Supplemental Needs Trusts for the Settlement of Tort Claims, Estate Planning and Protection of Inheritances. © 2003
by: Jay J. Sangerman
Please note that although this Outline includes New York State law in addition to federal law, the general issues presented here are applicable under the laws of most jurisdictions. It is important to always check the laws of the jurisdiction in which the trust is being created, as well as the jurisdiction in which the beneficiary resides and/or intends to reside in the future.
A. Purpose of a Supplemental Needs Trust.
1. A Supplemental Needs Trust (“SNT”) is an important estate planning tool that permits the maximization of funds to be made available to a disabled individual without being counted as a resource for Medicaid and Supplemental Security Income eligibility, except in so far as funds are distributed directly to the beneficiary or the trustee pays food, clothing and/or shelter for the beneficiary. See Social Security Income, Procedural Operations Manual at SI 00835.510; SI 01120.200; SI 01120.201, SI 01120.203 and EM-00067 (see www.sangerman.com for copies of the SSI rules and procedures) N.Y. Est. Powers and Trusts Law § 7_1.12. In tort actions, without the placement of the award into an SNT, a plaintiff with high medical and personal expenses may receive no real economic benefit from the tort award because of the need to use the award to pay for benefits the government previously provided. This outline is intended to offer a "nuts and bolts" analysis of the use of SNTs and to encourage their use in estate planning and in the settlement of tort actions whenever a plaintiff may be permanently disabled and does not have sufficient funds to pay for his/her future needs.
2. The funds in an SNT, subject in certain instances to court approval, may be used for educational and cultural programs, social services, companions and aides, purchase of a residence for the disabled person, home modifications, a specialized van for transportation and medical care should the Trustee determine that the provision of care from Medicaid is insufficient. SNTs can enhance the quality of a disabled person's life. In the absence of an SNT, a tort award or large inheritance may be fully depleted by medical and personal care needs, leaving the disabled individual with no source of funds to maintain and/or enhance his/her quality of life, except for those services provided by government programs to the indigent. See 42 U.S.C.A. § 1396 (West 1992) and N.Y. Soc. Serv. Law § 366(2)(b)(iii) (McKinney 1992 & Supp. 1998), which state that Medicaid cannot consider as available income or resources the corpus or income of such a trust.
B. Basic Types of Supplemental Needs Trusts.
1. Third-Party SNT. SNTs which are funded by one other than the beneficiary (e.g., by a parent, grandparent, sibling, whether inter vivos or testamentary), herein referred to as “Third-party SNTs”); and
2. First-Party SNT. SNTs funded with a Beneficiary's own funds, e.g., savings, inheritance, lawsuit proceeds, herein referred to as “First-party SNTs.” There are two primary types of First-party SNTs:
(a) Those established for a disabled individual under the age of 65 where the State has a right to be reimbursed for Medical Assistance paid upon the death of the beneficiary. See 42 U.S.C.A. § 1396p(d)(4)(A); N.Y. Soc. Serv. Law § 366(2)(b)(iii) (McKinney 1992 & Supp. 1998); and
(b) Those established for a disabled individual with a nonprofit association where a separate account is maintained for each beneficiary of the trust, but for purposes of investment and management, the trust pools the funds in these accounts (hereinafter referred to as a “Pooled-SNT”). To the extent that any amounts remaining in the Beneficiary's account upon the death of the Beneficiary are not retained by the Pooled-SNT, the State has a right to be reimbursed for medical assistance paid upon the death of the Beneficiary. See 42 U.S.C.A. § 1396p(d)(4)(C). Unlike the (d)(4)(A) trust, the (d)(4)(C) pooled trust can be funded by an individual 65 years or age or greater; however, such funding will be treated as a transfer for purposes of determining Medicaid eligibility. The "pooled trusts" are especially appropriate for the under 65 person at a time that the funds in the trust are quite small.
The essential difference between the Third-party SNT and the First-party SNT is that in the case of the First-party SNT, Medicaid must have a right of reimbursement against the remaining corpus of the SNT upon its termination (ordinarily at the death of the beneficiary) up to the amount expended by Medicaid. See New York State Social Services Law §366(2)(b)(ii)) and 42 U.S.C.A. §1396p(d)(4)(A). This is not the case with the Third-party SNT, in which the Grantor can designate any person or entity as the ultimate remainderman of the SNT.
