

51 POMS SI 01120.201F.2.b. Payment of administrative expenses was a further permissible exception to the sole benefit rule. POMS SI 01120.201F.2.c.

52 Example 1 — Trust provision that is not for the sole benefit of the trust beneficiary. An SSI recipient is awarded a court-ordered settlement that is placed in an irrevocable trust of which he is the beneficiary. The trust document includes a provision permitting the trustee to use trust funds to pay for the SSI recipient’s family to fly from Idaho to visit him in Nebraska. The trust is not established for the sole benefit of the trust beneficiary, because it permits the trustee to use trust funds in a manner that will benefit the SSI recipient’s family financially.

POMS SI 01120.201F.2, quoted in ElderLawAnswers, POMS Changes Tighten Interpretation of ‘Sole Benefit’ Rule for (d)(4)(A) Trusts (last modified Jan. 7, 2013) http://www.elderlawanswers.com/poms-changes-tighten-interpretation-of-sole-benefit-rule-for-d4a-trusts-9915 (accessed June 11, 2013).

53 ElderLawAnswers, SSA Removes Controversial POMS Language, But Planners Remain in Limbo,

http://attorney.elderlawanswers.com/ssa-removes-controversial-poms-language-but-planners-remain-in-

limbo-12067 (accessed June 11, 2013).

54 ElderLawAnswers, SSA Revises POMS, Permits First-Party Trusts to Pay for Non-Beneficiary Travel in Some Cases, http://attorney.elderlawanswers.com/ssa-revises-poms-permits-first-party-trusts-to-pay-for-non-beneficiary-travel-in-some-cases--12295 (accessed June 11, 2013).

55 Payment for third-party travel is permitted only if “necessary in order for the trust beneficiary to obtain medical treatment” or to “ensur[e] the safety and/or medical well-being of [an] individual” living in a nursing home, group home, or assisted living facility. POMS SI 01120.201F.2.b.

56 See Lewis, 685 F.3d at 347. Congress has of course done the same in other situations in which one party manages property for the benefit of another, e.g. Employee Retirement Income Security Act (ERISA) Pub.L. No. 93-406, 88 Stat. 829 (1974), although some think the combination has not always been a happy one. See John H. Langbein, The Supreme Court Flunks Trusts, S. Ct. Rev. 207, 209–211, 211–212, 223–228 (1991).

57 The phrase appears but typically only as a more emphatic statement of the notion of benefit (e.g., “failing to act for the sole benefit of the beneficiaries”), Markert v. PNC Fin. Servs. Group, Inc., 828 F. Supp. 2d 765 (E.D. Pa. 2011); In re Roman Catholic Archbishop of Portland in Or., 345 B.R. 686, 694 (Bankr. D. Or. 2006). It is different from “sole beneficiary” trusts, whose one beneficiary gets income and gets or controls principal, either during the beneficiary’s lifetime or at his or her death. See Mark L. Ascher et al., Scott and Ascher on Trusts § 12.2.1 (5th ed., Aspen 2006).

58 As used by CMS and SSA, this phrase includes the trusts identified by both the resource and transfer exclusions, 42 U.S.C. §§ 1396p(d)(4)(A) and (c)(2)(B)(i)–(iv), respectively. The similar phrase in (d)(4)(C)(iii) (“Accounts … established solely for the benefit of individuals”), referring to pooled trusts, has a different purpose, to limit the use of (d)(4)(C) trusts accounts to disabled individuals, excluding the non-disabled.

59 Restatement of the Law Third, Trusts § 2. The others are the trustee and the property the trustee manages for the beneficiary’s welfare. A trust is a fiduciary relationship involving property “subjecting the person who holds title to the property [the trustee] to duties to deal with it for the benefit of charity or for one or more persons, at least one of whom is not the sole trustee.” It may appear to exist for a time without a beneficiary, because the beneficiary may not be identified with specificity at first and possibly for a long time (viz., the unborn children of a class of individuals, one of whom may be the proverbial fertile octogenarian) after a trust is created. “But [i]n a more comprehensive sense, even at the outset [every] trust has existing beneficiaries by implication of law: the reversionary beneficiaries whose interests may or may not eventually materialize … .” Id. These are the people with beneficial interests in the property of the trust.

