The beneficiary of a special needs trust can never control or access trust funds – that is the job of the trustee. A common fear among beneficiaries or their families is that the trustee may not do what’s in the beneficiary’s best interests and that, if this happens, the beneficiary may not be able to do anything about it.
Choosing the right person to serve as trustee is one of the most important and difficult issues in creating a special needs trust. If you haven’t chosen wisely, problems can emerge. The trustee might be incompetent in administering the trust and thus jeopardize the beneficiary’s public benefits, be unresponsive to the beneficiary’s needs, or even take improper fees from the trust. Or, the beneficiary and the trustee simply might not get along. Can the beneficiary of a special needs trust do anything about the actions, or inactions, of the trustee?
The short answer is “yes.” First, the law generally charges a trustee of a special needs trust with the usual duties of any trustee, plus other specific obligations. Usually, the trustee has an affirmative duty to inquire into the needs and welfare of the beneficiary, to communicate with the beneficiary and other involved individuals, and to make certain that the beneficiary maintains eligibility for public benefit programs.
If the beneficiary has grounds to believe that the trustee is not acting according to the law, the beneficiary generally has the right to petition a court to remove the trustee and bring related actions to address the trustee’s conduct. Some states allow out-of-court ways to initiate a change of trustee. For example, in Pennsylvania, the beneficiary, or his or her representative, can draft a settlement agreement with the trustee to replace that trustee. As long as the change in trustee does not violate the essential purpose of the trust, the document is binding without going to court. However, these procedures, whether in or out of court, can be time-consuming and costly, and in some cases, merely “not getting along” with the trustee may not be enough to justify removal. Moreover, the beneficiary may not have the wherewithal to initiate the action or the legal capacity to do so. Generally, in court proceedings, the beneficiary must be able to understand what’s going on and assist in the legal representation.
To avoid these types of obstacles, a special needs planner may draft the trust document to include mechanisms for removing a trustee (including defining reasons for trustee removal). The trust can also include provisions for trustee resignation, the appointment of successor trustees, and the appointment of a “trust protector.” The trust protector is a person or entity chosen by the person setting up the trust to keep an eye on the trustee’s performance, usually with the right to remove the trustee and appoint a new one. Even though there is no need to anticipate trustee misconduct, appointing a trust protector is a recommended way to provide an extra level of protection to the beneficiary. However, the rights and procedures for changing trustees vary from state to state. Therefore, the best way to build in protections that allow for the replacement of a trustee gone bad is to consult with a qualified special needs planner.
If your child has reached the teenage years, you may already feel as though you are losing control of her life. This is legally true once your child reaches the age of 18 because then the state considers your child to be an adult with the legal right to govern his or her own life.
Up until your child reaches 18, you are absolutely entitled to access your child’s medical records and to make decisions regarding the course of his treatment. And, your child’s financial affairs are your financial affairs. This changes once your child reaches the age of 18 because your now-adult child is legally entitled to his privacy and you no longer have the same level of access to or authority over his financial, educational and medical information. As long as all is well, this can be fine. However, it’s important to plan for the unexpected and for your child to set up an estate plan that at least includes the following three crucial components:
1. Health Care Proxy with HIPAA Release
Under the Health Insurance Portability and Accountability Act, or HIPAA, once your child turns 18, the child's health records are now between the child and his or her health care provider. The HIPAA laws prevent you from even getting medical updates in the event your child is unable to communicate his or her wishes to have you involved. Without a HIPAA release, you may have many obstacles before receiving critically needed information, including whether your adult child has even been admitted to a particular medical facility.
Should your child suffer a medical crisis resulting in the child's inability to communicate for him or herself, doctors and other medical professionals may refuse to speak with you and allow you to make medical decisions for your child. You may be forced to hire an attorney to petition to have you appointed as your child’s legal guardian by a court. At this time of crisis, your primary concern is to ensure your child is taken care of and you do not need the additional burden of court proceedings and associated legal costs. A health care proxy with a HIPAA release would enable your child to designate you or another trusted person to make medical decisions in the event your child is unable to convey his or her wishes.
