Supplemental Needs Trusts for Disabled Beneficiaries - Module 5 of 6
Module 5: Supplemental Needs Trusts for Disabled Beneficiaries
Supplemental
Needs Trusts: Introduction
A
supplemental needs trust is a legislation-created device that allows
chronically disabled people to benefit from income and asset-based government
assistance programs even when they might have other sources of revenue.
The
theory behind the allowance of this device is that if a disabled person’s
assets were required to pay for his or her healthcare, there would be nothing
left to pay for quality of life expenses. In addition, the risk to eligibility
for government assistance would otherwise greatly discourage gifts to people
with disabilities.
A supplemental needs trust can be established as a
lifetime or testamentary trust. That is, a supplemental needs trust can be set
up either while the grantor is living or by a will, to take effect only upon
the death of the client. The latter is a common approach for people who have
disabled children. Rather than giving the disabled child an inheritance
outright, thereby potentially threatening her eligibility to receive government
assistance, the disabled child’s share can be held for her benefit in a
testamentary supplemental needs trust.
The provision establishing that one child’s share is held
in trust need not even specifically reference the disabled child. It can be
worded something to this effect:
Upon
my death, my assets shall be distributed among my children, in equal shares,
provided, however, that if any beneficiary under this Paragraph suffers from a
severe and chronic disability, then his or her share shall not be distributed
to the beneficiary outright, but shall instead be held for the benefit of the
beneficiary in a “supplemental needs trust.”
Although this type of trust is respected by courts even without statutory recognition, many states have given formal statutory recognition to supplemental needs trust. In addition, since the passage of the Omnibus Budget Reconciliation Act of 1993, there is also federal statutory recognition of supplemental needs trusts.
Supplemental
Needs Trusts: The Provisions
The exact language by which a supplemental needs trust
should be established may vary from state to state. However, a common thread is
that the trust must evince a clear intent that the trust assets are intended to
supplement, and not supplant, government assistance to the disabled
beneficiary. In addition, the trust may be used only to pay expenses that would
not otherwise be paid for by government assistance programs.
Assets
held by a supplemental needs trust are typically used to pay for things like
the education, clothing and luxuries of the beneficiary (such as travel,
entertainment, etc.). The trustee may be given discretion within this range of
possible uses of the trust funds, as long as the trustee may not pay for
expenses that government assistance would pay for.
The trust may give the trustee the authority to invest the trust assets and to manage the trust in the same manner that trustees are given these authorities in other trusts. Beyond the clear intent that the trustee cannot use assets that would supplant government benefits, there is little to distinguish supplemental needs trusts from other trusts.
Third
Party Supplemental Needs Trusts
A third party supplemental needs trust is the most
straightforward of the supplemental needs trusts. A supplemental needs trust is
a “third party” trust when assets other than those assets belonging to the
disabled person are used to fund the trust. To keep its status as a third-party
trust, no funds belonging to the disabled person nor funds to which the
disabled person is entitled should be used to fund the trust. These trusts are
usually funded by relatives or friends of the disabled beneficiary.
Testamentary trusts, because they are funded by the will of another person, are
inherently third-party supplemental needs trusts.
A testamentary supplemental needs trust can be quite
broad in the discretion it gives to the trustee, while protecting the
eligibility of the disabled beneficiary. As long as the disabled beneficiary
does not have control over the distributions from the trust (i.e., the decision
is made by an independent trustee), the assets in the trust should not be
considered an available resource to the disabled beneficiary.
Third
party supplemental needs trusts have little to distinguish them from other
trusts. But it is critical that the trust avoid directing the trustee to pay
for the healthcare (or similar) expenses of the beneficiary. Where the trustee
is directed to pay for the healthcare or general support needs of the disabled
beneficiary, or perhaps even where the trustee has the authority to do so, it
is possible that a local department of social services will consider the trust
assets to be an available resource to the beneficiary.