60 Ascher et al., supra n. 57, at § 12.14, 781–782; see also Restatement of the Law Third, Trusts, supra n. 59, at § 49.

61 A somewhat whimsical illustration might be the charitable “trust” in “The Red-Headed League,” a Sherlock Holmes story by Sir Arthur Conan Doyle. See The Adventures of Sherlock Holmes, The Red-Headed League (http://168.144.50.205/221bcollection/canon/redh.htm) (accessed Aug. 19, 2013).

62 The question often comes up in the context of directions to employ someone in management of the trust. Even if the trust uses mandatory rather than precatory language, the person named is not necessarily a beneficiary with any rights to enforce. The person might have been named “in the belief that such employment would promote both trust administration and the interests of the beneficiaries,” which leaves the employee as only that, not a beneficiary. Ascher et al., supra n. 57, at § 12.13, 769; see generally id. at 776–781.

63 Cf. Hobbs ex rel. Hobbs v. Zenderman, 579 F.3d 1171 (10th Cir. 2009).

64 If no one is named, property remaining would go to the probate estate of the life tenant and thus, absent a will, to his or her heirs at law.

65 Langbein, supra n. 56, at 987–988.

66 See U.T.C. §§ 803, 105(a), (b) (2010); Restatement of the Law Second, Trusts § 183, comment a.

67 McNeil v. Bennett, 792 A.2d 190 (Del. Ch. 2001), aff’d in part and rev’d in part, 798 A.2d 503 (Del. 2002) (communicating with the beneficiaries and letting them know of their rights and interests), discussed in Ascher et al., supra n. 57, at § 17.15, 1261.

68 See e.g. In re Estate of Whitman, 266 N.W. 28 (Iowa 1936) (where two beneficiaries are entitled to income, the trustee abuses his discretion when he permits one to live in trust property rent free); Penny v. Wilson, 20 Cal. Rptr. 3d 212 (Cal. App. 2004) (distributing property without taking into account appreciation and thus future tax liability); both cases are discussed in Ascher et al., supra n. 57, at § 17.15, 1259–1260.

69 Ascher et al., supra n. 57, at § 20.1, 1463.

70 Id. at § 20.1, 1466–1469.

71 See e.g. U.T.C. § 803, cmt., first unnumbered para.

72 The Uniform Trust Code has dispensed with the distinction between beneficiary and remainderman, treating them all, as they are, as beneficiaries of the trust. U.T.C. § 103 (treating as the same those with “present or future beneficial interest[s]”).

73 The plaintiffs prevailed before the district court and argued on appeal that the question was whether the comparability requirement under 42 U.S.C. § 1396a(a)(17) precluded the more restrictive state statute, but the Third Circuit declined to take that approach. Lewis, 685 F.3d at 347–348, n. 21.

74 Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188 (1938).

75 Lewis, 685 F.3d at 347.

76 U.S. v. Little Lake Misere Land Co., Inc., 412 U.S. 580, 93 S. Ct. 2389 (1973).

77 Boyle v. United Technologies Corp., 487 U.S. 500, 504, 108 S. Ct. 2510, 2514 (1988) (citations omitted). The exceptions are those areas involving “uniquely federal interests,” such as military operations.

78 Md. v. La., 451 U.S. 725, 746 (1981).

79 Lewis, 685 F.3rd at 347.

80 Id., citing U.S. Term Limits, Inc. v. Thornton, 514 U.S. 779, 131 L. Ed. 2d 881 (1995).

81 Plaintiffs did not appeal the district court decision dismissing their challenge to a sixth provision of the state statute that “all distributions from the trust must be for the sole benefit of the beneficiary.” See Lewis, 685 F.3d at 338, n. 9.

82 42 U.S.C. § 13p6p(d)(4)(C)(iv) (Medicaid payback required only “[t]o the extent that amounts remaining in the beneficiary’s account upon [his or her] death … are not retained by the trust …”).

