550 Forest Avenue Suite 205
Timothy M. Vogel, Esq.
Matthew R. Dubois, Esq.
Elder Law Q&A
When to Use Supplemental Needs Trusts for the Disabled and the Elderly
What constitutes a "Supplemental Needs Trust" or a "Special Needs Trust" (hereinafter "SNT")? How are SNTs appropriately drafted to comply with Federal and Maine law? How can a SNT protect and shelter funds for your disabled client, or for the disabled children of your elderly clients? Most important, when is it necessary for you to advise your clients regarding the availability and use of SNTs?
By M. Dubois
Maine Lawyers Review
Know When to Use an SNT
Considering the recent disciplinary action in Board of Overseers v. Brown (Me No. BAR-01-6, 10-25-02), every Maine attorney should be able to identify the circumstances when a SNT should be considered. In Brown the attorney failed to advise the need for or to draft a SNT causing the loss of an heir's Medicaid (now called 'MaineCare') long-term care financial assistance upon her receipt of proceeds from her deceased sister's estate. Maine attorneys who advise disabled or elderly individuals or their families must be aware of their obligation to consider the use of SNTs. Though it may be the highpoint of the representation, your obligation to your client does not end upon obtaining the large litigation settlement or inheritance distribution check.
SNTs are trusts established to provide funds for the "supplemental needs" of a "special" beneficiary. They are established because of a variety of beneficiary circumstances including physical or mental disability, need for expensive medical or long-term care, or inability to manage finances. Though different types of SNTs can be established for any individual, they are usually established for the purpose of preserving public benefits which are based on financial need or disability. The beneficiary may be receiving an insurance settlement, a litigation award, life insurance proceeds, or an inheritance. Regardless of the source of funds the goal remains to provide for the supplemental needs of the beneficiary, enrich and improve the quality of their life, without a corresponding loss of public benefits.
Public Benefits Affected By Receipt of Assets
Receipt of a settlement award or inheritance can reduce or eliminate a variety of public benefits including Social Security, Medicaid, and subsidized housing. Use of SNTs must be considered whenever a client or a client's beneficiaries or devisees are receiving any of these types of public assistance.
SSI benefits are a monthly income benefit calculated on the basis of need; in order to qualify for SSI a recipient must be impoverished and have limited income. Receipt of SSI benefits also automatically qualifies the recipient for companion MaineCare eligibility. Any receipt of assets or increase in income will cause a reduction or loss of SSI benefits.
SSDI benefits are work related disability based benefits. Anyone with sufficient Social Security work credits who becomes disabled may receive SSDI benefits. Because they are work related, SSDI benefits themselves do not have financial eligibility requirements and will not be affected by a receipt of assets or an increase in income. However, SSDI recipients are often also receiving SSI and MaineCare benefits. SSDI recipients who have sufficient income or assets that they do not qualify for SSI may still qualify under state guidelines for companion MaineCare assistance.
MaineCare for an elderly client may also be financing that individual's expensive long-term care costs in addition to medical costs. Therefore, as seen in Brown, it is important to know and advise clients regarding the effects of their estate plans on their intended devisees. Do they have elderly or disabled devisees who must be concerned about receiving an inheritance or life insurance benefit?
A third kind of needs based assistance which can be affected by increases in income and receipt of funds is Housing and Urban Development (HUD) based housing assistance. Public housing subsidies are often a part of the disabled client's support network. Such benefits can be reduced or eliminated by increases in income. See 24 CFR fi5.609(c) for HUD regulations on what is considered exempt from consideration as "income" to a recipient.
Fundamental SNT Provisions
There are a variety of concepts, based in traditional trust principles, the Social Security Regulations and The Omnibus Budget Reconciliation Act of 1993 (hereinafter "OBRA '93"), which are fundamental to an SNT. Some depend on how the trust is funded; i.e. - is the trust a grantor or third party trust?
The first is the concept of limiting the form of distribution and the "availability" of trust income and assets. All SNTs must contain spendthrift provisions. Trustee discretion to make cash distributions of income or principle will make funds in trust "available" for payment of 3rd party creditor's, including public assistance providers. Distributions for support or maintenance in cash or in-kind to the beneficiary should be strictly prohibited by the document. However, the concept of availability goes much further in limiting trustee discretion than standard spendthrift provisions.
