Supplemental Needs Trusts For Disabled Persons

by David Goldfarb Goldfarb Abrandt & Salzman LLP

A Supplemental Needs Trust is a trust created for a chronically and severely disabled beneficiary which supplements government benefits such as Medicaid rather than diminishing such benefits. Medicaid and other government benefit programs consider the resources and income of an individual for purposes of determining eligibility for assistance and the amount of such assistance. With a Supplemental Needs Trust, however, a person such as a family member may establish a trust for a disabled individual without jeopardizing the beneficiary’s eligibility for Medicaid and other government benefits. With recent changes in federal and state law, trusts for disabled persons may even be established with the disabled person’s own funds, if certain strictures are followed.

Pursuant to New York EPTL §7-1.12(a)(4) and (5), a supplemental needs trust is a “discretionary” trust established for the benefit of a person with a severe and chronic or persistent disability and whose disability is expected to, or does, give rise to long-term need for specialized services. EPTL §7-1.12(b)(3) provides that neither principal nor income held in trust shall be deemed an available resource under any government benefit or assistance program.

Generally, there are two types of supplemental trusts for disabled persons. The first type is established for a disabled person with the funds of someone other than the disabled person, or the disabled person’s spouse, or someone legally responsible for the expenses of care for the disabled person. This is referred to here as a “third-party” trust. The history of the use of third-party trusts for disabled beneficiaries evolved in three steps: (1) purely discretionary trusts, (2) Escher type trusts and (3) Statutory Supplemental Needs Trusts under EPTL §7-1.12. The use of the three types of trusts and how they affect government entitlement will be described briefly below.

If the third-party trust gives complete and total discretion over distribution of income and principal to the trustee, then the income and/or principal is not counted by the government benefit program unless the trustee actually makes it available to the beneficiary. In New York since 1966, the invasion of trust corpus for the support, maintenance and education of a beneficiary has been governed by EPTL §7-1.6. This statute allows a court having jurisdiction over the trust to use its discretion to make an allowance from principal to any income beneficiary whose support or education is not sufficiently provided for. Nonetheless, EPTL §7-1.6 is easily avoided by providing “in the disposing instrument” that the section shall not apply. However, trusts giving unlimited, absolute or uncontrolled discretion to a trustee are still controlled by a reasonableness standard and the trustee must act in a way contemplated by the grantor. See Restatement of the Law Second, Trusts 2d §187(j). Thus, even after excluding invasion pursuant to EPTL §7-1.6, some practitioners still questioned whether a court could invade such a trust if it found that the original purposes of the trust could not be carried out without allowing the use of trust principal.

Trusts specifically intended to supplement rather than supplant government benefits have generally been exempt from consideration by Medicaid since 1978, based on Matter of Escher.[1] This case, which was decided by Surrogate Gelfand in the Bronx and eventually approved by the New York Court of Appeals, has come to stand for the proposition that a settlor’s clear intent to supplement rather than supplant public benefits for a third party should be honored. Even though the trust upheld in Escher was a testamentary trust, an inter vivos trust will also be exempt from consideration by Medicaid if the person setting up the trust was not establishing the trust for his or her own benefit or for the benefit of a spouse.

Matter of Escher and other cases eventually resulted in the adoption of EPTL §7-1.12. EPTL .§7-1.12, which became effective in July of 1993, permits a third party to establish an inter vivos Supplemental Needs Trust that is specifically intended to supplement rather thansupplant government benefits and which restricts the trustee from spending assets in a manner that can reduce government benefits. The statute, however, includes language stating that the codification affects only conforming Supplemental Needs Trusts, and “nothing in this section shall affect the establishment, interpretation or construction of trust instruments which do not conform with the provisions of this section….” EPTL §7-1.12(f). Therefore, trusts that do not meet all of the statutory standards may still work pursuant to the common law.