83 Lewis, 685 F.3d at 348–350.

84 Id. at 350.

85 Id. at 350–351.

86 Id. at 351–352.

87 Id. at 338, n. 9.

88 Id. at 352–353.

89 20 Pa. Consol. Stat. Ann. § 7772(a) (West).

90 Lewis, 685 F.3d at 347.

91 Id. at 352.

92 U.S. v. Mead Corp., 533 U.S. 218, 228, 121 S. Ct. 2164, 2172 (2001).

93 Chevron U.S.A., Inc. v. Nat. Resources Def. Council, Inc., 467 U.S. 837 (1984).

94 Wis. Dept. of Soc. Servs. v. Blumer, 534 U.S. 473, 496, 122 S. Ct. 962, 976, 115 L. Ed. 2d 935 (2002) (“We have long noted Congress’s delegation of extremely broad regulatory authority to the Secretary in the Medicaid area”); Thomas Jefferson U. v. Shalala, 512 U.S. 504, 512, 114 S. Ct. 2381, 2387, 129 L. Ed. 2d 405 (1994) (this broad deference is all the more warranted when, as here, the regulation concerns “a complex and highly technical regulatory program [Medicaid],” in which the identification and classification of relevant “criteria necessarily require significant expertise and entail the exercise of judgment grounded in policy concerns”); Atkins v. Rivera, 477 U.S. 154, 162, 106 S. Ct. 2456, 2461, 91 L. Ed. 2d 131 (1986) (where the Secretary’s regulation of the Medicaid statute is supported by the plain language of the statute, it is entitled to more than mere deference or weight but is entitled to legislative effect and is controlling unless it is arbitrary, capricious, or manifestly contrary to the statute); Schweiker v. Gray Panthers, 453 U.S. 34, 43, 101 S. Ct. 2633, 2640, 69 L. Ed. 2d 460 (1981) (“Congress explicitly delegated to the Secretary broad authority to promulgate regulations defining eligibility requirements for Medicaid”).

95 Barnhart v. Thomas, 540 U.S. 20, 29–30, 124 S. Ct. 376, 382 (2003); Sullivan v. Everhart, 494 U.S. 83, 88–89, 110 S. Ct. 960, 964 (1990); cf. Sullivan v. Zebley, 493 U.S. 521, 110 S. Ct. 885 (1990); Bowen v. Yuckert, 482 U.S. 137, 145, 107 S. Ct. 2287, 2293 (1987) (“Where, as here, the statute expressly entrusts the Secretary with the responsibility for implementing a provision by regulation, our review is limited to determining whether the regulations promulgated exceeded the Secretary’s statutory authority and whether they are arbitrary and capricious”) (citations omitted).

96 Chevron, 467 U.S. at 843.

97 Id. at 844–845; the quote is from U.S. v. Shimer, 367 U.S. 374, 382, 6 L. Ed. 2d 908 (1961).

98 Chevron, 467 U.S. at 844.

99 U.S. v. Mead, 533 U.S. at 227.

100 Viz., respecting reports from issuers of long-term care insurance within the “partnership plan,” 42 U.S.C. § 1396p(b)(1)(C)(iii)(VI); for waiver based on undue hardship from estate recovery, id. at § 1396p(b)(3)(A); for imposition of transfer penalties, id. at § 1396p(c)(2)(D); for paying nursing facilities to hold a bed while the individual’s transfer waiver application is pending, id. at § 1396p(c)(2), last unnumbered para.; for applications for waivers of the trust counting rules, id. at § 1396p(d)(5); for what constitutes intent to obtain fair market value, return of transferred assets, or whether transfer was for another purpose, id. at § 1396p(c)(2)(C); for apportioning transfer penalties when both spouses require long-term care, id. at § 1396p(c)(4); for when to include annuities as trusts, id. at § 1396p(d)(6); and for determining what “similar financial instruments” to subject to annuity disclosure rules, id. at § 1396p(e)(1).

101 42 U.S.C. § 1396a(a)(18).

102 Transmittal 64, supra n. 1, at § 3259.7B.

103 42 U.S.C. § 1382b(e)(1)–(4). The language is not identical, but appears to reflect clarity and simplicity rather any change of policy, 42 U.S.C. § 1396p(d)(1)–(5), 1382b(e)(1)–(5).

