In recent years, as more developmentally disabled individuals have been deinstitutionalized and become active residents in local communities, estate planning for parents of these individuals has received greater focus. This article will review issues to be addressed when advising clients about planning for the devolution of their assets when they have one or more beneficiaries deemed to have a permanent disability, and will focus on special needs trusts. A special needs trust may also be used for estate planning between spouses, but that aspect is beyond the scope of this article. Moreover, references to state law will be limited to statutes promulgated in New York, the state in which I primarily practice, advising high-net-worth individuals and owners of closely held businesses on tax, estate, and business matters.
So whom are we discussing? Section 7-1.12 (a) (4) of the New York State Estate Powers and Trust Law ("EPTL") defines a disabled person as one "....(i) with mental illness, developmental disability or other physical or mental impairment; (ii) whose disability is expected, 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."
After overcoming the shock, disappointment, and, often, attempt to lay blame for having a developmentally disabled child, there are immediate issues that parents try to address. However, considering the major strides made over the past 30 years in diagnosing and treating developmental disabilities, the answers to those questions are never definitive but must be reassessed every three to five years. By the same token, the corresponding estate plan must also be revisited. One of the first questions to answer is determining the child's mental capacity--his ability to make decisions concerning his life and whether he can function on his own in society. As an example, can a mentally retarded individual maintain a job, collect a salary, and manage his expenses? Based on the conclusions of the mental health professionals engaged by the family, the parents may determine that if the child was to be the beneficiary of a sizable sum of money, he may not have the capacity to properly manage it.
Another consideration to be addressed is whether the disability can be measured definitively or is subject to variations. If definitive, with proper treatment and supervision the person might be able to maintain a stable level of existence. For example, someone suffering from a mental illness may become stabilized if properly supervised and treated on a regular schedule. The degree to which recurrence of the disease is determined to have lessened will affect the recommendations offered by the professionals involved in the parents' estate planning.
Lastly, the parents must consider if the child, despite the disability, can care for himself. This goes beyond the foregoing issues, for it concerns whether the person can live independently rather than in a group home. The impairment and its impact on the individual's independence must be considered when drawing up an estate plan.
A Unique Situation
Parents of a disabled child face a dilemma unknown to other parents since the child is eligible to receive public assistance, such as Supplemental Social Security Income (SSI), because of the disability. The estate planner must be aware that there should not be a direct distribution of the parents' assets to the child in order to avoid losing the SSI benefits. The planner should be aware of the planning device known as a special needs trust, or SNT, which provides benefits to the beneficiary, that is, the disabled individual, beyond those covered by federal and state benefits. This is a quality of life issue, since the SNT should supplement--not supplant--the government benefits received.
Before considering the SNT and its general characteristics, we should review the other alternatives of direct and indirect bequeathing of assets and why an SNT is preferable to those methods. First, the parents can disinherit the disabled child. While this action retains the ability to receive government benefits, it generally does not sit well with the parents who realize that nothing has been designated to improve the child's quality of life beyond what is received from government programs. Second, parents may choose to leave money outright to the disabled child, but federal and state governments will use this amount to offset services formerly covered by SSI and/or Medicaid. Only after the inheritance has been fully exhausted will the government benefits resume. Last, a method used by some parents is to leave funds to a sibling or another third party with instructions that the money be used for the disabled child. The parents hope this action will place a moral obligation on the third party to oversee the disabled child. However, the assets are not segregated and can be available for use by this third party or may be accessed by this individual's creditors in the event of a divorce or personal bankruptcy.
The SNT is unlike other commonly used trusts. Most people believe a trust's main use is to help the beneficiary maintain a standard of living. Not so with the SNT. Section 7-1.12(e) of the New York State EPTL suggests language to be incorporated into the trust document so it meets the criteria necessary to qualify as an SNT. The statute specifically details that a clause should contain verbiage "....that the trust assets be used to supplement, not supplant, impair or diminish, any benefits or assistance of any federal, state, county, city, or other governmental entity for which the beneficiary may otherwise be eligible or which the beneficiary may be receiving." It continues by suggesting that the grantor charge the trustee with language in the trust agreement stipulating, "....it is the grantor's desire that, before expending any amounts from the net income and/or principal of this trust, the trustee consider the availability of all benefits from government or private assistance programs for which the beneficiary may be eligible and that, where appropriate and to the extent possible, the trustee endeavor to maximize the collection of such benefits and to facilitate the distribution of such benefits for the benefit of the beneficiary." From this language, it is clear that an SNT is established to provide a secondary source of funds to pay for "extras" and should not be used to provide for the health and maintenance of the individual, something not normally associated with a traditional trust.
