Special Needs Trusts

Trust management for the inheritance of a disabled beneficiary can be very important. In addition to providing benefits and management for the disabled beneficiary’s inheritance, the goals of such a trust usually include protection of the trust assets from the beneficiary’s creditors and exclusion of the trust assets from consideration if the beneficiary needs to apply for government aid (for example, Medicaid to pay the costs of long term care). When we refer to a Special Needs Trust, we are referring to a trust established to accomplish such goals.

As discussed here, in order for a disabled person to become eligible, and remain eligible, for government benefits like Medicaid and Supplemental Security Income (SSI), the person must meet strict income and asset criteria. The Connecticut Department of Social Services (“DSS”) takes into account all “countable assets” when determining eligibility for benefits. Even after approval for these benefits, any changes in assets or income, even from an inheritance, can disqualify the person from the assistance he or she needs.

DSS considers a trust created for general maintenance and support as a countable asset for Medicaid purposes. On the other hand, a trust created strictly for supplemental needs, if drafted properly, will not be counted and can be a way to provide additional support to family members who rely on government benefits. The main question is whether a trust is a general support trust (counted as an asset) or a supplemental needs trust (not counted).

The answer depends upon what the person who created the trust intended to create. This may sound simple enough, but even if a Will says, “This trust is intended to be a supplemental needs trust,” the court may still find that it is, in fact, a general support trust. The courts look at the language of the trust instrument in its totality to determine the testator’s intent.

The courts weigh most heavily the amount of discretion the Trustee has over trust distributions. In order for a trust to qualify as a supplemental needs trust, the Trustee must have complete discretion over the trust payments including the discretion not to make distributions to the beneficiary. Seemingly harmless attempts to include standards for the exercise of discretion can result in the creation of a general support trust instead of a supplemental needs trust. If a trust includes guidelines regarding the Trustee’s exercise of discretion, the guidelines should be merely precatory—in the nature of expressing a mere “fond hope,” “wish” or “desire.” Any guideline or instruction that is more definite may limit Trustee discretion with the result of jeopardizing the goals mentioned above.

In the case of Zeoli v. Commissioner of Social Services, the Court held that the Trustee had “absolute and uncontrolled discretion,” over any and all distributions. As a result, the trust assets were not countable in determining eligibility for aid. In more recent decisions, like the decision in Rome v. Wilson-Coker, the Court seemed to suggest that “unfettered” should be added to the “absolute and uncontrolled” standard the Zeoli court used.

For instance, whenever a trust has only one beneficiary and the instructions provide that distributions are to be made for the beneficiary’s “best interest and general welfare” or that the trust assets may be used to support the beneficiary in “reasonable comfort,” the Court may hold that the Trustee’s discretion is not unlimited and that it would be an abuse of discretion for the Trustee to withhold payments when needed for general support. In that case, the trust would fail to achieve the intended goals. This was the approach taken by the Rome Court.

Unlike the Rome case, the Zeoli case involved a trust with more than one beneficiary. Its holding suggests that a Special Needs Trust should include multiple trust beneficiaries while giving the Trustee the ability to benefit one beneficiary and exclude others. The beneficiary’s case is even stronger if the terms of the trust provide that the trust is intended to be a supplement to, rather than a substitute for, other resources.

A Special Needs Trust for a surviving spouse must be established under the terms of a Will (not a revocable trust). Even if the trust for the surviving spouse satisfies all the requirements suggested by the Zeoli and Rome cases, if the trust is established under the terms of the revocable trust agreement of the deceased spouse (instead of under the terms of the Will of the deceased spouse), the trust will be considered a countable asset and disqualify the surviving spouse for Medicaid benefits to pay the costs of long term care. Accordingly, if the goals of a Special Needs Trust for the benefit of a surviving spouse are to be achieved, the trust must be established under the terms of a Will; the Probate Court and the probate process must become involved.

Unfortunately, many people have been frightened into believing that the probate process is something that must be avoided at all costs. As a result, they have used revocable lifetime trusts as the primary vehicle for disposing of their assets at death. If the intention of the revocable trust is to create a Special Needs Trust for the benefit of a surviving spouse, however, it will fail to accomplish the intended goals.

A Special Needs Trust can be an essential tool to enhance the life of its disabled beneficiary who is relying on government assistance programs.  If drafted improperly, trust assets may be depleted rapidly leaving the beneficiary completely dependent upon an impersonal welfare system which is vulnerable to change at any time.

Posted on 8/6/2010 by Kasey S. Galner, Associate, Chipman, Mazzucco, Land & Pennarola, LLC.

Explore posts in the same categories: Elder Law Planning for Incapacity and Long Term Care, Estate Tax and Estate Planning Developments

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