What Is a Pooled Trust and Why
What Is a Pooled Trust and Why Do We Care?
By David P. Fitch
Volume XIX, Number 3, October 2007, Aspen Publishing - The ElderLaw Report
Most attorneys who have at least some exposure to the world of the aged and disabled have heard of “special needs trusts” (SNTs), and many have used these trusts to the advantage of their clients who are on, or planning to go on, any governmental assistance program that has asset limitations, such as SSI or Medicaid. SNTs are creatures of federal statute, 42 USC 1396 p (d)(4)(a). The same attorneys may have at one time or another read down the page a bit farther past 42 USC 1396 p (d)(4)(A) to (d)(4)(C), which describes something called a pooled trust, thought it was interesting and moved on. Pooled trusts are becoming more common across the US, so increasingly the question is being asked “What is a Pooled Trust?” and, equally importantly for elder law attorneys, will transfers to such a trust by an individual over age 65 count as an uncompensated transfer?
A pooled trust is in many respects identical to an SNT. The creation of both types of trusts move assets from being countable assets for purposes of eligibility determination to being non-countable assets. Both trusts are created with the beneficiary’s own funds. Both trusts require that the trust assets be used solely for the benefit of the beneficiary. Both trusts require that the disbursements be for products or services
that are not supplied by the particular government program; thus, the money is used to supplement the government benefits to the beneficiary of the trust.
There are several notable differences between the two trusts. First, an SNT must be established prior to the beneficiary’s 65th birthday and an established SNT cannot be added to after the beneficiary’s 65th birthday without incurring
the imposition of a penalty period. Pooled trusts have no such limitations. Second, an SNT can be drafted to name any number of types of trustees to manage the trust assets. A pooled trust, on the other hand, is required by statute to be established and administered by a nonprofit corporation, as defined by Section 501(C)(3)of the IRC.
The end result is that a beneficiary, of any age, can use a pooled trust to start to receive or continue to receive public benefits and still have resources available for her special, or supplemental, needs.
Additional Benefits of a Pooled Trust
Besides public benefit protection, pooled trusts can offer additional significant value to beneficiaries. This added value stems from the fact that the funds of the individual beneficiary are pooled with the funds of many beneficiaries for investment and management purposes. Most beneficiaries’ funds could never perform as well in the financial market as those funds will perform when strengthened by their addition to a pool. Well designed pooled trusts can command
better interest rates and other financial benefits from the market that are unavailable to individuals with smaller amounts of money.
Who Can Benefit From a Pooled Trust?
Potential pooled trust beneficiaries include:
• Elderly persons who have become infirm.
• Nursing home residents or soon-to-be nursing home residents.
• Recipients of government assistance programs that have asset and income limitations, such as Medicaid or SSI.
• Applicants for government assistance programs that are based on asset and income limitations, such as Medicaid or SSI.
• Recipients of personal injury settlements who
need to apply for or protect government assistance
benefits.
How Can Pooled Trust Funds Be Used?
The list below illustrates some of the uses for which trust disbursements may be made (the potential uses are only limited by the creative application of the rules):
• Geriatric care services
• Supplemental nursing care
• Medical procedures not covered by government
assistance
• Differentials in housing costs between shared and private rooms in institutional settings
• Travel expenses
• Entertainment expenses
• Any other expense not provided by government
assistance programs
• Guardianship fees
• Attorney Fees
How Does a Pooled Trust Work and How Do You Get Someone Into One?
First, it is important to have a clear understanding of the technical components of a pooled trust. There are three main parts—the master trust agreement, the joinder agreement and the intake forms.
The master trust document is drafted by the nonprofit for the pooled trust and defines the nature, character and purpose of the trust, along with the trust’s underlying legal basis. The document is the same for every beneficiary in the trust.
The joinder agreement is drafted to include
the matters that apply to the specific beneficiary, without contravening the master trust. This is the document that places the beneficiary into the Master trust. The joinder is most likely to be drafted within a set of guidelines provided by the specific nonprofit
trustee that has created and administers the pooled trust.
The intake forms are the source of all the information provided to the trustee about the specifics of the beneficiary. Information collected here includes type and nature of the disability, prognosis, care plan, governmental
programs currently enrolled in and those for which application is being made, and a description of the grantor’s wishes concerning types of future disbursements. Note that the trustee must have absolute discretion in the amount and timing of asset distribution in order for the trust assets to be considered unavailable. The request by the trustee for the grantor’s opinions and comments on desired future distributions to the beneficiary has no effect on the trustee’s absolute discretion.
The beneficiary establishes himself in the pooled
trust by completing the required forms that the nonprofit trustee provides, pays any required enrollment fee, and funds the trust. Upon receipt of the completed form and the funds, the trustee establishes a sub-account in the master pooled trust account in the beneficiary’s name. This
is the event that the government agencies view as the critical date regarding when the pooled trust was established for a specific individual.
How Are Pooled Trust Distributions Made?
Although distribution practices and procedures vary among nonprofit trustees, the following is an overview of what steps a request might go through:
Step 1—The beneficiary or her legal representative
makes a request in writing for a particular product or service that will benefit the beneficiary.
Step 2—The trustee evaluates the request in the light of the particular benefit program that the beneficiary is currently enrolled in and its rules regarding assets and expenditures. If the trustee determines that the request would not disqualify the beneficiary from program benefits, the request goes to step three.
