Special Needs Planning: Back to Basics

Published by the New York State Bar Association in the Elder Law and Special Needs Section

Many of us are seeing an increased need for Special Needs Planning in our practices. But not all Elder Law attorneys are well-versed in this area of the law. It’s often good to get back to basics. Understanding the types of Special Needs Trusts is the best place to start to assist clients that have a child or children with a disability.

Executing a Last Will and Testament should be the first order of business for clients with a special needs child.  It is important to make sure that the Will directs that the inheritance for the disabled child be held in a Special Needs Trust (also called a Supplemental Needs Trust or “SNT”) for his or her benefit. SNTs permit disabled individuals to retain funds from an inheritance without eliminating or reducing government benefits, such as Medicaid or Supplemental Security Income “SSI” benefits.

In addition, an inter vivos SNT for the benefit of a client’s disabled child can be created during the client’s lifetime.  An inter vivos SNT can be funded with either the funds of the client (Third Party SNT) or funds from the disabled beneficiary (First Party SNT).  SNTs are highly favored under the law, but have particular rules.  As there are generally two types of inter vivos SNTs, it is important to know which trust is right for your client, as well as any consequences that must be addressed after the passing of the SNT beneficiary.

Third Party Special Needs Trusts The main concept behind any SNT is to “supplement,” rather than “supplant” any benefits the disabled child may receive from government programs. Third Party SNTs are special needs trusts established by an individual, such as a parent or grandparent, and funded with their assets for the benefit of another individual, such as a child or grandchild with a disability.  The Third Party SNT does not hold any assets of the beneficiary and the beneficiary cannot serve as trustee. Generally, the trustee is permitted to make such distributions to third parties to meet the disabled beneficiary’s needs for food, clothing, shelter or health care not otherwise provided by the beneficiary’s current benefits. Third Party SNTs may be established and funded during the creator’s lifetime (inter vivos or living SNT), or may be established in a Last Will and Testament (testamentary SNT) and therefore not created or funded until the death of the testator.  In either case, the creation or funding of the Third Party SNT has no effect on the beneficiary’s eligibility for government benefits. 

Finally, there is no pay-back requirement to New York State because another individual’s assets are used to fund the Third Party SNT.  Instead, any assets remaining in the Third Party SNT at the time of the beneficiary’s death may be inherited by other family members or beneficiaries as directed by the terms of the SNT.

First Party (Self-Settled) Supplemental Needs Trusts In the past, a First Party SNT (otherwise known as a “self-settled” SNT) had to be established by a parent, grandparent, legal guardian or by court order for a beneficiary under the age of 65. However, after the passage of the Special Needs Trust Fairness Act in December of 2016, a disabled person who has capacity can create his or her own special needs trust for themselves.  The trust must be funded with the assets of the beneficiary, such as lawsuit settlement proceeds, retroactive government benefits or an inheritance which was left outright to that person. 

The assets held in a properly established First Party SNT are not countable assets for the purposes of eligibility for government benefits, and thus the disabled beneficiary can continue to receive benefits such as SSI and Medicaid.  The trust must be a payback trust and therefore any funds remaining in the trust upon the death of the beneficiary are subject to be paid back to the government as reimbursement for the costs of care during the lifetime of the disabled beneficiary. While reasonable fees for the administration of the trust and any tax liability imputed to the First Party SNT may be paid prior to paying back the government, funeral expenses and preexisting debts of the beneficiary cannot be paid from the SNT after the death of the beneficiary and prior to repayment.  As such, the Trust should not allow for the payment of funeral expenses after the death of the beneficiary. Instead, the Trustee can purchase an irrevocable pre-paid funeral plan for the beneficiary.

