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NEW FEDERAL LAW EXPANDS ABILITY TO ESTABLISH SPECIAL NEEDS TRUSTS

President Obama signed the 21st Century Cures Act (H.R. 34) (the "Act") into law on December 13, 2016 following passage in the House of Representatives on November 30, 2016 and the Senate on December 7, 2016. While the Act addresses various issues ranging from FDA product approval requirements and an increase in health insurance coverage for mental health care, the Act includes Section 5007, aptly titled "Fairness in Medicaid Supplemental Needs Trusts", which now authorizes the individual who is to be the beneficiary of a special needs trust established in accordance with 42 U.S.C. § 1396p(d)(4)(A) to establish such trust for his or her own benefit. These "Special Needs Trust" allow a beneficiary of such a trust to qualify for financial-needs-based benefits (such as Medicaid and SSI) without having the trust assets disqualify the individual from those benefits.

While each jurisdiction has adopted or modified 42 U.S.C. § 1396p(d)(4) by its own laws pertaining to special needs trusts (including Pennsylvania's relevant "Special Needs Trusts" law set forth in 55 Pa. Code §178.7(f)(1) and 62 P.S. § 1414), the basis of a first-party special needs trust derives from 42 U.S.C. § 1396p(d)(4). In 1993, Congress initially authorized the establishment of certain trusts that would not disqualify a beneficiary from receiving Medicaid under 42 U.S.C. § 1396p(d)(4), often referred to as "(d)(4)(A)" or "OBRA '93" Special Needs Trusts, if they met the following requirements:

(1) the beneficiary is under the age of 65;

(2) the beneficiary is "disabled" in accordance with 42 U.S.C. § 1382c(a)(3);

(3) the trust is created by a parent or grandparent of the disabled beneficiary or by his or her guardian or a court; and

(4) upon the death of the beneficiary, the state is to be reimbursed up to an amount equal to the total medical assistance paid on behalf of the individual. See 42 U.S.C. § 1396p(d)(4)(A).

These "(d)(4)(A)" or "OBRA '93" Special Needs Trusts are referred to by a variety of other names, including self-funded "payback" trusts, first-party special needs trusts, and, ironically, self-settled special needs trusts. The enactment of the Act now expands the third requirement to allow a competent, adult beneficiary of such a trust to establish the trust for his or her own benefit, or "self-settle" the trust, without the need of a parent, grandparent, guardian or Court as previously required. Specifically, 42 U.S.C. § 1396p(d)(4)(A) now provides that the trust may be "established for the benefit of such individual by the individual, parent or grandparent of the disabled beneficiary or by his or her guardian or a court". This amendment corrects what many have considered to be a flaw in the enabling statute authorizing special needs trusts which had, up until this time, prohibited competent, adult individuals from creating their own self-funded special needs trust to exempt such assets from being considered for Medicaid qualification purposes. Without the ability to create a special needs trust themselves, disabled but competent beneficiaries over age 18, who did not have parents or grandparents to establish a special needs trust on their behalf, were forced to petition the court to create a special needs trust to become eligible for or maintain Medicaid qualification.

While the Act's "Fairness in Medicaid Supplemental Needs Trusts" section only consists of a few lines out of a nearly 400 page document, this seemingly small amendment, which simply added two words to the United States' Code's special needs trusts provision, will actually permit individuals to "self-settle" their own special needs trusts, reducing or eliminating the need to involve the Court and incur the added expense associated with such judicial filings.

The Pennsylvania legislature has not yet amended the relevant provisions of 55 Pa. Code §178.7(f)(1), which still requires the trust to be established for the individual's benefit "by a parent, grandparent, legal guardian of the individual, or a court." It is unclear at this point how the current conflict between the Pennsylvania Code and the newly amended federal law will affect the ability of a competent, adult disabled beneficiary in Pennsylvania to establish his or her own "(d)(4)(A)" Special Needs Trusts.

[Note that this change in the law only impacts competent, adult individuals who are the intended beneficiaries of a "(d)(4)(A)" special needs trust, and does not affect the process through which a "(d)(4)(A)" special needs trust must be established for the benefit of a minor or incapacitated person.]