Funding Pooled Special Needs Trusts After Age 64

Before, During, and After Pfoser v. Harpstead

Elder law attorney Laurie Hanson recalls a client she met with in 2008. He was 85 years old and virtually immobile from multiple sclerosis. The man had spent $600,000 on his long-term care and was down to his last $12,000. He had been a teacher, loved to read, and enjoyed simple life pleasures like meeting students and eating shrimp on Fridays. The man needed to apply for benefits, but he knew that once he went on assistance most of his monthly income would be mandated to go toward his care. It would be impossible for him to afford the small luxuries that boosted his quality of life. He asked Hanson to help him protect the little money he had left.

There are asset and income limits to qualify for Medicaid1 (Medical Assistance or MA), depending on the program. With few exceptions, to be eligible for MA for Long-Term Care (MA-LTC), a single person must be blind, disabled, or age 65 or older and have assets below $3,000. 2

Any transfer for less than fair market value made within five years of MA-LTC application (during the so-called “lookback period”) is an “uncompensated transfer” resulting in a penalty (period of ineligibility for benefits) unless the applicant either (1) overcomes the presumption the transfers were made solely to divest himself or herself to qualify for benefits or (2) shows an asset-transfer exception.

In 1993, Congress enacted a law that allows a person, regardless of age, to set aside funds above the asset limit in a special-needs pooled trust for the person’s sole benefit, to supplement government benefits like MA-LTC.3 Pooled trusts are established and managed by a nonprofit association, usually a 501(c)(3) charitable entity. A separate account, known as a sub-account, is maintained for each beneficiary. But, for investment and management purposes, all accounts are pooled into a “master pooled trust,” hence the name “pooled trust.”

To open a sub-account and join the pooled trust, a person signs an irrevocable joinder agreement. To ensure the sub-account was not funded to protect funds for the benefit of the person’s heirs, any funds left in the sub-account at the person’s death must be paid back to the state as reimbursement for MA benefits paid, less than 10 percent retained by the trustee and paid to a charitable trust.4

Hanson’s client was ineligible for MA-LTC because he was over the asset limit. Therefore, he placed his remaining $12,000 into a pooled trust sub-account so funds would be available to pay for those items that brought joy to his life, but that were not covered by MA-LTC. He applied for MA-LTC, but because he was over age 64 when he funded the sub-account, a transfer penalty was imposed. He appealed administratively, but the commissioner of the Minnesota Department of Human Services upheld the penalty. That was not, however, the end of the story.

Following an appeal and remand to Douglas County District Court, the penalty was reversed. The court held an individual cannot be penalized for transferring assets into a pooled trust sub-account solely because he was 65 or older; rather, the commissioner must show why the transfer was not for fair market value. This ruling was only at the district court level in one county. The ruling did not stop some counties from continuing to impose penalties in similar situations, while in other counties, individuals age 65 and over were able to fund pooled trust sub-accounts without penalty. There was inconsistency around the state. Additionally, the commissioner had not developed a policy concerning what constituted fair market value.

The laws related to MA eligibility prevent individuals from transferring assets out of their names for the sole purpose of qualifying for MA-LTC, but asset-transfer exceptions (such as funding a special needs pooled trust sub-account) exist for disabled people like Hanson’s client. If an individual age 65 or older shows that he or she received fair market value when funding the sub-account, a penalty may not be imposed. The commissioner’s own Health Care Programs Eligibility Policy Manual implementing federal law provides that an individual over the age of 64 who establishes a pooled trust sub-account has the right to show he or she received adequate compensation before a penalty may be imposed.5

Additionally, an asset-transfer penalty may not be imposed if applicants satisfactorily show they “intended to dispose of the assets either (1) at fair market value or (2) for other valuable consideration.”6

Applicants over age 64 have been establishing pooled trust sub-accounts in other states without penalty. As mentioned above, Minnesota determinations have been inconsistent across the counties, with some counties regularly allowing such funding, while others—such as Pfoser in Dakota County—have been treated per se as uncompensated transfers. In other words, penalties are imposed based on the applicant’s age without any analysis of value received.

Hanson took up the case of David Pfoser hoping to bring clarity to this area of the law. Pfoser had been diagnosed with severe Parkinson’s disease that left him incapable of living independently. While he was living in a skilled nursing facility and receiving MA-LTC, his legal guardian and conservator received court approval to transfer $28,010 (proceeds from the sale of a family home owned with his siblings) into a pooled trust sub-account. Dakota County Human Services imposed a transfer penalty solely because Pfoser was age 65 at the time he established the sub-account. On administrative appeal, the commissioner affirmed, concluding it was an uncompensated transfer without analyzing the value of consideration received. Pfoser appealed. The district court reversed the commissioner’s decision, and the Court of Appeals affirmed. The case, Pfoser v. Harpstead,7 A19-0853 (Minn. Ct. App. Jan. 13, 2020), has received a great deal of attention since being handed down. 

The appellate opinion clarifies that, although the burden is on the applicants or recipients to show fair market value or valuable consideration when placing assets into a pooled trust sub-account, the commissioner must analyze that value and cannot make an arbitrary determination based solely on the age of the applicant. “[T]he commissioner must determine, based on the evidence, whether the recipient has made a ‘satisfactory showing’ that the recipient ‘intended to dispose of the assets either at fair market value or for other valuable consideration.’” Pfoser confirms the commissioner’s duty to analyze the value of consideration received in exchange for assets transferred by a disabled individual (regardless of age) into a pooled trust sub-account—not just at the time when the trust is funded.

Hanson believes the Court of Appeals ruling is so important because “people who are disabled before they are 65 continue to be disabled after they are 65. If they are injured or need long-term care, and receive a personal injury settlement or an inheritance, they would have no option other than to spend down all their money to reach the $3,000 limit, and live on a stipend of $104 each month. Today’s “65” is not the same as when Medicaid first passed more than 45 years ago; people are living much longer. People would have to maintain this bare existence for the next 10, 15, or more years. This ruling allows them to set aside funds for their sole benefit to provide things that bring joy to their lives—perhaps a nice wheelchair or massage therapy.” In other cases, it could be the difference between living at home or in a care facility. This ruling is a very big deal. Indeed, practitioners quickly acknowledged its significance.

The commissioner has filed for Supreme Court review of Pfoser. In late March, the Minnesota Supreme Court accepted the case, with arguments normally taking place several months later. Now, all await a ruling from the Supreme Court.

Jill Sauber owns Sauber Legal Services. As a former mortician, she has a unique perspective on issues related to death and dying.  Sauber has a comprehensive estate and elder law practice which includes planning (disability, estate/trust, and complex long-term care planning) and related litigation.


Notes

1  Medicaid is a joint federal-state program that funds medical care for certain low-income, elderly, and disabled people. It is often confused with Medicare, but it is not the same. Medicaid covers long-term nursing care costs that are not covered by Medicare.

2  Minn. Stat. § 256B.055, subd. 7; 42 U.S.C. § 1381 (2018).

3  42 USC § 1396p(d)(4)(C).

4  42 USC § 1396p(d)(4)(C), Minn. Stat § 256B.056 subd. 3b(d).

5  EPM §§ 2.4.1.3.4 and 2.4.1.3.5.

6  42 USC § 1396p(c)(2)(C)(i), Minn. Stat § 256B.0595, subd. 4(a)(4).

7  Jodi Harpstead became commissioner of the Minnesota Department of Human Services in August 2019.