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Davidow Articles
Special Needs Trusts Preserve Assets While Maintaining Government Benefits
by Lawrence Eric Davidow
Elder
law attorneys are privileged to not only serve seniors, but persons
with disabilities as well. Sometimes we call serving both of these
segments of our clientele the practice of Elder Law, sometimes
we call serving the latter the practice of Special Needs Law. A
common element of both is the combined knowledge of public benefit
and trust law. More particularly, to practice Special Needs Law,
a thorough knowledge of Special Needs Trusts (also known as Supplemental
Needs Trusts or SNTs) is essential. Who else needs to know about
SNTs? The answer is personal injury attorneys and the parents,
grandparents, spouses and friends of the disabled. An SNT is a
trust created for the purpose of providing for the special or supplemental
needs of a person with disabilities while maintaining for such
person needs-based public benefits, such as Medicaid and Supplemental
Security Income benefits (SSI). More technically, an SNT is established
for the benefit of a person with a severe and chronic or persisten
disability, including a mental illness, developmental disability
or other physical or mental impairment, for the purpose of supplementing,
not supplanting, impairing or diminishing governmental benefits
or assistance. More practically, an SNT is a phenomenal tool which
allows those on Medicaid and SSI to have money and other resources
available to them to pay for all things above and beyond what medicaid
and SSI provide. The need for an SNT will evolve from one or two
contexts. In the first, a person has money and/or other non-exempt
resources (owned prior to the disability, or acquired by personal
injury settlement, inheritance or from the payment of retroactive
SSI payments) and now needs a "self settled trust" to
obtain or maintain government benefits. The second is that third
parties (spouses, parents, grandparents, other relatives and friends)
wish to give the person with disabilitiesmoney and/or other non-exempt
resources without such person losing his or her government benefits.
These are called third party trusts.
Development of the Law
It was not always clear whether an SNT was permissible in New York.
the controlling case leading to the creation of the SNT is Matter
of Escher. In Escher, the New York State Department of Mental Hygiene
brought an action seeking reimbursement for the cost of the life
beneficiary's care from the fuunds held in a testamentary trust.
the department argued that the trustee shuold deliver the entire
remaining corpus of the trust to it in satisfaction of its unpaid
bill. The court held that it was the testator's clear intention
to provide for the benefit of his disabled daughter on an ongoing
basis and that it "would be unfairly prejudicial to the life income beneficiary and an arrogant disregard of the testator's intent" to
invade the corpus of the trust to reimburse the department. Accordingly,
the court denied the department access to the funds and sanctioned
the beginning of the use of Special Needs Trusts in New York. Because
of the uncertainty in the law following the decision in Escher, the
Legislature cofified the court's finding by adopting Section 7-1.12
of the Estates Powers & Trusts Law. Although it is not required, this section provides suggested language for the creation of an SNT. If drafted properly, neither the income nor the principal held in trust for a disabled beneficiary will be considered resources that are actually "available" to
the beneficiary when determining whether the beneficiary is entitled
to SSI or Medicaid benefits.
The Self Settled Trust
A self-settled SNT is a trust that is funded with the disabled
beneficiary's own funds. The reason that these trusts are so popular
is that there is no Medicaid or SSI transfer penalty when funded;
the transferor is immediately eligible for either of these two
programs. As discussed above, this type of SNT is commonly established
with the proceeds from a personal injury settlement, an inheritance
or retroactive SSI payments appropriated by the beneficiary as
the result of a lawsuit. As an aside, it is important to note that
a disabled beneficiary cannot allow his or her SSI benefits to
accumulate for the purpose of funding a self-settled SNT. This
is because the program was established to provide the beneficiary
with income actually needed to maintain his or her standard of
living, not to provide for the beneficiary's future needs. There
are a few requirements that must be followed when creating a self-settled
SNT. First, the disabled individual must be under 65. Second, the
state must be reimbursed for any benefits paid upon the death of
the beneficiary from any funds remaining in the trust. (this is
why this type of trust is also called a "pay back trust".)
