Administration of Special Needs Trusts: Development of an Improved Approach (Part II)

Administration of Special Needs Trusts: Development of an Improved Approach (Part II)

3.10.2020

By Edward V. Wilcenski and Tara Anne Pleat

This is the second installment of an article that appeared in the March 2019 Issue of the NYSBA Journal.

The authors wish to express thanks to NAELA Fellow Ron M. Landsman for his willingness to offer insight and comment on the ideas expressed in this article. His article in the Spring 2014 issue of the NAELA Journal, When Worlds Collide: State Trust Law and Federal Welfare Programs, NAELA Journal Vol. 10, No. 1 (Spring 2014), remains one of the most important writings in the area of special needs trust practice in many years.

In Part I we discussed the different standards of review courts use to assess the work of supplemental needs trust (SNT) trustees. One derives from guardianship practice (a “best interest” assessment), another from benefit program eligibility (a “government benefit” assessment). Both incorporate important considerations when analyzing a distribution from a supplemental needs trust, but neither represents an appropriate standard for judicial review in determining whether a trustee properly exercised its discretion.

The appropriate standard of review for a distribution from a supplemental needs trust is the same one that applies to any discretionary trust: abuse of discretion. That standard provides the flexibility and protection afforded the trustees of other discretionary trusts so long as the trustee follows the commonly accepted rules of fiduciary conduct, as supplemented by additional steps that acknowledge the beneficiary’s disability and eligibility for government benefits.

To obtain the protection afforded to trustees of other discretionary trusts, the SNT trustee should acknowledge and address three aspects of SNT administration that are not at issue in the administration of other discretionary trusts:

1. A beneficiary’s cognitive disability may prevent reliable communication with the trustee;

2. Programs and services available to support the beneficiary in the community represent an additional resource to be considered before using trust funds to purchase a good or service; and

3. Traditional, informal means of settling accounts may be insufficiently protective.

Effective SNT administration requires the trustee to establish a means of communication with the beneficiary or a beneficiary’s representative, a protocol for assessing programs and services, and a plan for regular accounting and periodic settlement. If followed, and presuming that the trustee has satisfied the other, traditional obligations of fiduciary conduct, the trustee’s reasonable exercise of discretion should be supported upon judicial review under an abuse of discretion analysis, even if the court would have made a different decision on the same set of facts.

Basic rules of fiduciary conduct applicable to all trustees

All trustees must follow the basic rules of fiduciary conduct, requiring them to apply income and principal in accordance with the terms of the governing document,¹ account for the application of principal and income,² invest prudently and in accordance with the terms of the trust,³ prepare and file tax returns,⁴ and keep beneficiaries informed of how trust funds are being invested and/or utilized.⁵

Exercising discretion

Trustees of discretionary trusts must exercise judgment when making distribution decisions. In New York, case law follows a few common lines of inquiry in determining whether a trustee properly exercised discretion:

1. Does the trustee have an established process for review and consideration of beneficiary requests?⁶ In other words, is there evidence that the trustee is making informed decisions?

2. Did the trustee follow its own established policies in making distribution decisions, and did it document the basis for those decisions?⁷

3. Did the trustee exercise independent judgment rather than deferring to a beneficiary or a beneficiary’s representative?⁸

4. Does the document require the trustee to consider whether the beneficiary had other assets and resources that could be used in lieu of using funds from the trust, and if so, did the trustee do so?⁹

5. For significant or long-term expenditures, did the trustee balance the immediate needs of the beneficiary with probable future needs?¹⁰

If the trustee can answer these questions in the affirmative, courts will typically support the trustee’s discretionary decisions even if the judge or another party to the proceeding might have made a different decision on the same set of facts. In the realm of discretionary trusteeship, the process of proactive administration protects the fiduciary and beneficiary alike. When the trustee follows the process of communication, investigation, consideration and documentation, the beneficiary receives the benefits of the fiduciary arrangement. In exchange, the trustee is protected from later challenge to its distribution decisions simply because another might have reached a different conclusion.