(It is
important to note, however, that even when the provisions of a third-party
trust do not conform to the supplemental needs trust requirements, courts do
have the authority to reform a provision to turn a trust into a qualifying
supplemental needs trust.)
Self-Settled
Supplemental Needs Trusts
Things become more complex when supplemental needs trusts
are established using the assets of the disabled person. Despite the general
rule that assets held in self-settled trusts are vulnerable to the creditors of
the grantor, federal law exempts the assets in qualifying supplemental needs
trusts from inclusion as “available resources” to the disabled person who
funded it. In other words, if a disabled person has resources that would make
him ineligible for government assistance, he can create a supplemental needs
trust, use those assets to fund it and then continue receiving government
assistance.
Unlike the third-party trust, however, there are strict
conditions that must be followed for a self-settled trust to gain the benefits
of the supplemental needs trust. First,
the trust must be established by the disabled person himself, by the disabled
person’s parent, grandparent or legal guardian or by a court on behalf of the
disabled person. Second, the trust must be established for a disabled person
under the age of 65.
Third and most significantly, the trust must contain a
“payback provision.” This provision must dictate that, upon the death of the
disabled beneficiary, any money that is remaining in the trust will be used to
reimburse the state that paid healthcare costs for the beneficiary up to the
amount that it paid on behalf of the beneficiary. Any amount left over after
this reimbursement can be distributed in accordance with whatever the trust
dictates (such as to the beneficiary’s heirs).
Essentially, the government is saying, “we’ll let you
(the disabled person) keep your money for supplemental expenses for yourself,
but if there’s anything left over when you don’t need it anymore (because
you’re dead), we get first crack at whatever is left.” The logic behind this is
simple. The purpose of the supplemental needs trust statute was to allow the
disabled person quality of life that would be lacking if he used his resources
to pay for healthcare expenses. The purpose was not to allow the disabled
person’s family a windfall while the government pays for the healthcare of the
disabled person.
Without this provision, a trust will not qualify as a
supplemental needs trust. In that case, the entire trust corpus will be
considered an available resource to the disabled beneficiary, likely
disqualifying him from receiving many types of government assistance.
If there are self-settled and third-party supplemental needs trusts for the benefit of the same disabled beneficiary, the family of the beneficiary should be advised that if any family member wants to give substantial gifts to the disabled person she should do so by giving gifts to the third-party trust. This applies both to lifetime gifts and to testamentary gifts. This is because the third-party trust does not require a payback provision. Placing a gift in a self-settled trust likely means at least some of that money wind up going to the government.
Supplemental
Needs Trusts with other Beneficiaries as well as the Disabled Beneficiary
The next question is whether a supplemental needs trust
may benefit additional parties in addition to the disabled person.
A standard trust, whether a qualifying supplemental needs
trust or not, can benefit a disabled person as well as other third parties. As
long as the trustee is not required (and certainly, if she is not allowed) to
pay expenses for the disabled beneficiary that would be covered by government
assistance, the trust should not adversely affect the disabled person's
benefits eligibility.
The
same applies to supplemental needs trusts. Although supplemental needs trusts
typically benefit only the disabled person, there is probably no problem with
having other people potentially benefit from a third party supplemental needs
trust. In addition, third parties may (and should) be named as remainder
beneficiaries if trust assets remain after the death of the disabled
beneficiary.
A self-settled supplemental needs trust is another
matter. Since the state must, by definition, have a remainder interest in the
trust assets, it naturally has an interest in preserving the trust assets. As
such, in a self-settled supplemental needs trust no person other than the
disabled beneficiary may be a beneficiary of the trust, whether during the
lifetime of the disabled beneficiary or after his death, until the payback
provisions has been satisfied. Once the government has been reimbursed, any
additional trust assets can be distributed to the heirs of the beneficiary.
Miller
Trusts
The “Miller Trust,” also referred to as a “qualified
income” trust, serves as a vehicle to hold income of a disabled person that
exceed the state limit for Medicaid eligibility. This excess income, from
pensions or social security for example, can be placed into the Miller Trust
rather than being held by the beneficiary and thus allow such person to become
eligible for Medicaid. Named after a 1990 case of the same name, the Miller
trust was codified as part of the 1993 Act that also established the rules for
the self-settled supplemental needs trust discussed above.