II. Third-party Supplemental Needs Trusts.
1. The Third-party SNT was first recognized by the New York State courts in 1978 (see Matter of Escher, 94 Misc. 2d 952 (1978); 75 A.D.2d 531; 426 N.Y.S.2d 1008 (1980); aff’d. 52 N.Y.2d 1006; 438 N.Y.S.2d 293 (1981)) and courts of most other states have since recognized such Third-party trusts to be excludable sources of funds for disabled persons with regard to public benefit eligibility. In Matter of Escher, the Court of Appeals affirmed a decree of the Surrogate's Court holding that the trustee of a testamentary trust did not abuse her discretion as a matter of law in refusing to invade the corpus of a discretionary trust to pay the claim of a psychiatric facility, where both courts below found that the testator's intent was that the corpus be invaded only for health related emergencies and that routine expenses for day-to-day care be paid only from income.
2. Matter of Escher was codified in New York in 1993. See N.Y. Est. Powers and Trusts Law § 7_1.12 (5)(i)(McKinney Supp. 1996), which contains excellent drafting language for SNTs, useful in any jurisdiction. See also Social Security Income, Procedural Operations Manual at SI 00835.510; State Medicaid Manual, Part 3 ((HCFA Pub. 453) at §3259.7, entitled Exceptions to Treatment of Trusts Under Trust Provisions.
B. Basic Principles of the Third-Party Supplemental Needs Trust.
1. Any individual, other than the beneficiary, can place funds into a properly drafted Third-party SNT for the special and luxury needs of a disabled beneficiary without affecting such beneficiary’s eligibility for government benefits. 42 U.S.C.A. §1382c (a)(3) defines disability as follows:
An individual shall be considered to be disabled for purposes of this subchapter if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for continuous period of not less than twelve months (or, in the case of a child under the age of 18, if he suffers from any medically determinable physical or mental impairment of comparable severity).
2. The Third-party SNT can be inter vivos (i.e., established during the grantor 's lifetime); provided, however, that a spouse cannot create a Third-party SNT for the other spouse for whom s/he is legally responsible. The Third-party SNT can be testamentary for any individual (i.e., established under the grantor's last will and testament), in which case there are no restrictions upon a spouse's creating an SNT for the other spouse. See 42 U.S.C.A. §1396p(d)(2)(A):
(d) Treatment of trust amounts. (1) For purposes of determining an individual's eligibility for, or amount of, benefits under a State plan under this title [42 U.S.C.A. @ 1396 et seq.], subject to paragraph (4), the rules specified in paragraph (3) shall apply to a trust established by such individual. (2) (A) For purposes of this subsection, an individual shall be considered to have established a trust if assets of the individual were used to form all or part of the corpus of the trust and if any of the following individuals established such trust other than by will: (i) The individual. (ii) The individual's spouse. (iii) A person, including a court or administrative body, with legal authority to act in place of or on behalf of the individual or the individual's spouse. (iv) A person, including any court or administrative body, acting at the direction or upon the request of the individual or the individual's spouse.
3. Neither the beneficiary's (nor the beneficiary’s spouse’s) funds should be placed into a Third-party SNT. If the beneficiary's funds are placed into a Third-party SNT, the State will have a right to recoup monies expended from part of the corpus of the Third-party SNT upon the beneficiary's death. Moreover, the State may argue that it has the right of reimbursement against the entire trust upon the termination of the trust up to amount expended by Medicaid because it is, in fact, a First-party trust.
C. Advantages of an inter vivos SNT over a testamentary SNT.
1. General Benefits.
Maintenance of Medicaid and SSI benefits. Opportunity to have SNT effective during lifetime of parents.
2. Medicaid Planning.
Creates opportunity for Medicaid planning by parents of disabled child. No penalty periods applied for transfers into an SNT for legally disabled child (adult or minor) (as defined in section 1614(a)(3)) [42 USCS @. §1382c (a)(3). See also NYCRR §360_4.4(c)(iii):
3. Estate Tax Planning. The inter vivos SNT can be a useful mechanism in estate tax planning. See 2001 Tax Act.
(a) Although under Crummey (Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968), a donor can receive an annual exclusion for a gift into a trust, so long as the trust beneficiary has a right of withdrawal for a sufficient period of time of the funds, such Crummey powers may not be appropriate for an SNT.
(b) appreciation of assets will be removed from the parents' estates, thereby reducing any estate taxes.
(c) The SNT can be made the beneficiary of a Charitable Remainder Trust. See Letter Ruling 199903001, October 19, 1998, CCH IRS Letter Rulings Report No. 143, 01_27_99, which states:
4. Life Insurance. The SNT can be funded with life insurance, so as to create a source of funds for the disabled individual upon the parents' (or other's) deaths, which can be especially appropriate for families of moderate means.
