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The Next BIG Thing in Michigan Trust Law

Legislation currently moving through Michigan’s House and Senate will, if passed, dramatically impact the world of trust law in Michigan, and especially the drafting of discretionary trusts. Indications are that there is a good chance this legislation will become law before the year end. And so …. it’s probably time to start thinking about it.

The new law alters the way that trusts agreements can be crafted with respect to the roles of trustees and other fiduciary and non-fiduciary parties involved in the administration of a trust. While the proposed law is Michigan’s adoption of the Uniform Directed Trust Act, it goes well beyond the Uniform Act, particularly with respect to the provisions related to separate trustees.  In fact, it is probably best to understand this new development as two distinct changes to the law: (1) Rules relating to use of separate trustees when drafting discretionary trusts, and (2) the elimination of the Trust Protector, and replacement of that office with the Trust Director.

Separate Trustees

The new law defines several new types of roles and relationships that can be used in drafting trusts.

The law uses the term “Separate Trustee” to identify one of three types of separate trustees that have discrete powers and duties. They are:

* Investment Trustee. A Trustee exclusively responsible for investing the trust assets.

* Distributions Trustee. A Trustee exclusively responsible for making discretionary distributions of trust assets.  Note: There is no provision for a distributions trustee with respect to non-discretionary interests.

* Resultant Trustee. The Trustee responsible for all actions not otherwise allocated to an investment or distribution trustee.

So Long Trust Protectors

In addition to the creating laws to support the use of separate trustees (discussed above), the new law introduces the term “Trust Director” which equates roughly to what many would have heretofore defined as a Trust Protector. The scope of powers that can be given to a Trust Director are broad and it is not necessary for the trust agreement to have appointed separate trustees for the agreement to implement the use of a Trust Director.  The MTC defined the term “Trust Protectors” when it came into being in 2010, which was an important development associated with that legislation.  But with these changes, that term is removed and no longer defined.  [It is unclear (to me) how Courts will construe this term going forward, and what rules will apply to trust protectors appointed in documents.  In many instances, the powers typically allocated to a trust protector would seemingly result in those persons falling within the scope of what is now defined as a “Trust Director.”]

The law also then introduces the term “directed trustee” to refer to a trustee who takes direction from a trust director.

It’s All About Liability

With respect to the separate trustee provisions of the law, the idea is that without collusion, a separate trustee is not responsible for the acts of another separate trustee. And this is really the central legal development that makes this aspect of the new law click.  Heretofore, you could draft trusts with co-trustees and give them each a discrete role in the administration of a trust – but you could not, thereby, allow one trustee to be non-liable for the breach of their fellow co-trustee.  Now, by using this approach, you can.

In the simplest example, what that means is that you can appoint a bank as the investment trustee, and appoint the trust beneficiary’s sibling as the distributions trustee, and neither will be responsible for the other’s foibles. That is true even if the bank knew or should have known that the sibling was engaged in a breach, and vice versa.  Again, the exception would be if the separate trustees were colluding with each other with respect to the inappropriate conduct.  This development will make it much easier to have professional investment companies assume trusteeships over the investments, where others are making decisions about discretionary distributions.

When a power is exercised in a fiduciary capacity and when it is not; when a trustee or trust director is subject to liability and when they are not; are all addressed in detail in the legislation.

Special Needs Planning and Discretionary Trusts

In no area of trust planning will these changes be more relevant than in the drafting of discretionary trusts. And while there are many discretionary trusts that are not special needs trusts, all special needs trusts are discretionary trusts. The complexity of discretionary trust drafting will increase significantly with the passage of these laws, as will the opportunities to be more creative in the drafting of such trusts.

“Keep it simple” has long been the mantra of drafting SNTs. It is well recognized that the more detailed an SNT, the more likely the document is to be reviewed and perhaps challenged by the government entities which provide benefits to the SNT beneficiary.  For “high end” SNT planners, this opportunity might be an exception to that rule. The ability to work with institutional investors may mandate the adoption of separate trustee provisions.