The second type of supplemental trust for a disabled person is established with the funds of the disabled person or the disabled person’s spouse. In New York Chapter 170 of the Laws of 1994 allows these trusts if certain conditions are met. Prior to the enactment by Congress of the Omnibus Budget Reconciliation Act of 1993 (OBRA 93)[2] there was some controversy over whether an inheritance, a medical malpractice or personal injury settlement or award had to be considered as funds belonging to the disabled person, and therefore affecting the eligibility of the disabled person for government benefits. In a situation where a disabled person was expecting an inheritance or a personal injury recovery, but instead of the money going directly to him or her, the court created a trust and the estate or the defendant deposited the funds directly into the trust, there was a question as to whether the trust would be considered a third-party trust or a self-settled trust.[3]

OBRA 93 and the State enabling legislation (Chapter 170 of the Laws of 1994) specifically address this issue with regard to Medicaid eligibility. For purposes of the treatment of trusts the OBRA amendments state, “an individual shall be considered to have established a trust” (that is, the trust is self-settled) “if assets of the individual were used to form all or part of the corpus of the 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; (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.[4]

“Assets” under OBRA 93 and Chapter 170 are defined as income or resources of the individual and income or resources the individual is entitled to but does not receive because of action by the individual or spouse; or by a person, including a court or administrative body, with legal authority to act in place of or on behalf of the individual or spouse; or by any person including any court or administrative body, acting at the direction or upon the request of the individual or spouse.[5]Together, these provisions regarding who can establish a trust and the definition of assets evidence an intent by the Federal and State legislatures to include court settlements and awards as assets that may reduce, preclude or eliminate the benefits of the applicant or recipient.

Although both the Congress and the state legislature have adopted a broad view of when a trust is “self-settled,” both legislatures have nonetheless carved out an exemption for trusts for the disabled if the following strictures are followed:

  1. the trust is established for a disabled individual while he or she was under the age of sixty-five;
  2. the trust is established by a parent, grandparent, legal guardian, or court; and
  3. 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.[6]

A Supplemental Needs Trust may now be funded with the monies obtained by the disabled person by a court or through settlement of a medical malpractice or personal injury case. These trusts are referred to herein as “pay-back” trusts because they are valid only if the state is paid back for medical assistance at the end of the trust. Federal guidelines provide that if an individual resides in more than one state, then the trust must provide that the funds remaining in the trust must be distributed proportionately to each State’s share of the total Medicaid benefits provided.[7]

Pay-back trusts that are established when the disabled person is under the age of 65 continue even after the person becomes age 65. Funds added to the trust after the person reaches age 65, however will not be exempt under these rules.[8] Therefore special care may be necessary if the trust is funded by a structured settlement where payments to the trust maycontinue after the individual reaches age 65.[9]

OBRA 93 and Chapter 170 create a second type of exempt pay-back trust: pooled trusts created by a non-profit association.[10] Pooled trusts are significant because they are available to disabled persons over the age of 65. Also, a pooled trust may be established not only by a parent, grandparent, guardian or court, but also by the disabled individual him or herself. The statutes exempt both types of “pay-back” trusts from the income and resource requirements of the Medicaid law. It is less clear as to whether these provisions exempt the funding of the trust from the Medicaid transfer prohibitions or whether it is necessary to look to other sections of the law for such an exemption. There is a specific exemption for funding of a trust created for a disabled person under the age of 65.[11] If, however, the disabled person is over the age of 65, and the provisions for a pooled trust by a non-profit association are used,[12 ]then there is no specific separate exemption from the Medicaid transfer provisions. The federal Center for MEdicare a & Medicaid (CMS) has stated that the transfer to a pooled trust is only exempt from a transfer penalty if it is established for a disabled individual under age 65.[13]

CMS has stated that any pay-back trust where the state’s claim is satisfied before any other disbursements are made will be considered an exception to the rule that a trust must be “for the sole benefit” of a disabled individual in order to be exempt from transfer penalties. Therefore, there should be no problem with having remaindermen in a pay-back trust. However, where a third party trust (not a pay-back trust) is used the grantor may face a transfer penalty or waiting period for his or her own Medicaid eligibility unless the trust is “for the sole benefit” of the disabled individual, that is, no other individual or entity “can benefit from the assets transferred in any way, whether at the time of the transfer or at any time in the future.”[14] Naming any beneficiaries other than the disabled person may cause problems for the grantor.