2. Durable Power of Attorney
Like medical information, your 18-year-old child’s finances are also private. If your child becomes incapacitated, without a durable power of attorney you cannot access the child's bank accounts or credit cards to make sure bills are being paid. If you needed to access financial accounts in order to manage or resolve any problem, you may be forced to seek the court’s appointment as conservator of your child.
Absent a crisis, a power of attorney can also be helpful in issues that may arise when your child is away at college or traveling. For example, if your son is traveling and an issue comes up where he cannot access his accounts, a durable power of attorney would give you or another trusted person the authority to manage the issue. An alternative may be to encourage your child to consider a joint account with you. However, this is rarely recommended because of the unintended consequences for taxes, financial aid applications, creditor issues, etc.
Your child owns any funds given to him or her as a minor or that he or she may have earned. In the catastrophic event that your child predeceases you, these assets may have to be probated and will pass to your child’s heirs at law, which in most states would be the parents. If you have created an estate plan that reduces your estate for estate tax or asset protections purposes, the receipt of those assets could frustrate your estate planning goals. In addition, your child may wish to leave some tangible property and financial assets to other family members or to charity.
While a will may be less important than the health care proxy, HIPAA release or durable power of attorney, ensuring that your child has all three components of an estate plan can prevent you, as a parent, from having to go to court to obtain legal authority to make time-sensitive medical or financial decisions for your child.
If you have a child (or grandchild) who is approaching adulthood, talk to your elder law attorney about having the child execute these three crucial documents.
There are two types of Special Needs Trusts (SNTs), commonly designated as first-party and third-party SNTs. It is important to determine which type of SNT you have or need. This depends upon whose property is funding the SNT. If the property funding the SNT originates with the SNT beneficiary, then it is a first-party SNT. However, if the property funding the SNT always belonged to someone other than the SNT beneficiary, then it must be drafted as a third-party SNT.
Third-Party Special Needs Trusts
Third-party SNTs are commonly used by persons planning in advance for a loved one with special needs. Typically, the parents of an individual with disabilities or special needs will be the persons who establish a third-party SNT, although a grandparent, a sibling, or any other person (other than the beneficiary) may establish the SNT. Third-party SNTs can be included in a Last Will and Testament, established within an inter vivos trust that is designed to avoid probate ("Living Trust"), or drafted as a stand-alone SNT. These SNTs are typically funded upon the death of the beneficiary's parents or the other individual(s) who established the SNT.
SNTs created under a Will or as a subtrust within a Living Trust do not come into existence (and therefore cannot receive gifts) until after the death of the individual whose Will or Living Trust created the SNT. Therefore, a stand-alone SNT may be more useful if there are multiple donors who wish to fund the SNT. A stand-alone SNT exists during the lifetime of the person establishing the SNT, which allows the SNT to receive gifts from grandparents, family friends or even the person establishing the SNT, prior to the death of the SNT's creator. Such an SNT is available as a receptacle for lifetime and post mortem gifts from any third-party source.
This type of SNT does not have to be irrevocable in order to preserve the eligibility of the SNT beneficiary for means-tested public benefits. However, if the SNT beneficiary has the power to revoke the SNT, the SNT assets would be considered an available resource for Supplemental Security Income (SSI) and Medicaid purposes. The beneficiary's ability to revoke the SNT or otherwise exercise control over the SNT may render the beneficiary ineligible to receive public benefits that have an income or asset limit. The SNT agreement should authorize the person establishing the third-party SNT and/or the trustee to amend the SNT to address later changes in the law or the circumstances of the beneficiary. Allowing for such limited amendments helps ensure that essential government benefits are preserved if an agency challenges the terms of the SNT.
The most important difference between third-party SNTs and first-party SNTs (described below) is what happens to SNT property when the beneficiary dies. Upon the beneficiary's death, the third-party SNT is not required to use the remaining assets to reimburse any state(s) for the Medicaid benefits received by the beneficiary during his or her lifetime. As a result, this type of SNT is a useful planning tool for people who want to set aside property for a beneficiary with disabilities, preserve essential public benefits during that beneficiary's lifetime, and remain in full control of where all of the remaining SNT assets will go upon the beneficiary's death.
