New Wisconsin Estate Recovery Laws Create High Hurdles for Trustees

[IMPORTANT UPDATE TO THIS ARTICLE – PLEASE TAKE A LOOK AT THE POST HERE TO READ ABOUT SOME NEW DEVELOPMENTS THAT MAY AFFECT ISSUES I WROTE ABOUT IN THE ARTICLE BELOW! ]

There is a section of Wisconsin’s new Estate Recovery law that is not found in the statutes dealing with Medicaid (Chapter 49). Instead, it is in the statutes that deal with trusts. Section 701.06(5) of the Wisconsin Statutes dictates requirements that must be followed by trustees of certain types of trusts. Specifically, it places deadlines and payment obligations on trustees of three different types of trusts: “living” trusts, Special Needs Trusts, and Pooled Trusts.

Here are some terms you will need to understand:

• A “Settlor” is a person who creates a trust.

• A “Living Trust” is a trust that is created during the life of the “Settlor.” A Living Trust can be either revocable (where the Settlor can change or revoke it entirely during life) or irrevocable (where it cannot be revoked once it is established.) Frequently, these types of trusts are used to eliminate the need for probate, to provide privacy, to create tax advantages, to facilitate the management of a person’s funds in the case of disability, and to protect funds where a beneficiary is young, disabled, or a spendthrift.

• A “Special Needs Trust” for purposes of this law, is a trust that meets specific requirements of federal law (42 USC 1396p(d)(4)(a)). It is funded with assets belonging to a disabled individual. It must provide that upon the death of the disabled individual, the state will be repaid any Medicaid benefits that the individual received. These types of trusts are beneficial to disabled individuals since they do not count as resources for Medicaid or Supplemental Security Income (SSI). These types of trusts are used to preserve a person’s eligibility for benefits. They are used when an individual on Medicaid or SSI receives an inheritance, or an award in a personal injury case (such as nursing home abuse or neglect, or in an accident case that caused the individual’s disability to begin with,) or some other influx of funds that would otherwise cause the person to become ineligible for benefits.

• A “Pooled trust” is another special type of trust that must meet specific requirements of federal law (42 USC 1396p(d)(4)(c)). It is established by a not-for-profit organization and holds funds for disabled individuals, which are pooled together for investment purposes. When a disabled individual with funds in the pooled trust dies, the pooled trust will either retain funds for the benefit of other disabled individuals or repay Medicaid that the individual received. This type of trust is used for the same purposes as the Special Needs trust described above, it is another way of making sure the receipt of funds through inheritance, personal injury case, or other sources, does not cause the individual to lose benefits.

For purposes of this article, the types of “special needs” and “pooled trusts” I refer to, that are subject to this new law,  are trusts that are created using the assets that belong to the individual. These are called “first-party trusts.” Trusts where a parent or grandparent, or some other person,  puts funds in a trust for the disabled individual’s benefit are called “third-party trusts.”  However, as if this weren’t confusing enough,  the part of the new estate recovery law regarding “living trusts” could also include funds that a person such as a parent or a grandparent put in trust for a disabled child or grandchild, if the parent or grandparent (or other person creating the trust) needs Medicaid.

Elder and disability law attorneys like myself help people set up these types of trusts on a regular basis. Using these trusts, we can make sure that a person does not lose eligibility for any benefits they might receive. Often we work hand in hand with personal injury attorneys who are representing a client, to make sure that receiving a settlement for an injury or malpractice is protected and does not end up causing a problem with benefits. We also work with trustees to help them understand what the funds can and cannot be used for, and what the repayment requirements are.

How the New Law Affects Living Trusts:

Where an individual who is the settlor of a “living trust” receives Medicaid or similar long-term care benefits, or where that settlor’s spouse who died first received Medicaid, the new law creates a procedure that the Trustee must follow when the Settlor dies.

First, the trustee must notify the state’s estate recovery unit within 30 days of the settlor’s death. The notice must be in writing, by registered or certified mail. The trustee must provide information about the settlor, and must also provide details about the value of the trust. Given the amount of time it could take to obtain a death certificate, and obtain verification of the assets in the trust, particularly if the trustee was not managing the trust prior to the settlor’s death, it will be a big responsibility to get this information together within 30 days.  Because there is no provision for an extension, the trustee will have to apply to the court if more time is needed. This will increase the costs of trust administration substantially. Also, it is very likely a trustee may not be aware of this new requirement and may fail to follow it at all.

