The Medicaid Institutionalized Care Program, the Simple Estate Plan, and the Elective Share: Why the Qualified Special Needs Trust Was Born
The Florida Legislature enacted sweeping reforms to the elective share statute in 1999.1 The new law provides a surviving spouse with the right to claim a share of the “elective estate,”2 defined as containing both probate and nonprobate assets, not just assets subject to probate administration as under prior law.3 Florida’s public policy expressed in the new law seems designed to clearly prevent one spouse from disinheriting the other unless a valid agreement between the spouses exists.4
Typical estate planning between spouses leaves all property to the surviving spouse; then, after both spouses are deceased, to children or others. Basic estate tax planning wills usually provide substantial benefits to the surviving spouse, even if held in trust, on the first spouse’s death. These “simple” plans should cause no problem with the new law (nor should it cause any problems under the previous versions of this legislation) so long as one of the spouses is neither ill nor disabled. However, this planning (or lack of planning) can prove disastrous in situations where one of the spouses is ill or disabled and when the disabled spouse requires nursing home care. Should one spouse require nursing home care and the other spouse does not have the financial means to pay for this level of care and there are no long-term care insurance benefits available, government entitlement programs may be necessary so that the nondisabled spouse is not left financially devastated. One program available in Florida to offset the cost of nursing home care is the Medicaid Institutionalized Care Program (“Medicaid ICP”). This is a “means tested” program to assist the disabled spouse and nondisabled spouse. To qualify for Medicaid ICP, an applicant’s ( i.e., the disabled spouse’s) countable resources must be calculated and not exceed certain levels. As part of the planning to qualify for Medicaid ICP, it is common that the disabled spouse transfer all of the disabled spouse’s interest in the marital assets to the nondisabled spouse, individually, prior to or immediately following application for Medicaid ICP benefits.5
Should the nondisabled spouse die first owning all the assets in his or her individual name and the disabled spouse is the beneficiary under the simple estate planning option, an inheritance or beneficial interest may cause the disabled spouse to lose Medicaid ICP benefits and potentially cause a loss of inheritance to the spouses’ ultimate beneficiaries. This “timing problem” of the nondisabled spouse dying first cannot be rectified by merely disinheriting the disabled spouse or using a disclaimer.6 Remember, the disabled spouse is entitled to an elective share of 30 percent of the “elective estate.” As Professor David Powell explained in his Revised Executive Summary to the Elective Share Statute, “A decision not to claim an elective share may be viewed as a transfer that could disqualify a surviving spouse from Medicaid benefits.” This becomes problematic for the surviving spouse: 1) take the elective share and possibly lose Medicaid ICP benefits, or 2) refuse or disclaim the elective share and lose Medicaid ICP benefits under, among other things, the transfer penalty rules.7
To ameliorate this problem, the legislature created the qualifying special needs trust (QSNT).8 Use of a testamentary QSNT can allow the nondisabled spouse to provide for the disabled spouse and preserve both Medicaid ICP benefits.9
A qualified special needs trust:
means a trust established for an ill or disabled surviving spouse with court approval before or after a decedent’s death if, commencing on the decedent’s death: (a) The income and principal are distributable to or the benefit of the spouse for life in the discretion of one or more trustees less than half of whom are ineligible family trustees. For purposes of this paragraph, ineligible family trustees include the decedent’s grandparents and any descendants of the decedent’s grandparents who are not also descendants of the surviving spouse; and (b) during the spouse’s life, no person other than the spouse has the power to distribute income or principal to anyone other than the spouse. (Emphasis added.)10
The requirement for court approval shall not apply if the aggregate value of all property in all qualifying special needs trusts for the spouse is less than $100,000.11