104 See 42 U.S.C. § 1382b(e)(5).

105 See City of Arlington, Tex. v. Fed. Commun. Commn., ___ U.S. ___, 133 S. Ct. 1863, 2013 WL 2149789 (2013) at *10, citing Mead as denying Chevron deference to an agency with rulemaking authority for action that was not rulemaking.

106 POMS cautions that payments still have to be reviewed under the regular SSI counting rules; viz., payments of cash and the purchase of nonexempt items or in-kind goods and services for food and shelter also would be considered income to the beneficiary. POMS SI 01120.201I.1.a, b; see also id. d–f.

107 U.S. v. Mead, 533 U.S. at 228, quoting Justice Jackson in Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944).

108 E.g. Wash. St. Dept. of Soc. & Health Servs. v. Guardianship Est. of Keffeler, 537 U.S. 371, 385, 123 S. Ct. 1017, 1026 (2003) (“While these administrative interpretations are not products of formal rulemaking, they nevertheless warrant respect in closing the door on any suggestion that the usual rules of statutory construction should get short shrift for the sake of reading ‘other legal process’ in abstract breadth,” citing Skidmore, 323 U.S. at 139–140).

109 See e.g. Lopes v. Dept. of Soc. Servs., 696 F.3d 180 (2d Cir. 2012) (“The language of the relevant regulations, as clarified in the POMS and in HHS’s amicus brief, convinces us that the income stream from Lopes’ annuity is properly considered income, not a resource, because the annuity is non-assignable”); Beeler v. Astrue, 651 F.3d 954, 961–962 (8th Cir. 2011), cert. denied, 132 S. Ct. 2679 (2012). POMS tends to be relied on more for matters of procedure, e.g. Gossett v. Colvin, 527 Fed. Appx. 533 (7th Cir. 2013) (remand required where agency failed to follow procedure set out in POMS); Sullivan v. Colvin, 519 Fed. Appx. 985 (10th Cir. 2013) (citing POMS for proposition that a specific form is only a worksheet, not the residual functional capacity assessment per se), but even that is not absolute, Carillo-Yeras v. Astrue, 671 F.3d 731 (9th Cir. 2011) (POMS “does not impose judicially enforceable duties on either this court or the ALJ”).

110 See e.g., L.M. v. New Jersey Division of Medical Assistance, 140 N.J. 480, 659 A.2d 450 (1995) (no deference to state Medicaid agency on meaning or operation of a qualified domestic relations order, a matter of state domestic relations law).

111 SSA defines “grantor” as the one whose assets fund a trust and who “establishes the trust with funds or property,” POMS SI 01120.200B.2, and defines “grantor trust” as one in which the grantor is the “sole beneficiary,” explaining that “State law on grantor trusts varies.” But there is no state law of “grantor trusts,” which is a term of art in federal income tax law, referring to trusts that are disregarded for income tax purposes so that all income is attributed to the person deemed the grantor. See 26 U.S.C. §§ 671–678. Where states’ laws refer to grantor trusts, it means the federal tax law notion of grantor trust. E.g. Ala. Stat. Ann. § 40-18-25(j); Fla. Stat. Ann. § 201.02(b)(5). There is a notion of sole beneficiary trusts, however, and to the extent SSA limits its use of “grantor trust” to such trusts, it might introduce some confusion, but not results at odds with Congress’ intent.

112 See POMS SI 01120.201F.2.c, discussed above in text accompanying notes 51, 62 and 63.

113 See the discussion of this informal rule in Purser v. Rahm, 104 Wash. 2d 159, 170, 702 P.2d 1196, 1202 (1985), and the authorities cited there.

114 Ptolemy (c. A.D. 90-168) improved the accuracy of the geocentric theory’s explanation of the movement of celestial bodies by positing that they moved in circles centered on other circles centered on yet other circles centered on the earth.