Second, if the state files a claim with the trust within 4 months after receiving the notice from the trustee, the trustee must turn over all trust property needed to pay the claim within 90 days of the claim. Again, there is no provision for an extension, and no provision to dispute the claim or pay other claims ahead of the state, such as the costs of a funeral.

These requirements put the trustee in a precarious position of choosing whether to comply with this law or follow the terms of the trust if they are different. Trustees may need to apply to the court for guidance. Trustees may also choose to resign or decline the job.

This new law may also mean that where a parent has put funds in a “living trust” for a disabled person, and that parent ends up receiving Medicaid, the funds set aside for the disabled person can be subject to recovery because they are in a “living trust.” If these same funds were bequeathed to the disabled person in a trust that is created in the probate process (called a “testamentary trust”), there is a law that prevents the state from taking the funds. So this part of the new law actually makes it less favorable for a parent or grandparent of a disabled person to use a trust to provide for their disabled child if that parent or grandparent needs Medicaid. People who have carefully planned for the needs of their disabled children or relatives by setting aside funds in a living trust may have those funds snatched by the state if the person who set them aside, or the person’s spouse, needs Medicaid.

I recommend that living trusts being created after this law contain a provision allowing the trustee to terminate the trust if it appears estate recovery will become an issue. Existing trusts could be amended to allow for this. This allows the entire matter to be handled through probate, which has deadlines that are more manageable, and court oversight as to priority of claims. Ironically, this is the very thing most trusts try to avoid. Handling the entire issue through probate will be more costly, and will ultimately result in the state receiving less through estate recovery, but will prevent the trustee from being subjected to difficult requirements and will allow the assets to be distributed under an objective court’s watchful eye instead of having this dictated by the state. Also, the probate process can be used to create a testamentary trust for a disabled individual and protect the funds intended for that person. Some types of trusts may allow for distribution to beneficiaries upon termination.

Requirements for Special Needs and Pooled Trusts:

Trustees of first-party pooled trusts and special needs trusts must also provide the state with the 30-day notice of death I describe above. If the state files a claim, the trustee must also make payment within 90 days as described above. However, this section of the law does not have a four-month deadline for the state to file claims. I do not know if this omission is intentional or an oversight. But its effect is that the state could delay filing a claim for months, yet still, the trustee must respond if the claim gets filed, whenever that is.

Disturbingly, if the trustee fails to comply with these requirements, the trustee is personally liable for any costs the department incurs in attempting to recover the amounts from individuals who received any trust property, and for the difference between the recoverable amount of the claim and what the department can actually recover from those individuals. For example, under a broad reading of this new law, if the trustee fails to follow the proper procedures, even inadvertently, and there was $10,000 in the trust that was distributed to beneficiaries, if the state’s claim is $100,000, it could hold the trustee liable for the other $90,000. Under a more narrow reading of the new law, if the trust distributed $10,000 to beneficiaries and the trustee failed to comply with the notice and payment requirements above, then the trustee must pay whatever the state cannot recover of that $10,000. (Joe's beneficiary blew his $2,000 share at the casino, so the state can only get $8,000 from the remaining beneficiaries. The Trustee is liable to the state for $2,000.) I believe trustees will have to seek court guidance and approval more often than previously.

Also, the new law limits the amount that pooled trusts can retain for the benefit of other disabled beneficiaries. The federal law has no such limitation. “Retained” funds are used by pooled trusts to benefit disabled individuals who may not have enough money in their own account but have a critical need for assistance, and for other purposes that benefit disabled individuals.

These onerous requirements on trustees mean that being a trustee for someone who receives nursing home Medicaid, or long-term care, or other recoverable services, just became much more complicated. Some people may refuse to take on the role of trustee. Professional Trustees will be very particular about these cases and may need to charge more due to the increased liability exposure.

I am not sure why the Legislature felt the need to create additional hurdles for special needs and pooled trusts since by law these trusts already have repayment obligations. These new rules serve only to increase the cost of trust administration and reduce the number of qualified trustees who would be willing to serve disabled beneficiaries. I am puzzled why the Legislature would want to impose personal liability on trustees of special needs and pooled trusts. Is there widespread abuse by the two pooled trusts that are operating in Wisconsin? Are trustees of special needs trusts absconding with funds? Like many other elder law attorneys in Wisconsin, I work closely with individuals involved in these pooled and special needs trusts. I am not aware of any issues of trustee misappropriation or abuse of the payback requirement for these trusts. This is simply mean-spirited punishment of people who have the foresight to create these types of trust arrangements to protect benefits, by making it more difficult and expensive to find qualified trustees.