Source: http://www.mayberrylawfirm.com/SNT
Timestamp: 2017-08-21 13:40:58
Document Index: 402710841

Matched Legal Cases: ['§1396', '§1396', '§1382', 'art;\n6', '§ 1396', '§1382']

Special Needs Trusts - McLean Estate Plan
Special Needs Trust PLUS
Estate Planning for the Disabled[1]
Planning for persons with disabilities typically includes qualification for all eligible federal and state public benefits including, but not limited to, Social Security Income [SSI], Social Security Disability Income [SSDI] and Medicaid. Pubic benefits are often “means –tested.” Qualification rules limit the income and countable assets [“resources”] of the applicant.
Special needs trusts (SNTs) are a favored approach for planning for minor and adult children with disabilities. SNTs:[2]
A. Don’t jeopardize government benefits which typically have a “means-test”.
B. Provide a legal structure for prudently managing the disabled child’s resources.
C. Obviate inheritance conundrums by avoiding probate and permitting distribution of the remainder after the death of the disabled person.
II. Types of SNT
The source of the funding of a special needs trust determines its type and rules:
A. Third-Party Trusts
A third-party trust is a trust established by someone other than the beneficiary or his/her spouse. These trusts may be inter vivos or testamentary. Testamentary trusts are created from the estate of the testator. The assets that go into the trust can be subject to Virginia Medicaid estate recovery if the testator received benefits during their lifetime.[3] The requirements for a third party trust are as follows:
1. Beneficiary Must Lack Control
Trust assets are only attributed to the beneficiary to the extent they are made available to the beneficiary.[4] Thus a trust permitting its beneficiary to revoke and/or control the use of the trust res shall mean the trust is a countable resource for SSI purpose. Moreover, mandatory payments to the beneficiary are considered a countable resource.
The solution to this lies with the beneficiary’s lack of control:
“(I)f an individual does not have the legal authority to revoke the trust or direct the use of the trust assets for his or her own support and maintenance, the trust principal is not the individual’s resource for SSI purposes.” [Similarly], “if a trust is irrevocable by its terms and under state law and cannot be used by an individual for support and maintenance, it is not a resource.” [5]
2. Types of Third-Party Special Needs Trusts
a) Discretionary Needs Trusts
Trust actions are in “the sole and exclusive control of the trustee,” and are referred to as discretionary trusts. The trustee’s control is without limitation over the amount and purpose of trust distributions. This type of trust is not counted as a resource for the beneficiary because they have no rights at all regarding the trust assets.[6]
b) Supplemental Needs Trusts
The terms of Supplemental Needs Trusts expressly state “distribution guidelines’ which are binding on the trustee. The guidelines are tailored to providing distributions that meet the needs of the beneficiary as determined by the nature of the disability.
The trust may supplement, but not supplant or be a substitute for state benefits, without jeopardizing the ability of the beneficiary to have both the benefits of the trust and pubic benefits.
After the death of the special needs beneficiary, the remainder of a third party trust may be distributed without limitation to any person for any purpose with reimbursement to the state of benefits paid to the disabled person during their lifetime.[7]
B. Self-Settled Trusts [also known as first-party trusts, self-funded trusts, payback trusts, or self-settled trusts]
Self-settled trusts are funded with property that already belongs to the disabled person before it is placed into the trust, such as a legacy, malpractice lawsuit recovery, or gift. These trusts permit Medicaid, SSI, and SSDI qualification but have strict resource limits. For example an individual may not have countable assets in excess of $2,000[8] outside of a qualified special needs trust.[9] For immediate Medicaid eligibility, the disabled person may transfer assets in excess of the $2,000 into a self-settled SNT.
C. Types of self-settled trusts:
1. The Qualified under 65 Disabled Trust
Transfers to a disabled person without FMV compensation are treated as gifts; thus countable towards the resource limitations of Medicaid. A disabled person under age 65 pursuant to 42 U.S.C. §1396p(d)(4) may create a trust whose assets are exempt from asset transfer rules provided the following are met:
a. Irrevocability
The trust must be irrevocable.[10] If the beneficiary receives SSI benefits, this requires more than including a provision stating that the trust is irrevocable.[11]
b. Trust Creator Not the Disabled Person
The trust must be created by a parent, grandparent, legal guardian, or by court order by a person who has legal standing to do so.[12] Without legal standing the trust may be declared invalid. An agent to a durable power of attorney generally has such standing; otherwise a court of competent jurisdiction may grant legal standing.
c. Trust Assets
The trust must only contain the beneficiary’s resources; and no assets can be transferred to the trust after the beneficiary reaches 65.
Only a person under the age of 65 who is disabled at the time the trust is created may be the beneficiary of the trust.
The person must be disabled as defined in the Social Security Act[13].
With self-settled trusts at the death of the beneficiary, the remaining trust assets “pay-back” the state for the total medical assistance paid on behalf of the individual by the State.[14] Amounts in excess of the “pay-back” amount may go to any designated remainder beneficiaries.
