Section Review

Self-settled special-needs trusts for disabled beneficiaries

Mark W. Williamson is a partner in the Boston law firm of Casner & Edwards.
Individuals suffering from disabilities may be partially or completely incapable of self-support. As a consequence, many rely on the various government programs that are available to provide them with the basic amenities of life. Although some such programs are based solely on the disabled status of the individual, many are needs-based. This means that an individual's access to benefits may be restricted or eliminated entirely, if the individual ceases to (or simply doesn't) financially qualify for a given program.

Unfortunately, financial qualification requirements for the needs-based programs are very strict. Many individuals are disqualified even though they possess insufficient resources to comfortably survive. As a consequence, strategies have developed to remove or exempt an individual's own funds from governmental consideration, while preserving them to fund somewhat higher standard of living than the benefits alone would allow.

To address this troublesome issue, so-called "Medicaid qualifying trusts" or "MQTs," were created. These were designed to allow elderly individuals to qualify for Medicaid benefits while continuing to protect their funds for special uses (thus avoiding depletion of such funds, and ultimately saving them for inheritance by the next generation). Predictably, however, there was a legislative response to the "problem" of providing a safe harbor of support by means of such trusts. More than a decade ago, Congress enacted 42 U.S.C 1396p(d)(4)(A), which effectively put an end to such trusts for individuals over the age of 65 (which demographic group, not surprisingly, comprised the vast majority of those who would benefit from them).

However, the federal statutory scheme did carve out a few exemptions to the general prohibition against MQTs, and the planning opportunities that these carve-outs present continue to this day. Trusts designed to utilize these exemptions, called special-needs trusts, or "SNTs," now encourage a (somewhat haphazard) coordination between the individual's personal resources and those provided by public agencies, so that the extraordinary needs of an individual, beyond basic custodial and medical care, may be addressed.

SNT assets may be put to numerous purposes. They may provide aides to assist in the "activities of daily living" ("ADLs"). They may be used to improve living arrangements or buy special services in a long-term care facility. They may provide funds for pleasurable activities, or special prostheses. Almost anything that would augment the quality of life of the disabled individual could conceivably be paid for by an SNT.

There are two broad categories of SNT, depending on whether the disabled person or someone else provides the source of funds for the trust. This article addresses SNTs that are funded by the disabled individual's own assets. If the disabled individual obtains assets that would otherwise exceed the financial qualification limits and disqualify the individual from the governmental benefits on which he or she might rely, these special trusts can remove such assets from needs-based calculations and free them to pay for "special needs."

There are many situations in which a qualifying individual might have his or her benefits suddenly jeopardized by an unexpected infusion of cash or assets. For example, an injured accident victim might win a lawsuit. Without the availability of an SNT, the victim might be forced to forego seeking legal recourse. Although such funds might make life a little more bearable the unfortunate victim, the disqualification from Medicaid or SSI that would result could be devastating.

Similarly, a disabled individual might unexpectedly inherit valuable assets from a parent or relative, whose estate planning did not contemplate the effect such receipt would have on the beneficiary. Or the opposite scenario could occur: an individual of adequate means might become disabled, placing a financial drain on his or her own resources, which would deplete them long before the end of the unfortunate individual's expected lifetime.

Fortunately, disabled persons who are under the age of 65 ("disabled" in this context being defined as being unable to engage in any substantial gainful activity) are permitted to fund SNTs with their own assets. These trusts, sometimes referred to as "(d)(4)(A)" trusts, because their use is sanctioned by 42 U.S.C. section 1396p(d)(4)(A), must provide that the government benefits received by the beneficiary be paid back, upon the death of the beneficiary, to the providers of such largesse. These trusts are also called "payback trusts," because of this reimbursement requirement. If there are funds left over in a payback trust after all required governmental reimbursement has been made, the excess may pass to the disabled individual's beneficiaries in accordance with the provisions of the trust. Although the beneficiary funds these trusts, the transfer does not cause disqualification from Medicaid or Supplemental Security Income (SSI).

An individual who is over the age of 65 and wishes to preserve assets for "special needs" purposes cannot use a payback SNT. There is a statutory option for them, however - the so-called "pooled trust." There are also other, more complex and, to a certain extent, more risky techniques that may be implemented to approximate the function of a payback SNT for an individual over the age of 65, but these will be addressed in subsequent articles.

Payback SNTs can be set up by court order, or they can be created by the parents, grandparents or guardians of the beneficiary. Oddly, they cannot be set up by the disabled individuals themselves. After the trust is created, the assets of the beneficiary can be transferred into the trust by a guardian or conservator, by court order, or under valid durable power of attorney.

The trust's provisions must require payback for governmental benefits received by the beneficiary. Such language may read:

This trust shall terminate upon the later of the death of the beneficiary or the depletion of the trust assets for the special needs of the beneficiary as otherwise provided herein. In the event that this trust holds assets upon its termination by the death of the beneficiary, the Trustee shall notify and pay the claim of any federal or state agency that may have provided reimbursable benefits to the beneficiary, in accordance with the provisions of 42 U.S.C. 1396p(d)(4)(A) and 42 U.S.C. 1382b(e)(5), as they may from time be amended.

With the complications involved in the administration of SNTs, the proper selection of trustees is of great importance. The coordination of financial management, fiduciary reporting and record keeping, tax compliance, public benefit reporting requirements and the like can make for a daunting task.

Proper choice of trustee is key. While the technical challenges of administering an SNT might militate toward the use of an institutional trustee, there are drawbacks to using the typical bank or trust company. First, if the trust is of a relatively modest size, it may be difficult to find an institutional trustee willing to take on the task. Banks and trust companies typically charge on the basis of a percentage of assets under administration, and thus there may be little interest in taking on a smaller trust. Secondly, SNTs are by nature entirely discretionary with regard to benefit distributions. Institutional trustees are often more restrictive than other fiduciaries in their exercise of such discretion, because they are naturally conflicted - the larger the discretionary distributions, the smaller the trust corpus upon which to charge fees. The bureaucratic hassle of dealing with an institution may prove aggravating in the extreme. For this reason, it may be advisable that the beneficiary's guardian, family or other caretakers have a right to remove any institutional trustee and replace it with another. The right to fire the trustee can often influence the outcome of any conflict.

Sometimes, the best candidates for trusteeship may be family members. They are more willing to consider the requests of the beneficiary, they may be more sensitive to the beneficiary's needs and they are less likely to object to a smaller trust corpus because they are less likely to be "in it for the fees." However, in many circumstances there is no family candidate that has the time, experience, energy and patience to deal with the challenges presented.

Attorneys who are experienced providers of fiduciary services are occasionally the only viable choice for a trustee. It is, of course, advisable for the client to choose such a professional on the basis of specific experience in the SNT administration. For the protection of both the individual and the fiduciary, explicit fee contracts are essential. As an attorney considering such engagement, make certain that you are fully familiar and comfortable with the applicable regulatory requirements (or seek counsel of an attorney who can advise you).

A co-trusteeship between professional fiduciary and family member may strike a helpful compromise between the multiple objectives of regulatory compliance, client/beneficiary needs and cost control.

©2017 Massachusetts Bar Association