1st-party Court-Established Special Needs Trust and the State’s Right to Reimbursement for Medical Assistance Paid on Behalf of the Beneficiary under a State Plan?

December 7, 2015 - 12 minutes read

Any first-party special needs trust is invalid unless it contains a provision that “the State will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State plan.”  {42 U.S.C. § 1396p(d)(4)(A).} This is referred to as a “payback” clause, where the trustee must refund the state Medicaid plan for the medical assistance it provided during the life of the trust beneficiary, to the extent there are assets in the trust.

This post addresses what has come to be known as a “Litigation Special Needs Trust,” or “LSNT,” which is a sub-set of court established trusts.

The Background on Court-Establishment of a Trust.

The federal statute defining a first party self-standing special needs trust is found at 42 U.S.C. § 1396p(d)(4)(A). That entire paragraph is reproduced here:

“A trust containing the assets of an individual under age 65 who is disabled (as defined in section 1382c(a)(3) of this title) and which is established for the benefit of such individual by a parent, grandparent, legal guardian of the individual, or a court if the State will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State plan under this subchapter.”

There are four categories of persons/entities who can establish the trust: “parent, grandparent, legal guardian of the individual, or a court.” The fourth category is the basis for the term “court-established.”

What Types of Special Needs Trusts Can a Court Establish?

A court typically establishes First-Party trusts. However, a court can “establish” a third party trust. While not strictly “court-established,” one example of which would be an amendment of an irrevocable trust, adding or modifying an existing support trust into a Third-Party special needs trust, by way of a court-approved amendment of an irrevocable trust. It is not uncommon for irrevocable trusts to be amended through court approval, due to unforseen circumstances, where a child or grandchild would benefit from a special needs trust, the need for which was unknown at the time the trust was established.

Typically however, one thinks of a First-Party trust as court-established. One example of a First-Party court-established special needs trust would be a trust established with a conservatee or ward’s assets. {See, for example, Conservatorship of the Estate of Kane, (2006) 137 Cal.App.4th 400, 40 Cal.Rptr.3d 378.}

Another example of a First-Party court-established special needs trust, for which there is a specific statutory scheme, is establishment of a special needs trust with the proceeds of litigation. This type of trust was at issue in two separate cases, both of which concerned the state Medicaid agency’s right to reimbursement: Shewry v. Arnold, (2004) 125 Cal.App.4th 186, and Herting v. California DHCS, (2015) 235 Cal.App.4th 607. Both of these cases will be discussed in subsequent posts, but first, some background on the procedure of court-established special needs trusts, funded with the proceeds of litigation.

What both of these cases have in common is that the trusts established in both Shewry and Herting were established pursuant to Probate Code Sections 3600 – 3613. What they do not have in common is that in Shewry, the court found the Department of Health Care Services could not recover on its claim for reimbursement, but in Herting, the Department could. Next, a brief overview of California’s statutory scheme for protecting the litigation proceeds of minors and persons with disabilities.

Beyond First and Third-Party Trusts, there are individual and pooled Special Needs Trusts, which will be addressed in other posts.

California’s Procedure for Establishing a Special Needs Trust, Funded with the Proceeds of Litigation.

In California, court established special needs trusts funded with the proceeds of a personal injury settlement are governed by California Probate Code Sections 3600 – 3613. These sections were amended by AB-1851 in 2004. These new amended sections took effect in January 2005. I was the principal drafter of this legislation. Whether a trust must be established under this statute is determined by the application of a two-pronged test:

The Two-Pronged Test of Probate Code Section 3600.

The protections for minors and persons with disabilities apply only when a two-pronged test is satisfied. Both prongs of the test must be met. The term a “person with a disability” is defined at Probate Code Section 3603. The first prong of the two pronged test is:

“A court (1) approves a compromise of, or the execution of a covenant not to sue on or a covenant not to enforce judgment on, a minor’s disputed claim, (2) approves a compromise of a pending action or proceeding to which a minor or person with a disability is a party, or (3) gives judgment for a minor or person with a disability” {Probate Code Section 3600(a).}The second prong of the test is

“The compromise, covenant, or judgment provides for the payment or delivery of money or other property for the benefit of the minor or person with a disability.” {Probate Code Section 3600(b).}The statutory scheme provides for several vehicles for managing and protecting the assets of a minor or person with a disability. One such vehicle is a special needs trust, which was used in both the Shewry and Herting cases. {See Probate Code Section 3604.}

The State’s Right to Reimbursement for Medicaid Dollars Spent on the First-Party Special Needs Trust Beneficiary’s Behalf Under a State Plan.

Once a special needs trust is established under this statutory scheme, the State’s Medicaid Plan has an interest in the trust remainder upon termination of the trust, to the extent the state plan provided medical assistance to the beneficiary of the court-established trust.

The Federal “Pay-Back” Language.

The federal law, referred to as OBRA ‘93 (the Omnibus Budget Reconciliation Act of 1993.), which is found at 42 U.S.C. § 1396p(d)(4)(A) states in relevant part:

“[the trust is only valid] if the State will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State plan under this subchapter.”

California’s “Pay-Back” Language.

Probate Code Section 3605, concerns the Medicaid reimbursement, which states in relevant part:

“Notwithstanding any provision in the trust instrument, at the death of the special needs trust beneficiary or on termination of the trust, the trust property is subject to claims of the State Department of Health Care Services, the State Department of State Hospitals, the State Department of Developmental Services, and any county or city and county in this state to the extent authorized by law as if the trust property is owned by the beneficiary or is part of the beneficiary’s estate.” {Probate Code § 3605(b), emphasis added.}

Back to the Original Question: Is There a Right to Reimbursement for Medical Assistance Paid on Behalf of the Beneficiary of a First-Party Special Needs Trust Under a State Plan?

Under the federal language, the answer appears to be an unqualified yes: “if the State will receive all amounts remaining in the trust. . . ” The remaining trust assets on the death of the trust beneficiary are to be repaid to the state, up to the amount of medical assistance provided to the trust beneficiary. 

But under California law, the answer is not so clear, as is apparent by two cases addressing the question but resulting in court orders that are in direct opposition to each other. The Shewry court interpreted California’s statute to treat the assets remaining on the beneficiary’s death, not as trust assets, but as a part of the beneficiary’s estate.

A beneficiary’s estate, or a decedent’s estate refers to a case where a probate is opened to probate a will, or probate the estate of someone who died without a will, i.e., intestate.

The Exclusions Available When a Medicaid Claim is Made Against a Decedent’s Estate.

The interpretation of state law found in Shewry and Herting have significant ramifications because certain exclusions, which the Herting court found not to be available in a claim against a trust, but the Shewry court found do apply because notwithstanding the trust, the matter is brought in the context of a decedent’s estate case, bar the State’s recovery rights in certain cases. 

For example, On the death of a Medicaid recipient, the state is barred from recovering from the estate of the decedent Medicaid recipient until after the death of the Medicaid recipient’s surviving spouse. Recovery is also barred, if the Medicaid recipient has a surviving child who is under age 21, or is blind or permanently and totally disabled. 42 U.S.C. § 1396p(b)(2)(A).

There is also an exception that bars the State Medicaid Plan’s recovery to the extent the decedent was under the age of 55 when the medical care was received.

See federal law, 42 U.S.C. § 1396p(b)(1)(B), and state law, Welfare and Institutions Code section 14009.5(b)(1).

With this brief overview of the law, later posts will consider both Shewry and Herting  in greater detail.

 

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