Using Special Needs Trusts
Comfort for Parents, Dignity for Disabled Children

By I. Jay Safier

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NOVEMBER 2005 - As more developmentally disabled individuals have been deinstitutionalized and become active residents in their communities, estate planning for parents of these individuals has received greater focus. A special needs trust may be an effective planning tool for the devolution of parents’ assets when they have one or more beneficiaries deemed to have a permanent disability. Although beyond the scope of this article, such a trust may also be used for estate planning between spouses.

New York Law

Section 7-1.12 (a)(4) of the New York State Estate Powers and Trust Law (EPTL) defines a disabled person as someone—

(i) with mental illness, developmental disability or other physical or mental impairment; (ii) whose disability is expected, or does, give rise to a long-term need for specialized health, mental health, developmental disabilities, social or other related services; and (iii) who may need to rely on government benefits or assistance.

Parents of disabled children have to deal with strong, complicated emotions, and also with other issues, both short- and long-term, that must be reassessed every three to five years. They must also revisit the corresponding estate plan. One of the first questions to answer involves determining the child’s mental capacity—his ability to make decisions concerning his life and whether he can function on his own in society. For example, can a mentally retarded individual maintain a job, collect a salary, and manage his expenses? Based on the conclusions of the mental health professionals engaged by the family, the parents may determine that if a child is to be the beneficiary of a sizable sum of money, he may not have the capacity to properly manage it.

Another consideration is whether the disability can be measured definitively or is subject to variations. If it is definitive, then with proper treatment and supervision the person might be able to maintain a stable level of existence. For example, someone suffering from a mental illness may become stabilized if properly supervised and treated. The degree to which recurrence of the disease has lessened will affect the recommendations offered by the professionals involved in the parents’ estate planning.

Finally, the parents must consider if their child, despite the disability, can care for herself. This goes beyond the foregoing issues, because it concerns whether the person can live independently rather than in a group home. The impairment and its impact on the individual’s independence must be considered when developing an estate plan.

Unique Situation

Parents of a disabled child face a unique dilemma because their child is eligible to receive public assistance, such as Supplemental Social Security Income (SSI). An estate planner must be aware that, in order to avoid losing SSI benefits, there should be no direct distribution of the parents’ assets to the child. The planner should be aware of the planning device known as a special needs trust (SNT), which provides benefits to the beneficiary (i.e., the disabled individual) that go beyond those covered by federal and state benefits. This is a quality-of-life issue, because the SNT should supplement, not supplant, the government benefits received.

A review of the other alternatives for the direct and indirect bequeathing of assets will reveal why an SNT is preferable. First, parents can disinherit the disabled child. While this action would ensure the child retains the ability to receive government benefits, parents who realize that nothing has been designated to improve their child’s quality of life beyond such government subsidies generally avoid it. Second, parents can choose to leave money outright to the disabled child. Federal and state governments will use this amount, however, to offset services that would have been covered by SSI or Medicaid. Only after the inheritance is exhausted will government benefits resume. Finally, parents can leave funds to a sibling or another third party with instructions that the money be used for the disabled child. Parents hope this action will place a moral obligation on the third party to oversee the disabled child. The assets are not segregated, however, and can be available for use by this third party or accessed by this individual’s creditors in the event of a divorce or personal bankruptcy.

The SNT is unlike other commonly used trusts. Trusts are generally used to help the beneficiary maintain a standard of living, but that is not the case with the SNT. The New York State EPTL section 7-1.12(e) suggests language to be incorporated into the trust document so it meets the criteria necessary to qualify as an SNT. The statute specifically details that a clause should contain verbiage that: “the trust assets be used to supplement, not supplant, impair, or diminish, any benefits or assistance of any federal, state, county, city, or other governmental entity for which the beneficiary may otherwise be eligible or which the beneficiary may be receiving.” It also suggests that the grantor charge the trustee with language in the trust agreement stipulating that: “it is the grantor’s desire that, before expending any amounts from the net income and/or principal of this trust, the trustee consider the availability of all benefits from government or private assistance programs for which the beneficiary may be eligible and that, where appropriate and to the extent possible, the trustee endeavor to maximize the collection of such benefits and to facilitate the distribution of such benefits for the benefit of the beneficiary.” This language makes it clear that an SNT is established to provide a secondary source of funds to pay for “extras” and should not be used to provide for the health and maintenance of the individual, something not normally associated with a traditional trust.

