As with Special Needs Trusts, Pooled Trusts are also specifically authorized under Federal law. See Social Security Act §1917(d)(4)(C) and 42 U.S.C. §1396p(d)(4)(C). This means that someone can establish a self-settled Pooled Trust (PT) and continue receiving means-tested public assistance benefits like Supplemental Security Income (SSI) and Medicaid just as they can with a Special Needs Trust (SNT). As explained on our Special Needs Trust page, “self-settled” means that the money funding the PT originally belonged to the trust beneficiary.
The Federal provisions that set out the requirements for PTs are very similar to the requirements for SNTs, but they do contain some important differences. While these differences can be easy to explain and understand, it is also easy to become confused by the differences when applying them to real life situations. The paragraphs that follow below examine these differences in detail, but to help avoid any confusion, you can refer to our Special Needs and Pooled Trust Comparison chart at any time.
Must Comply with Controlling Law
To create a valid PT that protects someone’s SSI and Medicaid eligibility, the trust must be set up to comply with the Federal law that authorizes PTs. In other words, the trust document must contain provisions that mirror the provisions found in Federal law. In addition to the trust mirroring the provisions found in Federal law, these provisions must actually be satisfied at the time the trust is created. Accordingly, the provisions found in subparagraph (C) of §1396p(d)(4) require a PT to:
- contain the assets of an individual of any age who has a disability as defined in U.S.C. 42 §1382c(a)(3);
- be established for the benefit of the individual;
- be established and managed by a nonprofit association;
- maintain a separate account for each beneficiary but pool the funds for investment and management purposes;
- be established by the parent, grandparent, or legal guardian of the individual, by the individual, or by a court; and,
- reimburse the State for all of the medical assistance paid on behalf of the individual from any remaining assets upon the individual’s death to the extent the funds are not retained by the trust.
Established for an Individual with a Disability
As part of the process of determining whether someone is eligible for SSI benefits, the Social Security Administration (SSA) makes a formal determination that the person has a disability. The criteria used by the SSA for making this determination was previously explained on our Special Needs Trust page and is not repeated here to avoid unnecessary repetition. However, for your convenience, please click here if you would like to review the explanation.
Be Established for the Benefit of the Individual
As with the Federal provisions on SNTs, this requirement seems to be simple and straightforward. On its face, it would only seem to require the individual with a disability to be the beneficiary of the PT. However, the SSA Policy Operations Manual System (POMS) goes beyond this simple requirement. The POMS is the policy manual used by SSA employees to process claims, and it is explained in more detail on our Special Needs Trust page along with an explanation of what requirement it adds. Like the SSA determination of disability in the section above, these explanations are not repeated here to avoid unnecessary repetition. However, please click here if you would like to review this information.
Be Established and Managed by a Nonprofit Association
Based on the plain language of the Federal statute, it would seem that any association formed as a nonprofit would be able to establish a PT. Since business entities are always formed under State law, this means that any entity formed under the non-profit laws of its State is technically a nonprofit and should be able to establish a PT. The POMS, however, add to this analysis by requiring a nonprofit to also have tax-exempt status with the Internal Revenue Service. Section SSI 01120.203F. of the POMS instructs SSA employees to verify the tax-exempt status of any nonprofit establishing a PT, and section SI 01130.689E. describes the procedure for this verification.
While the Federal statue can be said to provide a basic framework, it does not provide any practical guidance for how a PT should be managed. This leaves nonprofits with the challenge of formulating workable operational procedures while staying within the sparse but bright lines of the law. It is no surprise that this do-it-yourself approach has led to considerable variation with some PT operational procedures while consistency has emerged with other operational procedures. Perhaps the most consistent procedure can be found in the documents used to establish PTs.
The documents used to establish PTs typically consist of a master trust and a joinder agreement. The master trust is the trust document used by the nonprofit to declare or create the PT, and the joinder agreement is the trust document used to establish an individual account within the PT for the sole benefit of an individual beneficiary. Individual accounts are generally referred to as sub-accounts. While the use of a master trust and joinder agreement is not strictly required, their use is practical and common enough that the SSA uses the POMS to explain both documents to its employees. At SI 01120.203B.2., the POMS explain that the master trust, “…is established by the actions of the nonprofit…”, while the individual subaccounts, “…are established through the actions of the individual or another person for the individual.”
Another way in which nonprofits must develop operational procedures lies in the decision of whether to work with for-profit business entities and how broad the scope of any such relationship will be. For example, some nonprofits act as the sole trustee and carry out all PT operational procedures without the services of any for-profit entities. Other nonprofits act as sole trustee and develop contractual relationships for any needed services. Yet still, some nonprofits act as co-trustee while a for-profit entity acts provides services as the other co-trustee. There are even some nonprofits who technically act only as the administrator with a for-profit company acting as the sole trustee. None of these operational arrangements are necessarily good or bad in isolation, but the structure of any operation will obviously have some relationship to the quality of services.
