A federal appeals court has ruled that special needs trusts may not qualify for special treatment under Medicaid if they are used to benefit the family of the disabled beneficiary. The court upheld a determination that a trust that was drafted to preserve Medicaid eligibility must be counted, leaving a disabled minor ineligible for Medicaid.
Special needs trusts
Ordinarily, trust funds that may be used for the benefit of an individual are counted as available resources when the individual applies for Medicaid. Soc. Sec. Act §1917(d)(4) provides that trusts created for the benefit of disabled individuals do not count as available resources if they meet certain requirements. The trust must be created by a parent, grandparent, guardian or a court for the benefit of a disabled individual under age 66. The trust terms: (1) may not permit use of the funds for the benefit of anyone other than the disabled individual; and (2) must provide that at the death of the beneficiary, the remaining funds will be paid to the state to repay its expenditures for the beneficiary.
Denial of benefits
A Medicaid payback trust was established with $1.1 million in proceeds from a personal injury settlement. The beneficiary was a child who sustained disabling injuries in an accident. The terms of the trust required that the funds be spent for the beneficiary so as not to disqualify him for Medicaid. However, the trust also provided for amendment by the trustees and for payment to family members for furnishing special care or shelter for him.
Trust funds were used to pay the child's mother for caring for him, to buy an interest in the family land and home and pay for home furnishings, home maintenance and improvement, homeowner's insurance, property taxes and life insurance on the child's parents.
The Medicaid agency determined that the trust was a countable resource and that the child was ineligible for Medicaid. In a denial letter, the agency's attorney explained why the trust could not be considered a special needs trust under the statute, suggested that the trust be amended and enclosed a sample trust.
After an initial administrative appeal, the parents brought a civil rights action against the agency officials, contending that the denial violated his rights under Soc. Sec. Act §1917(d)(4) because only the establishment, not the administration, of the trust could be considered. They also claimed violation of the Due Process Clause of the United States Constitution because the agency did not apply clear standards when it determined he was not eligible for assistance.
The district court ¶302,364) ruled that the agency could consider both the establishment and the administration of the trust in determining whether it was countable. It decided that the trust benefited other family members because, among other things, it was used to purchase the home and to pay the child's mother a salary for caring for him. The mother had a legal obligation to care for her child, using trust funds to pay her a salary to do so benefited the mother, not the child.
The appeal
On appeal, the applicant abandoned the argument that the state could not consider the administration of the trust but contended that the agency wrongly interpreted the statute concerning special needs trusts. The court first considered whether Soc. Sec. Act §1917(d)(4) was enforceable in a civil rights action. Only statutes that clearly and unambiguously create obligations of the state to benefit individuals.
This relevant statute described the methodology states must use to determine whether a trust may be excluded from an applicant's countable resources. The statute directs the state agency to examine the trust documents and to count the trust as a resource if its terms permit payment of trust funds to or for the benefit of someone other than the disabled applicant. The statute does not create any obligation of the state to any individual. Therefore, it cannot be enforced in a civil rights action under 42 U.S.C. §1983.
The court also found that CMS' interpretation, reflected in the State Medicaid Manual, that the trust must be both established and administered solely for the benefit of the disabled individual, and trust funds or property must not pass to any other individual to qualify for the exclusion, was reasonable and within the agency's discretion.
Hobbs v. Zenderman, 10th Cir., Sept. 1, 2009, ¶303,109
For more information on this and related topics, consult the CCH® Medicare and Medicaid Guide.
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