The QSNT must be testamentary to ensure continuation of Medicaid ICP benefits for the disabled spouse.12 A testamentary QSNT does not cause termination in whole or in part of Medicaid ICP benefits to a disabled spouse for two reasons: 1) There is no inclusion of the QSNT’s corpus as a countable resource against the disabled spouse. This type of trust is not counted in calculating countable resources for an applicant. No inclusion of the QSNT’s corpus should be counted as a countable resource by the state against a disabled spouse.13 2) The new law provides, under F.S. §732.2045, the assets in a QSNT are not a part of the elective share. This furthers Florida’s public policy purpose in not permitting a disabled spouse to be disinherited just to permit a continuing receipt of public benefits. If a disabled surviving spouse receives Medicaid ICP benefits, the state cannot claim, on behalf of the surviving disabled spouse, any portion of the QSNT assets as they are not a part of the elective estate subject to the marital election right of claim.14
The QSNT must receive “court approval” unless the “aggregate value of all property in all qualifying special needs trusts is less than $100,000.”15 The condition of court approval is awkward, as the elective share statute requires an election before computation of an elective share amount is determined. It may be difficult to determine if, in fact, the elective share will exceed $100,000. As the elective share includes both probate and nonprobate assets, determining value may be difficult. Therefore, it is suggested that practitioners always obtain court approval for a QSNT if the election of the elective share is being considered. Court approval should be obtained by a petition for construction of a will as an adversary proceeding in the probate court. See Fla. Prob. R. 5.025(a). Following this article is a memorandum used to assist in the hearing establishing proper creation of a QSNT. The author files a declaratory judgment action in the probate court and serves formal notice on both the Department of Children and Families (DCF) and the Agency for Health Care Administration (AHCA) of the adversary proceeding. In this manner, if either or both agencies fail to respond, there will be a strong argument that these agencies should be estopped from raising the issue that the trust fails to comply with the elective share statute at any further review.
Choosing the proper trustee for the QSNT is another important consideration. The statute permits discretionary distribution by one or more trustees, “less than half of whom are ineligible family trustees.”16 The statutory concept appears to require the trustees to have a close relationship with the disabled spouse beneficiary contrary to the “independent trustee” perspective utilized by many discretionary trusts. For example, a stepchild of the beneficiary may not serve as trustee of a QSNT unless other qualified family members serve with the stepchild but, if one of two cotrustees is an “illegible family member,” then the QSNT does not meet the statutory definition. Mathematically, any ineligible trustee can only serve if there are at least two or more other qualified trustees (i.e., one of three co-trustees). To assist the practitioner, the chart below is included to help ensure a QSNT does not fail for lack of proper trustee designation. It is interesting that the chart shows that remote relatives of the decedent (second cousins, grand uncles and aunts) are suitable trustees, while decedent’s children by a prior marriage, who may in fact be more connected to the surviving spouse, are not eligible.
The practitioner should also be aware of Fla. Prob. R. 5.360(b)(2). Since the surviving spouse for whom the election is made will, in most cases, be incapacitated, a separate court order must be obtained by the attorney-in-fact or guardian of property. While this will most likely be granted routinely, the rule requires a statement of facts supporting the election. Other than merely reciting the existence of a surviving spouse, what facts would be appropriate to support the petition? When the spouse is a Medicaid ICP recipient and the decedent has provided a QSNT, is the elective share in the ward’s best interest? This would be the traditional standard when a guardian seeks court approval for a proposed action. Potentially, the court could refuse to authorize the elective share election as not benefitting the spouse given the discretionary provisions of the QSNT, particularly if the guardian/power of attorney, trustee of the QSNT, personal representative of the estate, and the alternate beneficiary under the decedent’s will are the children of both the decedent and surviving spouse. Perhaps an attorney ad litem is needed? If you assume that the children would act to benefit the disabled parent, what difference would the trust make and would not they be better off without the administrative burden of the QSNT? If the elective share election is not authorized, the QSNT is not needed by the terms of the will. Whether the failure of the court to authorize the elective share would be binding upon the Medicaid agencies is an open issue.