Unlike a self-settled supplemental needs trust, this
device can be used by people over the age of 65. As with a self-settled
supplemental needs trust, the trust assets may be used for the benefit of the
disabled person, but only in a manner that will supplement, and not replace,
payments that would otherwise be made by government assistance.
Also, as in a self-settled supplemental needs trust,
Miller trusts require payback provisions. So, any trust assets that are unused
at the time of the beneficiary’s death must be used to reimburse the state for
expenses paid on behalf of the disabled person. Any assets remaining after this
reimbursement to the state may be paid to the disabled person’s heirs, in
accordance with the wishes of the disabled person.
Pooled
Trusts
An alternative to the Miller Trust, also codified by the
1993 Act, is the “pooled trust” that is held by a non-profit organization. The non-profit organization establishes a
trust where many disabled people “pool” their resources to be managed and
invested by the organization. Separate
accounts must be held for each disabled beneficiary and the separate account
must be set up by the disabled beneficiary or the parent, grandparent, or legal
guardian of the beneficiary (or by a court).
The disabled person can fund his or her account in the
pooled trust with assets (to lower his or her asset holdings below the Medicaid
asset threshold) and may consistently fund the pooled trust with income that
exceeds the Medicaid income threshold. The trust may use the disabled
beneficiary’s account to pay for the beneficiary’s supplemental needs.
Unlike the self-settled trust and the Miller trust, after
the death of the disabled beneficiary, there is some flexibility in the pooled
trust. The trust has two choices.
The
first choice is to have the beneficiary’s account simply remain with the
non-profit organization and be used as part of its general (non-profit)
purpose. In that case, the state need not be reimbursed for the care provided
to the beneficiaries. Alternatively, the trust may pay back the state for the
care it provided to the beneficiary and the remainder may then be distributed
to the heirs of the beneficiary.
In most states, there is no age restriction on who can fund a pooled trust. This is an important advantage over the self-settled supplemental needs trust. Of course, the downside to the pooled trust strategy is that the organization maintains control over the trust assets and must approve expenditures on behalf of the beneficiary. With a supplemental needs trust it will be recalled, a family member or friend can be the trustee and thus control distributions to the disabled beneficiary.
Transfers
to Supplemental Needs Trusts
In addition to the other statutory requirements of a
supplemental needs trust, to be eligible for this transfer exemption the trust
must be for the “sole benefit” of the disabled beneficiary. This is true even
if the transfer is made to a third-party supplemental needs trust.
Since a supplemental needs trust to which such a transfer
is made is generally a third-party supplemental needs trust, a “payback”
provision is not required. However, the gift to the supplemental needs trust
must be such that, based on sound actuarial data, it is reasonable to expect
that the amount transferred will be spent over the course of the life of the
disabled beneficiary. Any gift over and
above this amount will cause a period of ineligibility for Medicaid
purposes. The reason for this is simple.
If the gift is large enough that it will not likely be spent during the
lifetime of the beneficiary, the entire gift cannot reasonably be considered
for the benefit of the disabled beneficiary.
Unfortunately, this only works to avoid the transfer
ineligibility period. If a person has consistent income exceeding the Medicaid
income limitations, transferring the excess income to a supplemental needs
trust for the benefit of a disabled child will not prevent it from being
considered available to the recipient of the income.
One last possible benefit of transferring assets to a
supplemental needs trust is that some states will not “recover” assets paid by
Medicaid after the recipient’s death if the assets are left to a supplemental
needs trust for the benefit of a disabled beneficiary. Typically, if Medicaid
pays for the care of a person who dies with assets, the state is required by
law to seek recovery of the expenses that were laid out. However, at least one
state, California, expressly states that it will not seek to recover such
assets if they are left to a supplemental needs trust.