This quid pro quo assumes that both the trustee and the beneficiary are capable of self-advocacy. But when a beneficiary has a cognitive disability, she is at a disadvantage. Courts struggle to find the correct balance between oversight for the benefit of those who cannot fully advocate for themselves and the well-established body of law that protects a fiduciary’s authority to make discretionary decisions.

Disability and discretion

Supplemental Needs Trusts are discretionary trusts¹¹ for a reason. These trusts often have to last for the lifetime of a beneficiary with a disability. Circumstances change, and the authority to exercise discretion allows the trustee to respond to changes in need.

Where a beneficiary is unable to adequately advocate for herself because of a cognitive disability, courts have a responsibility to provide oversight.¹² In proceedings for the establishment of supplemental needs trusts in New York, this equitable authority is often cited as justification for imposing administrative obligations on the trustee that are above and beyond what the federal and state statutes would otherwise require.¹³ So, for example, even though there is no statutory or regulatory or administrative requirement that the trustee of a supplemental needs trust prepare annual accountings, guardianship courts often impose such a requirement in order to protect a beneficiary who is incapable of self-advocacy.

No one would question the courts’ parens patriae responsibility to protect the interests of those who cannot protect themselves. But simply reciting the obligation does not provide any practical administrative guidance to the trustee of a discretionary trust. In the context of SNT administration, the question is not whether a court has the authority to protect the interests of a beneficiary with a disability. The question is how that protection is provided.

Court reluctance to substitute judgment

Courts typically do not substitute their judgment for that of a trustee so long as the trustee’s exercise of discretion was reasonable, consistent with the terms of the trust, and made in good faith.¹⁴ Courts often refuse to provide guidance when the trust document gives the trustee the responsibility to make a discretionary decision.¹⁵ This narrow role for the courts is codified by statute in New York, where courts render “advice and direction” in a limited number of enumerated situations.¹⁶

This structure breaks down when cognitive disability enters the picture. Courts are reluctant to defer to the discretion of the trustee and often substitute their judgment when reviewing discretionary distributions.¹⁷ The net effect is that trustees – unsure of how their discretionary decisions will be measured – are often reluctant to make any significant distributions, or refuse to do so without regular input from a court.

This is precisely the type of micromanagement that a discretionary trust is intended to avoid.¹⁸ A beneficiary’s disability is no reason to deviate from the standard practice of deferring to the trustee’s judgment, so long as the trustee has not abused its discretion. Under an “abuse of discretion” analysis, if the trustee of an SNT follows the traditional rules governing trustee conduct, the trustee’s exercise of discretion should be upheld even if a court would have made a different decision on the same set of facts.

Establishing a protocol for communication with a beneficiary

Trustees need information to make informed discretionary decisions. In a typical administration, the trustee can communicate directly with an adult beneficiary, and in the case of a minor a trustee can communicate with a legally responsible adult such as a parent. Communication is relatively straightforward and unencumbered.

SNT beneficiaries may lack the ability to communicate. They may not have court-appointed guardians or voluntarily designated agents under power of attorney. They may lack informal supports like family members and friends, or those informal supports may be unreliable or dishonest.

These practical challenges defy simple solution. If a beneficiary with a developmental disability needs a winter coat, the trustee may have the authority to purchase the coat, and the purchase may be an appropriate exercise of discretion. But how would the trustee know that the beneficiary needs a coat? How does the trustee buy an appropriate coat? How does the trustee get the information it needs to appropriately exercise its discretion and facilitate the purchase?

Family members might be able and willing to do so. But what if the beneficiary has no reliable family members (or no honest family members), no court appointed guardian, and no other reliable, informal advocates?

SNT beneficiaries might have Medicaid-funded staff to provide this information, but the continued erosion of Medicaid funding for this type of service has made this a less reliable option. Medicaid-funded care managers have increased caseloads, and disability provider agencies face high staff turnover (or are simply unable to locate staff in the first place). As a result, the trustee’s affirmative obligation to make informed discretionary decisions¹⁹ often cannot be met through communication with Medicaid-funded staff alone.

If there are no credible family supports, no court-appointed guardian, and no reliable Medicaid-funded staff, the trustee should consider retaining a private care manager, social worker or other advocate to serve as its “boots on the ground” to obtain information that the trustee can consider when making a distribution decision.