Disbursements from SNTs In general, and depending on the beneficiary’s receipt of certain means-tested benefits, funds held in a SNT can be used to pay for food, clothing, shelter or health care of the disabled beneficiary. Examples include personal care items, vacations (the beneficiary’s share and expenses for a necessary caregiver), 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.  It is important to note that the payment for such items must be made directly to the service provider, retailer or vendor.  In other words, principal from a SNT cannot be distributed directly to the disabled beneficiary for any purpose.

However, in making distributions for food, shelter, or health care, Trustees need to be aware of the possible impact on benefits. For example, if a Trustee pays the beneficiary’s food or housing expenses, SSI benefits may be reduced by up to one-third. This may be an acceptable tradeoff to pay for the desired quality of housing, if the Trust permits it. Additionally, the Trustee should also only be paying for medical or health expenses not otherwise covered by existing benefits (such as Medicare or Medicaid).

Often times a judicial accounting may be required to settle the SNT after the passing of the beneficiary.  This is required for all First Party SNTs, and may be required for Third Party SNTs where the remainder beneficiaries will not accept an informal settlement. It may also be prudent to account to the local department of social services (“DSS”) on an annual basis so any issues they may have can be addressed at the time. The Trustee also has the option to seek court approval of major expenditures (such as the purchase of a home) on notice to DSS. Accordingly, Trustees should be advised to keep very careful records, including invoices and receipts, for all expenditures made from a SNT. Maintaining good records will help to avoid objections as to the validity of the disbursements made by the Trustee, avoid Trustee liability, and make the settlement process easier.

Pooled Trusts A pooled trust is a type of SNT that is established and maintained by a non-profit organization which pools the funds of a number of individuals in separate accounts for investment and management purposes.  A pooled trust can be funded by a parent, grandparent, legal guardian or the individual with special needs him or herself.  There are both first party and third party options for pooled trusts, and they are a valuable planning tool for individuals who are either over 65 (and can no longer create a standard First Party SNT) or those who do not have a trusted friend or relative to serve as Trustee (and the amount to be held in trust is too small for a corporate trustee). Typically, upon the death of the beneficiary the remaining trust assets are retained by the non-profit organization. However, there are some options that allow for the designation of a portion of the remainder to beneficiaries, after any required repayment of government benefits.

17-A Guardianships In New York State, when a person turns 18 years of age, he or she is assumed to be legally competent to make decisions until and unless a Court determines otherwise.  This means that no other person, including their parents, can make medical, financial or personal decisions for them. If the individual is deemed to lack capacity to make medical decisions, the Family Health Care Decisions Act allows some medical decisions to be made by parents, but has its limits. As such, parents of children with special needs should plan for the child’s care beyond the age of 18. The preferred option is for the adult child to execute a power of attorney and health care proxy to name decision makers, as long as the adult child has the capacity to do so. Otherwise, if parents wish to continue to make important decisions for their child after age 18, such as medical care and residential placement decisions, they must become the legal guardians of the adult child. 

There are two types of guardianship for incapacitated individuals from two separate statutes: Mental Hygiene Law Article 81 and Surrogate’s Court Procedure Act Article 17-A. An Article 81 guardianship, brought in Supreme Court, is a more flexible form of guardianship that can grant the guardian tailored powers. It is typically utilized for older adults who require a guardian, such as those with substantial cognitive decline. On the other hand, an Article 17-A guardianship, brought in the surrogate’s court, is utilized for individuals with intellectual or developmental disabilities and grants very broad authority to the guardian.

A 17-A guardianship covers most decisions that are usually made by a parent for a child, including healthcare and financial decisions.  The Court can appoint a guardian of the person, the property or both.  Certifications are required from two physicians or a physician and a psychologist attesting that the adult child is not able to manage his/her affairs because of an intellectual disability or developmental disability.

The world of Special Needs is highly detailed and concentrated.  As there is more and more of a call for these services, Elder Law practitioners should be aware of the basics to help guide clients and know when to reach out to colleagues for these services.

NYSBA Elder Law and Special Needs Journal 2021 Vol. 31 No. 1