Source: http://lawyerforseniors.com/articles/the-new-ca-decanting-statute-some-advisory-cautions-2/
Timestamp: 2019-04-24 10:10:38+00:00

Document:
A Trust becomes irrevocable because of the death of the Trustor. It requires the trustee to distribute trust principal to C when C attains age 30. Assume C has attained age 31, but the trustee has not yet distributed trust principal to C. C is now a person with a disability and receives, or may receive, means-tested public benefits. The Trustee now desires to decant C’s bequest into a SNT for C, so that it does not undermine his continued receipt of public benefits.
Question: Must the Decanted Trust with SNT provisions contain a “pay-back” provision? Or, put another way, must it now comply with First Party SNT rules, or may it be structured as a Third Party SNT without payback requirements?
Analysis: It seems evident that C’s right to his bequest has already vested, so arguably the funds representing his bequest would now be his own property and he would have legal control of them. On this point, SSI may be stricter than Medi-Cal.
For SSI purposes, if he has the legal right to access the funds, then they are a resource under the POMS.[ii] As such, in order to preserve the beneficiary’s SSI, wouldn’t it now be necessary for the SNT for C to be structured as a First Party SNT with pay-back provisions, as per 42 USC 1396p(d)(4)(A).? If not so structured, would not C’s bequest then be a countable resource and potentially restrict him from public benefits, or at least from SSI?
Whether this New York case will govern similar proceedings in California is presently unknown. That said, the careful practitioner who desires to decant to a SNT without “payback” provisions would be wise to do so well prior to the time the beneficiary’s interest is deemed to vest. Timing may be critical.
In practice, most efforts to decant to an SNT to preserve public benefits will likely occur only after the death of the trustor. As to these trusts, if the target beneficiary has by then already reached the age for distribution, then the issue litigated in Kroll will continue to present until an appellate court renders a precedential decision, the state issues a definitive regulation or ACWDL, and/or SSA issues a controlling POMS.
2) Procedurally, handle the decanting pursuant to the Notice provisions of the Act, rather than via the Consent provisions. Doing so might render it less likely that the creation of the SNT will be construed as the volitional act of the target beneficiary (as opposed to that of the original Trustor), and hence a “self-settled” SNT requiring First Party compliance, including the often dreaded “payback” provision.
3) If the amount to be funded into the SNT is relatively modest and/or is likely to be fully expended during the lifetime of the SNT beneficiary, consider biting the bullet: include a payback provision and otherwise structure the SNT as a First Party trust, so as to avoid the issue altogether. Why spend funds litigating the issue (or risking loss of public benefits) where the benefit may well prove illusory?
4) Include a Trust Protector, where the latter is given the specific power to add a payback provision, albeit prospectively [viii].
If the Decanted SNT is characterized by Medi-Cal or SSI as a “First Party Self-Settled SNT”, that could pose a big problem for a beneficiary aged 65 years or older. Reason: a beneficiary over age 65 cannot self-settle a SNT under any circumstance. See, 42 USC 1396p(d)(4)(A). The only option for this beneficiary is to join and fund a Pooled Special Needs Trust, as authorized by 42 USC 1396p(d)(4) (C).
Fortunately –the Cox and other decisions notwithstanding — the rule in California has long been that a person of any age may join and make an initial funding [xi] into a Pooled SNT without jeopardy to his Medi-Cal eligibility. [xii] Indeed, the California Dept. Of Health Care Services acknowledges as much on its own website. See Special Needs Trust Notice, wherein it recites that a person of “any age” may join a Pooled SNT. [xiii] Hopefully, the ‘California rule’ will not change.
(3) Unwinding A-B Credit Shelter Trusts By Decanting; Limited Utility?
Many practitioners were hoping that the Uniform Decanting Act would present a mechanism to unwind unwanted A-B Credit Shelter Trusts without the expense and uncertainty of a formal court proceeding under the usual probate code provisions, including Section 15409. However, I believe that in most cases, use of the Act to decant in this circumstance will not work.
From the Official Comments, I have teased out what I believe to be four conditions precedent to the use of the Act to decant in this context, as follows: (1) the trustee must seemingly be an independent person (i.e., it cannot be the surviving spouse); (2) the independent trustee must have ‘expanded distributive discretion’ (i.e., the trustee’s discretion cannot be limited to only principal distributions for the survivor’s Health, Education, Maintenance and Support [“H.E.M.S”]); (3) the surviving spouse must still be alive; and (4) the proposed decanting must save more in taxes than contemplated by the original Credit Shelter Trust (“CST”). Of these four conditions, numbers (1) and (2) will likely be the key obstacles which will prevent use of the Act to eliminate the CST in many cases.
