Special Needs Trusts

Which One Meets Your Client’s Needs?

By Jennifer B. Cona and Matthew Zebatto

Personal injury and medical malpractice practitioners know better than anyone that earning a lawsuit award by verdict or settlement is only half the battle for a disabled client; ensuring that lawsuit proceeds are used to enrich that client’s life is another challenge altogether.  Special Needs Trusts (also known as Supplemental Needs Trusts) are of critical importance to any litigation practice that serves the needs of disabled clients, whether the client was previously disabled or now is as a result of the injury at issue in the personal injury or medical malpractice litigation.

Special Needs Trusts (SNT) permit disabled individuals to retain funds from personal injury and medical malpractice cases, among other sources, without eliminating or reducing government benefits, such as Medicaid or SSI benefits.  While SNTs are highly favored under both Federal and State laws and regulations, the different types of trusts with differing sets of rules can leave a practitioner overwhelmed and unsure how to best serve the client.

The Federal laws regarding SNTs were codified as part of the Omnibus Budget Reconciliation Act of 1993 (OBRA ’93) (42 U.S.C. S 1396p (d) (4)).  Federal mandates of said Act were adopted by New York State in both the Social Services Law (§ 366) and the New York Estates, Powers and Trusts Law (EPTL § 7-1.12).  Subdivision (a) (5) of EPTL § 7-1.12 provides that an SNT is a discretionary trust established for the benefit of a person with a severe and chronic or persistent disability.  The statute defines a person with a severe and chronic or persistent disability as a person (i) with a mental illness, developmental disability, or other physical or mental impairment; (ii) whose disability is expected to, or does, give rise to a long-term need for specialized health, mental health, developmental disabilities, social or other related services; and (iii) who may need to rely on government benefits or assistance.  

First Party Special Needs Trusts
First Party SNTs, also referred to as Self-Settled SNTs or “pay-back trusts”, are funded with the beneficiary’s own assets but, pursuant to statute, can only be established by a parent, grandparent, legal guardian, or court of competent jurisdiction.  Despite this provision however, since 2003, New York case law has permitted a disabled person him/herself to petition the court to establish an SNT on his or her own behalf, as long as the trust has not been signed by the trustee and funded before submission to the court.  This has been of tremendous help to physically disabled but mentally competent clients who are not in need of a legal guardian under Article 81 of the Mental Hygiene Law and who do not have the requisite living family members to establish a trust on their behalf.  Of particular concern in the Elder Law context is the requirement that the SNT be established and funded before the beneficiary reaches age sixty-five (65) in order for the trust assets to be treated as exempt resources for Medicaid eligibility purposes. If an SNT is established or funded after the beneficiary reaches 65 years of age, the beneficiary is subject to the Medicaid transfer penalty rules.  

As noted above, a First Party SNT is also sometimes referred to as a “pay-back trust”.  That is because Medicaid must receive all amounts remaining in the SNT upon the death of the beneficiary up to an amount equal to the total Medicaid assistance paid on behalf of the individual.  

From the drafting perspective, EPTL § 7-1.12 provides suggested language and guidance, to which the practitioner must be extremely careful to adhere.  Specifically, the SNT must clearly evidence the creator’s intent to supplement, not supplant, impair or diminish government benefits or assistance for which the beneficiary may otherwise be eligible or may be receiving and the SNT must require the trustee to make distributions to third parties to meet the beneficiary’s needs such that distributions are not made directly to the beneficiary.

Third Party Special Needs Trusts
Third Party SNTs are special needs trusts established by an individual such as a parent or grandparent with their own assets for the benefit of a third party, such as a child or grandchild with disabilities.  Such Third Party SNT may be established and funded during the creator’s lifetime (a living SNT) or may be established in a Last Will and Testament (a testamentary SNT) and therefore not created or funded until the death of the testator.  In either case, the creation and funding of such Third Party SNTs has no effect on the beneficiary’s Medicaid eligibility.  Further, as another individual’s assets are used to fund the Third Party trust, there is no pay-back requirement to the State.  Instead, any assets remaining in the Third Party SNT at the time of the beneficiary’s death may be bequeathed to other family members or beneficiaries. Personal injury and medical malpractice attorneys need be aware of these rules and encourage family members of the disabled client to engage in proper estate planning to ensure that if and when the disabled person is to inherit any assets, the beneficiary does not lose either the inheritance or his/ her government benefits.

Expenditures from SNTs
Monies held in an SNT can be used to pay for personal care items, vacations,  transportation (including purchase of a car or van), purchase of a home, modifications to a home (such as installation of ramps or wheelchair accessible bathrooms), computer equipment, special medical or therapeutic equipment, personal care aides, and medical care not provided by government programs.  As noted above, payment for such items must be made directly to the service provider, retailer or vendor.  Money cannot be distributed directly to the trust beneficiary.

Pooled Trusts
In many cases, the disabled client may not have family members willing or able to act as a creator or trustee of an SNT.  We often encounter families who are unsophisticated and intimidated by the concept of financial management and fiduciary duties or who are simply unwilling to sign on for the daunting, life-long day-to-day management and administration of a trust, and particularly of an SNT with its strict rules regarding distributions.  Fortunately, a third type of SNT was established by OBRA ’93:  the Pooled Trust. A Pooled Trust is a Special Needs Trust established and maintained by a non-profit association which pools the funds from a disabled beneficiary’s account with other beneficiary funds for investment and management purposes.  A separate account for each disabled individual is maintained within the trust.  Pooled Trusts can take the form of either a First Party SNT or a Third Party SNT.

In the case of a First Party Pooled Trust, all other provisions applicable to First Party SNTs apply to Pooled Trusts including the standard of disability, the requirement that the trust be established solely for the benefit of the disabled individual, the ban on adding to the trust corpus after the beneficiary has reached age sixty-five (65), and the requirement of a pay-back provision whereby upon the death of the individual with disabilities, the balance in his or her account, up to the amount of Medicaid paid on his/her behalf, must be paid back to New York State or its designated Department of Social Services.  However, uniquely and importantly, in a Pooled Trust SNT only, a beneficiary may opt out of the pay-back provision by electing to donate any funds remaining in the Pooled Trust at the time of the beneficiary’s death to the charitable organization managing the Pooled Trust.  This option alone can be reason for some families to establish a First Party Pooled Trust.

One such example are the trusts managed by Life’s WORC, a 501(c)(3) organization with a forty year history of supporting people with disabilities.  Life’s WORC maintains a First Party Pooled Trust (funded with the proceeds of a lawsuit or other assets of the beneficiary), a Third Party Pooled Trust (established by a family member with their own assets for the benefit of the disabled individual) and a Surplus Income Pooled Trust, into which excess income for Medicaid community benefits purposes can be deposited each month instead of being spent down on the cost of care.  The professionally managed Pooled Trusts are less costly and complicated than individual trusts, making them better options for many families.  Further, the funds remaining in any of the various Pooled Trusts at Life’s WORC can, upon a given beneficiary’s death, remain with the charitable organization to benefit other people with disabilities.

Personal injury and medical malpractice attorneys cannot be expected to be completely knowledgeable in all aspects of Special Needs Trusts.  However, a basic understanding of the issues and options is required to properly serve the client.