The idea that you will soon have new tools to allow financial institutions to manage the money in the SNT, while having the family members (or family lawyer) make the decisions about how resources are used to improve the quality of life of the beneficiary is huge, and a big reason SNT planners will need to carefully consider how this legislation will change their practices. As everyone in the SNT world knows, banks and other financial institutions have attempted to gain entry into the world of special needs planning, but they are inevitably ill-suited to mange the distribution decisions associated with taking on the role of trustee. This legislation provides a safe harbor approach which allows them to manage the money while taking them off the hook of doing the dirty work of special needs trust administration.

These new laws offer SNT planners an opportunity that in many instances will be too hard to pass up, but they come with requirement that special needs trust drafters elevate their games.  Dabblers in SNT drafting beware.

IF You Decide To Go There

The good news for some no doubt, is you don’t have to use separate trustees or trust directors or otherwise incorporate these options into your trust agreements. And in fact, most simple “will substitute” trusts wouldn’t need or benefit from such provisions.

But if you draft inter vivos irrevocable trusts, or draft any trusts that continue after death, you will want to consider the possible benefits of these new tools. If you do, you need to read the statute carefully, because there are a whole host of requirements that spell out what has to be express in the trust agreement, and a handful of rules that cannot be altered or negated by your drafting.

If you have used Trust Protectors in your documents in the past, or want to use the concept in the future, you will need to understand the term Trust Director, how it differs from a Trust Protector and what the rules are in terms of appointment, exculpation and scope of authority.

So for many, keeping it simple may be best. For others, the possibilities will be too intriguing.  At times, perhaps, the objectives of the client may demand separate trustee provisions, and it may be malpractice to draft agreements that are not sufficiently attentive to these new rules.

Conclusion

It’s been a wild ride since Michigan adopted the Michigan Trust Code in 2010. In the eight years since, we’ve seen dramatic additional developments to Michigan trust law, including domestic self-settled asset protection trusts and liberalized decanting rules. This is the next big thing.

Michigan’s own Jim Spica is a member of the Uniform Directed Trust Act Committee, and the primary author of Michigan’s proposed law. As with everything Jim touches, this legislation is thorough and thoughtful.  To read the legislation in its present form click on the following House Bill links:

HB 6129 (Relating to the provisions for Separate Trustees)

HB 6130 (Relating to the Provisions for Trust Directors)

HB 6131 (Corresponding changes to other provisions of EPIC and the MTC)

And if f you are really in love with this topic, click here to read the Uniform Act, which includes commentary. If you look you will see that Michigan’s law varies significantly in many substantive ways from the Uniform Act.

Decanting Made Easy

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It’s been four years since Michigan’s decanting laws took effect. Those of us at CT have found ourselves decanting more and more lately. It has provided magnificent results in several cases.  I think the reason it took us so long to get on the bandwagon is that the whole concept seemed complicated and intimidating.  But as we’ve worked through these cases, we’ve kept coming to the same conclusion: It works and it’s way easier than we imagined it could be.

Decanting is taking a beneficiary’s interest in an irrevocable trust and creating a new trust for that beneficiary, with, in most cases, new terms. The term “decanting” comes from the concept of taking a bottle of old wine and pouring it into a new bottle or skin.

Now Michigan’s decanting laws (written and advanced by our good friend and that outstanding leader in probate law, Jim Spica) come in a variety of flavors (and you should definitely look up Jim’s writings and speaking materials for a more sophisticated understanding of this topic). Decanting can be accomplished, for instance, where a Trustee has been granted a sufficiently broad power of appointment to accomplish the task.  These decanting rules are set out in Michigan’s Power of Appointment Act.  MCL 556.115(a).  And while I am sure there are situations where this is the appropriate tool to accomplish the task, what we’ve found is that, for our purposes, the most fruitful application of Michigan’s decanting laws are those provisions for decanting set forth in Michigan Trust Code, and specifically MCL 700.7820a.

