Understanding Trusts: Part Two
May 2016 | By Jeffrey G. Abrandt, Esq., Goldfarb Abrandt Salzman & Kutzin LLPThis is the second in a two-part series about trusts – a legal construct in which, to varying degrees, you can divest yourself of ownership of your property but still control how your property is used.
In Part One of this series, we discussed Testamentary Trusts, which are created under a will and do not come into existence until after the creator’s death and the will is probated. We also discussed Inter Vivos Trusts (or Living Trusts), which are created and activated during the life of the creator.
Different types of Inter Vivos Trusts include Revocable Trusts, where the creator (sometimes called the settlor or the grantor) retains power over his or her assets, power to change the trust terms or even the power to terminate the trust during his or her lifetime; and Irrevocable Trusts, where the creator designs the trust, but once executed cannot change its terms.
Certain types of irrevocable trusts called Grantor Trusts are commonly used to protect assets from the ravages of health care costs. Finally, Inter Vivos Trusts (both revocable and irrevocable) can work just like wills and distribute your property to your heirs by avoiding the need for probate – making the distribution of assets after death faster and easier.
We left off in Part One of this series with the area of trusts known as Supplemental Needs Trusts or Special Needs Trusts (SNTs), which refer to trusts that can enhance the life of someone who is disabled without interfering with government benefits that many disabled children, adults and retirees depend on such as Medicaid and Supplemental Security Income (SSI).
The history of Supplemental Needs Trusts began in 1978, when a Bronx judge denied a request by New York State to invade the testamentary trust of Martin Escher to satisfy the cost of providing care for his disabled daughter Marie (who was in a state run institution).
Mr. Escher’s will intended to provide Marie with a trust for her lifetime so that she would be able to purchase items above and beyond the bare necessities herself, as she would never have the ability to make a living.
New York State believed that the Escher Trust should be made available to pay for Marie’s past and current care of which Medicaid was footing the bill. The judge reviewed how modern society now recognizes that people with disabilities need help, and how we are no longer burdened with the idea that public benefits (such as Medicaid and SSI) are charity; instead, they are considered a right.
Thus, the judge held that Mr. Escher could provide his daughter with a trust for emergency needs in addition to the basic needs met by the State.
How Supplemental Needs Trusts Work
Most if not all Supplemental Needs Trusts do not provide an income to the disabled person, but rather permit the Trustee to use his or her discretion to pay for certain expenses.
The Trustee should not provide money directly to the disabled person like an ATM, but rather the Trustee should pay third-party vendors for services or goods provided for the sole benefit the disabled person. Thus, the Trust can only “supplement” the basic needs of the disabled person with goods and services that the disabled person could not otherwise obtain.
Supplemental Needs Trusts have taken on such importance because so many of the government programs that support our elderly and disabled have limits on the amount of income and assets the recipient may hold in his or her name. These types of trusts provide a way to shelter income and assets so that the disabled person can continue to receive government benefits.
Supplemental Needs Trusts can generally be divided into two types: Third Party and First Party SNTs. First Party SNTs are often called “Self-Settled” SNTs and include their brethren – Not-For-Profit Pooled Trusts.
Third-Party Supplemental Needs Trusts
Third-Party Supplemental Needs Trusts are trusts created by a person who has no legal obligation to support the disabled person (i.e., the parent of a child under 21 years old has a legal obligation to support the child, but after the child turns 21, there is no further legal support obligation).
The Third-Party Supplemental Needs Trust must be funded with money not belonging to the disabled individual. It can be established by will or Inter Vivos Trust; however, if by will, the age of the child beneficiary is irrelevant for the testamentary Supplemental Needs Trust.
Since the funds set aside for the disabled person are never his or her property, Third-Party Supplemental Needs Trusts should provide that upon the death of the beneficiary, any remaining trust funds be designated to other family members, friends or charities.
Finally, teachers can fund Supplemental Needs Trusts with qualified retirement accounts by designating a properly drafted Third-Party Supplemental Needs Trust as the beneficiary – thereby protecting the disabled person from receiving the account directly, and insuring that if any of the account is left after the trust is terminated, it can pass to other beneficiaries.
Self-Settled Supplemental Needs Trusts
Self-Settled Supplemental Needs Trusts allow for the protection of a disabled person’s income or assets (such as an annuity or damages award) without disqualifying them for government benefits like Medicaid or SSI.
This branch of Supplemental Needs Trusts traces its roots back to Federal legislation from the 1990s that recognized that the income and asset limitations were so rigorously modest for some benefit programs that people who qualified for programs like Medicaid would not have sufficient funds to pay all their expenses.
