Supplemental Needs Trusts
© 2003, Jay J. Sangerman, PLLC
Supplemental Needs Trusts ("SNTs") are trusts which are established for persons with disabilities and/or persons receiving government assistance (e.g., SSI, Medicaid) without disqualifying or otherwise making such persons ineligible for such government benefits. There are, in fact, two distinctly different forms of SNTs: one created with funds supplied by a third person (e.g., a parent or grandparent) and the other, which is funded with the beneficiary's own funds. This article will briefly describe the attributes of both kinds of SNTs.
Third-Party Trust (Generally Used in Estate Planning)
The third-party trust has been popular for some time. New York courts have upheld such trusts since approximately 1978 and most courts of other states have similarly upheld such trusts to be excludable sources of funds for the disabled. The third-party trust was codified by the New York State Legislature in 1994. Furthermore, the Social Security Administration, in its Procedural Operating Manuals (POMs), holds that such trusts, when properly drafted, do not effect eligibility for SSI or Medicaid.
Any individual, other than the beneficiary, can place funds into the SNT for the supplemental and luxury needs of an individual with disabilities or an individual who is otherwise receiving government benefits (the "Beneficiary"). The Beneficiary does not have any right to require the distribution of principal or income from the trust. The trust pays for supplemental needs and luxury items not provided by government entitlements (SSI, Medicaid), such as medical or dental treatment not covered by the government benefits, cosmetic care, vacations, travel companions, etc. The trustee is instructed to pay the providers directly. The trust distributions are, therefore, not deemed to be income to the Beneficiary and the Beneficiary will not be rendered ineligible for SSI and/or Medicaid.
The third-party trust can be inter vivos (i.e., established while the creator/donor of the trust is alive) or testamentary (i.e., established under the creator/donor's last will and testament). If an inter vivos trust is established, it is often funded with life insurance. This may present an added tax and estate planning benefit to the creator/donor. Secondly, the inter vivos trust can give the creator/donor the comfort of knowing that the trust has been approved by the Social Security Administration. If the Beneficiary is a recipient of Supplemental Security Income, then the trust should be submitted to the Social Security Administration for approval. A letter of approval takes approximately six months to receive. Often, parents establish an inter-vivos trust, fund it partially, and then complete the funding under their last wills and testaments or by designating the trust as the beneficiary of a life insurance policy.
Parents frequently inquire whether the SNT should be created or, alternatively, whether an inheritance should be distributed to others to pay for the needs of the individual with disabilities. We recommend that giving funds to a third party is usually not prudent, both from an emotional viewpoint and a tax viewpoint. Placing funds into an SNT, on the other hand, creates a concrete plan of financial care for the Beneficiary. The creator/donor specifies in the trust agreement how the funds are to be utilized and who is to receive the funds upon the Beneficiary's death. On the other hand, if a sibling, for instance, holds funds for another sibling, there can be a discrepancy as to the true owner of the money, family problems can be created, and it is unclear whether the holder of the funds can use the money for him/herself, even if only temporarily. The holder of the funds will also have to pay income tax on the monies and possibly encounter gift and estate tax consequences. To the contrary, placing the funds into an SNT sets forth a clear, concise plan of care.
It is most important to remember that the Beneficiary's own funds must not be placed into this type of SNT. If the Beneficiary's funds are placed into the SNT, Medicaid will have the right of recoupment for monies expended from part of the corpus of the SNT upon the Beneficiary's death. Moreover, Medicaid may argue that it has the right of recoupment against the entire trust. Lastly, the Beneficiary can never have any right to personally receive the funds in the SNT; nevertheless, the trustee can be authorized to terminate the SNT and distribute the assets, including a distribution to the Beneficiary, keeping in mind that any distribution to the Beneficiary will certainly make the Beneficiary ineligible for government entitlements. However, it is possible that at the time the SNT is created, the creator/donor of the SNT will not know whether the Beneficiary will forever require government entitlements. The creator/donor will, therefore, want to give the trustee the authority to terminate the SNT irrespective of the impact upon the Beneficiary's entitlements.
First-Party Trust (Generally Used in Personal Injury Litigation Settlements)
The second type of trust was introduced by the Omnibus Budget and Reconciliation Act of 1993. New York State enacted the law, which is found in Social Services Law § 366 and in the Estates Powers and Trusts Law § 7-1.12. This second type of trust is created with the individual's own assets and, when properly drafted, will protect the assets, permitting the individual to receive both Medicaid and SSI benefits, assuming that the individual is otherwise eligible. Medicaid will be able, and must have the right, to recoup against the trust upon the Beneficiary's death. The use of the funds in this type of trust is also for the supplemental and luxury needs of the Beneficiary.
This second type of trust is often used for the placement of settlement proceeds (personal injury and medical malpractice actions) into such trust by court order. If the recipient of funds from a settlement or court award of funds is a minor or incapacitated, then there usually needs to be a court order authorizing the creation of the SNT and the placement of the individual's funds into the SNT. In the case of an award from a personal injury action or medical malpractice action, Medicaid argues that it has a lien on the proceeds for Medicaid payments made prior to the establishment of the trust. Medicaid's claim is questionable and the issue is currently being litigated.
Where there is an expected award from a personal injury or medical malpractice action prior to settlement or compromise order, the responsible relatives or the individual should consult with an attorney well versed in entitlements so that an SNT can be part of the settlement or compromise award.
Jay J. Sangerman, PLLC is a law firm, rated as preeminent in its fields of practice by Martindale Hubbell, which concentrates in estate planning and administration, with an emphasis on estate planning for the disabled and the elderly. Jay J. Sangerman, PLLC represented the petitioners in the landmark cases of Sutton, McCullough, Klapper, and Fishman developing new law in estate planning for the disabled and the elderly. We are frequent speakers in these areas of law. For personal injury and medical malpractice attorneys, we have prepared an outline on the developing law of Supplemental Needs Trusts, which is available upon request. Attorneys admitted to practice in New York, Florida and New Jersey. Mr. Sangerman is an Assistant Adjunct Professor in the New York University School of Professional Studies.
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