Special Needs Law Section
Planning Options for Disabled Individuals 65 Years Old and Over By Robert P. Mascali, Esq.
Individuals over the age of 65 have limited options to receive an influx cash and not jeopardize their Medicaid and SSI benefits.
As practitioners in the overlapping fields of elder and special needs law, we are constantly reminded of the rapid increase of individuals over the age of 65 who, if also disabled, have limited options in the event they become entitled to receive an influx of assets, usually money, as a result of a personal injury accident, an unexpected inheritance, a retroactive Social Security award, or even just a lucky day at the neighborhood convenience store playing a lottery game.We know that every day more than 10,000 people turn 65 in this county. According to published governmental data, more than 7 million individuals over the age of 64 receive services through Medicaid nationwide, while almost 2.5 million receive Social Security Income (SSI) benefits. As these are both needs-based programs, those individuals must have less than a certain level of income and assets to remain eligible — a life or death issue for many. This article will discuss the limited number of options available to them when faced with this dilemma.
Spend Down Assets
The first option should always be to try to spend down any cash in the month received on necessary items. The list of permissible spend-down items is practically unlimited, but the key is that any spend-down must be for value and not be considered a gift. If the influx of cash is substantial, purchasing a house or an automobile (or needed repairs to one or the other or both) would be appropriate if consistent with the individual’s needs. Also, consider a prepaid burial and the payoff of a valid debt. A common strategy is paying back an individual who has advanced funds or possibly been a caregiver for the disabled individual. However, care must be taken to ensure the so-called debt is valid and can be supported by sufficient contemporaneous evidence.
Special Needs Trusts
Federal law allows for a first-party, self-settled special needs trust, provided the trust is established and funded before the individual with a disability turns age 65. The same law allows for a pooled special needs trust to be established, but in that statute, there is no specific reference to the age of the individual (42 USC 1396p(d)(4) (a) and (c)).
A memorandum issued by the Center for Medicaid and Medicare Services in July 2008 raises the point that states “are not in compliance” with federal law if the state permits “individuals age 65 or older to establish pooled trusts without applying the transfer of assets provisions.” Stated differently, if an individual 65 years and older deposits funds in a pooled trust, has that individual made an uncompensated transfer? This has led to a state-by-state determination.
Based on anecdotal evidence and a survey presented by Minnesota attorney Laurie Hanson to the Stetson National Special Needs Conference in October 2020, currently 23 states1 absolutely penalize transfers to pooled trusts by disabled individuals 65 years old and older while the District of Columbia and 18 other states2 permit transfers without penalty) and the remaining states either have variations or no known policy or law. For instance, New York differentiates between individuals in nursing homes (not permitted) or in the community (permitted, although a recent change in New York Medicaid laws may result in penalties in the future) and Colorado and Connecticut require approved spending plans in order to avoid a penalty.
The most recent published decision on this issue comes from Minnesota, Pfoser v. Harpstead, which affirmed the reversal of a determination by the state Medicaid agency against an applicant who had transferred funds to a pooled trust based on the issue of fair market value and the imposition of asset transfer penalty. “[The Minnesota] Supreme Court affirmed the decision of the court of appeals affirming the judgment of the district court reversing a transfer penalty imposed by the Commissioner of the Minnesota Department of Human Services on David Pfoser, a disabled Medicaid recipient who resided in a long-term care facility, after he transferred partial proceeds from the sale of a house into a pooled special-needs trust, holding that Pfoser made a satisfactory showing that he intended to receive valuable consideration for his transfer of assets.” (https://law.justia.com/cases/minnesota/supreme-court/2021/a19-0853.html)
Given the ever-changing landscape and state-by-state litigation, counsel should always verify the current policy/law of any state before proceeding with a pooled trust transfer in order to avoid an unexpected transfer penalty. It should also be noted that each state, even those that permit transfers without penalty, has differing policies to determine the disposition of any remaining funds upon the pooled trust account’s termination. Furthermore, while the above discussion deals with the impact under the Medicaid program, an individual over age 64, wherever located, who is on SSI, faces a penalty of up to three years based on the amount of a transfer to a pooled trust. Therefore, an in-depth analysis of the particular facts with a qualified elder or special needs law attorney is always essential.
Another option, albeit one limited by the permissible annual amounts, is to deposit funds into an ABLE account, which is a tax-advantaged savings account similar to the IRC Section 529 College Savings Plan. In order to qualify for such an account, the individual’s disability must have begun prior to age 26, even if the disability was not officially diagnosed until later. The annual limit is $15,000 per year, and the total permissible deposit amount is determined by reference to the state’s limit for the 529 Plan. While Medicaid does not have limits on the total amount, individuals on SSI can only have an account up to $100,000, and if over that amount, SSI is suspended until the account is once again below $100,000. Unlike pooled trusts, the remaining amount upon the death of the beneficiary or the termination of the act must be used to pay back any claims for Medicaid. However, some states have sought to limit such a payback by statute. While distributions from a pooled trust must be for the sole benefit of a beneficiary, there is no requirement that funds are used for expenses directly related to the disability of the beneficiary distributions from an ABLE account can only be used for “qualified disability expenses.”
Accordingly, as long as the annual amount is not in excess of $15,000, an ABLE account can be used without affecting an individual’s eligibility for either SSI or Medicaid. There is some outstanding question about possible penalty periods for Medicaid, but with some advance planning the ABLE account can still be a very valuable option for individuals over age 64. For example, if possible, timing the payments so that only $15,000 per year is paid to the beneficiary through payments to the ABLE account. Another option is funding the ABLE account through a previously established self-settled or pooled special needs trust.
All of these options, as well as other state-specific options, offer distinct advantages to the disabled individual in the event of an unexpected influx of cash. Of course, an individual can also decide to retain the funds and forego the benefits of the needs-based programs or give away the funds and accept the consequences. We, as practitioners, need to understand the options and advise our clients accordingly. Good luck and stay safe.
1 Arizona, Georgia, Hawaii, Louisiana, Maine, Mississippi, North Carolina, North Dakota, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, Oklahoma, Pennsylvania, South Carolina, South Dakota, Texas, Utah, Vermont, Virginia, Washington, and Wyoming..
2 Alabama, Alaska, Arkansas, California, Delaware, Florida, Idaho, Indiana, Iowa, Kentucky, Maryland, Massachusetts, Montana, Ohio, Tennessee, Rhode Island, West Virginia, and Wisconsin.
Robert Mascali, Esq., has more than 40 years’ experience in the nonprofit, government, and private sectors. He is currently a senior consultant with the Center for Special Needs Trust Administration, Inc., a national nonprofit organization that administers special needs trusts throughout the United States. He is currently managing attorney with Bourget Law Group in Falmouth, Massachusetts, and of counsel at Pierro Connor and Strauss, LLP in New York City and Albany, New York. He concentrates in the areas of special needs planning for persons with disabilities and their families and caregivers, long-term care planning, and elder law and estate planning.