Recommendation

In determining whether a trustee of a supplemental needs trust reasonably exercised discretion, judicial review should consider whether the trustee established an effective protocol for communication and a credible means of obtaining reliable information about the beneficiary’s needs.

Upon being appointed, the trustee should undertake the following analysis:

1. Is the beneficiary competent to correspond and advocate directly? Many SNT beneficiaries with physical disabilities are fully capable of communicating directly with the trustee.

2. If the beneficiary cannot communicate directly, is there a court-appointed guardian or agent under power of attorney who is able to speak reliably on behalf of the beneficiary and provide important information and documentation?²⁰

3. Is the beneficiary supported by reliable²¹ family members, friends or other informal advocates? While the trustee may be precluded from sharing information about the trust with individuals who lack legal authority to access it, the trustee is free to receive information from any credible source, supplementing whatever other information the trustee receives.

4. Does the beneficiary have program staff who could help communicate requests for goods and services to supplement what government benefit programs provide?

5. Can the trustee hire a private care manager or other advocate to provide periodic assessments and recommendations for distributions.?²²

Developing a process for assessing and reviewing programs and services

Professional trustees are required to have a basic knowledge and understanding of the rules governing investments, income taxes, and other financial issues common to all fiduciary appointments. Most institutions have a process in place to review these issues on a regular basis.

When an issue falls outside of a trustee’s traditional area of expertise, trust documents are typically written to allow the trustee to retain outside professionals and to pay those professionals with trust funds. For example, fiduciaries often retain outside professionals to address complicated tax questions. The reasonableness of the fee paid is always subject to review on an accounting, but the authority to retain outside expertise is well established.²³

SNTs – by their terms and by statute – require a trustee to consider factors that are outside the traditional realms of trustee expertise: the availability of public benefits and the means-tested goods and services they provide, the adequacy of those goods and services, and the potential impact of a distribution on continuing eligibility.²⁴

This requirement is a variation on a common theme found in cases analyzing a trustee’s exercise of discretion. Government benefit programs represent a valuable source of funding for goods or services that the trustee must consider before making a discretionary distribution.²⁵ To adequately consider these other sources, the trustee must answer a few questions.

Determining whether Medicaid (or another program) pays for a good or service

This requires more than simply asking, “Is the beneficiary Medicaid eligible?” Medicaid is a payment source for certain goods and services, but the question for the trustee is whether Medicaid will pay for the specific good or service that the beneficiary needs. It is not uncommon for a beneficiary to be eligible for Medicaid (meaning that the Medicaid program is willing to pay for a good or service), but the good or service itself may be unavailable. This dilemma is often seen in the area of Medicaid funded staffing, where the hourly rate paid to community-based staff is so low that service providers either cannot find people to fill the positions, or they are forced to hire individuals with minimal experience.²⁶

Medicaid-funded waiver²⁷ programs offer a broad range of services to beneficiaries, some with more generous housing supports, and others with better hourly reimbursement rates for staff. But it is the responsibility of the beneficiary (or the beneficiary’s family or staff) to ensure that those services are being fully utilized. In our experience, parents and other family members spend so much time and effort simply managing the affairs of the person with the disability that they have neither the time nor the inclination to develop a comprehensive understanding of program requirements. And if staff are overworked, underpaid or inexperienced, they will be minimally resourceful. Available services often go underutilized.

Assessing whether the government-funded option is adequate, or whether trust funds should be used to supplement or replace it

In order to comply with the terms of the trust and (in New York) the language of the governing statute, the trustee of a supplemental needs trust must determine whether funds in the trust should be used to supplement (or supplant) an available good or service.

Consider a beneficiary in need of a wheelchair. Medicaid pays for a basic wheelchair, but the beneficiary might do better with a more expensive wheelchair that is a better fit for her needs – safer, more comfortable, with more sophisticated positioning systems and other controls. The trustee might be able to acquire the chair immediately and without having to go through the Medicaid program’s administrative review and approval process. The trustee has the discretion to pay for the better chair.

Consider a beneficiary with Medicaid-funded staffing in the home. A beneficiary may be approved for three hours per day, two days per week. But the beneficiary and her family would rather not work with inexperienced Medicaid-funded staff, or they may want more hours of coverage. If there are funds in the trust to pay, then the trustee has the discretion to purchase those extra hours, or hire other, more experienced staff.