EPTL §7-1.12, which codifies the Supplemental Needs Trust in New York, protects the principal and income of these trusts from more than just consideration by Medicaid. The statute also provides protection from income and resource requirements of state-funded programs such as the Mental Hygiene Law. Therefore, disabled persons having a pay-back trust which meets the statutory requirements of EPTL §7-1.12 will qualify for benefits both under Medicaid and the Mental Hygiene Law. Chapter 170 amended EPTL §7-1.12 which previously provided only for third-party Supplemental Needs Trusts, to allow for trusts funded with the property of the disabled person if the trust meets the requirements set forth in the new sections of the Social Service Law as set forth herein.[15]

The State has promolgated regulations implementing Chapter 170 of the Laws of 1994.[16] One condition imposed by the regulations is that any lien obtained pursuant to Soc. Serv. Law §104-b or 369 on the funds used to establish the trust on account of Medicaid provided prior to the trust establishment, must be satisfied or otherwise resolved in order for those funds to be disregarded.[17] On March 25, 1997, the New York Court of Appeals reversed two lower court cases and held that a Medicaid lien must be repaid before a supplemental needs trust could be funded.[18]

Chapter 170 had provided for the Department of Social Services to promulgate regulations assuring that the fiduciary obligations of the trustee of an exempt pay-back trust be met.[19] According to the regulations 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);
  4. notify the social services district in advance of any transactions involving transfers of principal for less than fair market value; and
  5. provide the social services district with proof of bonding.[20]

The statute and the regulations provide that Social Services may commence an action or proceeding under Executive Law §63 to assure the trustee’s compliance and protect the state’s remainder interest in the trust.[21]

The practitioner is therefore advised to provide notice to the social services district whenever a trust is created and/or funded. It is our experience that when the trust is being created in connection with a court proceeding, the local agency, the state agency, or both, will appear in the court proceeding and make known any objections they have to the trust or its provisions. This provides an opportunity to settle any issues and produce a so-ordered stipulation incorporating all negotiated terms including that the social services district and the state agree that the income and resources of the trust will not be considered in determining Medicaid eligibility. This should prevent problems later when Medicaid and other benefits are applied for or obtained.[22] See article “Courts Add Criteria to Supplemental Needs Trusts.”

Medicaid recipients may now use Supplemental Needs Trust for income and reduce or eliminate their spend downs. Any disabled individual receiving community based care (including home care) and disabled individuals under age 65 in nursing homes can have their pension or Social Security placed into a supplemental needs trust and it will not be budgeted toward their Medicaid spend down. Disabled individuals over age 65 must used a pooled trust established by a not-for-profit, while individuals under age 65 may use a pooled trust or an individual pay-back Supplemental Needs Trust. See New York State Office of Temporary & Disability Assistance Administrative Memo 96-ADM 8.

Many disabled persons also receive income from the federally administered Supplementary Security Income (SSI) program. Although Medicaid eligibility for aged and disabled persons often follows SSI income and asset rules, they sometimes differ. That is the case when considering trusts.[23] The SSI trust rules are discussed in detail in the Social Security Program Operations Manual (POMS).[24] The following is a brief synopsis of the SSI rules.

SSI considers the beneficiary to be the “Grantor” of the trust if the trust is set up by an agent or someone empowered to act on the beneficiary’s behalf, with funds or property that belong to the beneficiary. Whether the funds of the “Grantor Trust” are a resource for SSI purposes depends on whether the beneficiary can revoke and use the assets of the trust. SSI looks not only to the terms of the trust for revocability, but also to State law. In New York a trust may be revoked upon the consent of the settlor and “all the persons beneficially interested.”[25] Since the settlor and the primary beneficiary are the same person, the trust is considered “revocable” unless there is at least a “residual beneficiary” in the trust document who would receive funds at the beneficiary’s death.