We’ve used decanting for two primary purposes: (1) To fix problem trusts, and (2) To delay a beneficiary from obtaining unfettered access to an interest in trust.

The key to an MTC decanting is discretion. Basically, to the extent a beneficiary’s interest in trust is a discretionary interest, it can be decanted.  For that reason, decanting comes up as an option in a lot of special needs planning cases, where discretion is always in play.  But decanting options have arisen in other types of cases as well.

So first you need to understand what discretion is. And in Michigan, a discretionary interest in Michigan is defined very broadly. See MCL 700.7103(d).  Even the ability to determine when a distribution will be made is sufficient to create a discretionary interest.  What’s more, where the language defining the beneficial interest is confused between discretion and support, our law defaults to discretion. MCL 700.7103(k) (and this type of confusing language appears in a lot of instruments, particularly older special needs trusts).  So this means, to the extent the Trustee exercises any judgment regarding distributions to the beneficiary, that interest is almost always going to be defined by Michigan law as a “discretionary interest” thereby triggering the ability to decant.

[To read more on Michigan’s liberal law on discretion, click here for an article I wrote several years ago on the topic.] https://mielderlaw.com/wp-content/uploads/2013/05/Pages_from_winter2009-2-MPEPJournal-The-power-of-discretion.pdf

Now here’s another point (a real gem) that you need to understand when the objective of decanting is continuing property in trust that the trustee would otherwise be required to be distribute at a date/age certain. While the law says that you cannot use decanting to materially change the terms of the trust, it also says: “An increase in the maximum period during which the vesting of a future interest may be suspended or postponed under applicable law does not constitute a material change in the interest of a beneficiary.” Voila!

So the point of all this is that, the proposition that you can rewrite a trust to get rid of problems in the way it was written, and even rewrite the trust so that a trust beneficiary’s distributions will be put on hold, is not just doable, but relatively easy to accomplish in those cases where you can define the beneficial interest as a discretionary interest.

Two Happy Notes

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On the topic of self-settled special needs trusts (aka Medicaid Pay-Back Trusts; aka D4A Trusts), the “Special Needs Trust Fairness Act” has passed both houses of Congress and is headed to the desk of President Obama for his signature. These trusts have long been used to protect the assets of persons who are disabled and under age 65, and who apply for Medicaid and/or Supplemental Security Income.  However, the law has been that these trusts must be created by a court, a guardian/conservator, or the parent or grandparent of the disabled trust beneficiary.  After this new Act becomes law, in addition to these existing methods, persons who are disabled and competent will be able to create their own trusts.  A very important and long sought development in the special needs world.

On the topic of long term care Medicaid benefits, Michigan’s Department of Health and Human Services has amended the rules relating to the treatment of annuities in the context of qualified retirement accounts owned by a Medicaid applicant.   Specifically, as of January 1, 2017, new BEM policy (click here) will provide that where the Medicaid applicant has money in retirement accounts (IRA’s, 401k’s, 403B’s, etc.), different rules will apply to the conversion of those accounts to income through the use of a commercial annuity.  Specifically, the requirement that such annuities are irrevocable, actuarially sound, and that they make payments in equal monthly amounts; will not apply to annuities created with these types of accounts.  Welcome back balloon annuities – I guess. [This positive development was brought about by Chalgian and Tripp’s own David Shaltz, who continues to work under the radar for important reforms that benefit the broader elder law community.]

 

Four New Things

Michigan Launches ABLE Accounts

Michigan will unveil details about it’s ABLE program November 1. ABLE is the Achieving Better Life Experience  ACT that each State can implement, and that allows for tax-free savings accounts to be established for persons with disabilities.  Click here for an update on the Michigan account, written by our own Chris Smith (who was instrumental in the drafting of the Michigan law).

New LTC Ombudsman

As previously discussed, the State Long Term Care Ombudsman has relocated from inside State government to a legal services agency, the Michigan Advocacy Program; and long time ombudsman Sarah Slocum is retiring. The Michigan Advocacy Program has announced that they have hired Salli Pung as the new State Ombudsman.