Although the Federal statute does not impose any formal structure, the POMS places a limit on how much control and responsibility a nonprofit can relinquish. SI 01120.255 Pooled Trusts Management Provisions. According to the POMS, a nonprofit that uses for-profit entities to deliver PT services in any capacity must be careful to exercise ultimate managerial control. It is permissible to engage for-profits entities for some trust functions, but for-profit entities must always be subordinate to the nonprofit.
POMS section SI 01120.255 provides several examples of responsibilities for which the nonprofit must remain responsible. These examples include determining how much of the trust property should be invested, the power or ability to remove or replace trustees, and day-to-day decision making authority regarding the PT beneficiaries’ health and well-being. The POMS are clear that this list is not exhaustive and is provided only as a few examples. It is critical for a nonprofit to understand this requirement and maintain sufficient control because a failure to do so will result in the PT being counted as an available resource. This means it is important to understand the internal structure of any nonprofit before deciding on which PT will best protect public assistance eligibility and meet a beneficiary’s needs.
Maintain Separate Accounts but Pool Funds for Investment and Management
The requirement to maintain separate accounts while pooling funds presents another operational challenge to nonprofits, which has led to multiple solutions. Larger and more experienced nonprofits are able to take advantage of economies of scale that are not available to smaller nonprofits. Because their options may be limited, these smaller nonprofits sometimes turn to local banks who can easily maintain separate accounts but who can only offer limited financial services. In the Center’s experience of becoming successor trustee to a number of PTs, we have even seen banks create the equivalent of proprietary mutual funds to be used by the nonprofit’s PT. While these arrangements may meet the requirement to pool funds, they do not always lend themselves to demonstrating that separate accounts are maintained.
Whether a nonprofit simply works with a bank and purchases government bonds or takes the extra step of developing financial plans and portfolios, every nonprofit should be able to document that separate accounts are maintained by providing individual accountings for each subaccount. Accountings for PTs, and also for SNTs, serve two purposes. First, they should provide all of the information that the SSA or the local State Medicaid Agency requires for verifying that the trust has been used appropriately within the SSI and Medicaid guidelines. This information is fairly consistent across the country, especially for SSI, and a good Trustee will understand what is required and will be responsive by producing it quickly and easily.
The second purpose of an accounting is to meet the more general State law requirement for the trustee to report trust activity to the beneficiary. While the required information will vary somewhat from State to State, these requirements are fairly uniform in what the trustee must provide. Accountings must be understandable reports that cover the period of time beginning with the date of the last accounting. For new or transferred trusts, the report must begin with the date the trust was funded or was transferred to the successor trustee.
Trust reports must also identify the trust, the trustee, and the total time period covered. In terms of substance, the report must show everything received and disbursed by the trust along with all other transactions, which includes trustee fees and all realized gains and losses. The report should also identify all assets owned by the trust as of the end of the accounting period along with the value of each asset. According to most State law requirements, the trustee must provide accountings on an annual basis. While producing an annual accounting will meet general reporting requirements in most cases, a good nonprofit trustee will be willing and prepared to provide reports to government agencies and courts as needed anytime during the year.
Be Established by a Parent, Grandparent, Legal Guardian, the Individual, or a Court
One very significant difference between this PT provision and its corresponding Federal SNT provision is that the individual is added to the list of who can establish the PT. This is a significant difference because it alleviates the problem discussed on our Special Needs Trust page. By allowing the person whose assets are funding the trust to sign his or her own trust documents, this brings the establishment of a PT sub-account into line with the well-established trust law of all States.
Allowing an individual to sign their own trust document also makes the establishment of a PT sub-account much more cost-effective when the beneficiary does not have an available parent, grandparent, legal guardian, or a court with jurisdiction. Instead of fashioning a basis to petition a court, the individual can avoid the additional time and expense of court involvement by signing the trust documents on his or her own. Perhaps most importantly, however, it removes the sigma of a fully competent adult not being able to sign his or her own trust documents and the implicit, but inaccurate, message that someone with a disability is somehow automatically incompetent.
As an extension of the individual’s ability to sign trust documents, the individual can also authorize an agent to create a PT sub-account for the individual under a properly drafted Durable Power of Attorney (DPOA). By contrast, an agent cannot create a SNT for an individual under a DPOA because the individual cannot authorize someone to take action that the individual is not authorized to take on his or her own. However, since the Federal statute authorizes individuals to create their own PT sub-accounts, they can authorize an agent to take this action on their behalf. This opens up additional planning techniques for the individual’s benefit because someone will be able to create a PT sub account if the individual loses capacity for any reason and is not able to act on their own.
