When creating a Special Needs Trust (SNT), whether it’s part of a family’s estate plan or for an individual to hold his own assets, it’s important that it’s written to include the necessary requirements for the particular trust you’re drafting. An experienced special needs planning attorney will help you draft a SNT properly to avoid common mistakes that drafters, especially those who do not regularly handle these types of matters, make, including, but not limited to the following:
1) Failing to use a SNT as part of an estate plan.
Some parents opt not to leave assets to a Third-Party Funded Special Needs Trust (TPF-SNT) for their disabled child. Rather they leave money to their other children with precatory language, hoping that it will be used for the child with special needs. There are several issues with this option. First, the child(ren) in possession of the money may not use the money for the disabled child. Second, the money may inadvertently be subject to divorce proceedings. Third, the monies may be subject to the child’s creditors. Placing the assets for a disabled child into a TPF-SNT will ensure that the money is available for the intended beneficiary, the beneficiary has the benefit of the money and remains eligible for public benefits, and any remaining money can be paid to the grantor’s other children and/or family members upon the beneficiary’s passing.
2) Failing to update beneficiary designations.
For many Americans, a majority of their wealth is held in assets that pass via beneficiary designations, including retirement assets and life insurance. If parents of an individual with special needs modify their estate plan to include a TPF-SNT, the assets directed to the TPF-SNT will be an excludable resource for purposes of Medicaid eligibility. To ensure that no assets will be available to the disabled individual, it’s imperative that an individual update their beneficiary designation forms to name the TPF-SNT as opposed to naming the disabled individual outright. When money is left outright, the disabled individual could place those assets in a Self-Funded Special Needs Trust (SF-SNT); however, failure to plan properly unnecessarily subjects those funds to the Medicaid payback that must be included in a SF-SNT.
3) Being more restrictive than necessary.
Trust language that restricts the trust distributions absolutely could be detrimental to the beneficiary. Some SNTs will provide that a Trustee must never distribute any trust assets for goods and services that are provided for by public benefits programs. This language is unnecessarily restrictive. For example, if a beneficiary is unable to qualify for Section 8 housing benefits and unable to find appropriate housing for an amount less than their monthly SSI, a trust that included the restrictive language above would not be able to assist the beneficiary although it is highly likely that the grantor would have wanted such an outcome.
4) Requiring mandatory distributions of income.
If the trust agreement requires mandatory distributions of income to an individual that receives Medicaid or Supplemental Security Income, it would be considered unearned income for these programs. An individual that is eligible for one dollar of SSI is automatically eligible for Medicaid. Unearned income reduces an SSI benefit dollar for dollar up to one-third of the monthly SSI payment. One key requirement of a SNT is that the trustee have complete and unfettered discretion over trust distributions. The inclusion of mandatory distributions of income means the trustee does not have discretion over distributions.
5) Including Crummey Powers.
A Crummey Power is a provision that is contained in certain irrevocable trusts that allows specific beneficiaries to withdraw gifts for a limited time period that a donor makes to the trust, allowing the donor’s gift to be treated as a present gift and qualifying for the federal annual gift tax exclusion. The inclusion of a Crummey Power in a SNT would give the disabled beneficiary a right of withdrawal; the right to withdraw would be income to the beneficiary in the month during which the right may be exercised. This income may disqualify the disabled beneficiary from SSI and Medicaid if the individual receives Medicaid because of his SSI eligibility. If the grantor of the trust wants inter vivos gifts to qualify as present gifts, the solution may be to include a Cristofani Power.
6) Using a HEMS standard.
Most trusts include a provision that the trustee should make distributions to the beneficiary according to an ascertainable standard, which is generally for the health, education, maintenance and support (HEMS) of the beneficiary. This language should not be included in a SNT for a beneficiary who is disabled. Including a HEMS standard would make the trust a support trust rather than a SNT, which should be to supplement the beneficiary’s public benefits that assist with basic support needs as opposed to supplanting them. Additionally, the inclusion of the HEMS standard would remove the trustee’s discretion over distributions.