In order for a grantor SNT to not be considered available and qualify as exempt, the discretion of the trustee must be sufficiently limited so that the assets and income of the trust may not be used for support expenses which would otherwise be covered through public assistance. The terms of the trust should prohibit the State from being able to force the Trustee to make distributions to provide for a beneficiary's support. 42 USC fi1396p(d)(3)(B). See Clifton B. Kruse, Jr., Third-Party and Self-Created Trusts, American Bar Association (2002 ed.), p.52. The trustee's discretion should be limited to payment of third party vendors for non-support goods or services. Further, it is prudent to have language strictly prohibiting any distribution by the trustee, in any form, which would disqualify the beneficiary for public assistance for which they might otherwise be eligible.
In addition to limiting the form of distribution, a SNT must state the discretion of the trustee as to the purpose of the expenditures. Grantor SNT expenditures are only for "supplemental" needs and are not for support or maintenance, defined to include "food, clothing and shelter" and related expenses. This is known as the strict, or SSI standard. Cynthia L. Barrett, Esq., Special Needs Trusts, presentation materials, National Academy of Elder Law Attorneys Symposium, April 2001, Vancouver, Canada, p8.
It should be noted that MMAEM fi3330.24 is written to discourage use of revocable trusts in Maine. Assets in revocable grantor trusts are expressly made "available" by the section. But even with third party grantors, the section only refers to the treatment of the irrevocable third party trust. It should be possible to establish a third party revocable SNT where the grantor has no support obligation for the beneficiary as long as the trustee's discretion as to the purpose of distributions is limited according to the strict standard. However, considering the poor treatment of revocable trusts by the Maine Department of Human Services in other areas, and the language of fi3330.24, it is clearly superior to create an irrevocable SNT as part of a larger financial plan for a disabled individual.
The establishment, existence, funding, or distributions from any grantor SNT not expressly authorized by 42 USC fi1396p(d)(4) and Maine Medical Assistance Eligibility Manual (MMAEM) fi3330.24 will disqualify a beneficiary for public assistance.
Though a variety of self-settled irrevocable trusts qualify as SNTs, only two types currently comply with both Social Security and MaineCare guidelines. For purposes of MaineCare, a sixty month "look back" period applies to transfers to or from a grantor trust with strict limits on the discretion of the trustee, MMAEM fi3330.24(Trusts Established by the Individual)(IV)(B)); this extends the period of financial documentation which must be provided to the Maine Department of Human Services, when the beneficiary is applying for MaineCare assistance, from three to five years. The current system of allowed grantor SNTs was created by Congress in OBRA '93, its subsequent amendments, and rulemakings. Many types of grantor trusts previously used in estate and long-term care planning were rendered unusable by OBRA '93. See Kruse, p.14.
The first type of allowed grantor SNT is generally referred to as the "(d)(4)(A)" personal disability trust. 42 U.S.C. fi1396p(d)(4)(A). The requirements of this section provide that funds received and deposited to a qualifying trust will not be treated as available and that the transfer will not be treated as a disqualifying transfer. This section requires that the beneficiary be disabled (under Social Security disability requirements) and be under age 65. The age requirement makes this trust unavailable to elderly clients. Though this is considered a grantor trust, because it is established for a disabled person, the grantor must be a parent, grandparent, legal guardian, or a court. If a related proceeding is not already in progress, a single transaction authority proceeding may be brought in Probate court pursuant to 18-A MRSA fi5-409 to establish the trust. Finally, the trust must contain a provision requiring the trustee to repay the State for any medical assistance (MaineCare) provided upon the death of the beneficiary. This type of trust is approved under MMAEM fi3330.24(Trusts Established by the Individual)(V)(A).
The second type of allowed grantor SNT is generally referred to as a (d)(4)(C) "pooled trust". 42 U.S.C. fi1396p(d)(4)(C). This section also provides that funds received and deposited to a qualifying trust will not be treated as available and that the transfer will not be treated as a disqualifying transfer. The pooled trust created by this section requires that the beneficiary be disabled (under Social Security disability requirements). The trust must be established and managed by a non-profit organization. Separate accounts must be maintained for each beneficiary and a parent, grandparent, legal guardian, or a court must establish the sub-account in the trust. Again, if a related proceeding is not already in progress, a single transaction authority proceeding may be brought in Probate court pursuant to 18-A MRSA fi5-409 to establish the trust sub-account. Finally, the trust also must contain a State re-payment provision. This type of trust is approved under MMAEM fi3330.24(Trusts Established by the Individual)(V)(B).