However, if the original trust provides that the successor trustee of a CST is an independent trustee with expanded distributive discretion, presumably a surviving spouse—who would likely be the initial trustee under a more limited standard – could resign in favor of that independent trustee, and thereby satisfy conditions (1) and (2), above. But, absent this circumstance, most CSTs (at least that I have seen) appoint the surviving spouse as the trustee, usually with limited distributive discretion over principal (i.e. H.E.M.S). Under this circumstance, decanting would apparently not be available. Instead, the remedy would be the traditional approach of seeking reformation by Petition and Court Order under Probate Code § 15409. California courts routinely grant those requests, and the relief is retroactive.
As we begin to use the Act, my hope is that more opportunities, than limitations, will present as we and our courts become familiar with its provisions. In the SNT context, we might also hope for a court decision with statewide precedential value, a clarifying Regulation or ACWDL from the State regarding Medi-Cal, and/or a POMS from SSA regarding SSI, all to affirm the ability of the trustee to decant retroactively, so that the trust bequest in issue is not deemed a resource to the beneficiary with a disability.
* Gene L. Osofsky is a sole practitioner in Hayward, CA. This article appeared in the Legal Network News published on 04/09/2019 by California Advocates for Nursing Home Reform, Spring 2019, Vol 30, No.1.
[i] Probate Code § 19513(b).
[iv] An ‘Attorney’s Analysis’ associated with the case indicates that it was decanted only 6 days before the beneficiary reached the required distribution age of 21. https://tinyurl.com/y67z4374.
[v] The 2nd Circuit has affirmed continuation of Medicaid benefits in a decanting case arising in Connecticut. Simonsen v. Bremby (02/15/2017). The critical fact: the trust had a spendthrift clause, which prevented the SNT beneficiary from accessing the funds at will. The court held that she was “legally restricted from using the trust funds except as disbursed to her in the discretion of the trustee”.
[vi] [Kleinert v Commissioner of Social Security, A U.S. District Court Magistrate’s Decision for the Northern District of California, (07/08/2016); https://tinyurl.com/y672dcpg].
[vii] Under Probate Code § 16061.7, for the 120 days period after notification is served, the trust can be contested. Therefore, the trustee would not normally distribute funds until that notice period has run, and—likewise—the beneficiar(ies) could not insist upon distribution until then. Where the trustee is obliged to prepare an accounting, trust distributions would be further delayed. Probate Code §16062 [duty to account] and §16461 (180 days to Object). During at least these periods, the practitioner might well argue that the funds are not ‘available’ within the meaning of POMS SI 01120.010 (B)(2) [for SSI], and 22 CCR 50402 [for Medi-Cal].
[viii] California courts have held that a court may not modify a prior judgment retroactively to create a SNT to avoid the lien of DDS. Rather, such a nun pro tunc order is limited to an order that merely corrects clerical error so that the judgment conforms to the original court order. See, Hamilton v. Laine, (1st DCA, 1997). 57 Cal. App. 4th 885, 67 Cal. Rptr. 2d 407.
[ix] State decisions holding that funding a Pooled SNT by a person 65 years of age or older may be an uncompensated transfer of assets and will therefore trigger a transfer penalty, include the following: Richardson v. Hamilton (US District Ct in Maine, 02/27/2018) [https://tinyurl.com/yxzchk2c]; Lewis v. Alexander (3rd Cir., 06/20/2012) [https://tinyurl.com/yxzchk2c]; Center for Special Needs Trust Administration, Inc. v. Olson (North Dakota, 04/25/2011) [https://tinyurl.com/yy2ewd5e].
[x] The Cox decision: https://www.iowacourts.gov/courtcases/3143/embed/SupremeCourtOpinion.
[xi] But the over age 65 individual may not, after the initial funding, later add to or augment his/her initial funding into the Pooled SNT. 22 CCR 50489.9(c).
[xiii] “Special Needs Trust” Notice on the State DHCS website. https://tinyurl.com/yyksszjv. See, CEB, Special Needs Trusts, Planning, Drafting and Administration, at §12.9.
[xiv] See CEB, Special Needs Trusts, Planning, Drafting and Administration, at §12.10.
[xv] Those Official Comments are available at https://tinyurl.com/y4jhlntw and attention is invited to page 69 thereof.

References: § 15409
 § 19513
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 § 16061
 §16062
 §16461
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 §12
 §12