III. First-Party Supplemental Needs Trusts.
A. Funds to which the Beneficiary is Entitled.
A First-party SNT is one in which the beneficiary's own funds (e.g., from a tort award, inheritance or funds in the beneficiary’s name, e.g., pension monies or other savings) are placed into the trust. This generally will occur when (i) the disabled individual is to receive an award in a tort action or (ii) the disabled individual is to receive an inheritance and no provision was made by the testator for the placement of the funds into a Third-party SNT.
B. Supplemental Needs Trust Enacting Legislation.
Federal legislation authorizing the First-party SNT is found in the Omnibus Budget Reconciliation Act of 1993. See 42 U.S.C.A. § 1396p(d)(4) (West Supp. 1998). In 1994, New York State enacted enabling legislation, consistent with the federal law. N.Y. Soc. Serv. Law § 366(2)(b)(iii) (McKinney 1992 & Supp. 1998) states:
SSI Rules Effective for Trusts After January 1, 2001SSI
On December 14, 1999, the President signed into law the Foster Care Independence Act of 1999. Although SNTs were previously permitted under the SSI rules, this law, which becomes effective for trusts established after January 1, 2001, codifies the SNT rules for SSI. Pursuant to this law, the Social Security Administration set forth in its Procedural Operating Manual its regulations pertaining to Supplemental Needs Trusts. The Social Security Administration also set forth the mechanism to evaluate when a Supplemental Needs Trust conforms to the rules and, therefore, excludable as an asset for purposes of eligibility. See also www.sangerman.com for these rules. In part, the POMs state:
C. The Two Basic Types of First-Party Supplemental Needs Trusts.
1. The Supplemental Needs Trust for one under 65 Years of Age. 42 U.S.C.A. §1396p(d)(4)(A); and N.Y. Soc. Serv. Law §366(2)(b)(iii) (McKinney 1992 & Supp. 1998) .
(a) Unlike the Third-party SNT, to the extent that amounts remaining in the beneficiary’s account upon the death of the beneficiary are not retained by the trust, the trust pays to the State from such remaining amounts in the account an amount up to the total amount of Medical Assistance paid on behalf of the beneficiary under the State plan. See 42 U.S.C.A. §§ 1396p (d)(4)(A)
(b) Although the First-party SNT contains the assets of the disabled beneficiary, the legislation requires that it be established by a parent, grandparent, legal guardian of the individual or a court. Under federal and state law, the First-party SNT cannot be established by the beneficiary him/herself, but it can be directly funded by the beneficiary. See 42 U.S.C.A. §§ 1396p (d)(4)(A).
(c) As to qualification for Medicaid eligibility, there is no period of ineligibility imposed for a transfer into a First-party SNT when the beneficiary is under 65 years of age at the time of the transfer.
(d) Duration of Supplemental Needs Trust: Pursuant to federal and State laws (see 42 U.S.C.A. §1396p(d)(4)(A)), a valid First-party SNT requires that Medicaid receive all amounts remaining in the SNT at the death of the beneficiary, up to the total value of all Medical Assistance paid on behalf of the beneficiary. However, it may be possible to draft the trust to terminate prior to death of the beneficiary.
2. The Pooled Supplemental Needs Trust.
42 U.S.C.A. §1396p(d)(4)(C)
Must be established and managed by a nonprofit association. Unlike the (d)(4)(A) trust (the under 65 year old SNT), the (d)(4)(C) pooled SNT can be funded by an individual 65 years of age or greater; however, in the case of a beneficiary over the age of 65 years, the transfer into the trust will be considered a transfer for no consideration, creating a period of ineligibility for institutional Medicaid.
IV. Establishment of The First-Party Supplemental Needs Trust for a Minor or Mentally Incapacitated Individual .
A. No Court Order Necessarily Required.
If the prospective beneficiary is a competent adult and has a parent or grandparent willing and able to be the creator of the SNT, then there should be no need to make an application to a court to order the creation of the SNT and to transfer assets into the SNT.
B. Court Order Required.
1. In the case of a minor or mentally incapacitated individual, whether or not the parents are living and are the natural guardians of such individual, a court order is always required to transfer the individual's assets, including a transfer into an SNT. If there is no living parent or grandparent, a court order is necessary in order to create a Supplemental Needs Trust irrespective of whether the beneficiary is competent or not.
2. Prior to seeking the establishment of an SNT within a guardianship proceeding, the practitioner should ascertain whether jurisdiction is properly within the Supreme Court or Surrogate's Court.
(a) By means of a guardianship proceeding pursuant to New York State Mental Hygiene Law §81.21(a)(6).
(b) By means of a special proceeding for a competent beneficiary without the requisite relative to create the trust.
