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Court Rules on Supplemental Needs Trust for Petitioners Son


This is an APPEAL by nonparty Commissioner, New York State Department of Health, in a proceeding pursuant to CPLR article 78 to review a determination of the New York State Department of Health dated June 7, 2006, made after an administrative fair hearing, that so much of the income of the petitioner’s decedent as was deposited into a supplemental needs trust for the benefit of the decedent’s adult disabled son was required to be included in the calculation of the decedent’s eligibility and entitlement to Medicaid benefits during her lifetime and in the calculation of the obligation of the decedent’s estate for the reimbursement of a certain portion of those benefits, from a judgment of the Supreme Court, entered in Nassau County on January 12, 2007, which granted the petition and annulled the determination.

In New York, the concept of a supplemental needs trust originated in 1978, establishing a vehicle for parents and guardians of adult children with severe and chronic disabilities to provide for their children’s future by transferring their funds to a trust, created to pay for items that will enhance their children’s quality of life without jeopardizing their children’s eligibility for government benefits, such as Supplemental Security Income, pursuant to 42 USC § 1382 et seq. and Medicaid, pursuant to 42 USC § 1396 et seq. and Social Services Law § 363 et seq.

The issues of first impression at the appellate level are whether the transfer of a settlor/parent’s recurring income into a supplemental needs trust created for his or her disabled child must be counted toward (a) the settlor/parent’s net available monthly income for calculation of the amount of the Medicaid benefits to which the settlor/parent is entitled after he or she is determined to be eligible for Medicaid (hereinafter post-eligibility benefits) and (b) the obligation of the estate of a deceased settlor/parent for the reimbursement of a certain portion of those benefits.

The primary purpose of the Medicaid program is to enable each state, jointly with the Federal government, to furnish “medical assistance on behalf of families with dependent children and of aged, blind, or disabled individuals, whose income and resources are insufficient to meet the costs of necessary medical services” For purposes of eligibility for Medicaid, the government considers the amount of an individual’s “assets,” defined as “all income and resources of the individual and of the individual’s spouse, including any income or resources which the individual or such individual’s spouse is entitled to but does not receive because of action by the individual or such individual’s spouse. If the individual’s financial assets fall below a certain income level, he or she becomes eligible for Medicaid benefits.

Throughout the years, nonqualifying individuals have attempted to shelter their assets and income to establish their eligibility for Medicaid benefits, prompting Congress to enact the Omnibus Budget Reconciliation Act of 1993, restricting individuals’ manipulation of their assets to obtain Medicaid benefits. Consonant with OBRA, the New York State Legislature enacted, among other provisions, Social Services Law § 366(5)(d)(3), which, echoing the Federal statute, provides that “[i]n determining the medical assistance eligibility of an institutionalized individual, any transfer of an asset by the individual or the individual’s spouse for less than fair market value,” made within the three years immediately preceding the date on which the individual was both institutionalized and applied for medical assistance, would render the individual ineligible for Medicaid benefits and nursing-facility services. The Medicaid statutes, however, provide an exemption to this rule, whereby an individual may transfer his or her own income and assets to fund an SNT without having the funds counted as available resources for Medicaid eligibility purposes.

More specifically, and consistent with the Federal regulations, the Legislature codified the definition of an SNT in 1993, pursuant to EPTL 7-1.12, defining it as a “discretionary trust established for the benefit of a person with a severe and chronic or persistent disability” by his or her parent, grandparent, legal guardian, or a court.

Since “[a]s a condition of the receipt of Federal program funding, State Medicaid plans must conform with the statutory standards established by Federal law and the regulations promulgated by the Secretary of Health and Human Services, the corresponding New York regulation, 18 NYCRR 360-4.9, entitled “Post-Eligibility Utilization of Income,” mirrors the federal regulation, and consequently provides as follows:

“For a person in permanent absence status in a medical facility, after eligibility is established the person is subject to chronic care budgeting. Under chronic care budgeting, all income must be applied toward the cost of care in the facility, including income disregarded or considered unavailable for the purpose of determining [medical assistance] eligibility. However, before any income is required to be applied to the person’s cost of care, [certain] deductions will be made”

On the instant appeal, petitioner contends that the transfer of Hammond’s recurring Social Security retirement and pension income into the third-party SNT created for the benefit must be excluded from her NAMI for the purpose of calculating her own contribution towards her Medicaid post-eligibility benefits. He argues this, despite the fact that Hammond did not create her own first-party SNT to potentially shield her income from such a benefit determination.

In interpreting the Medicaid statutory framework with respect to this issue, we must be cognizant of the appropriate standard of review in light of the procedural posture of this matter as a CPLR article 78 proceeding.

“Under most circumstances, judicial review of an administrative determination made after a hearing required by law, and at which evidence was taken, is limited to whether that determination is supported by substantial evidence. However, such an administrative determination is arbitrary and capricious when it exceeds the agency’s statutory authority or [is made] in violation of the Constitution or laws of this State’.

In a proceeding such as this, which challenges a determination made by an administrative agency as to the proper interpretation of statutes and regulations, the court’s function is to ascertain, upon the proof before the agency, whether its determination had a rational basis in the record or, conversely, was arbitrary and capricious or affected by an error of law. An agency action is deemed to be arbitrary if it is taken “without a sound basis in reason and without regard to the facts”.

Applying these principles to the matter at bar, we find that the Supreme Court erred in concluding that the DOH’s interpretation of the Medicaid provisions governing the calculation of post-eligibility benefits for an applicant who deposits income into a third-party SNT was irrational, arbitrary and capricious, or affected by an error of law. As previously noted, an applicant for Medicaid, such as Hammond, may not herself be deemed ineligible by reason of assets or income transferred to her “child who is blind or disabled, or to a trust established solely for the benefit of such child” or “for the benefit of an individual under [65] years of age who is disabled”. In light of the foregoing Federal and state statutes and regulations, it is clear that Hammond did not jeopardize her own eligibility for Medicaid by transferring her monthly income into the SNT for the benefit of her son, who was both disabled and under 65 years of age (see Reames v State of Oklahoma, 411 F3d at 1164; Estate Planning for a Family with a Special Needs Child, 23 Probate & Property at 16).

Contrary to the conclusion of our dissenting colleague, our determination today does not frustrate a “parental right” to establish an SNT for a disabled child, but merely disallows a parent or guardian in a similar situation as Hammond from utilizing this statutory exemption for her own benefit. It would be counter to public policy to permit Hammond to attempt to take a first-party benefit from a third-party SNT, given that the available income or resources placed in the SNT are for the sole benefit.

In accordance with the foregoing, the Supreme Court should have confirmed the determination, denied the petition and dismissed the proceeding in its entirety. Consequently, the judgment is reversed, on the law, the determination is confirmed, the petition is denied, and the proceeding is dismissed on the merits.

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