Estate Planning for the Disabled^[1]

       I.            Purposes

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.

                             d.                  Age

 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.

                             e.                   Disability

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. 

2.                  Pooled Trusts

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]

The following examples are illustrative of situations that you may encounter. You should not rely solely on the analysis given in the examples in making determinations in a specific case as laws vary from State to State and the language of individual trust documents may provide different results from those given in the example. You can refer to regional instructions, if any, and consult your regional office, as necessary. Also you should be aware of the implications the trust may have for Medicaid eligibility. SI 01730.048 contains instructions on trusts and Medicaid.

The claimant is the beneficiary of a trust established on her behalf by her mother, who is her legal guardian. The money used to establish the trust was inherited by the claimant from her grandmother. The mother is also the trustee. The trust document clearly indicates that the trust may be revoked at any time by the grantor.

Since the grantor may revoke the trust at any time, the trust is a resource to the grantor. In this situation, the child is the grantor (see SI 01120.200B.2.) and the trust is her resource. This is the case because the actions of the mother, as her legal guardian, are as an agent for the child.

·         Situation

The SSI recipient is the beneficiary of an irrevocable trust created by her deceased parents. Her brother is the trustee. The terms of the trust give the brother full discretionary power to withdraw funds for his sister's educational expenses. The trustee uses these funds to pay the recipient's tuition and room and board at a boarding school. The trust document also specifies that $25 of monthly interest income be paid into a separate account that designates the recipient as owner. She has the right to use these funds in any way she wishes. The trust also contains a valid spendthrift clause that prohibits the beneficiary from transferring her interest in the trust payments prior to receipt.

·         Analysis

Since the recipient, as beneficiary, has no authority to terminate the trust established with her parents’ assets or access the principal directly, the trust principal is not her resource. While trust disbursements on a beneficiary's behalf may be income, the disbursements for tuition are not income since they do not provide food or shelter in any form. However, the trust disbursements for room and board are in-kind support and maintenance valued under the PMV rule. The $25 deposits of trust earnings into the recipient's personal account are income when the deposit is made and are resources to the extent retained into the following month. The beneficiary's right to the stream of $25 monthly payments is not a resource because she cannot sell or assign them prior to receiving them because of the valid spendthrift clause. (See SI 01120.200B.16. for a definition of spendthrift clauses.)

·         Situation

The claimant is a minor and the beneficiary of an irrevocable trust established with the child's annuity payment by his father, who is his representative payee. The father is also the trustee. The claimant's brothers and sisters will become the trust beneficiaries in the event of the claimant's death. In the State where the claimant lives, the grantor can revoke the trust if he is also the sole beneficiary. The brothers and sisters are “residual beneficiaries” who become the beneficiaries upon the prior beneficiary's death or occurrence of another event.

·         Analysis

The trust principal is not a resource to the claimant. Under the general rule in SI 01120.200D.2., the trust document provides that the trust is irrevocable. Although the claimant can be considered the grantor of the trust (because the actions of the father as payee are as an agent of the claimant), the trust is not revocable under the rule for grantor trusts in SI 01120.200D.3. because the claimant is not the sole beneficiary.

The trust beneficiary, a 17-year-old SSI recipient, received a $125,000 judgment as the result of a car accident that left him disabled. His mother, as his legal guardian, placed the money in an irrevocable trust for the sole benefit of the recipient with the recipient's sister as trustee. The trustee has absolute discretion as to how the trust funds are to be spent and the trust has a prohibition against the trustee spending an amount of funds that would make the recipient ineligible for Federal or State assistance payments. Applicable State law recognizes the principle that if an individual is both the grantor of a trust and the sole beneficiary, the trust is revocable, regardless of language in the trust to the contrary.

Since the recipient's mother, as his legal guardian, established the trust with funds that belonged to the recipient, it is treated as if the recipient established the trust himself. Therefore, he is considered the grantor of the trust. Since he is also the sole beneficiary of the trust, the trust is revocable and is the recipient's resource, regardless of the language in the trust document. The recipient is ineligible due to excess resources.

·         Situation

The SSI claimant is the beneficiary of a revocable trust established with her father’s assets for her future care. Her father is her legal guardian. The claimant, as trust beneficiary, has no authority to terminate the trust. The CR reviews the trust document to see if the claimant, through her legal guardian, has unrestricted access to the trust principal, whether the trust provides for payments on her behalf or whether the trust principal generates income.

The trust document is very complex and the situation is further complicated by the fact that the claimant's father is grantor, trustee, and her legal guardian. The CR cannot determine whether the trust principal is available to the trust beneficiary through the grantor/trustee.

·         Analysis

Because it is not clear from the trust document whether the father, as legal guardian, “stands in the claimant's shoes” and controls the trust, the CR consults with the RO staff for possible referral through the ARC, MOS, to the Regional Chief Counsel for an opinion.

·         Situation

The recipient is the beneficiary of an irrevocable trust. The trust document indicates that the recipient is the sole named beneficiary and also the grantor of the trust. The document also indicates that there are unnamed residual beneficiaries, the recipient's “heirs.”

·         Analysis

The adjudicator consults regional instructions on State law pertaining to grantor trusts. According to those instructions, a grantor trust may be a resource to the recipient, but the State law is unclear about the effect of the unnamed residual beneficiaries. The adjudicator consults with the RO staff for possible referral through the ARC, MOS, to the Regional Chief Counsel.