Even though the establishment of a PT can be easier in many cases, it is important to recognize a potential challenge that also exists with SNTs. In any situation where a parent is appointed guardian, the parent’s role as legal guardian will take precedent over the natural parent and child relationship when the parent wants to establish a PT. In other words, the parent will be required to establish the PT in his or her capacity of legal guardian and not in the capacity of parent. If you are not already familiar with such a situation from reading about it on our Special Needs Trust page, click here to read a full explanation.
Reimburse the State for all Medical Assistance if Funds are Not Retained by the Trust
As with the requirement for a SNT to reimburse the State, most people express a strong reaction to the requirement that any remaining funds in a PT must be retained in the trust or used to reimburse the State for all of the medical benefits provided to the individual over the individual’s lifetime. This is sometimes referred to as a modified payback provision. If more than one State provided Medicaid benefits, each State must receive its proportional share of the remaining trust assets to the extent the assets are not retained in trust.
The same public policy that requires SNTs to reimburse the State applies to PTs. In other words, public policy balances the personal interests of the individual and the public interests of society at large. However, the requirement to reimburse the State from a PT is modified because there is a second public policy that bears on the issue of reimbursement. As a matter of general public policy, the Federal government grants tax exempt status to qualified nonprofits because of the public good they provide by serving some charitable, educational, or other nonprofit purpose.
By allowing PTs to retain any remaining funds instead of reimbursing a State, the Federal statute on PTs gives the general public policy regarding nonprofits a higher priority than it gives to the public policy of reimbursing the State. Applying the policy to PTs in this manner makes sense when you remember that only nonprofits can establish a PT. The Federal statute even demonstrates this priority by placing retention before reimbursement in the language of the statute. Reading the full paragraph of this Federal statute helps to put the issue in perspective:
To the extent that amounts remaining in the beneficiary’s account upon the death of the beneficiary are not retained by the trust, the trust pays to the State from such remaining amounts in the account an amount equal to the total amount of medical assistance paid on behalf of the beneficiary under the State plan under this subchapter.
The same priority expressed in the Federal statute is also expressed almost verbatim in the POMS at SI 01120.203B.2.f., where SSA employees are instructed to look for specific language in the PT documents that provides:
…to the extent that amounts remaining in the individual’s account upon the death of the individual are not retained by the trust, the trust pays to the State(s) from such remaining amounts in the account an amount equal to the total amount of medical assistance paid on behalf of the individual under the State Medicaid plan(s).
Despite the modified payback provision of PTs, it is important to remember that nothing in Federal law or the POMS requires that any funds remain at a beneficiary’s death. As with SNTs, it is legal and perfectly ethical to use all of the assets in a PT sub-account during the individual beneficiary’s lifetime. However, the same caveat that applies to SNTs also applies to PTs in that the PT must be administered in a manner during the beneficiary’s lifetime that is consistent with the sole benefit rule. Also, the same restrictions apply to a PT as apply to a SNT regarding what can be paid upon a beneficiary’s death. You can review these restrictions in more detail on our Special Needs Trust page, but they bear repeating here if only briefly.
Upon a beneficiary’s death, section SI 10203.B. of the POMS lists what are allowable and prohibited expenses. State and Federal taxes that the PT sub-account may owe because of the beneficiary’s death can be paid along with any reasonable administration fees that must be paid for closing the sub-account such as accountings and filing fees. However, the following payments are specifically prohibited: 1) funeral expenses; 2) any taxes owed by the beneficiary personally; 3) third party debt; 4) inheritance taxes owed by residual beneficiaries; and, 5) distributions to residual beneficiaries. Of particular concern is the prohibition on paying funeral expenses. Since paying for funeral expenses in advance of the beneficiary’s death is an appropriate expense, it is extremely important to pre-plan and pay for these services before the beneficiary’s death. A diligent nonprofit trustee will strongly encourage pre-need planning and may even implement operational policies that make sure funeral expenses have been paid.
Since all of the assets in a PT sub-account can be used during the beneficiary’s lifetime, it is important to have a nonprofit trustee who is able to work with the beneficiary actively and develop a plan for using the sub-account. By developing a plan, the beneficiary and nonprofit can set priorities for meeting the beneficiary’s needs and agree on objectives for stretching the life of the assets. Such a plan can give the beneficiary the ability to receive the greatest benefit from his or her sub-account by developing a knowing spending pattern that balances current and future needs.