Step 3—The next threshold question is whether or
not the expenditure will legitimately benefit the beneficiary and improve the quality of her life. Given an affirmative answer at this stage, arrangements are made for the trustee to pay the vendor of the product or service directly for the benefit of the beneficiary.
Are Transfers Subject to Penalties?
An important and frequently asked question is: Are
transfers into a pooled trust by a person over the age of 65 subject to Medicaid’s transfer penalties? The answer is no, and here is the analysis.
First, the federal statutory language at 42 USC 1396 p (d)(4)(A) clearly defines qualified SNTs. One of the primary requirements for qualification is the establishment of the SNT prior to a
disabled person’s 65th birthday. Two paragraphs later, Congress chose to focus (d)(4)(C) on the type of trustee that would be required for a pooled trust and chose not to add other restrictions, such as age, to this section. In fact, of the three distinct paragraphs in 1396p(d)(4) – (A), (B) and (C)—only paragraph (A) discusses the issue of age.
Second, the Centers for Medicare & Medicaid
Services manual, section 3259.7(A), gives direction regarding SNTs and specifically discusses the establishment prior to age 65 requirement, but goes further to say that additions to a properly created SNT after the beneficiary has reached age 65 are countable
assets for eligibility determinations. Section
3259.7(B) addresses pooled trusts, with primary
attention given to the issue of the trustee and the beneficiary accounts and with a notable lack of mention of any age issue. The absence of discussion of age is persuasive concerning a presumed intent of having no age restrictions.
There is, however, a “note” following subsection B
stating: “Establishing an account in the kind of trust described above may or may not constitute a
transfer of assets for less than fair market value. For example, the transfer provisions exempt from a penalty trusts established solely for disabled individuals who are under 65 or for an individual’s disabled child. As a result, a special needs trust established for a disabled individual who is 66 could be subject to a transfer penalty. ( See Sec 3258.10 for the exceptions to imposing penalties for certain transfers of assets.)”
This “note” requires its own analysis.
The first step in correctly interpreting this language is to continue reading the rest of Section 3259.7(B). Reading beyond the second “note” that follows the discussion of pooled trusts, the next paragraph says: “While trusts for the disabled (as well as Miller trusts described in subsection C) are exempt from treatment under the trust rules described in §3259.6, funds entering and leaving them are not necessarily exempt from treatment under the rules of the appropriate cash assistance program. The
following are rules applicable to funds entering
and leaving both kinds of exempt trusts for the
disabled.” (emphasis added)
Clients in income cap states need to be aware of
3259.7(B)(1), but here we go on to 3259.7(B)(2), with particular attention to the second paragraph:
Trusts Established with Resources. --When an exempt trust is established for a disabled individual using resources either in whole or in part, those resources are treated as follows.
Resources placed in an exempt irrevocable trust
for a disabled individual may or may not count as
resources to the individual in determining eligibility, depending on the circumstances. Resources are counted as resources only during those months in which they are in the possession of the individual, up to but not including the month in which the resources are placed in the trust. Beginning with the month the resources
are placed in the trust, they are exempt from being counted as resources to the individual.
Resources placed in an exempt trust for a disabled
individual are subject to imposition of a penalty under the transfer of assets provisions unless the transfer is specifically exempt from penalty as explained in §3258.10 or unless the resources placed in the trust are used to benefit the individual, and the trust purchases items and services for the individual at fair market value.
See subsection C for the rules concerning application of the transfer of assets provisions to assets placed in an exempt trust. These rules apply to both income and resources placed in the exempt trusts discussed in this section. (emphasis added)
If we go to Section 3258.10 and look at the exemptions from penalty we find that there is in 3258.10(B) a specific exemption for trusts established for a disabled person under the age of 65, in other words an SNT, but we find no equivalent exemption for pooled trusts.
However, the rules outlined in 3259.7(B)(2) provide another alternative to determine if the transfer into one of the types of exempt trusts described in 3259.7 can still be considered exempt. Here is the alternative exemption to 3258.10:“…the resources placed in the trust are used to benefit the individual, and the trust purchases items and services for the individual at fair market value.” 3259.7(B)(2)
Whether there is a penalty for a transfer into a
pooled trust does not rest on the issue of age but rather on whether or not the pooled trust is administered in such a way to satisfy the alternative exemption noted immediately above this sentence. If the trustee uses the resources for the benefit of the individual and pays fair
market value for the goods and services provided to the individual, then there is no penalty.
Now back to the “note” following the text of
3259.7(B) that discussed pooled trusts:
“Establishing an account in the kind of trust
described above may or may not constitute a
transfer of assets for less than fair market value. For example, the transfer provisions exempt from a penalty trusts established solely for disabled individuals who are under 65 or for an individual’s disabled child. As a result, a special needs trust established for a disabled individual who is 66 could be subject to a transfer penalty. (See Sec 3258.10 for the exceptions to imposing penalties for certain transfers of assets.)” (emphasis added)
Looking at the active phrases in this note—”may or
may not constitute a transfer” and “could be subject the to a transfer penalty”—they present the possibility that the transfer might not pass the muster of either 3258.10 or the alternate exemption of 3259.7(B), but nothing more.
Trying to find an absolute prohibition in these “notes” against exempting transfers into a pooled trust would be to say that all the language concerning pooled trusts was frivolous and totally useless.
David P. Fitch is an elder law attorney and a representative for The National Pooled Trust. The National Pooled Trust operates in all 50 states providing assistance to attorneys and their clients for the preservation of governmental benefits. E mail:dpfitch@elderlawminnesota.com Phone: 763-213-0759