Federal law permits only a parent, grandparent, guardian, or court to “establish” a trust with the income and/or assets of a disabled person between 21 and 65 years old that can then be used to pay for goods and services of the disabled person.
An important difference between the Self-Settled Supplemental Needs Trust and Third-Party Supplemental Needs Trust is that at the end of the beneficiary’s life, any remaining money in the Self-Settled SNT first goes to reimburse Medicaid for the cost of the beneficiary’s care; only afterwards can any remaining money in the SNT be paid to the beneficiary’s estate.
Not-for-Profit Pooled Trusts
Not-for-Profit Pooled Trusts are for disabled persons who cannot have a Self-Settled SNT because they are either more than 65 years old and living in the community; between 21 and 65 years old but do not have a parent, grandparent or guardian to establish an SNT for them; or do not wish or cannot afford to petition a court for the establishment of a trust.
Like Self-Settled SNTs, Pooled Trusts can hold income and/or assets so that disabled people can qualify for Medicaid and SSI benefits; in addition, the money deposited into the Pooled Trust can be used for payment of the disabled persons’ goods and services so they can continue living in the community.
The same Federal law that permitted Self-Settled SNTs authorizes not-for-profits entities to create a “pool” of individual SNTs; each SNT is composed of the assets and income of each disabled individual above the eligibility limits for benefit programs such as Medicaid. It is very important that when income is being shielded it must be transferred into the trust each month so it does not appear in the account balance at the beginning of the next month.
Unlike Self-Settled SNTs, any funds left in the Not-for-Profit Pooled Trust at the death of the beneficiary do not go to the state but instead remain in the Pooled Trust to help other disabled beneficiaries.
Those retirees concerned about a spouse, loved one or friend who is disabled should consider creating a Supplemental Needs Trusts in your planning as a way to continue caring for your disabled loved ones without disrupting their entitlement Medicaid or other government benefits.
Jeffrey G. Abrandt is a partner in the law firm of Goldfarb Abrandt Salzman & Kutzin LLP. He is part of the Elder Law supplement to the UFT/NYSUT Legal Service Plan. Mr. Abrandt can be reached at 212-387-8400 or by writing to Goldfarb Abrandt Salzman & Kutzin LLP, Attention: Jeffrey G. Abrandt, Esq., 350 Fifth Avenue, Suite 4310, New York, NY 10118. He can also be reached at 914-397-0900 or by writing to Goldfarb Abrandt Salzman & Kutzin LLP, Attention: Jeffrey G. Abrandt, Esq., 170 Hamilton Avenue, Suite 301, White Plains, NY 10601.
In Part One of this series, we discussed Testamentary Trusts, which are created under a will and do not come into existence until after the creator’s death and the will is probated. We also discussed Inter Vivos Trusts (or Living Trusts), which are created and activated during the life of the creator.
Different types of Inter Vivos Trusts include Revocable Trusts, where the creator (sometimes called the settlor or the grantor) retains power over his or her assets, power to change the trust terms or even the power to terminate the trust during his or her lifetime; and Irrevocable Trusts, where the creator designs the trust, but once executed cannot change its terms.
Certain types of irrevocable trusts called Grantor Trusts are commonly used to protect assets from the ravages of health care costs. Finally, Inter Vivos Trusts (both revocable and irrevocable) can work just like wills and distribute your property to your heirs by avoiding the need for probate – making the distribution of assets after death faster and easier.
We left off in Part One of this series with the area of trusts known as Supplemental Needs Trusts or Special Needs Trusts (SNTs), which refer to trusts that can enhance the life of someone who is disabled without interfering with government benefits that many disabled children, adults and retirees depend on such as Medicaid and Supplemental Security Income (SSI).
The history of Supplemental Needs Trusts began in 1978, when a Bronx judge denied a request by New York State to invade the testamentary trust of Martin Escher to satisfy the cost of providing care for his disabled daughter Marie (who was in a state run institution).
Mr. Escher’s will intended to provide Marie with a trust for her lifetime so that she would be able to purchase items above and beyond the bare necessities herself, as she would never have the ability to make a living.
New York State believed that the Escher Trust should be made available to pay for Marie’s past and current care of which Medicaid was footing the bill. The judge reviewed how modern society now recognizes that people with disabilities need help, and how we are no longer burdened with the idea that public benefits (such as Medicaid and SSI) are charity; instead, they are considered a right.
Thus, the judge held that Mr. Escher could provide his daughter with a trust for emergency needs in addition to the basic needs met by the State.
How Supplemental Needs Trusts Work
Most if not all Supplemental Needs Trusts do not provide an income to the disabled person, but rather permit the Trustee to use his or her discretion to pay for certain expenses.