Third, the trust must be created by the beneficiary's parent, grandparent,
guardian or the court. Finally, the governmental agency must be notified
of certain events, such as when the trust is funded or when the funds
in the trust are substantially depleted. this notification requirement
must be included in the language of the trust. A variation on this
type of SNT is the Pooled SNT. This is a trust created for the benefit
of a disabled beneficiary of any age (not limited to those less than
65). The monies used to fund the trust can come from the disabled
beneficiary's own funds or from a third party. Unlike the self-settled
SNT described above, the pooled SNT can be created by the beneficiary
himself as well as by the beneficiary's parent, granparent, guardian
or the court. The important distinction between the pooled SNT and
other SNTs is that the pooled SNT must be managed by a non-profit
organization. Upon the death of the SNT, the monies remaining in
the trust will continue to remain there for the benefit of other
trust beneficiaries or will be reimbursed to the state for any benefits
paid if the funds held in the trust were self-settled. This latter
option is an option that is never used.
Third-Party SNT
The second type of SNT is the third-party SNT, or a
trust created by a third party for the benefit of a person with
disabilities. The trust can be created by the third party during
his lifetime (inter vivos) or upon his death through his last
will and testament (testamentary). The third-party SNT is the
most common type of SNT. Upon the death of the disabled beneficiary,
the funds remaining in the trust are to be paid to a remainder
beneficiary identified in the trust instrument (usually another
family member or a charity which cared for the beneficiary).
Although a decedent can create a testamentary SNT for his spouse,
a third party cannot create an inter vivos SNT for the benefit
of his spouse. In addition, the third party creating the SNT
cannot be someone with a legal or financial obligation to support
the beneficiary.ale of the senior's principal residence.
Important Distinctions
There are two important distinctions to note between third-party
SNTs and selfsettled SNTs. First, there is no age requirement for
the establishment of a third-party SNT. Second, there is no requirement
that the fudns remaining in the trust be reimbursed to the state
upon the death of the disabled beneficiary. If the disabled beneficiary
is receiving SSI benefits, it is extremely important to draft the
SNT in strict accord withSection 7-1.12 so as to secure his or
her entitlement to these benefits. The trust must clearly indicate
that the fundsbeing held are to be used only to supplement and
not diminish the disabled beneficiary's entitlement to benefits.
As a result, the funds cannot be used for food, clothing or shelter.
If funds are paid to the disabled beneficiary for any of these
purposes, the beneficiary will be denied SSI benefits. This is
because the government has adopted this program specifically to
provide for this type of support. If a disabled individual is receiving
this support from some other source, therefore, the federal government
is no longer compelled to meet these needs. In fact, because of
this rationale, if the trust qualifies as an SNT, the law presumes
that the creator of the trust did not intend for the funds held
in the trust ot be used for these items.
The trust can essentially provide for anyother needs of the beneficiary
which cannot be classified as food, clothing or shelter. These
other needs include, but are not limited to, entertainment, education,
vacations and transportation. The trustee, however, can be given
the discretion to make distributions from the trust for food, clothing
or shelter if the trustee determines that such a distribution would
better serve the beneficiary even if it would result in a loss
of governmental benefits. In addition to the requirement that the
funds may not be used for food, clothing or shelter, in order to
maintain SSI benefits, the SNT that is created with the disabled
beneficiary's own funds must also be irrevocable. By classifying
the trust as irrevocable, the beneficiary gives up his or her right
to cancel the trust and take back the property, thereby making
the property "unavailable" to the beneficiary. If the property were considered an "available resource" of
the beneficiary, he or she would not be entitled to SSI benefits.
CONCLUSION
The creation of the SNT has many benefits for families caring for
individuals with disabilities and the individuals themselves. SNTs
enable trust beneficiaries to access government benefits while
preserving other assets to enrich their lives. It is a planning
tool that should be considered by all families or guardians providing
for disabled individuals.
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