115 Hobbs v. Zenderman, supra, n. 63.

116 Application of sole benefit to payments to parents is discussed in more detail below.

117 POMS SI 01120.200D.3, first unnumbered para. The idea that a trust naming heirs, rather than specific individuals, is always revocable as a matter of law is drawn from the Doctrine of Worthier Title and the Rule in Shelley’s Case, two post-feudal era rules designed to thwart attempts to avoid feudal duties. See Radford & Bryan, supra n. 11, at 14. These rules treated dispositions to the heirs of the settlor or another person as transfers to the ancestor, thus subjecting the transfer to taxes or duties that the settlor hoped to avoid. Both rules have long since been repealed by statute and are largely repudiated in the United States, seen at most as rules of construction (i.e., an inference unless the settlor clearly indicated a contrary intent) rather than rules of law. See id. at 15–16.

118 See Radford and Bryan, supra n. 11, at 29.

119 In determining the terms of the trust, the first resort is, of course, to the governing instrument. … [T]he terms of the governing instrument ordinarily are the terms of the trust. … [T]he governing instrument, if unambiguous, is ordinarily determinative. In such a case, extrinsic evidence is inadmissible to vary or add to the terms of the instrument … .

Ascher et al., supra n. 57, at § 2.2.4, 42–43.

120 See POMS SI 01120.203B.1.f. This is another misuse of existing terms from state trust law. In trust law, a dry trust is one in which the trustee has no affirmative duties, e.g. Provident Life & Accident Ins. Co. v. Little, 88 F. Supp. 2d 604, 607–608 (S.D.W. Va. 2000), and Atkins v. Marks, 288 S.W.3d 356, 367 (Tenn. Ct. App. 2008); an empty trust is one whose assets have been distributed, e.g. Giannini v. First Nat. Bank of Des Plaines, 136 Ill. App. 3d 971, 975 n. 3, 483 N.E.2d 924, 929 (Ill. App. 1st Dist. 1985).

121 See POMS PS 01825.046 (S.D.), summarizing the decision affirmed in Draper v. Colvin, ___ F. Supp. ___ (D.S.D., July 10, 2013), 2013 WL 3477272, appeal pending, No. 13-2757 (8th Cir.).

122 Cf. POMS PS 01825.046 (S.D.), stating that South Dakota does not authorize dry trusts, citing and relying on Higgins v. Higgins, 71 S.D. 17, 20 N.W.2d 523 (1945), for the proposition that “to be a valid trust, the provisions ‘must be reasonably certain as to the property …’”) with e.g. POMS PS 01825.042 (Pa.), which states that Maryland does authorize such trusts, citing and relying on From the Heart Church Ministries, Inc. v. African Methodist Episcopal Zion Church, 370 Md. 152, 167, 803 A.2d 528, 557–558 (2002), although the court states the opposite: “A trust [only] exists where the legal title to property is held by one or more persons …”). See also Duggan v. Keto, 554 A.2d 1126, 1133 (D.C. 1989) (a trust must have “a trustee, who holds the trust property”); Buchanan v. Brentwood Fed. Sav. & Loan Ass’n, 457 Pa. 135, 144, 320 A.2d 117 (1974) (transferee of property with duties to “deal with the property for the benefit of another person”; “one of them as trustee holds property for the benefit of the other”), also cited and relied on in POMS PS 01825.042 to find that those jurisdictions allowed so-called dry trusts.

123 POMS SI 01120.200E; Transmittal 64, supra n. 1, at § 3259.7C (“funds entering and leaving [so-called Miller trusts] are not necessarily exempt from treatment under the rules of the appropriate cash assistance program”). See supra nn. 102 and 106.

124 Cf. Md. Dept. of Health & Mental Hygiene v. Ctrs. for Medicare & Medicaid Servs., 542 F.3d 424 (4th Cir. 2008).

125 Cf. Gonzales v. Ore., 546 U.S. 243, 256–257, 126 S. Ct. 904, 915 (2006) (dismissing an “interpretive” rule that “does little more than restate the terms of the statute itself”).

126 POMS SI 01120.201F.2; Transmittal 64, supra n. 1, at § 3257.6.

127 The proverbial dog in the manger cannot use the hay that is there while keeping away the ox that could, so the hay is wasted. Aesop’s Fables 163 (Laura Gibbs trans., Oxford World Classics 2002).