7) Failing to adequately fund the SNT.
When a SF-SNT is created to be funded with the personal injury settlement of the beneficiary, oftentimes a structured settlement may be considered for a variety of reasons. If a structured settlement is going to be placed into a SNT, it is important that a life care plan be completed and an initial conversation with the family be had regarding the beneficiary’s immediate needs to ensure that there are sufficient seed monies to fund the Trust, which will be available for the beneficiary’s use. For families that wish to leave assets to a TPF-SNT for a disabled child, it is important that they, too, adequately fund the SNT. Most parents have a tendency to split their assets equally between/among their disabled child and non-disabled child(ren) to avoid hurt feelings; however, the non-disabled child(ren) will assumedly be able to work and are less likely to need the inheritance.
8) Including a payback provision in a TPF-SNT.
The Medicaid payback provision was created by the Omnibus Budget Reconciliation Act of 1993 (OBRA-93), which relates solely to Self-Settled Special Needs Trusts. There is no federal statute that creates or governs Third-Party Funded Special Needs Trust. TPF-SNT are governed by the Social Security Administration’s Program Operating Manual System (POMS), which does not require a payback provision. Inclusion of a payback provision requirement could subject the Trust drafter to a malpractice action.
9) Failing to give a minor beneficiary with capacity a limited power of appointment.
In many states, estate planning cannot be done for a minor; therefore, a SF-SNT will typically provide that if any monies remain in the trust the after the beneficiary’s death and the Medicaid payback, they will pass via intestacy. By providing that the trust beneficiary has a limited power of appointment that can be exercised upon attaining the age of majority, then the trust assets can be more appropriately distributed, thus allowing the beneficiary to select who will receive any remaining assets.
10) Creating a SF-SNT for an individual over 65.
OBRA-93 requires that a SF-SNT is to hold the assets of an individual under the age of sixty-five, which is codified at 42 U.S.C. § 1396p(d)(4)(A). Moreover, the Medicaid Manual provides that a SF-SNT can only be funded with the assets of an individual under age 65. If an individual over 65 transferred his assets to a SF-SNT and want to qualify for Medicaid, the transfer would be evaluated for a transfer of assets, resulting in a sanction period.
11) Failing to make a SF-SNT irrevocable.
A SF-SNT must include a requirement that the trust is irrevocable, or the trust will be treated as an available resource (as opposed to an excluded resource if it is irrevocable) and will likely cause the beneficiary to be financially ineligible for public benefits. If the trust is revocable, the assets therein will become an available resource and public benefits will be lost. In a TPF-SNT, it may be either irrevocable or revocable. If a TPF-SNT is revocable, it will generally include language that allows the grantor to revoke the trust until his death or it is funded with monies of another individual.
12) Allowing commingling of funds between a TPF-SNT and a SF-SNT.
If a TPF-SNT does not specifically include language that prohibits the beneficiary from adding assets to the trust, the trustee should never allow a beneficiary to contribute to a TPF-SNT. If a TPF-SNT allows for funding by the disabled beneficiary, it has effectively become a SF-SNT, requiring Medicaid payback provisions. A main reason that people create a TPF-SNT for their loved one is to avoid the Medicaid payback. If the beneficiary’s money is commingled, then all monies therein are subject to the Medicaid payback.
Call the special needs planning attorneys at Weaver, Bennett, & Bland, P.A. at (704) 844-1400, to create a special needs trust for you or your loved one or to review an existing special needs trust to ensure it is properly drafted.
Crystal L. Welton is an estate planning, estate administration, elder law, and special needs planning attorney at Weaver, Bennett & Bland, P.A. Contact Crystal at Weaver, Bennett & Bland, P.A. at (704) 844-1400. The information contained in this article is general in nature and not to be taken as legal advice, nor to establish an attorney-client relationship between the reader and Crystal L. Welton or the law firm of Weaver, Bennett & Bland, P.A.
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