Intense Scrutiny for Third Party Trusts

A technical article for Maryland elder law professionals.

Elder law lawyers are familiar with third party trusts authorized by the Omnibus Budget Reconciliation Act of 1993 (OBRA ’93), which third party trusts are addressed in 42 U.S.C. 1396p(c)(2)(B). With such a trust an individual can set aside assets for a disabled person under age 65 and not cause such disabled beneficiary to lose Supplemental Security Income (SSI) or Medicaid benefits. Moreover, the person who creates and funds the trust will not become ineligible to receive such benefits as a consequence of funding the trust.

The Gatesman Law Office now is negotiating with the Maryland Medicaid authority over Maryland’s imposition of strict requirements not found in the law allowing the use of such trusts. In particular, for a so-called c2B trust, Maryland will require the following:

1. The trust must contain within the trust document a schedule of distributions that the State can audit to determine if the trust is “actuarially sound.”

2. The trust must provide for repayment to Medicaid for any benefits the State pays for the trust beneficiary and for the person funding the trust.

3. The trust must be reviewed and approved by the Attorney General’s office.

4. The trust must be registered with the Medicaid recoveries department once Medicaid eligibility is granted.

Some of these requirements are not supported by applicable law and procedural practice. Indeed, the assistant Attorney General charged with reviewing special needs trusts has stated that she will not review a c2B trust notwithstanding the regulator’s insistence that such review is required before this type of trust will be allowed. Nevertheless, any lawyer drafting such a trust must weigh the cost of suffering a denial of benefits and the necessity of having to appeal an adverse determination before deciding whether to draft a c2b trust without these provisions.

The Gatesman Law Office has not yet determined whether to appeal the State’s position or to amend the trust at issue to facilitate benefits in the case at hand. We presently are weighing the costs and benefits of the two alternatives.