For SSI purposes, disbursements from the trust will be counted as income unless they are “in-kind” payments by the trustee to a third-party that result in the beneficiary receiving items which are not food, clothing or shelter. If the in-kind payments are for food, clothing or shelter, then SSI has presumed maximum value (PMV) rules, to calculate how much will be deemed as income and thus reduce the individual’s SSI benefits. Income paid directly to the beneficiary will reduce benefits dollar for dollar. The practitioner would be well advised to draft the Supplemental Needs Trust so that it is insulated against consideration by SSI by including a residuary beneficiary and providing only for in-kind payments.[26] The Trustee should be cautioned that if he or she chooses to pay for basics such as food, clothing or shelter, there will be a reduction of SSI benefits.

Footnotes

  1. 94 Misc.2d 952, 407 N.Y.S.2d 106 (Surr. Ct., Bx. Cty., 1978); aff’d mem. 75 A.D.2d 531 (1st Dept., 1980); aff’d 52 N.Y.2d 1006, 438 N.Y.S.2d 293 (1981).
  2. Pub L 103-66, §13611[b], 107 US Stat 624, 525. 42 U.S.C. §1396p et seq.
  3. Cases upholding creation of trusts: Hughes v. Physician’s Hospital, 149 Misc.2d 661, 566 N.Y.S.2d 496 (Sup. Ct. Queens Co. 1991); Matter of Varkey, N.Y.L.J., April 26, 1991 (Surr. Ct. Nassau Co 1991); Mills v. Durst, 156 Misc.2d 676, 594 N.Y.S.2d 537 (Sup.Ct. Onondonga Co. 1993).
Cases denying trusts: DiGennaro v. Community Hospital of Glen Cove, N.Y.L.J., March 20, 1992, p. 27 (Sup. Ct. Suffolk Co. 1992), aff’d 204 A.D.2d 259, 611 N.Y.S.2d 591 (2nd Dept.) [the Appellate Division found the court did have discretion to approve a supplemental needs trust but affirmed on other grounds]; Matter of Harrison Daniel, N.Y.L.J., April 7, 1992, p. 27 (Surr. Ct. Dutchess Co.); Matter of Gonzalez, 154 Misc.2d 633, 586 N.Y.S.2d 861 (Sup. Ct. Nassau Co. 1992); Matter of Shaw, N.Y.L.J., July 8, 1992, p.33 (Surr. Ct. Nassau Co.); Matter of Daley, N.Y.L.J., Sept. 16, 1992, p.25, col.2 (Surr. Ct. Nassau Co.); Matter of Moretti, N.Y.L.J., Sept. 24, 1992 (Sup. Ct. Kings Co.), reargument granted, 159 Misc. 2d 654, 606 N.Y.S.2d 543 (Sup. Ct. Kings Co. 1993) [the trust fund was approved upon reargument after the enactment of OBRA ’93]; Matter of Cangelosi, 155 Misc.2d 621, 589 N.Y.S.2d 275 (Sup. Ct. Suffolk Co. 1992); Matter of Arens, N.Y.L.J., Nov. 6, 1992, p. 25 (Surr. Ct. Kings Co.).
  4. 42 U.S.C. 1396p(d)(2)(A)(i-iv).
  5. 42 U.S.C. 1396p(e)(1) and Soc. Serv. Law §366 subd.5(d)(1)(i).
  6. 42 U.S.C. 1396p(d)(4)(A) and Soc. Serv. Law §366 subd.2(b)(2)(iii)(A). OBRA 93 also provides exceptions for income trusts in income cap states and pooled trusts managed by non-profit associations. 42 U.S.C. §1396p(d)(4)(B) and (C). New York Law contains the exception for pooled trusts. Soc. Serv. Law §366 subd.2 (b)(2)(iii)(B). No New York exception for income trusts exists because New York is a supplemental income or “spend-down” state for Medicaid purposes rather than an income cap state.
  7. Health Care Financing Administration, State Medicaid Manual, Part 3 – Eligibility, §3259.7 at page 3-3-109.31 (Transmittal No. 64, November 1994).
  8. Health Care Financing Administration, State Medicaid Manual, Part 3 Eligibility,§3259.7 A. at page 3-3-109.31 (Transmittal No. 64, November 1994).