128 CMS may have meant something such as the “minimum required distribution” rules that require distributions from tax qualified retirement plans at a rate designed to exhaust the accounts during the taxpayer’s actuarial lifetime. But in fact “actuarial soundness,” as actuaries use the term, is a rule of caution limiting how much a plan can pay out and still be able to meet its future obligations. While it is almost always used in the context of a plan involving multiple beneficiaries, e.g. Allied Structural Steel Co. v. Spannaus, 438 U.S. 234 (1978), in an individual case it may mean reducing a monthly benefit to ensure that the benefit will continue during the person’s entire lifetime, the opposite of what CMS likely intended.

CMS’s use of the term “actuarially sound” with respect to annuities is similarly unsophisticated. It published an SSA table of life expectancies based on age and stated that “[i]f the individual is not reasonably expected to live longer than the guaranteed period of the annuity,” he or she “will not receive fair market value” and the annuity is “not actuarially sound.” Transmittal 64, supra n. 1, at § 3258.9B, para. 4.

First, this reflects a misunderstanding of the significance of an actuarial table, which shows only average life expectancy; it is not a prediction of how long any one person will live. Second, the rule does not recognize the risk element in an annuity and thus fails to treat as a transfer the purchase of a life-plus-years-certain annuity no matter what the term-certain period is.

The additional cost of the term-certain provision is the price to be paid to cover the risk that payments must be made beyond the person’s actual lifetime. Thus it allows for the benefit of someone other than the annuitant. For example, if a 70-year-old man with a life expectancy (under the Medicaid table) of 12.81 years can purchase an annuity paying $3,000 per month for life for $475,000, and a life-plus-10-years-certain annuity paying that much per month costs $550,000, the cost of the term-certain benefit, which only benefits others, is $75,000 — the additional cost to purchase the right to payment (up to 10 years) beyond the annuitant’s actual lifetime. That $75,000 should be treated as a transfer to the named beneficiaries, but isn’t.

Congress has adopted CMS’s approach in using the idea of “actuarially sound” based on SSA tables in approving the use of certain annuities in Medicaid planning, 42 U.S.C. § 1396p(c)(1)(G)(ii)(II). That may render the use of actuarial soundness immune to judicial review with respect to annuities, but the issue with respect to special needs trusts is quite different.

129 In Lloyd v. Campbell 120 Ohio App. 441, 196 N.E.2d 786 (Ohio App. 1964), the court rejected the beneficiary’s claim that she was entitled to all current income where the trust did not specifically authorize the trustee to convert undistributed income to principal, under the trustee’s duty to consider her future welfare if not in derogation of present needs.

Most certainly, it may be logically and persuasively argued that the beneficiary’s welfare and benefit is being nobly served if the trustee elects to treat excess income as principal and invests it as such, thereby increasing the fund subject to the trust and the amount that will be received by the beneficiary when she reaches age 25, and likewise increasing the amount she will receive at age 32 when the trust is terminated and final distribution of the remaining half of the principal is made to her. Of course, if the beneficiary’s present benefit and welfare is neglected in order to increase the trust principal, this would be an abuse of discretion on the part of the trustee.

Id. at 449, 196 N.E.2d at 791–792.

130 Hobbs, 579 F.3d at 1171.

131 The fact that the plan was proposed by an independent corporate trustee and approved by the local probate court are among the undisputed facts that the court in Hobbs believed unnecessary to include in its decision justifying the result. See In the Matter of the Steffan Hobbs Special Needs Trust, San Juan County (N.M.), 11th Judicial Cir., Case No. CV-2003-136-6, Order Authorizing Expenditure of Funds (June 11, 2003) (http://www.naela.org/NAELADocs/PDF/NAELA%20Journal/Hobbs%206-11-2003%20order_001.pdf).

132 See supra nn. 52–55 and accompanying text.

133 For example, its analysis of (d)(4)(B) trusts, which finds that income that funds the trust is for the benefit of the beneficiary only when spent. If the trustee has an affirmative duty to use the funds for the beneficiary, under a best interests standard, funding the trust is for his or her benefit no matter when the money is spent.

134 For example, blanket imposition of the Rule in Shelley’s Case and the Doctrine of Worthier Title.




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