Ms. Pung has previously acted as the state’s Nursing Facility Closure Coordinator.  Ms. Pung. has also served as the Program Manager in the MI Health Link program. In addition, Ms. Pung  was formerly a Senior Program Manager at the Center for Long Term Care at the Michigan Public Health Institute and the Director of Education at the non-profit Michigan Association of Homes and Services for the Aging. .

New DOL Rules Establish Fiduciary Duties

The Federal Department of Labor has issues new regulations designed to increase consumer protections in the context of obtaining financial advice with respect to their retirement funds. The critical change is the imposition of a “fiduciary” duty on the financial advising industry, which will require them to act in the consumer’s best interests.  These rules should dramatically alter the conduct of investment advisors who push clients into high commission products that are not necessarily in the client’s best interest.  As discussed on this blogsite before, the sale of high commission products (most notably, annuities) to older investors at chicken dinner seminars is one of the primary forms of financial exploitation that older adults have faced.  While this change only applies to retirement accounts, it is hoped that the change will disincentive such conduct across the board.  The Feds appear to be willing to take on the financial services industry in a manner that state lawmakers are not.  To read more about these changes, click here and here.

New Regulations re NH Rights

And more good news from the Feds in that the Centers for Medicare and Medicaid Services recently released new nursing home regulations designed to improve (provide more protections) in the discharge process. To read all 700 pages, click here.

I was fortunate to sit in on a presentation on this topic by Alison Hirschel, Director of the Michigan Elder Justice Initiative, my takeaways were:

  • The normal protections for discharge remain in place even when the resident has been sent to the hospital or pysch ward. That means, sending people to the psych ward isn’t a way for nursing homes to avoid the discharge rules.
  • Pre-dispute arbitration clauses are now banned.
  • Before a discharge is allowed, it must be demonstrated that the facility accepting the resident can meet their needs.

All good.

The Self-Inflicted Drafting Defect that Keeps on Giving

Discretionary trusts are important for all sorts of reasons. Essentially, the law holds that when a beneficiary’s interest in a trust is subject to the pure and unfettered discretion of a trustee, because that beneficiary has no ability to control what, if anything, comes out of the trust for their benefit, creditors have nothing to glob onto.

The protection afforded beneficiaries of discretionary trusts importantly applies to situations where the creditor (or would be creditor) is a government entity that offers assistance through a needs-based government programs; such as Supplemental Security Income (SSI) and Medicaid. Accordingly, one of the important applications of pure discretion is with respect to so-called “special needs trusts” – trusts that allow people to become or remain eligible for these benefits even though they have a beneficial interest in a trust.

A discretionary trust interest is commonly defined by what it is not. Specifically, a discretionary trust interest is not a fixed right such as: “Beneficiary A shall receive $10,000 per month” or “Beneficiary A shall receive all income distributed quarterly.”  In addition, a discretionary trust interest is not an “ascertainable standard.”  An interest in a trust creating an ascertainable standard would say something like “the trustee shall make distributions for the health, education and welfare of Beneficiary A.”  In both cases [a fixed right interest and an ascertainable standard interest (also known as a “support trust”)] the trust gives the beneficiary something tangible, something they can go to court and enforce.  If the trustee fails to make a distribution mandated by a fixed right interest, or fails to make a distribution that falls within the scope of the ascertainable standard interest, the court will order the trustee to make that distribution.  And it is this right to compel a distribution that makes the beneficiary’s interest reachable by his/her creditors.

The problem is that in the context of discretionary trusts there is a history and continuing inclination of attorneys to draft language that confuses or mixes the standards, particularly the standards of discretion and an ascertainable standard. It is not uncommon to see trusts intended to be purely discretionary contain language such as:  “Trustee may distribute trust property for the health and maintenance of Beneficiary A, as the Trustee in its sole discretion may deem appropriate.”