  9. It is also unclear how the Medicaid “pay-back” requirements interact with a structured settlement payable to the trust where a different beneficiary is named in case of the early demise of the primary beneficiary.
  10. 42 U.S.C. §1396p(d)(4)(C) and Soc.Serv. Law §366 subd.2 (b)(2)(iii)(B). The following not-for-profit organizations have established and manage pooled trusts in New York State: AHRC New York City Foundation, Inc.; ACLD – Adults & Children with Learning and Developmental Disabilities, Inc.; Community Living Corporation; Disabled and Alone, Life Services for the Handicapped, Inc.; Family Service of Rochester, Inc.; Lifetime Care Foundation for the Jewish Disabled (Check for other restrictions); NYSARC, Inc.; UJA Federation of New York (Services provided through F.E.G.S. Community Trust); YAI/National Institute for People with Disabilities.
  11. 42 USC §1396p(c)(2)(B)(iv) and Soc.Serv.Law §366 subd.5 (d)(3)(ii)(D).
  12. 42 U.S.C. §1396p(d)(4)(C) and Soc.Serv. Law §366 subd.2 (b)(2)(iii)(B).
  13. Health Care Financing Administration, State Medicaid Manual, Part 3 -Eligibility, §3259.7 B. at 3-3-109.33 (Transmittal No. 64, November 1994).
  14. Health Care Financing Administration, State Medicaid Manual, Part 3 Eligibility, §3257 B.6. at page 3-3-109.2 (Transmittal No. 64, November 1994).
  15. EPTL §7-1.12 previously had an exception for the beneficiary to be the creator of the trust where the trust was funded by court awarded retroactive Supplementary Security Income (SSI). EPTL §7-1.12(a)(5)(v). This subparagraph now allows the beneficiary to be the “creator” of the trust, if the trust meets the requirements of Soc.Serv. Law §366 subd.2(b)(2).
  16. 18 NYCRR §360-4.5.
  17. 18 NYCRR §360-4.5(b)(5)(ii).
  18. Cricchio v. Pennisi and Link v. Town of Smithtown.
  19. Soc.Serv.Law §366 subd.2(b)(2)(iv).
  20. 18 NYCRR §360-4.5(b)(5)(iii).
  21. Soc.Serv.Law §366 subd. 2(b)(iv); 18 NYCRR §360-4.5(b)(5)(iv).
  22. But see Williamson v. Alleyne, N.Y.L.J., March 27, 1995, p. 32 (Sup.Ct. Suffolk Co.), where the court stated it would establish a supplemental needs trust for a competant adult plaintiff in a personal injury case, but declined to have the parties and the social services agency litigate the validity of the trust, leaving that to a future Article 78 or declaratory judgment if “the local social service official wrongfully rejects any of the terms of the proposed supplemental needs trust.”
  23.  See Tobin, Patricia, “How the New SSI Trust Rules Can Clash with OBRA-93 (And What to Do About It),” The Elderlaw Report, Vol. IV, No. 3, October 1994, p. 1.
  24. POMS §SI 01 01120.200. Transmittal No. 33, SSA Pub. No. 68-0501120, March 1994.
  25. EPTL §7-1.9. See Aaron L. Danzig, “How to Amend A Trust, If You Must,” New York Law Journal, August 24, 1990 at 1, col. 1.
  26. A residuary beneficiary should not pose a problem in a pay-back trust, but for eligibility consequences for the grantor of a third-party trust see the discussion of the HCFA rules defining “for the sole benefit,” above and fn.14 above.

written June 27 1995
last revised June 21 1998

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