Moses Ratowsky created an irrevocable trust for the benefit of his grandson, Daniel Schreiber (hereinafter the grandson). Petitioners, the co-trustees of the irrevocable trust, filed an application to appoint the principal of the trust to a new special needs trust that would allow the grandson to retain the benefits of the original trust while preserving his eligibility for Medicaid and other needs-based government benefits.

The court application alleged that the grandson was a 20 year old disabled person who received Medicaid and Social Security benefits, and lived at home with his mother and father. The application recognized that, under the terms of the original trust, the grandson would have the right to withdraw all of the principal of the trust when he attained the age of 21.

The application asserted that merely having the right to withdraw the principal of the original trust would cause the entire trust corpus to be considered an available resource, thereby disqualifying the grandson from receiving needs-based government benefits. In order to avoid this result, the trustees sought court approval to exercise a power of appointment of assets from the original trust to a new trust, which would contain the same terms, conditions, beneficiaries, and trustees, and which also contain supplemental needs trust protection. This new trust would allow the grandson to continue receiving governmental benefits and, at the same time, permit the assets in the new trust to be used to enhance the grandson’s quality of life.

The petition summarized the terms of the new trust. The petition alleged that the new trust was a supplemental needs trust that did not give the grandson the right withdraw any sum from the trust at any time. Rather, the new trust stated that the grandson “shall not have any right or power to assign, encumber, direct, distribute or authorize distribution from this trust.”

The New York State Department of Health (hereinafter the State) filed objections to the court application. The State argued, among other things, that the new trust had been created using the grandson’s assets since he was the only beneficiary of the original trust. The State contended that because the new trust had been created with the grandson’s assets, it must be considered a “first-party” or “self-settled” supplemental needs trust, and that it was therefore required to contain a “payback” provision that would allow the State, upon the grandson’s death, to recoup all amounts remaining in the new supplemental needs trust up to the total value of all medical assistance paid on behalf of the grandson. Since the new trust did not contain a payback provision, the State argued that the court should not approve the exercise of the power of appointment.

The trustees submitted a certification in response to the State’s objections alleging that the grandson’s father had given written consent, on behalf of the grandson, to the creation of the new trust, and that the new trust was therefore “immediately effective . . . before the grandson turned 21 years old.” Since the assets of the original trust had not vested in the grandson when the new trust was created, the trustees contended that the new trust “cannot be a self-settled trust . . . and no pay-back clause [was] required.”

In its decision, the court rejected the State’s objections, concluding that a payback provision was not required. As a result, the trustees appointed the assets of the original trust to the new supplemental needs trust, a process often referred to as “decanting.” The decanting statute authorizes a trustee to appoint the assets of an existing trust to a new supplemental needs trust.

The State appealed, asserting that the court should not have approved of the exercise of the power of appointment since the new supplemental needs trust did not contain a payback provision.

The appellate court affirmed, holding that a payback provision was not required because the assets contained in the original trust did not constitute a “resource” or “income” of the grandson at the time that the trustees exercised their power of appointment. That is, the appeals court held that it was undisputed that the original trust was funded by Ratowsky and that the grandson did not contribute his own assets to it. Inasmuch as the principal of the original trust was not the grandson’s asset at the time that it was decanted into the new supplemental needs trust, the grandson did not create the new trust. As the result, a payback provision was not required

The case is attached here – Matter of Kroll v New York State Dept

For additional information concerning special needs trusts and disability planning, visit:

NJ Special Needs Trusts and Disability Planning