(c) By Means of the New York State Surrogate's Court Procedure Act Articles 17 or 17A.
(d) By Means of New York State Civil Procedure Law and Rules §§1206 and 1207.
V. Drafting Provisions for the Supplemental Needs Trust.
A. With the exception of the Medicaid reimbursement provisions, the language of the First-party and Third-party SNT is essentially the same.
B. The New York State Estates, Power and Trust Law Section ("EPTL") 7_1.12 provides the essential provisions for inclusion in an SNT. Although the language provided in EPTL 7_1.12 is not required, it is useful to consider the use of such language in the drafting of the SNT. Judge Leone, in Matter of Morales, N.Y.L.J., July 28, 1995, at 25, col. 1 (Sup. Ct. Kings Co.), presented a fully drafted First-party SNT, which is required, without change, by certain courts. It is this author's position that any SNT must be customized for each situation, taking into account the medical status and age of the beneficiary, the family circumstances, the choice of trustee, the requirements of the Medicaid agency of the particular county and the requirements of the court. However, technically, Matter of Morales, presented to the Court without change, complies with the law, but may not comply with the individual Medicaid district’s wishes for the provisions of a Supplemental Needs Trust.
11. Specific Issues Relating to the First-Party Supplemental Needs Trust.
(a) Medicaid's Right to Reimbursement.
The regulations at 18 NYCRR 360_4.5 provide:
(d) A trustee of a trust described in subparagraph (i) of this paragraph, in order to fulfill his or her fiduciary obligations with respect to the State’s remainder interest in the trust, must:
(a) notify the appropriate social services district of the creation or funding of the trust for the benefit of an MA applicant/recipient;
(b) notify the social services district of the death of the beneficiary of the trust;
(c) notify the social services district in advance of any transactions tending to substantially deplete the principal of the trust, in the case of a trust valued at more than $100,000; for purposes of this clause, the trustee must notify the district of disbursements from the trust in excess of the following percentage of the trust principal and accumulated income: five percent for trusts over $100,000 up to $500,000; 10 percent for trusts valued over $500,000 up to $1,000,000; and 15 percent for trusts over $1,000,000;
(d) notify the social services district in advance of any transactions involving transfers from the trust principal for less than fair market value; and
(e) provide the social services district with proof of bonding if the assets of the trust at any time equal or exceed $1,000,000, unless that requirement has been waived by a court of competent jurisdiction, and provide proof of bonding if the assets of the trust are less than $1,000,000, if required by a court of competent jurisdiction.
Consider including these notice provisions in the SNT in order to direct and provide guidance to the trustee to best assure compliance with the applicable law.
(b) Remainder Interest.
Courts generally require that the remainder interest in the SNT, after payment to the State Medicaid agency, is to the beneficiary's estate and not to any named persons.
VII. Tort Settlements.
A. Medicaid Lien.
1. New York caselaw holds that Medicaid can enforce its full lien against the proceeds of the personal injury action, which must be paid prior to the establishment of the Supplemental Needs Trust. Cricchio v. Pennisi, 90 N.Y.2d 296, 660 N.Y.S.2d 679, amended sub nom. Link v. Town of Smithtown, 1997 N.Y. LEXIS 2309 (N.Y., July 1, 1997). See also Robin K. Calvanese v. Anthony J. Calvanese et. al. Suffolk County Department of Social Services, Respondent; Patricia Callahan, Appellant. 93 N.Y.2d 111; 710 N.E.2d 1079 (1999) (the Court held that all settlement proceeds were available to satisfy Medicaid liens, and that transfer of settlement funds from a tort recovery to a supplemental needs trust could be made only after the liens were paid); Arvil Samerson et al., Respondents, v. Mather Memorial Hospital et al., Defendants, 90 N.Y.2d 870; 684 N.E.2d 271; 1997 N.Y. LEXIS 4809; 661 N.Y.S.2d 822 (1997) (the Medicaid lien must be established prior to the establishment of the Supplemental Needs Trust with settlement proceeds before satisfying a Medicaid lien). The recovery of the Medicaid lien prior to the finding of the Supplemental Needs Trust also applies to infants. See the joined appeals before the New York State Court of Appeals, (i) Abraham Gold, an Infant, by Kathleen A. Gold, His Mother and Natural Guardian, et. al., Appellants, v. United Health Services Hospitals, Inc., et. al., Defendants. New York State Office of Mental Retardation and Developmental Disabilities, et. al., Respondents, and (ii) Kimberly Santiago, an Infant, by Benital Santiago, Her Mother and Natural Guardian, et. al., Appellants, v. Craigbrand Realty Corp. et. al, Defendants. New York City Department of Social Services, Respondent, 95 N.Y.2d 683; 746 N.E.2d 172; 723 N.Y.S.2d 117; 2001 LEXIS 526 (2001).
