I have an adult cousin who is disabled. She is the beneficiary under the Will of our aunt. She went to another relative who is an attorney to do her Will. Although the attorney was aware of my cousin’s disability, he did not put any Supplemental Needs Trust provisions in the Will. Our aunt died. The bequest, which is significant, will disrupt her government benefits, which include residence in an assisted living facility paid for by Medicaid. What can I do?
This is a frustrating problem that happens quite often. Before we look at the solution, let’s review what a Supplemental Needs Trust is. These trusts are authorized by federal and state law and are created to hold assets for the benefit of a disabled individual in a way that will not interfere with any government benefits available to him or her. The assets could come to the individual by employment, testamentary bequest, or proceeds from a personal injury litigation settlement. These benefits include Social Security income and Medicaid benefits.
These can be crucial for the disabled individual, both in economic terms and to the extent that there are community resources available to the disabled beneficiary through Medicaid that would not otherwise be available, even through a private pay mechanism. It is paramount to protect these benefits so that care continues without interruption.
There are two types of Supplemental Needs Trusts: a “first-party” and a “third-party.” A Supplemental Needs Trust is often referred to as a Special Needs Trust and the two terms are, for general purposes, referring to the same trust vehicle.
When a Supplemental Needs Trust is funded with the individual’s own assets (i.e. bequest, lawsuit proceeds), it is called a “first-party SNT.” This is in contrast to a “third-party SNT,” which is funded with another person’s assets for the individual’s benefit.
A first-party trust is permitted only when the individual is younger than 65 years old when the transfer occurs; otherwise there is a transfer penalty (a period during which the government will not pay for benefits). If the individual was still in the community, a first-party trust may be established after the age of 65; however, the transfer is a non-qualified transfer with a five-year look-back period. If the disabled beneficiary is over 65 years old, however, and already in nursing home care, this is not the best option.
A testamentary trust established under someone’s will is generally a “third-party SNT.” The benefit to a third-party trust is that it does not have a “pay back” requirement to the government, because the funds used to “seed” the third-party trust are not the disabled individual’s own funds. They are generally the funds contributed by a third-party, whether a parent, grandparent, sibling, or anyone else. Any remaining assets at the individual’s death pass as the grantor of the third-party trust directs. A first-party trust requires that the trust balance be used to pay back any government benefits received.
Back to the problem with your aunt’s Will. There are a few options, but usually the most prudent option is to seek reformation of the Will if it is financially feasible to do so:
Option 1: Pooled trust
Pooled Trusts are essentially a form of a Supplemental Needs Trust in that it suspends ownership of the funds sufficient to preserve benefits, but the individual need not create or administer a separate trust (hence the “pooled” reference). A pooled trust is managed by a nonprofit organization that is authorized to act as trustee of a global Supplemental Needs Trust for several beneficiaries (not just one, like a privately created trust). The assets in the pooled trust are not counted as assets of the individual for the purpose of determining eligibility for government benefits. Unlike the first-party trusts discussed above, the pooled trust can be utilized at any age. However, a transfer to a pooled trust can create a transfer penalty if the disabled beneficiary is currently receiving Social Security income.
Assets of a disabled person are put into a subaccount with the pooled trust and the assets can be used for the individual’s benefits during her life. Distributions are permissible to enhance the individual’s quality of life, which may include payments for vacation, computers, sporting goods, furniture, or transportation. Prohibited distributions include distributions to the beneficiary directly (as with all trusts discussed herein), distribution to a bank account, alcohol, tobacco, or firearms.
The pooled trust option alleviates the administrative burden of ensuring payments won’t jeopardize benefits, but drawback of this type of trust is that there are delays in payments, as the pooled trust must first authorize the payment and then send a check. Also, at the individual’s death, the remainder of the trust assets will become the property of the pooled trust; you cannot direct a beneficiary.
There are some start-up costs to a pooled trust and a monthly (or annual) fee during the individual’s life. In New York, there are approximately 20 different pooled trusts to choose from. Each has its own rules, minimum contribution limits, and fees. Once the individual is accepted into a pooled trust, her guardian or representative notifies Medicaid and the Social Security Administration by presenting the acceptance letter, a copy of the Master Trust Agreement, and Joinder Agreement, in order to ensure there is no disruption in the individual’s government benefits.
The pooled trust option may not be viable if the beneficiary (your cousin) is already receiving government benefits, since it could create a transfer penalty.
Option 2: ABLE account
In 2014 President Obama signed a law called the Achieving a Better Life Experience Act (ABLE), which created the ability for disabled persons to have a savings account, similar to the college education 529 Plans, but for a broader scope of services beyond higher education. In order to be eligible for an account, the disabled person must be someone who had a disability that occurred before she turned 26 years old. Even then, the account may only be funded with amounts up to the annual exclusion, currently $14,000.
Because the individual became disabled later in life, she is not eligible for this type of account. Also, although the law has been enacted, it is up to each state to implement the accounts, and in New York, this type of trust is not yet available.
Option 3: Will reformation
The final and usually preferable option is to seek reformation of the Will. A reformation seeks to “rewrite” the will to include the trust provisions that were not included in the first place. If there is a contingent beneficiary in the Will, you can seek reformation in a way that would allow any remaining trust funds to pass to that beneficiary. There is no age limitation to a testamentary Supplemental Needs Trust.
In order to reform the Will, the executor or the representative of the disabled beneficiary petitions the court for a construction proceeding, and asks the court to establish the trust and authorize a trustee. You would present a proposed draft of the trust provisions. Ideally, you would obtain consent from all other interested parties (the other beneficiaries) who should not be adversely affected by the reformation and therefore are not likely to object.
Notice would also likely need to be given to the New York State Department of Health and the Department of Social Services, which might object because it might deprive it of reimbursement for the provision of benefits. However, case law does suggest that the court will be willing to reform a Will in order to effectuate the testator’s intent, and if the reformation would not materially change the testator’s dispositive plan.
If your aunt knew that your cousin was disabled, a valid argument could be made that she intended to protect her and would have done so had she known that the trust provision was an option. In that regard, if the reformation were to be disallowed, the testator’s intent that the disabled beneficiary receives a benefit under the Will would be frustrated because it would require disclaiming her interest under the Will and sacrificing it in order to preserve her government benefits. However, the Department of Health and Social Services may object to the trust unless a payback provision is included.
Alison Arden Besunder is the founding attorney of the law firm of Arden Besunder P.C., where she assists with estate-planning. Her firm assists clients in Manhattan, Brooklyn, Queens, Nassau, and Suffolk Counties. Find her on Twitter @estatetrustplan and on her website at www.besun