Supplemental (Special) Needs Trusts and Inheritance: Will Reformation and Other Techniques
Supplemental (Special) Needs Trusts and Inheritance: Will Reformation and Other Techniques
By Donald D. Vanarelli, Esq.
I. Supplemental (Special) Needs Trust (“SNT”):
A trust designed to supplement, and not to supplant, impair or diminish, public benefits a beneficiary is receiving, or may in the future be receiving. Designed to (1) protect the trust corpus in the event that the beneficiary is, or becomes, eligible for public benefits and (2) protect the beneficiary’s eligibility for benefits, which might otherwise be in jeopardy by an outright distribution of the trust corpus.
II. Types of SNTs:
- Inter vivos (established during the settlor’s lifetime):
Self-settled: a SNT established using the beneficiary’s own funds
Third Party: a SNT established using funds of a non-beneficiary third party
A third-party trust established under a testator’s Last Will and Testament. Also called “Supplemental Benefits Trust”
- Sole Benefit Trust: A third-party SNT usually established by the parent(s) of a disabled adult child who is receiving or may receive needs-based public benefits in cases where the parent(s) also need Medicaid.
III. Overview of SNTs
1. Self-Settled SNTs
A. Applicable Law
- 42 U.S.C. §1396p(d)(4)(a), as amended on August 10, 1993 by the Omnibus Budget Reconciliation Act of 1993, Public Law No. 103-66:
recognizes the use of special needs trusts to ensure that assets of a disabled individual are not exploited or wasted, and to preserve that disabled individual’s eligibility for Medicaid and other needs-based public benefits.
- June 5, 1996 HCFA Memorandum, “Treating Disability Trusts under Transfer of Assets, Trust Estate Recovery, and Third Party Liability Rules”:
HCFA confirms to all state Medicaid directors that special needs trusts, including those established by a court on behalf of or at the behest of an individual, are covered by the Medicaid trust rules, including the provisions exempting a trust from the general rules that cause the trust to be considered as an available resource.
- N.J.S.A. 3B:11-36 et seq.
- N.J.A.C. 10:71-4.11 (g)(1)(i-xviii).
B. Nature of the Trust
The Self-Settled SNT, also referred to as a “Self Settled Supplemental Needs Trust,” a “Disability Trust,” or a “Payback Trust”, is available only to individuals who are disabled and under the age of 65 years. The Trust must be funded with the assets of the individual who is disabled and must be created for his or her benefit by either a parent, a grandparent, a legal guardian of the individual or a court. The funding will not affect the Medicaid eligibility of the individual.
There is a statutory requirement that the disabled beneficiary be under the age of sixty-five (65) upon the creation of the Trust If a Special Needs Trust is created for an individual who is under the age of 65 years, that SNT will remain exempt if the individual lives beyond the age of 65. However, any assets added to the Trust after the individual reached age 65 will be subject to the Medicaid transfer penalty rules. Although a properly drafted Special Needs Trust is exempt for Medicaid eligibility purposes, it is subject to certain statutory restrictions. The language of the federal statute regarding the pay back provides that the “… state will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total Medicaid assistance paid on behalf of the individual under a state plan under this title.4]” 42 U.S.C. § 1396p(d)(4)(B)(ii). Thus, in order to meet statutory requirements for exemption, the Special Needs Trust must contain a pay back provision. Upon the death of the individual, any balance left in the Trust must be paid back to the State of New Jersey in an amount not to exceed the Medicaid benefits paid on behalf of the individual. The remaining balance can then be distributed to the remainder beneficiaries of the trust as provided for in the trust agreement.
In addition, Medicaid is entitled to recover any assistance paid on behalf of the individual prior to the creation of the Trust before the SNT is funded.
2. State Requirements for Establishment of Self-Settled SNTs:
A special needs trust may be established if the following criteria, inter alia, are met:
- The trust is irrevocable.
- The trust is established for a person under 65 years of age.
- The individual for whom the trust is established is disabled within the definition of 42 U.S.C.1382c(a)(3).
- The trust is established by a parent, grandparent, legal guardian of the individual, or a court.
- The purpose of the trust is to use the trust assets to supplement, rather than supplant, public benefits.
- The trust contains a provision that, upon the death of the beneficiary, any state which has provided medical payments under its Medicaid program for the disabled individual is entitled to be reimbursed from the remaining assets of the trust. (Applies to self-settled SNTs only.)
- The trust states that the trustee shall fully comply with all State laws, including the Prudent Investor Act.
N.J.S.A. 3B:11-36 et seq.; N.J.A.C. 10:71-4.11 (g)(1)(i-xviii).
3. Distributions for the Benefit of the Individual with Disabilities
Special Needs Trusts are intended to supplement rather than duplicated or replace Medicaid benefits. To accomplish this and achieve the benefits of a Special Needs Trust, the trustee’s authority must be carefully defined and limited. The Trust instrument must contain a provision prohibiting the trustee from paying for any expense that would otherwise be paid for by Medicaid or any other means tested entitlement program.
Care must also be taken to prevent direct payments to the individual, because direct unrestricted payments are income to the individual which would affect his or her Medicaid eligibility. However, provision can be made for the trustee to spend Trust funds on specific items that would not be covered by Medicaid. For example, the trustee could be authorized to purchase a television set for the individual. Since a television set is not a medical item provided by Medicaid, such authorization or purchase would not affect the individual’s Medicaid eligibility. The type and number of items and services can be authorized by a Special Needs Trust are limited only by the need to avoid any replacement or duplication of items or services available from Medicaid and of the needs of the beneficiary.
