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Supplemental Needs Trusts

Since 1993, with the enactment of the Omnibus Budget Reconciliation Act (OBRA 93), the concept “Supplemental Needs Trust” (SNT) has been widely discussed and is more recognized than prior to that time.  However, SNTs were often used before OBRA 93 and the principal and income of such trusts have generally been exempt from consideration by Medicaid since 1978, based on Matter of Escher.  In Escher, the New York Court of Appeals upheld a parent’s clear intent to supplement rather than supplant public benefits for his child.   An SNT is a trust created for a chronically and severely disabled beneficiary that supplements government benefits such as Medicaid, rather than diminishing such benefits. Medicaid and other government programs such as SSI are available only to individuals with minimum assets and income.  Such programs consider the assets and income of a properly established SNT to be unavailable.  Accordingly, an individual, such as a family member, can establish a trust for a third party (the disabled individual) without jeopardizing that individual’s eligibility for Medicaid and other government benefits.  With OBRA 93, disabled persons may establish the SNT with their own funds, provided they follow certain guidelines.   Thus, there are two types of SNTs.  The first is established for a disabled person with the funds of someone other than the disabled person, his or her spouse, or someone legally responsible for the expenses of care for that person.  This is referred to as a “third party” trust and we have been using these for many years.  Based on the holding in Escher, the trustee may have total discretion over distribution of income and principal and said income and/or principal is not counted by the government benefit program unless the trustee actually makes the income and/or principal available to the disabled person.  The holding in Escher and cases that followed were codified with the enactment of EPTL §7-1.12 in 1993.  For example, a couple has three children, one of whom suffered brain trauma either at birth or as the result of an accident.  That disabled child will never be able to work or live independently.  He cannot afford to lose his medical coverage (Medicaid) and he will rely on SSI for income and housing purposes.  The parents do not wish to disinherit him from their estate, but know that they cannot leave him any part of their estate without causing him to lose his government benefits.  The remedy is to draft SNT provisions in each of their Wills, leaving a portion of their estate to a trustee who will manage the assets and income of the SNT for the benefit of the disabled child for the rest of his life.   The second type of SNT is one established with the funds of the disabled person or the disabled person’s spouse.  Prior to the enactment of OBRA 93, it was unclear as to whether an inheritance or a settlement from a medical malpractice or personal injury case had to be treated as funds belonging to the disabled person, thereby making him ineligible for government benefits.  We tried to avoid this outcome by creating a “fiction” by having the money go to a trust directly from an estate or from a settlement rather than go into the “hands” of the disabled person.  The Court would create a trust and the estate or the defendant deposited the funds directly into the trust.  We were never absolutely sure whether such a trust would be considered a third-party trust or a self-settled trust (established by the disabled person).   OBRA 93 clarified this issue.  According to OBRA, an individual shall be considered to have established a trust if assets of the individual were used to form all or part of the corpus of the trust (a self-settled trust) if the trust is not testamentary; and if one of the following established the trust: (i) the individual; (ii) the individual’s spouse; (iii) a person, including a court or administrative body, with legal authority to act in place of or on behalf of the individual or the individual’s spouse; or (iv) a person, including any court or administrative body, acting at the direction or upon the request of the individual or the individual’s spouse.  Such a self-settled trust may still be protective of the disabled person’s government benefits if the following requirements are met:
  1. the trust is established for a disabled individual while he or she is under the age of sixty-five;
2. the trust is established by a parent, grandparent, legal guardian, or court; and
  1. the trust provides that upon the death of the disabled individual, the state will be paid back by the trust for the medical assistance it has provided, to the extent such amounts remain in the trust.
  These are the SNTs that are generally used with settlement funds and are referred to as “pay-back” trusts because they are protective only if the state is paid back for medical assistance at the death of the disabled person when the trust terminates.  To be valid, the pay-back SNT must be established when the disabled person is under the age of 65. It continues to be protective of the funds and government benefits after the disabled person is beyond the age of 65.  However, monies added to the trust after the person reaches age 65 will not be protected.  Accordingly, special attention must be paid to trusts funded with a structured settlement where payments may continue after the individual reaches age 65.   In 1997, the New York Court of Appeals held that when a pay-back SNT is funded with the proceeds of third-party action, any Medicaid lien obtained pursuant to Social Services Law §104-b or 369 must be repaid first.  Further, pursuant to the regulations of the Department of Social Services, there are certain fiduciary obligations of the trustee that must be met.  A trustee must:
  1. notify the social services district of the creation or funding of the trust;
2.   notify the social services district of the death of the beneficiary; 3.   notify the social services district in advance of any transactions tending to substantially deplete the principal of the trust (substantially deplete is defined in the regulation as disbursements of various percentages of the principal and accumulated income of the trust);
  1. notify the social services district in advance of any transactions involving transfers of principal for less than fair market value; and
    1. provide the social services district with proof of bonding.
  OBRA 93 created a second type of exempt pay-back trust.  Pooled trusts created by a non-profit association are available to disabled persons over the age of 65.  Such a trust may be established not only by a parent, grandparent, guardian or court, but also by the disabled individual himself/herself.  The assets and income in this trust are not available to Medicaid.  Unfortunately, it appears that the funding of such a trust creates a transfer penalty for Medicaid purposes, making it a much less useful trust.