Furthermore, the trust document should clearly state that the trust’s assets must never be directly accessible by the disabled person; the trustee alone should have exclusive management over the income and principal of the trust. Only the trustee should be permitted to make distributions on behalf of the disabled person, and those payments should be made directly to the provider of the services.

The following are examples of the kinds of services covered by the income and assets of an SNT:

  • Entertainment, such as attending concerts or ball games, traveling, and vacations;
  • Payments to a nurse or other attendant to accompany the beneficiary while traveling;
  • Private transportation for these
    purposes;
  • Athletic training and similar services not covered by public programs; and
  • Special medical and dental care not covered by Medicaid.

The Two Types of Trusts

SNTs fall into two categories. The first is created with assets of the disabled person. This is often the case when an award is made to the disabled individual or this person is the beneficiary under another person’s will. A parent, relative, or court-appointed guardian, rather than the disabled person, acts as the grantor. A popular spin on this type of trust is the pooled trust, which can be managed only by a not-for-profit organization. Separate subaccounts are established for each participating SNT and respective beneficiary, but the funds are pooled for purposes of investment and administration. Management fees are arranged with the organization. Besides managing the assets and making distributions on behalf of the beneficiary, the organization may also act as a personal advocate for the disabled beneficiary. Upon the beneficiary’s death, any undistributed trust assets may be distributed to Medicaid as reimbursement for advances made, and the balance may be paid to the remainder beneficiaries.

The second type of SNT is one established by a third party, such as parents or grandparents. This category of SNT may be funded during the lives of the grantors or upon their deaths, using cash, life insurance, or a combination of assets. Upon the beneficiary’s death, the remaining assets are distributed to the designated persons listed in the trust agreement or will of the grantor. If the document is properly prepared, none of the remaining funds will be reimbursed to the state for the previously advanced Medicaid payments. Because an SNT is irrevocable, family members might be more apt to fund such a trust through a will rather than during their lifetimes. Because a disabled beneficiary is limited by law to the amount of assets he can own directly, the third-party SNT is generally created under a will that has a “spillover” provision of assets into the SNT, rather than one which names the disabled beneficiary as a direct recipient.

Choosing a trustee is another difficult task. Generally, the parents look first to the disabled child’s siblings or to close family members who can be relied upon to carry out their wishes after they die. Given the responsibilities of this trust, however, some families prefer naming an institutional trustee. Depending upon the facts and circumstances of the case, the grantor may choose both. An institution may be sought to handle the financial aspects of the trust, such as handling the investing and other financial duties, while an individual is selected as the personal advocate for the disabled beneficiary. If only an individual is named, then the trust agreement should include a clause allowing for the appointment of an institutional cotrustee if the financial responsibilities become too onerous.

Change Anticipated

The benefits of a special needs trust are the result of laws that may change in the future. Given the intention of President Bush to make changes in Social Security, for example, it is possible that the U.S. Congress and state legislatures may look again at the interrelationships of public benefits and the SNT. With that in mind, the trust agreement should always provide that the trustee, as a last resort, should be empowered to terminate the trust if legislative guidelines change.


I. Jay Safier, CPA, is a principal in the New York accounting firm of Rosen Seymour Shapss Martin & Company LLP. He is a member of the board of directors of Crystal Run Village, Inc., a not-for-profit corporation that owns and operates group homes for the developmentally disabled in New York State. He can be reached at jsafier@rssmcpa.com.

This article was originally published in the April 2005 issue of Investment Advisor and is adapted with permission of the publisher and author.

 

 

 

 

 

 

 

 

 

 

 

 


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