The Trustee should not provide money directly to the disabled person like an ATM, but rather the Trustee should pay third-party vendors for services or goods provided for the sole benefit the disabled person. Thus, the Trust can only “supplement” the basic needs of the disabled person with goods and services that the disabled person could not otherwise obtain.
Supplemental Needs Trusts have taken on such importance because so many of the government programs that support our elderly and disabled have limits on the amount of income and assets the recipient may hold in his or her name. These types of trusts provide a way to shelter income and assets so that the disabled person can continue to receive government benefits.
Supplemental Needs Trusts can generally be divided into two types: Third Party and First Party SNTs. First Party SNTs are often called “Self-Settled” SNTs and include their brethren – Not-For-Profit Pooled Trusts.
Third-Party Supplemental Needs Trusts
Third-Party Supplemental Needs Trusts are trusts created by a person who has no legal obligation to support the disabled person (i.e., the parent of a child under 21 years old has a legal obligation to support the child, but after the child turns 21, there is no further legal support obligation).
The Third-Party Supplemental Needs Trust must be funded with money not belonging to the disabled individual. It can be established by will or Inter Vivos Trust; however, if by will, the age of the child beneficiary is irrelevant for the testamentary Supplemental Needs Trust.
Since the funds set aside for the disabled person are never his or her property, Third-Party Supplemental Needs Trusts should provide that upon the death of the beneficiary, any remaining trust funds be designated to other family members, friends or charities.
Finally, teachers can fund Supplemental Needs Trusts with qualified retirement accounts by designating a properly drafted Third-Party Supplemental Needs Trust as the beneficiary – thereby protecting the disabled person from receiving the account directly, and insuring that if any of the account is left after the trust is terminated, it can pass to other beneficiaries.
Self-Settled Supplemental Needs Trusts
Self-Settled Supplemental Needs Trusts allow for the protection of a disabled person’s income or assets (such as an annuity or damages award) without disqualifying them for government benefits like Medicaid or SSI.
This branch of Supplemental Needs Trusts traces its roots back to Federal legislation from the 1990s that recognized that the income and asset limitations were so rigorously modest for some benefit programs that people who qualified for programs like Medicaid would not have sufficient funds to pay all their expenses.
Federal law permits only a parent, grandparent, guardian, or court to “establish” a trust with the income and/or assets of a disabled person between 21 and 65 years old that can then be used to pay for goods and services of the disabled person.
An important difference between the Self-Settled Supplemental Needs Trust and Third-Party Supplemental Needs Trust is that at the end of the beneficiary’s life, any remaining money in the Self-Settled SNT first goes to reimburse Medicaid for the cost of the beneficiary’s care; only afterwards can any remaining money in the SNT be paid to the beneficiary’s estate.
Not-for-Profit Pooled Trusts
Not-for-Profit Pooled Trusts are for disabled persons who cannot have a Self-Settled SNT because they are either more than 65 years old and living in the community; between 21 and 65 years old but do not have a parent, grandparent or guardian to establish an SNT for them; or do not wish or cannot afford to petition a court for the establishment of a trust.
Like Self-Settled SNTs, Pooled Trusts can hold income and/or assets so that disabled people can qualify for Medicaid and SSI benefits; in addition, the money deposited into the Pooled Trust can be used for payment of the disabled persons’ goods and services so they can continue living in the community.
The same Federal law that permitted Self-Settled SNTs authorizes not-for-profits entities to create a “pool” of individual SNTs; each SNT is composed of the assets and income of each disabled individual above the eligibility limits for benefit programs such as Medicaid. It is very important that when income is being shielded it must be transferred into the trust each month so it does not appear in the account balance at the beginning of the next month.
Unlike Self-Settled SNTs, any funds left in the Not-for-Profit Pooled Trust at the death of the beneficiary do not go to the state but instead remain in the Pooled Trust to help other disabled beneficiaries.
Those retirees concerned about a spouse, loved one or friend who is disabled should consider creating a Supplemental Needs Trusts in your planning as a way to continue caring for your disabled loved ones without disrupting their entitlement Medicaid or other government benefits.
Jeffrey G. Abrandt is a partner in the law firm of Goldfarb Abrandt Salzman & Kutzin LLP. He is part of the Elder Law supplement to the UFT/NYSUT Legal Service Plan. Mr. Abrandt can be reached at 212-387-8400 or by writing to Goldfarb Abrandt Salzman & Kutzin LLP, Attention: Jeffrey G. Abrandt, Esq., 350 Fifth Avenue, Suite 4310, New York, NY 10118. He can also be reached at 914-397-0900 or by writing to Goldfarb Abrandt Salzman & Kutzin LLP, Attention: Jeffrey G. Abrandt, Esq., 170 Hamilton Avenue, Suite 301, White Plains, NY 10601.