The repayment provision requirement of (d)(4)(C) pooled trusts has been of some contention in Maine and nationwide. The language of the statute states that "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 . . ." reimbursements for medical expenditures. OBRA '93 fi13611(b) as codified at 42 USC fi1396p(d)(4)(C)(iv). This language has been interpreted according to its plain meaning in some states as giving discretion to the establishing non-profit organization and/or trustee of the trust to retain whatever amount they choose from funds remaining in a trust account upon the death of the beneficiary as is necessary for both the maintenance of the trust and for the benefit of its remaining disabled sub-account holders. However in some states, trustees have come to an accommodation with their State medical assistance agency regarding what percentage of funds remaining in the sub-account on death may be kept by the trust and what percentage must go for repayment of medical assistance provided the State. In many states, the inability to obtain a court decision enforcing the plain language of the statute or to work out an accommodation with the State Medicaid agency means that there is not a pooled trust available for disabled recipients of public assistance.
Third Party Trusts
Third party settlors, not in need of public assistance themselves, have greater discretion in that they can establish SNTs for disabled individuals without including provisions for repayment of State medical expenditures. A beneficiary can be elderly (over 65). In addition, the establishment of a third party SNT may not be discoverable under the expanded sixty-month "look back period" (MMAEM fi3330.24) for grantor trusts which have not made support distributions within that period. The look back does not apply to assets in which the beneficiary/recipient has no interest.
Third party SNTs may be established as inter-vivos or testamentary trusts by any party, without a support obligation for the beneficiary. The exception to this rule would be that a spouse may not create an inter-vivos SNT for their own spouse for purposes of qualifying for MaineCare assistance; the assets of the trust would be considered available to the couple. Because 42 USC fi1396p(d)(3)(B) construes availability within the confines of traditional trust law, the terms of the trust will govern what distributions the trustee can make to the beneficiary without making the corpus of the trust available.
However, the same strict purpose standard, of food, clothing, or shelter, applies to distributions made to the beneficiary of a third party SNT. Any direct cash distributions or distributions for support or maintenance according to this standard will be treated as income to the beneficiary, reducing their public benefits accordingly. See also MMAEM fi3330.24(Trusts Established for the Individual by Someone Else) which mirrors the Social Security requirements of 42 USC fi1396p(d).
As a result, it is generally best to draft third party SNTs with the same form and strict purpose restrictions on trustee discretion as are required to make grantor trusts qualify as Social Security approved SNTs. This will preserve the trust for the supplemental care of the beneficiary and for the remaindermen of the trust. If the Trustee understands the limits of her distributive duties she will make no expenditures or distributions which could be countable as income to the beneficiary or which must be reported to the relevant public agency.
It is important to note that both individual and institutional trustees of self settled and third party SNTs must be educated regarding appropriate form and type of distributions; never for food, clothing, or shelter related expenses. Not only should explicit examples of appropriate expenditures and distributions be included in the trust document, but also attorney oversight of trustee actions may be appropriate. For this reason, filing of regular accountings, approved by the Probate Court pursuant to 18-A MRSA fi7-201 and related, are most appropriate for SNTs. Particularly where the Maine Department of Human Services will be entitled to reimbursement from a grantor SNT, such regular accountings will provide opportunity for notice and hearing to the Department and limit an otherwise broad post death review of trust expenditures.
Supplemental Needs Trusts are a valuable tool for Maine attorneys assisting clients in preserving settlement funds or inheritances for disabled individuals while allowing them to maintain their network of public benefits. Maine practitioners, particularly those concentrating in litigation and estates, should be able to identify the need for a SNT, and procure a trustee and counsel to establish this important tool for maintaining the independence of disabled individuals, in preserving settlement funds or inheritances for disabled individuals while allowing them to maintain their network of public benefits. Maine practitioners, particularly those concentrating in litigation and estates, should be able to identify the need for a SNT, and procure a trustee and counsel to establish this important tool for maintaining the independence of disabled individuals.
Vogel & Dubois