A recent example is the case of Cook v Ohio Department of Job and Family Services. (click on the name to read the case).  In this case, Ms. Cook applied for Medicaid and was denied because she was a beneficiary of a trust that contained mixed language – discretion and ascertainable standard.  The agency denied benefits and the Court of Appeals of Ohio upheld that decision.

The appeal was well-argued by highly qualified counsel, but the Court held that the language was sufficiently subject to interpretation as an ascertainable standard and accordingly sided with the agency. In a nod to the proposition that the meaning of a trust is a matter of state law, the appellate court simply said that Ms. Cook could have gone to state court and obtained a declaratory ruling regarding the meaning of the trust, but because she did not do so, the agency’s interpretation would be adopted.

It is frustrating to learn of these cases, and yet they come up frequently. Discretionary and special needs trusts have been around a long time. The law is well developed.  Perhaps it is because, decades ago, the law was less defined and lawyers are reaching for old forms in creating these trusts; or perhaps it is because lawyers tend to be verbose and simply can’t leave the simple statement of “Trustee may make distributions to Beneficiary A in its sole and unfettered discretion” alone.  In any event, this common but completely unnecessarily problem never seems to go away.

To read more on discretionary trusts and the Michigan Trust Code, click here.

Capacity to Gender Identify

Talk about cutting edge cases…

How about this one out of Jackson County: 60 year-old biological male with history of developmental disabilities and psychiatric events, decides he wants to become a woman. Family recognizes he has a history of gender confusion but believes that this recent push is the function of his trying to impress a certain caregiver and get attention – and that s/he doesn’t have the capacity to fully comprehend the implications of the decision.

The matter comes to court as a petition for a DD Guardianship, for an adult who heretofore has functioned independently with supports, but without a court appointed fiduciary.

This tees up the question: What is the standard for capacity to identify one’s own gender? Intuitively one would expect that capacity to gender identify would be one of the lowest standards in the law (like capacity to marry); but what if it is a passing delusion of a fragile mind? It entails serious medical implications and is irreversible.

Even better that the case was handled by two wonderful young lawyers: Chris Smith of CT’s Southfield Office, an officer of the Elder Law and Disability Rights Section of the State Bar v Rick Mills with Marcoux Allen in Jackson (and formerly of CT), a member of the council of the Probate and Estate Planning Section of the State Bar. The case was well pled and prepared on both sides.

Ultimately, the trial Court adopted the recommendation of the court-appointed expert to appoint a neutral guardian with specific instructions to investigate the extent to which the desire to transgender is fully appreciated by the man/woman who is the subject of the petition. Kudos to Dr. Lisa Ficker, psychologist out of the Wayne State University Institute of Gerontology for an excellent report.

Reasonable result. Great issue. Makes you think.

 

8th Circuit Decision Stuns SNT World

Topic:  Self Settled Special Needs Trusts, aka Medicaid Payback Trusts, aka d(4)(A) Trusts.

Legal Background:  When a person under 65 meets the requirements of being disabled for the purposes of qualifying for needs-based government benefits (most notably Medicaid and Supplemental Security Income), they have the ability to meet the financial eligibility requirements of those programs by transferring assets they may have into a trust for their own benefit, provided those trusts meet the requirements of 42 U.S.C.§ 1396p(d)(4)(A). The law provides that once they put their own assets in these trusts, those assets will not be considered as part of their resources in determining eligibility for the aforementioned benefits.  The law allows the property held in such trusts to be used for the benefit of the disabled person during their life, but upon the death of the disabled person/trust beneficiary, the state(s) that paid for medical expenses for that disabled person are entitled to be reimbursed for those expenses from whatever trust property has not been distributed during the disabled person’s life.  The law does not currently allow the disabled person themselves to create these trusts, rather it says such trusts must be created by a parent, grandparent, guardian or court order.  It is this “who can create the trust” issue that is the subject of this surprising case.  These trusts are useful in all sorts of situations, including, where the person who is disabled became disabled as a result of medical malpractice or a car accident and receives a settlement or judgment as a result.  This allows the injured party to receive the lawsuit proceeds and use them to enhance their quality of life while remaining on government benefits, most importantly Medicaid.

