A Review of
Special Needs Trusts
and the Alternatives
Gregory L. Kenyon
Bradshaw, Fowler, Proctor & Fairgrave, P.C.
Des Moines, IA 50309
Polk County Bar Association
Summer CLE
June 15, 2012
Methods of Payment
for Long-Term Care
Three ways to pay for long-term care:
• Private financial resources
and income
• Long-term care insurance
• Governmental assistance
such as Medicaid (Title
XIX)
Eligibility for Medicaid
Eligibility for Medicaid is based on:
• Age or disability
• Income and resources
Income and Resources
Income
• Only the applicant’s income
is considered
• For a married couple only the
income of the spouse seeking
assistance is considered
Resources
• Only countable resources
are considered
Noncountable Resources
•
•
•
•
•
•
Home
Auto
Household goods
Health aids
Prepaid burial
Life insurance - limited
to $1,500 death benefit
• Assets used for self
support
• Special Needs Trusts
• Annuities
Noncountable Resources
(continued)

Annuities which satisfy 441 IAC 75.23(9)

Special Needs Trusts under Iowa Code
633 C
Acquisition of
Noncountable Resources
It is acceptable to use countable
resources such as cash to acquire
noncountable resources.
Using Trusts in Long-Term
Care Planning
Revocable Trust - no value for eligibility
but may be of value for management of
assets and other traditional trust purposes
Non-Revocable Trust - if established
prior to the lookback period, only actual
distributions from a trust will be counted
Testamentary Trusts
Only actual distributions
count but in some
settings, if discretion is
given to the trustee, trust
assets may count. See
the recent case of Strojek
v. Hardin County.
Discretionary Language
Prevails Over Other Standard
The legislature enacted 633A.4702 in 2004 in an effort to
clarify the law following the decision in Strojek. This
statute has yet to be interpreted by the appellate courts.
633A.4702 Discretionary language prevails over other
standard.
In the absence of clear and convincing evidence to the
contrary, language in a governing instrument granting a
trustee discretion to make or withhold a distribution shall
prevail over any language in the governing instrument
indicating that the beneficiary may have a legally
enforceable right to distributions or indicating a standard
for payments or distributions.
OBRA 1993 Trusts
 Special Needs Trusts
 Charitable Foundation Trusts
 Income Assignment Trusts (Miller Trusts)
COMMON CHARACTERISTICS
A “self-settled trust” must meet OBRA 1993
requirements in order for an individual to be eligible.
On the death of the individual, any remaining portion
of the trust must be paid to the payor’s state to
reimburse it.
Special Needs Trusts
A Special Needs Trust may be
established to cover those
needs that would not exist
except as a direct result of the
beneficiary’s disability. It may
not pay for ordinary needs,
such as ordinary support and
maintenance, education, and
entertainment that would exist
regardless of disability.
Special Needs Trusts (cont’d)
Use of Funds:
• Expenses of trust administration
are limited to $10 per month,
unless otherwise approved by
the court
• Distributions are allowed for
special needs that would not
exist but for the disability
• Ordinary needs of food, shelter
and clothing are NOT considered
special needs
Special Needs Trusts (cont’d)
To qualify to establish a Special Needs Trust:
• a person must be under 65
years of age
• the person must be disabled
• the trust must be established
for the benefit of the
individual, by a parent,
grandparent, legal guardian, or
a court
Income Assignment Trusts
(Miller Trusts) (cont’d)
Iowa law provides an upper limit for which
a Miller Trust may be used. If a
beneficiary of a Miller Trust has income
which is equal to or greater than the
statewide average for a nursing facility, the
income is once again considered available
for purposes of determining eligibility.
Iowa Code Section 633C.3(2). The upper
limit is $4,594 through June 30, 2012.
Income Assignment Trusts
(Miller Trusts)
Average statewide charge
for a private pay resident
of a nursing facility
$4,594
(per month)
A Miller Trust is used
to bring a Medicaid
applicant’s income
within the limit for
Eligible for a Miller Trust
Medicaid eligibility.
During 2012, the
monthly income
must be between
Income limit for Medicaid
$2,094 eligibility (per month)
$2,094 and $4,594
per month.
2012 Dollar Amounts
Pooled Trust
• In Iowa this is essentially the same
as a special needs trust for
administration purposes
• A pooled trust can leave funds to a
nonprofit entity at the death of the
primary beneficiary
• As with a Miller trust and a special
needs trust, the remainder in the
trust must be payable to the state to
reimburse it for Medicaid benefits
Charitable Foundation Trusts
A Charitable Foundation Trust operates like a
Special Needs Trust. However, after death of
the primary beneficiary, a foundation trust
may allow distribution of principal, or income,
or both, to the charitable entity.