Establishing a Self-Settled SNT:
A SNT may be established by a parent, grandparent, legal guardian of the individual, or a court.
The “Payback Provision”:
Pursuant to 42 U.S.C. 1396p(d)(4)(a), an individual may remain eligible for such benefits under the “Payback Trust” provision if he or she has:
A trust containing the assets of an individual under age 65 who is disabled … and which is established for the benefit of such individual by a parent, grandparent, legal guardian of the individual, or a court if the State will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State plan under this subchapter.
Id. (emphasis supplied).
The highlighted language supports the conclusion that there is no payback provision required for a third-party SNT (or a Testamentary SNT).
4. Third Party SNTs
A. Nature of the Trust
A third party SNT can be established by a third party with the third party’s own assets for the benefit of a disabled person which is designed to supplement, but not duplicated or reduce, Medicaid benefits. This type of Trust is distinguished from a Self-Settled SNT. Because the SNT is not funded with the disabled individual’s assets, there is no required pay back to the State for Medicaid provided to the disabled beneficiary. This type of trust is designed to provide for the special needs of a child or grandchild with disabilities. As with exempt and other trusts for the benefit of individual with disabilities, care must be taken to avoid substituting the grantor’s assets for the assets of a government program benefiting the individual with disabilities. The trust can be established as an inter vivos trust or as a testamentary trust. The trust instrument usually provides for discretionary trustee powers to utilize income or principal for the benefit of a primary beneficiary, without replacing any government benefits. These powers must be drafted in accordance with applicable State law.
B. Trust Management and Administration
The management and administration of a Third Party SNT is one of the most flexible of the Supplemental or special needs trusts. Because it is not funded with the disabled person’s own assets, the drafter is much freer to satisfy the desires of the grantor. Broad discretion can be given to trustees regarding income and principal distribution to anyone other than the disabled individual. Although there is no statutory expansion of trustee discretion, caution must still be exercised regarding any benefits actually provided to the disabled individual. One must check the law of the local jurisdiction as to how much flexibility will be permitted.
5. Sole Benefit SNTs
A Sole Benefit SNT (SBT) is a type of inter vivos third party SNT usually established by the parent of a disabled adult child who is receiving or may receive Medicaid and other needs-based public benefits in situations where the parent also needs Medicaid eligibility. If the trust is properly drafted, the transfer of assets to the SBT will not disqualify the parent for Medicaid benefits and the trust corpus will not disqualify the disabled adult child from needs-based public benefits. A pay back provision is required.
IV. Consider taking action in the following cases:
- When a Testator’s Last Will and Testament does not include a trust but instead leaves an outright distribution to the disabled child, apply to the court for reformation of a testator’s Last Will and Testament, in order to effectuate the probable intent of the testator, to include a testamentary third party SNT. No pay back provision required.
- When a Testator’s Last Will and Testament includes a non-complying trust, apply to the court for reformation of the existing (but non-complying) trust under a testator’s Last Will and Testament, in order to effectuate the probable intent of the testator. No pay back provision required.
- When a Last Will and Testament does not contain a SNT and the estate has already been distributed to the disabled individual, apply to the court for permission to establish a Self-Settled SNT, to hold in trust the funds distributed to the disabled person under a will. Because the funds have already been distributed to the disabled person, under federal and state law, any Medicaid lien existing at the time the special needs trust is created must be repaid before the trust may be funded with the will distribution. Pay back provision required.
- When a testator in a Last Will and Testament omitted the disabled person in an attempt to preserve the disabled person’s eligibility for public benefits, apply to the court for reformation of the will in order to effectuate the probable intent of the testator by providing a share to the disabled person in a Testamentary Third-Party SNT
- When a Last Will and Testament does not contain a SNT and omits the disabled child, and the estate has been distributed to the disabled child’s siblings, those siblings may wish to establish a Third-Party SNT with those funds.
2. Will Reformation: Applicable Law
In re Estate of Payne, 186 N.J. 324 (2006)
In interpreting a will, the court’s aim is to ascertain the intent of the testator.
Fidelity Union Trust Co. v. Robert, 36 N.J. 561, 564 (1962)
Scarborough v. Scarborough, 134 N.J. Eq. 201 (Ch. Ct. 1943)
The question central to a reformation action:
Will the court execute the clear intent of the testator not fully or clearly expressed in a will, or will it by a strict technical adherence to the form of words and their literal meaning suffer the intention of the testator to be defeated?
Fidelity Union Trust Co. v. Robert, 36 N.J. 561 (1962)
In re Estate of Bonardi, 376 N.J. Super. 508 (App. Div. 2006)
In re Estate of Branigan, 129 N.J. 324 (1992)
In re Estate of Gabrellian, 372 N.J. Super. 432 (App. Div. 2004), certif. denied, 182 N.J. 430 (2006)
The Court’s function in construing a decedent’s will is to ascertain and give effect to the probable intention of the testator. This function applies to the enforcement of the testator’s intent regarding testamentary trusts, and is carried out by “giv[ing] primary emphasis to [the testator’s] dominant plan and purpose as they appear from the entirety of his will when read and considered in the light of the surrounding facts and circumstances.”
The primary goal “is not to be thwarted by unduly stressing the literal meaning of [the decedent’s] words.”
Once that intent is established by a preponderance of the evidence, those wishes are to be carried out “even though they be imperfectly expressed.” A fundamental principle of probable intent is that “it is reasonable to impute to the decedent a general intent that reflects impulses…common to human nature.”
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