First-Party Special Needs Trusts
First-party SNTs are most often used when the person with a disability inherits money or property outright, or receives a court settlement. These SNTs also are useful when a person without a prior disability owns assets in his or her name, later becomes disabled, and thereafter needs to qualify for public benefits that have an income or asset limitation. These SNTs are creatures of federal law, specifically (i) individual first-party SNTs are authorized under 42 U.S.C. § 1396p(d)(4)(A), and (ii) pooled first-party SNTs are authorized under 42 U.S.C. § 1396p(d)(4)(C). First-party SNTs also are commonly called self-settled SNTs, Medicaid payback trusts, OBRA '93 trusts, and d4A or d4C trusts.
Until the Special Needs Trust Fairness Act became law late in 2016, the only persons or entities authorized to "establish" (create) an individual first-party SNT were the SNT beneficiary's parent, grandparent, legal guardian, or a court. Since December 13, 2016, federal law also authorizes a mentally and legally competent SNT beneficiary to establish an individual first-party SNT. A first-party SNT is funded with property that belongs to the beneficiary, or to which the beneficiary is or becomes legally entitled. Property in a first-party SNT can only be used for the "sole benefit" of that beneficiary. Individual first-party SNTs may be created (and funded) only for individuals who meet the government's definition of "disabled" and are under sixty-five years of age when the SNT is established (and funded).
While a pooled first-party SNT (described below) can be established by individuals over sixty-five years of age in many states, a significant number of states do not allow a person over age sixty-five to establish or transfer property to a pooled first-party SNT without penalty. Pooled first-party SNTs can be established by the beneficiary, the beneficiary's parent, grandparent, or guardian, or a court. If the SNT beneficiary is not mentally and legally competent, then court approval must be obtained to fund the SNT with the beneficiary's property.
All first-party SNTs must specify that after the beneficiary's death, all amounts remaining in the SNT, up to an amount equal to the total lifetime medical assistance benefits paid on behalf of the beneficiary by the Medicaid program(s) of any state(s), are first repaid to those state Medicaid program(s), even to the extent of fully exhausting the remaining SNT assets. Only after this Medicaid payback may any balance be distributed to other remainder beneficiaries.
A legally competent person with a disability may have a first-party SNT established and funded without court involvement. However, annual accountings should be provided on an informal basis to the beneficiary and to the applicable Medicaid agencies. When a minor or mentally incompetent adult is legally entitled to receive funds from a lawsuit, an inheritance, or from any other source, then court approval to establish and fund the first-party SNT is required. Often, the court must make specific findings to ensure that the SNT is considered "exempt" when determining the beneficiary's eligibility for public benefits that have income or asset qualification thresholds. These findings could include:
Pooled Special Needs Trusts
Pooled SNT programs can be used to establish both first-party and third-party SNTs. Pooled SNTs are established and administered by a non-profit association for the benefit of multiple beneficiaries. Pooled SNT programs have the following features:
Both first-party and third-party SNTs must be properly drafted in order to protect a beneficiary's right to receive means-tested public benefits. The tax consequences of SNTs are not addressed in this article, but also are very complex. (Visit the index of prior issues of The Voice to discover those which specifically address various SNT tax issues.) To best protect the government benefits for which an individual with disabilities may be eligible, it is important to discuss which type of SNT should be used in a specific situation with an attorney who is proficient in special needs planning, including any of the Special Needs Alliance members found on the SNA website (www.specialneedsalliance.org).
About this Newsletter: We hope you find this newsletter useful and informative, but it is not the same as legal counsel. A free newsletter is ultimately worth everything it costs you; you rely on it at your own risk. Good legal advice includes a review of all of the facts of your situation, including many that may at first blush seem to you not to matter. The plan it generates is sensitive to your goals and wishes while taking into account a whole panoply of laws, rules and practices, many not published. That is what The Special Needs Alliance is all about. Contact information for a member in your state may be obtained by calling toll-free (877) 572-8472, or by visiting the Special Needs Alliance online.
Reprinted with permission of the Special Needs Alliance - www.specialneedsalliance.org.
Jeffrey C. Nickerson - Estate Planning Attorney - My Passion is Special Needs Planning!