This Case:  Click here to read Stephany Draper v Social Security Administration.  Stephany Draper is a person under the age of 65 who received a personal injury settlement. The parents of Ms. Draper created a d(4)(A) trust by signing it in their individual capacities, clearly attempting to satisfy the requirement option that the trust be created by a parent.  The parents, coincidentally, were also agents for Ms. Draper under a financial power of attorney.  The parents used their authority as Ms. Draper’s agents to sign the personal injury settlement documents and transfer the settlement proceeds to the Trustee of the d(4)(A) trust they created in their individual capacity.

The Social Security Administration said that this trust did not protect these funds because the parents were really acting as their daughter’s agent when they created the trust.  The 8th Circuit Court upheld the Social Security Administration’s decision, noting that Courts must give significant deference to the Social Security Administration with respect to the interpretation of the Social Security Act.

The fact that the Court upheld the conclusion that even though the parents signed the trust individually, and not as agents under the power of attorney, they were in fact acting as Ms. Draper’s agents in doing so; and notwithstanding the fact that the law itself expressly authorizes a parent to create such a trust, is more than troubling.  But the analysis gets even stranger.  The Court goes on to support this conclusion by asserting that even where State law allows the creation of an unfunded (or “dry”) trust, if someone creates an unfunded trust that trust is not valid because of the requirement that to create a valid trust the party creating it must have a financial interest in the trust, citing the Restatement of Trusts 3rd for that proposition.  The Court says, it seems, that they could either have concluded that the trust itself was not valid because the parents could not have created a trust in which they had no financial interest, or, alternatively, that the parents must have been acting as their daughter’s agents in creating the trust.  Since the Social Security Administration concluded the latter, they upheld that conclusion.

Obviously the Draper case will impact the way attorneys help clients create d(4)(A) trusts in the future. The 8th Circuit Court of Appeals is a Federal Court of Appeals, one step below the United States Supreme Court.  So this is not an insignificant decision.  However, Michigan is not part of the 8th Circuit.  Rather Michigan sits in the 6th Circuit. Technically, Michigan Courts are not bound by this decision.  However, in reality, Social Security Administration offices all over the U.S. will be emboldened by this “victory” and we will no doubt see an increase by the Social Security Administration with respect to aggressive challenges to self-settled special needs trusts as a result.

SNT’s, ObamaCare and More

A recent unpublished COA opinion raises some interesting issues regarding the probate court’s role in creating special needs trusts, as well as some food for thought on how the Affordable Care Act (aka, Obamacare) may impact decisions in these cases in the future.

In In Re Hope Special Needs Trust a 75 year-old man with mental illness petitioned the probate court for authority to create and fund a self-settled Special Needs Trust (SNT) with about $300,000 which he inherited.  At the time he petitioned, the man was receiving several government benefits, including two means-tested benefits: Supplemental Security Income and Medicaid.  In addition, because of his eligibility for these benefits, the cost to him of staying in the group home in which he resided was for reduced.

The Court found that the man was in fact a protected person, but denied the request to create and fund the SNT and instead ordered the funds be placed in a conservatorship for his benefit.

The COA upheld the trial Court’s decision.

In reaching this result, the trial Court found that the resources the man had were sufficient to privately pay for his care needs, including any increase in rent at the group home, and that the petitioner did not fully appreciate that trade-off that he was making, which was that he was giving up the ability to leave any unused portion of his estate to his heirs in return for continuing to receive modest government assistance through these means-tested programs.  Interestingly, the Court stated that this man did not understand what his attorney had him sign, a seeming slam on the attorney (no doubt, one of our several fine Yooper elder law attorneys, as this case came out of Chippewa County.)

So the conclusion of this trial Court was that the best interests of the protected person were not being served by the relief requested. This case should remind those of us who do this work that once the authority of the probate court is invoked, the court has the ability to independently analyze the situation and make its own determination about what is in the best interest of the protected person.