Conclusion
Utilizing a testamentary QSNT appears to be the best protection to ensuring a decedent’s disabled spouse can continue Medicaid ICP benefits (as well as other possible government entitlements) should the nondisabled spouse predecease. The QSNT is consistent with Florida public policy in preserving not only the right for the disabled spouse to have an elective share, but also to preserve a spouse’s right to continue obtaining government benefits so that, among other things, a disabled spouse’s care is not interrupted or diminished by being removed from the Medicaid program. As QSNTs and the new law have only been around for a few years, it is important to stress to clients the need to be aware notwithstanding the creation of the trust by will and court approval of the QSNT, DCF may still choose to raise resource and transfer issues when reviews of a disabled spouse are conducted. However, use of the QSNT should provide couples with a disabled or ill spouse the comfort of knowing their estate plan can provide for both of them, without causing a loss of benefits to the disabled spouse.
1 See Fla. Stat. §732.201 et seq.
2 This article does not address the nuances of the new law. For an excellent discussion on the new law refer to Morgan, Boyer and Jackson, Planning for the Elderly in Florida (Lexis/Nexis) and Solkoff, Florida Elder Law (Lawyers Cooperative).
3 See Fla. Stat. §§732.2035 and 732.2045.
4 See City National Bank of Florida v. Tescher, 578 So. 2d 701 (Fla. 1991).
5 There is no penalty for interspousal transfers. See Florida Department of Children and Families, Economic Self-Sufficiency (“ESS”) Program Policy Manual §1640.0609.04.
6 Assume no valid prenuptial or postnuptial agreement exists.
7 See Morgan, Boyer and Jackson, supra note 2, at §10.02.
8 Fla. Stat. §732.2025(8); this is also referred to as a “supplemental needs trust.”
9 As will be demonstrated, the laws and regulations dealing with Medicaid ICP favor the use of a will to create the QSNT or the use of a pour-back revocable trust provision so the QSNT provision is established in a nondisabled spouse’s will.
10 See Fla. Stat. §732.2025(8).
11 See Fla. Stat. §732.2025(8).
12 See Robinson and Chamberlain, Administration of Trusts in Florida, Chapter 17, Section [17.22d], The Florida Bar 3d Addition (2001). See also ESS Policy Program Manual §§1640.0576.01, 1640.0576.07, and 1640.0576.08(1).
Section 1640.0576.07 provides: “The following policy applies to trusts established by an individual on or after 10/01/93: An individual will be considered to have established the trust if assets of the individual were used to form all or part of the corpus of the trust and if any of the following individuals established the trust (other than by will):. . . . ” (Emphasis added.)
13 See supra note 12.
14 See Fla. Stat. §732.2045 and Executive Summary for House Bill 301 (now §732.201 et seq.) prepared by or for the Augmented Share Committee of The Florida Bar (the Bar committee charged with drafting and submitting the new law to the legislature).
15 See supra note 8.
16 Fla. Stat. §732.2025. The statute specifies that the trustees for the surviving spouse as beneficiary are measured against the family tree of the deceased spouse.
Robert M. Morgan is partner in charge of the probate, estates and elder law department of the Jacksonville law firm of Ford, Bowlus, Duss, Morgan, Kenney, Safer & Hampton, P.A., where he primarily practices in the areas of elder law, estate planning, and real estate. He received his B.S. from Arizona State University in business administration and his J.D., with distinction, from the Mississippi College School of Law. He is a member of the National Academy of Elder Law Attorneys and the Academy of Florida Elder Law Attorneys.
Eliot J. Safer is a partner with the firm of Ford, Bowlus, Duss, Morgan, Kenney, Safer & Hampton, P.A., Jacksonville. He received a B.A. in finance from the University of South Florida and a J.D., with honors, from the University of Florida College of Law. Mr. Safer was admitted to the U.S. District Court, Middle District of Florida, and the U.S. Tax Court. His practice areas include probate and guardianship, estate planning, corporate and business transactions.
This column is submitted on behalf of the Elder Law Section, Scott M. Solkoff, chair.
