Legally Speaking

Legally Speaking

Understanding Supplemental Needs Trust for the Disabled

by Susan S. Brown, Esq.,

Planning your financial future is always a complicated and intensely personal undertaking. This planning is particularly complicated when a person is disabled. A disabled person with resources should be concerned about protecting those resources while maintaining eligibility for means tested government benefits. The parents and family of a disabled individual may dedicate themselves to helping their child achieve maximum emotional, physical and financial independence, but they undoubtedly worry about the day that they can no longer provide a safety net. This article will describe the "Supplemental Needs Trust" or "Special Needs Trust",("SNT") which provides a legal safe harbor in which a disabled person's inheritance, or her own hers own funds, may be securely

administered for his or her benefit with the added advantage of exempting those funds from being counted as resources for the purpose of qualifying the disabled beneficiary for "means tested" government benefits such as Medicaid Assistance or Supplemental Security Income.

Traditional Planning for Disabled Heirs

Financial and estate planning for the disabled has traditionally been. accomplished in several(mostly unsatisfactory) ways. A disabled person with his or her own, resources had little choice other than to "spend down" his, or her assets in order to qualify for many government benefits.

Similarly, the parents or grandparents of a disabled individual who is sufficiently competent to administer his or her own funds might simply bequeath to the disabled person an outright share if their estates.

However, an outright inheritance can cause ineligibility for means tested government benefits, with the undesirable result that the disabled individual would be required to "spend down" his or her inheritance in order to remain eligible or qualify for such benefits.

Consequently, many estate plans maintain a disabled person eligibility for government benefits by disinheriting the disabled individual, and leaving the family fortune to his or her siblings upon whom a moral obligation is imposed to expend a share of their inheritance for the benefit of their disinherited and disabled sibling. Of course, this unsecured estate "Plan", exposes the disabled person's share of the family fortune to various risks, such as the siblings' creditors, improvidence, bankruptcy, divorce or other circumstances that could reduce the amount of assets held for a disabled relative.

Finally, the best alternative is, and traditionally has been, to leave a disabled person's inheritance in a "discretionary' trust, the terms of which allow the Trustee to distribute trust funds for the best interests of the disabled beneficiary. A trust offers the best alternative to protect the assets for the intended beneficiary, and the discretionary nature of its terms enables the Trustee to refuse to expend trust funds if government benefits are otherwise available to meet the beneficiaries needs.

Supplemental Needs Trusts or Special Needs Trusts

Discretionary trusts have been in use and approved by New York courts for the disabled since a 1978 case, known as Matter of Escher, permitted a disabled trust beneficiary to qualify for means tested government benefits, thus overruling the argument of the Department of Social Service that he was ineligible for such benefits due to the existence of a discretionary trust holding substantial resources for his benefit. Congress and the New York legislature finally caught on and endorsed the Supplemental Needs Trust through legislation passed in 1993. From a policy perspective, this is sensible legislation, which permits a disabled individual to enjoy an improved quality of life as the beneficiary of an SNT, without affecting his or her eligibility for government assistance. Examples of uses to which SNT finds may be put, on behalf of the disabled beneficiary are: travel, computers, special therapies or equipment, education, vehicles and supplemental medical treatments or aides.

Types Of SNTs"

There are three types of SNT. The "third party SNT", the "self-settled SNT" and the "pooled SNT'. Family and friends, who do not have a legal obligation to support a disabled individual, may establish a lifetime or testamentary "third part," SNT for his or her benefit, to provide funds for purposes other than those provided through government programs.

Or, a parent, grandparent, legal guardian or court may create and fund a "self-settled" SNT with funds that belong to the disabled beneficiary - typically, the proceeds of a lawsuit or an outright inheritance. Finally, a "pooled" SNT permits a disabled individual or his or her family to contribute funds to a pooled trust created by a not-for-profit agency, such as ARC or UJA-Federation, in exchange for services for the disabled beneficiary, through the agency.

During the disabled beneficiary's lifetime, there is essentially no difference between the third party and self-settled SNT. Trust distributions may be made on behalf of the disabled beneficiary to "supplement, not supplant impair or diminish, government benefits or assistance for which the beneficiary may otherwise be eligible" (New York Estates Powers and Trusts Law) However, the law requires a self-settled SNT to provide that upon the death of the disabled beneficiary, the State must be reimbursed for amounts expended by the State, on his or her behalf.

After this "pay-back" requirement is satisfied, the remaining funds, if any, are paid to the disabled beneficiary's estate. A third party SNT does not have this "pay-back" requirement. Upon the death of a disabled beneficiary of a third party SNT, the remaining funds may be paid to any individuals or entities designated by the SNT creator. Upon the death of a pooled SNT beneficiary the trust remainder is subject to pay back" requirements if self-settled or, if a third party contributed to the pooled SNT, the remainder is payable to the not-for-profit agency and, sometimes, other individuals or, entities designated by the third party contributor.