Charitable
Foundation Trust
Principal
Interest
Death of
Primary
Beneficiary
Charitable
Entity
When to Use Annuitization
• Annuity income will help meet monthly
needs but will not cause applicant to exceed
income eligibility limit
• Community spouse income is low and there
are considerable resources which may serve
to render the institutional spouse ineligible,
use of an annuity may allow them to obtain
benefits and income without spending down
for long-term care
• The community spouse can live on the cash
flow generated by the annuities and other
sources of income
Disadvantages of Annuitization
• Limited access and flexibility for potential
emergency uses of the cash
Transfers of Resources
ELIGIBILITY
A transfer for less than fair market value
will render the transferor ineligible for
benefits for a period of time determined
by dividing the fair market value of the
resources transferred divided by the
average statewide private pay rate for
nursing facility services at the time of
the application.
Transfers of Resources (cont’d)
Transfers include not only the obvious sort
of transfers, i.e. sales and gifts, but also
such things as disclaimers, or failure of a
surviving spouse to seek the elective
share in an estate, or otherwise failing to
seek an asset to which one is entitled.
Iowa Code Section 249F.1(2), IAC
75.23(8)
Transfers of Resources (cont’d)
RESPONSIBILITY
In addition to the eligibility issues above, Iowa
has a “responsibility” rule which establishes a
presumption that any transfer made for less
than fair market value within sixty (60) months
of seeking benefits, or becoming
institutionalized, is made for purposes of
obtaining benefits. The DHS is authorized to
seek reimbursement from the recipient for any
such transfers, for the full amount of the
transfers. Iowa Code Section 249F(2)(a).
Transfers of Resources (cont’d)
There are exceptions to the transfers of assets rules.
The exceptions include transfers to:
• a spouse
• a child who is blind or permanently and totally
disabled
• a sibling who has an equity interest in a home and
who resided with the individual for at least one year
• a child who resided in the home with the individual
for at least two years
• another for sole benefit of the transferor, or spouse,
dependent or disabled child
Sample Worksheet
Income
Husband
SS/Pension
Other
Income
Wife
Countable
Resources
Investments
Cash
Real Estate
Life Insurance
IRA
Noncountable
Resources
Home
1 Car
Household Goods
Medical Equipment
Prepaid Burial
-------------Annuity (Medicaid
Qualified)
Special Needs Trusts
Husband’s
Income (IS)
Wife’s
Income (CS)
Countable
Resources
Noncountable
Resources
SS & Pension
SS and pension
Cash, investments, etc.
$1500
$900
$150,000
Home,
household
goods, health
equipment,
auto, and
prepaid burial
accounts
This is less than
income eligibility
lit of $2094, so
income test is met
---------Special Needs
Trust
Annuities which
satisfy Medicaid
regulations
Minimum monthly
Needs allowance
is $2841
Shortfall between
CS income and
MMNA
Shortfall is:
$2841 less
$900=$1941
Attribution: Divide
countable resources
equally between IS
and CS, so IS will
be allocated $75,000
Eligibility will be
Granted when IS
has countable
resources of $2000
or less. Spend down
of IS resources is
necessary
CS will also be
allocated
$75,000
Husband’s
Income (IS)
Wife’s
Income (CS)
Countable
Resources
Diversion to CS
$1500 .--->
Assuming other
Eligibility tests
are satisfied,
DHS will divert
income from IS
to CS
up to shortfall
Spenddown options:
(1) Pay for care and living expenses,
(2) pay off debt;
(3) pay for
services;
(4) purchase non countable resources
including
annuity which meets regulations; (5)
consider
special needs trust
Shortfall remains
$1941 less
diversion of
$1500 leaves
remaining
shortfall of $441
CS – after
annuity purchase
CS income is
increased by
annuity am’t so
shortfall is
reduced and
spousal diversion
is adjusted
Example of action:
Assets allocated to
IS are used to
(1) pay off debt;
(2) pay for care for
several months
(3) prepaid burial
(4) $40,000 to annuity which provides
income to
CS
The result reduces IS resources to $2,000
Noncountable
Resources
CS retains
countable
resources of
$75,000
CS retains
resources of
$75,000
Resulting in:
Debt paid off;
Burial funds
purchased;
annuity
purchased for
benefit of CS
Discretionary Trust Decision Tree
Thank you
for your kind attention.
Gregory L. Kenyon
Bradshaw, Fowler, Proctor & Fairgrave, P.C.
801 Grand Avenue, Suite 3700
Des Moines, IA 50309
(515) 246-5829
kenyon.gregory@bradshawlaw.com