[An interesting side issue in this case is that the petition requested the funds be put in a pooled accounts (d4C) trust.  This is interesting because it is divestment to fund a pooled accounts trust after age 65 for Medicaid purposes. BEM 401, page 7.  It appears this individual was not in a Medicaid program where divestment is an issue, and the facts suggest that he was not likely to pursue these divestment programs (the long term care programs) anytime soon, if ever.  It is also interesting because, were this a first-party (d4A) trust, and were this individual under the age of 65, the issue of cutting out the heirs would have been mitigated since a first-party trust could have left the remaining resources, after reimbursement to the state for medical expenses paid by Medicaid (which in this case it appears would have been minimal) to the heirs or beneficiaries, seemingly removing the Court’s primary objection to the plan.]

Now the Obamacare issue.

Assuming Obamacare stands, in the future, purchasing health insurance for people who have preexisting conditions will not be an issue.  That means there will be fewer situations where SNTs are needed where the purpose is primarily to realize government health care benefits.  That doesn’t mean the other benefits of SNTs are lost or that some government benefits, like services through Community Mental Health which may not be obtainable without Medicaid eligibility, won’t still exist.  It does mean however, that the analysis will be different, and that in more situations the attorney will likely arrive at the same conclusion that this Court did, that the protected person can afford to pay for their care needs without establishing an SNT.

Trending Up: Medicare Set Aside Agreement

This is an important probate issue, although admittedly one that many probate lawyers may never come in contact with.  The topic is Medicare Set Aside Agreements (MSAs).  This topic is significant to those probate attorneys who work with plaintiff’s attorneys to assist in settlements of personal injury actions and workers compensation claims.

Background

MSAs are used to hold a portion of the funds received from settlements to pay for health care expenses that Medicare would otherwise pay for.  The idea is that when someone is injured and receives a settlement, the settlement funds represent a variety of damages, including future medical expenses.  If the injured person is, or is expected to become, covered by Medicare, an MSA holds a portion of those funds to pay for medical expenses incurred in the future so that Medicare is not charged for medical expenses that have already been paid for by a third party (the defendant).

MSA have traditionally been used exclusively in the worker’s compensation context.  The federal entity that runs Medicare (CMS) has long established rules and procedures for settling workers compensation claims: when MSAs are required and how to have the MSA, and the amount of the settlement placed in the MSA, approved.

What’s New

Over the last few years there has been a push to require MSAs be used in liability actions (traditional personal injury cases).  The push has come largely from annuity companies and other interests that operate in the workers compensation world.  They see liability claims as a new and large market for their products and services.

Although the federal law on this point has always cryptically required parties to liability settlements and judgments to “consider Medicare’s interest” in settlement proceeds, CMS has never required liability actions to use MSAs and they have no procedure for having MSAs approved in that context.  However, more recently it appears that those pushing for the expansion of MSAs into the liability arena are gaining traction. It appears we may have, or may soon have, a requirement that MSAs be used in larger liability cases where the plaintiff is, or is expected to become, a Medicare beneficiary.  Defense counsel are already demanding this issue be addressed in larger cases.

The application of MSAs to liability matters would be more complex than in workers compensation, for among other reasons, the allocation of fault among multiple defendants as well as the allocation of damages between future medical costs and the many other possible forms of damages suffered and recoverable in these cases as opposed to workers compensation matters.

It is also important to recognize that a full fledged adoption of MSAs into the liability world is a very bad thing for plaintiffs.  In a worst case scenario, such a requirement could dramatically reduce the benefit realized by the plaintiff in these matters, for the reason that in many cases a substantial portion of the settlement could become unavailable to them, set aside to replace care costs that would otherwise be paid by Medicare.

Of course Special Needs Trusts (SNTs) have long been part of the probate work that arises in the context of assisting personal injury lawyers with settlements.  This will not change.  What may change is the need to also develop and fund MSAs (or SNTs that can also operate as MSAs).