Requirements of an SNT

While the criteria for a valid SNT vary in some respects between a self-settled SNT, a third party SNT and a pooled SNT, the basic requirements are:

1. The beneficiary must have a "chronic or persistent" disability, including mental illness, developmental disability or other physical or mental impairment;

2. Self-settled SNTs can only be created for disabled individuals under age 65, unless they are pooled;

3. Self-settled SNTs are subject to certain reporting requirements to government agencies such as the Department of Social Services;

4. The trust document must state the creator's intent to supplement and not supplant government benefits to which the beneficiary is entitled;

5. The trust document must prohibit the beneficiary from having direct access to the trust funds (e.g.., the Trustee has complete discretion to make distributions of trust funds on the beneficiary's behalf;

6. In general, an SNT that is established or created by an individual who is legally responsible for: the disabled beneficiary(e.g.., the parent of a disabled child underage 18) must contain pay-back provisions to reimburse the State for government funds expended on behalf of the disabled beneficiary.

Recommendations

As a trusts and estates lawyer, I have drafted and reviewed many trusts for

the disabled individuals, both before and after the enactment of the New York and federal legislation approving the SNT as a "safe harbor" in which funds may be protected for the benefit of a disabled beneficiary.

Based upon this experience, the following are my recommendations to establish a comprehensive SNT:

1. New York legislation validating SNTs contains specimen trust language. Adopt this language to insure the beneficiary's eligibility for government as provided by the SNT legislation. It's hard to argue about the validity or purpose of a trust that contains the same provisions as those provided in statute.

2. Incorporate in the SNT, optional statutory language which permits the Trustee to distribute funds for a purpose that is also available to the disabled beneficiary through government benefits, if the Trustee determents that the beneficiary's needs are better served by using trust funds for that purpose. This is protective of the disabled beneficiary in case government programs are inadequate.

3. Provide for the Trustee to purchase a residence for the disabled beneficiary, if the Trustee believes that is appropriate.

4. Include an "escape hatch" in a third party SNT, allowing the Trustee to &-tribute the trust funds to an individual (say, a sib-ling and/or, the disabled beneficiary) if, in the future, SNT legislation is revoked,; narrowed or amended in any way which threatens the beneficiary's security, eligibility for government benefits or endangers the trust fund.

5. Choose your Trustee (or co-trustees)wisely; this person or the entity (such as a bank)will have a great deal of influence on the quality of life of the disabled beneficiary, and will be responsible for investing the funds wisely.

Estate Planning

From an estate planning perspective, a third party SNT is an essential piece of a comprehensive estate plan for the parents and grandparents of a disabled heir.

If parents or grandparents wish to provide for a disabled individual, the establishment of a third party SNT is overwhelmingly preferred to an outright disposition or gift that would necessitate the creation of a self settled SNT, because the trust remainder of a third party SNT is not subject to the self-settled SNT "payback" requirement to reimburse the State. Clearly, on the death of a disabled heir, the parents or friends who provided for him or her would prefer to have the remaining trust funds, if any, distributed to their other children, grandchildren, another individual or charity of the creator's choice.

In order to fund a third party SNT, a life insurance policy may be obtained to enhance the inheritance of the disabled individual, who may have greater need for a larger inheritance than his or her independent siblings. If estate taxes are a concern, a life insurance trust may be set up to avoid estate taxation on the insurance proceeds; however, the requirements to avoid gift taxation on a life insurance trust may affect the beneficiary's eligibility for government benefits.

If a self-settled SNT is being set up for someone who is incompetent, particularly if it will hold a large sum of money, estate planning techniques should be considered to protect the trust remainder from estate taxation on the death of the disabled beneficiary. A disabled individual should be afforded the same opportunities to minimize estate taxes as a competent person.

Estate planning, with Court approval, is an acceptable purpose to be undertaken by an incompetent person's guardian, so long as the lifetime needs of the disabled beneficiary are provided for and the State's pay-back is not jeopardized.

Further, the family of a disabled person with a self-settled SNT may also set up a third party SNT to provide for the disabled beneficiary only if the self-settled SNT is exhausted, thereby preserving the third party trust remainder for their chosen remainder beneficiaries.

Susan S. Brown, Esq. is a member of Glassman & Brown, LLP, a White Plains [NY] law firm. Ms. Brown specializes in tax and estate planning, guardianship and elder law, estate litigation and estate and trust administration.