VIII. The Supplemental Needs Trust may be funded with a lump sum of case or structured settlement annuity or combination of both. .
Jay J. Sangerman's firm, Jay J. Sangerman, PLLC, is a boutique law firm which practices in the areas of trusts and estates and elder law. The firm is listed in The Bar Register of Preeminent Lawyers published by Martindale-Hubbell. The practice includes estate planning, estate administration and estate litigation; Supplemental Needs Trusts; Medicare Set-Aside Trusts; assisting in the settlement of tort claims by maximizing the settlement through effective estate planning; guardianship proceedings; Medicaid planning and eligibility; and hospital discharge planning and nursing home placement. The firm performs fiduciary accountings for bank trust departments, executors and trustees and guardians. Our clients include individuals, hospitals and nursing homes, banks and stock brokerage companies and insurance companies. The firm practices law in New York, Florida and New Jersey.
Jay J. Sangerman, PLLC has successfully argued landmark cases in elder law and estate planning and has been responsible for changes in the law, e.g., In re Klapper, in which the Court permitted the transfer of an incapacitated person’s assets by Court order; In re Sutton, in which the Surrogate’s Court authorized a Supplemental Needs Trust for a minor where it was unclear what the minor’s future medical needs would be; In re McCullough, in which the Surrogate’s Court permitted the late renunciation by a guardian of an incapacitated individual’s interest in an estate and the reversal of the deed to real property which had been previously transferred; The Commissioner of the Department of Social Services of the City of New York v. Fishman, in which an action against a community spouse for Medicaid paid for the institutionalized spouse was dismissed for reasons that Medicaid fails to follow basic elements of contract law in such suits, changing the manner in which Medicaid must litigate such cases. Fishman was reversed on appeal by DSS to the First Department and is currently before the First Department on reargument. The firm has also successfully changed both federal and state Medicaid laws relating to the exemption of Holocaust Reparations; and In the Matter of the Appointment of a Guardian of the Person and Property of Claire Spingarn, an Alleged Incapacitated Person, in which we represented the alleged incapacitated person to avoid the appointment of petitioner as guardian. This case is a landmark case pertaining to the award of attorney’s fees in a guardianship matter.
Jay J. Sangerman teaches Estate Planning and Gift Taxation at New York University School of Continuing and Professional Studies. Mr. Sangerman speaks extensively on Estate Planning, Elder Law and planning for disabled adults and children. His audiences include bar and trade associations, as well as hospital, medical and social work staffs, and various social, educational, professional and philanthropic groups. Mr. Sangerman's articles have been published by the Practicing Law Institute, the New York State Bar Association, the National Academy of Elder Law Attorneys, the CPA/Law Forum and the Central Conference of American Rabbis. His hospital discharge article is cited in 42 U.S.C.A §1395x. Mr. Sangerman contributed an article in “Alzheimer’s Disease, Questions and Answers,” published by Merit Publishing International.
Among Mr. Sangerman’s professional memberships are the the Supreme Court Committee of the New York County Bar Association, New York State Bar Association Section on Trusts and Estates, the Association of the Bar of the City of New York Committee on Legal Problems of the Aging and the National Academy of Elder Law Attorneys. Mr. Sangerman is a founding member of the Elder Law Section of the New York State Bar Association, served on its board and was Chair of the Elder Law Section Committee on Practice and Ethics. Mr. Sangerman a Trustee of the Jewish Board of Family and Children's Services, Inc. and the Post Graduate Center for Mental Health. He is a Fellow of the Brookdale Center on Aging.
Mr. Sangerman graduated cum laude from Yeshiva University's Benjamin N. Cardozo School of Law, where he was a member of Law Review, and an Alexander Fellow which provided him the opportunity to be a fulltime student clerk to Chief Judge Jack B. Weinstein of the United States District Court, Eastern District of New York. Upon graduation, Mr. Sangerman worked for Fried, Frank, Harris, Shriver & Jacobson, where he handled complex litigation matters. Before attending law school, Mr. Sangerman was a practicing Reform Rabbi. Mr. Sangerman was ordained in 1971 from the Hebrew Union College Jewish Institute of Religion in Cincinnati, Ohio. Mr. Sangerman earned his Bachelor of Arts Degree in Philosophy from the University of Illinois in 1968. Mr. Sangerman is admitted to practice in New York, Florida and New Jersey.
JAY J. SANGERMAN, ESQ.