42 U.S.C. §1396p(d)(4)(C) permits “pooled trusts” for beneficiaries with special needs; so named because many beneficiaries “pool” their resources to optimize management, often by nonprofits, and return on investment. These pooled trusts are available to disabled persons of no matter what their age; however, if the beneficiary of the trust is over age 65 then Medicaid and SSI penalties may be assessed.[15]
The requirements for pooled trusts are as follows:
a. Funded with the assets of an individual who is disabled as per the Social Security definition (42 U.S.C. §1382c(a)(3)(A)); and
b. Created and managed by non-profit organizations.
The non-profit organization creates a master trust document and a joinder agreement that provides for sub-accounts to be pooled for investment purposes, adopt the trust agreement terms, and acknowledge the beneficiary’s special needs.[16] The sub-accounts are for each special needs person or beneficiary.
Accounts in the trust are established solely for the benefit of individuals who are disabled. The account can be created by the disabled individual, a parent, a grandparent, a legal guardian, or a court. Remaining corpus can stay in the trust as long as it remains open. However when the trust ends, it must repay the state an amount equal to medical assistance paid to the beneficiary. Remaining assets after that can be distributed to the designated beneficiaries.
III. The Trustee
Selecting the appropriate trustee is key to the trust fulfilling its purpose of aiding a special needs beneficiary. Empathy and knowledge of the special needs person is highly desirable. Hiring counsel to guide the trustee is critical to ensure the legal requirements are met. Thus it is often helpful to use a trustee familiar in dealing with a lawyer.
A. Caution When Parents or Family Members are Trustee
Having a parent as trustee makes it more difficult to show the beneficiary has no control over distributions.
Income withdrawn from the trust to pay for a disabled child’s living expenses might be counted as income to the family if the child lives at home and participates in the living expenses.
A conflict of interest can arise: family trustees are not always in the optimal position to determine what is in the best interest of the disabled child as opposed to what is in the best interest of the family. This can lead to family conflict.
B. Legal and Fiduciary Duty
A trustee is held to a fiduciary duty; and a fiduciary’s obligations include:
1. Conforming to the terms of the trust;
2. Refraining from engaging in self-dealing or co-mingling of assets;
3. Keeping the beneficiary informed;
4. Protecting the trust property;
5. Making the trust property productive by investing in reputable investment vehicles that earn a reasonable rate of return, while refraining from engaging in too risky investments. Following the provisions of the Uniform Prudent Investor Act is usually a good start;
6. Enforcing claims and defending the trust; and
7. Paying all taxes when due.
A trustee is liable for losses, and is generally held to the highest standard of care under state law. The trusts can include “exculpatory clause” limited damages to acts in bad faith and an “indemnification clause” reimbursing the trustee for any losses incurred by virtue of the trusteeship.
Addendum[17]
Examples of trusts, for sources see FOOTNOTE 2 to text
[1] CLE “Estate Planning for the Disabled” by Richard Mayberry, www.MayberryLawFirm.com. I acknowledge the valuable assistance of my colleague Nicholas Dibben, Esquire in this writing.
[2] For income taxation of SNT, beyond the scope of this writing, see VSB Newsletter at http://www.vsb.org/site/sections/trustsandestates/spring2011b
[3] 42 U.S.C. 1396p (b). 12VAC30-20-140. (Note: If the testator is potentially subject to a large estate recovery it would be advantageous to transfer the assets into a trust created under 42 USC 1396p(d)(4)(A) during the settlor’s lifetime. If the transfer is not made during the third party’s lifetime the Medicaid will recover from the estate before the testamentary third party trust is created.)
[4] Va. Medicaid Manual § M 1140.400
[5] Social Security Administration Operating Manual [POMS] SI 01120.200D
[6] Va. Medicaid Manual § S 1120.200 D.m
[7] 42 U.S.C. § 1396p (d)(2)(A) specifically only applies to trusts created “other than by will.” Thus testamentary trusts are exempt from Medicaid estate recovery. Inter vivos revocable trusts are considered to be a resource for the settlor and thus are not a resource for the beneficiary. 12 VAC 30-40-300(F); Va. Medicaid Manual § M 1450.550
[8] Medicaid Manual, S1110.100 (B)
[9] POMS SI 01120.203 (D), Exceptions to Counting Trusts Established on or after 1/1/00
[11] The language required is outlined in POMs SI 01120.203B.1.h
[12] POMS SI 01120.203 (D)
[13] 42 U.S.C. §1382c(a)(3)(A)
[14] 12VAC30-20-141
[15] For Medicaid see: Va. Medicaid Manual § M1450.550 (D). For SSI see: SI 01150.121 (A)(3)
[16] 42 U.S.C. 1396 p (d)(4)(C)
[17] These examples are found in POMs SI 01120.200L
Subpages (5): Funding Individualized Education Plan Permissible Distributions Resources Special Needs Trust PLUS