Furthermore, the trust document should clearly state that the trust's assets must never be directly accessible by the disabled person--the trustee alone should have exclusive management over the income and principal of the trust. Only the trustee should be permitted to make distributions on behalf of the disabled person and those payments should be made directly to the provider of the services. Examples of the kinds of services covered by the income and assets of an SNT include but are not limited to:
- Entertainment, such as attending concerts, ball games, traveling, and vacations
- Payments to a nurse or other attendant to accompany the beneficiary while traveling
- Private transportation for these purposes
- Athletic training and similar services not covered by public programs
- Special medical and dental care not covered by Medicaid
The Two Types of Trusts
There are two basic types of special needs trusts. The first is created with assets of the disabled person. This is often the case when an award is made to the disabled individual or this person is the beneficiary under another person's will. However, it is not the disabled person who acts as the grantor, but rather a parent, other relative, or a court-appointed guardian. A popular spin on this type of trust is the pooled trust, which can only be managed by a not-for-profit organization. Separate subaccounts are established for each participating SNT and the respective beneficiary, but all of the funds are pooled for purposes of investment and administration. Management fees are arranged with the organization. Besides managing the assets and making distributions on behalf of the beneficiary, the organization may also act as a personal advocate for the disabled beneficiary during the person's lifetime. At the death of the beneficiary, the undistributed assets in the trust may be distributed to Medicaid as reimbursement for advances made, and the balance may be paid to the remainder beneficiaries.
The second type of SNT is one established by a third party, such as parents or grandparents. This category of SNT may be funded during the lives of the grantors or at their deaths using cash, life insurance, or a combination of assets. Upon the death of the beneficiary, the remaining assets are distributed to the designated person(s) listed in the trust agreement or will of the grantor(s). If the document is properly prepared, none of the remaining funds will be reimbursed to the state for the previously advanced Medicaid payments. It is important to remember that an SNT is irrevocable, so family members might be more apt to fund such a trust through a will rather than during their lifetimes. A knowledgeable estate planning advisor must be aware that a disabled beneficiary is limited by law to the amount of assets he can own directly, generally no more than $2,000. For this reason, the third-party SNT is generally created under a will that has a "spill-over" provision of assets into the SNT rather than directly naming the disabled beneficiary as a direct recipient.
Choosing a trustee is another difficult task. Generally, the parents look first to other siblings or close family members whom they hope can be relied upon to carry out their wishes after they die. Given the responsibilities of this trust, however, some families prefer naming an institutional trustee. Depending on the facts and circumstances of a specific case, the grantor may choose both. An institution may be sought to handle the financial aspects of the trust, such as handling the investing and other financial duties, while an individual is selected as the personal advocate for the disabled beneficiary. If only an individual is named, then a clause should be inserted into the trust agreement allowing for the appointment of an institutional co-trustee if the financial responsibilities become too onerous.
In conclusion, it is important to remember that the benefits of a special needs trust are the result of enacting laws that may be changed. Given the intention of President Bush to make changes in Social Security, for instance, it is possible that the U.S. Congress and the state legislatures may look again at the interrelationships of public benefits and the SNT. With that in mind, the trust agreement should always provide that the trustee, as a last resort, should be empowered to terminate the trust if legislative guidelines change.
I. Jay Safier, CPA, is a partner in the New York accounting firm of Weinick Sanders Leventhal & Co., LLP, where he is actively involved in advising high-net-worth individuals and owners of closely-held businesses on a broad range of corporate, accounting and auditing, tax, estate, and business matters. He is a member of the board of directors of Crystal Run Village, Inc., a not-for-profit corporation that owns and operates group homes for the developmentally disabled in New York State. He can be reached at firstname.lastname@example.org.