Before using trust assets to supplement (or supplant) a government-funded good or service, the trustee should have some process in place to confirm what the program is providing, and some means of documenting that the beneficiary would benefit from other or additional goods or services.

Determining whether using trust funds used to pay for a good or service will negatively impact benefit program eligibility

Programs such as the Supplemental Security Income (SSI) and Supplemental Nutritional Assistance Program (SNAP) provide direct financial benefits to their participants. Others – like Medicaid – provide a payment source for goods and services, but do not make payments directly to a beneficiary.

The same distribution from an SNT can impact different programs in different ways. For example, the payment of rent from a trust will have no impact on Medicaid²⁸ but may result in a reduction in a monthly SSI payment and an increase in the rent paid for HUD-subsidized housing.²⁹

The trustee is charged with knowing which benefit programs a beneficiary is participating in at the time of the distribution, understanding that many beneficiaries migrate in and out of different benefit programs based on changes in family composition, financial condition, and other circumstances, and knowing how the proposed distribution might impact those benefits.³⁰

If a trustee exercises discretion and uses funds in the trust to pay rent so that the beneficiary can move into a nicer neighborhood, the trustee must understand the impact of its discretionary distribution on the SSI benefit, and document why the beneficiary would be better off with less monthly income but a better place to live.

Recommendation

In determining whether a trustee of a supplemental needs trust has reasonably exercised discretion, judicial review should consider whether the trustee developed a protocol for assessing government benefits and available services, and a process for periodic review and update.

Upon being appointed, the trustee should promptly develop a plan to confirm government benefit eligibility and available goods and services, to assess whether those services and supports are adequate, and to review that information on a regular basis. The trustee should consider the following resources and suggestions:

1. For beneficiaries participating in a waiver program, disability service providers prepare periodic reports (called Service Plans or Life Plans in New York)³¹ which include information on a beneficiary’s preferences, health, family supports, and professional providers. Different programs have different reporting requirements, but most publicly funded programs will require a summary report of some type. These reports can often provide useful information on what services might be available through a government benefit program.³² The trustee should regularly obtain these reports.

2. If a beneficiary has proactive and well-informed family members, they may be able to provide the trustee with information needed to determine whether a government benefit program is providing an adequate level of goods and services.

3. The trustee can hire a private care manager or other advocate to conduct a comprehensive review of benefit eligibility and available services and provide options for supplementing those benefits and supports.³³

Preparing annual accountings and periodically seeking judicial settlement

At some point, every trustee seeking to be discharged must account to its beneficiaries. If those beneficiaries are competent and willing, they can “settle” the trustee’s accounting voluntarily and without court order. This is often not an option for SNT trustees.

What is an “accounting”?

We use the term “accounting” to refer to a summary of financial activity over a given time period, presented to the beneficiaries of a trust to keep them informed about trust activity. Sometimes they are filed with a court, sometimes not.

Some courts provide forms that trustees must use in summarizing financial activity. Some court forms are very simple, requesting only opening and ending balances and a summary of distributions made over the accounting year. Others are more elaborate and track unrealized gain and loss, allocate expenses to principal and income, and allow the trustee to provide additional information on explanatory schedules.

Used here, the term “informal accounting” refers to accountings which are filed with a court or presented to a beneficiary for informational purposes. In some cases, they are required by statute, by court order or by the terms of the trust document. In others they are not required but are prepared voluntarily by a trustee to keep the beneficiaries informed of trust activity.

In New York, many SNT trustees are required to file annual informal accountings when the trusts were established and funded by court order in a guardianship proceeding or personal injury action. These informal accountings are reviewed by an examiner or fiduciary clerk, but they will not receive formal judicial review. We refer to them as informal accountings even though they are filed with a court.

The format used for an informal accounting can vary. A year-end financial statement that a trustee provides to a beneficiary could be considered an informal accounting. A checkbook ledger and accompanying bank statements might be appropriate in some circumstances. If a trustee is required to account by court order and the court has a preferred form, then the trustee will use that form. If there is no court filing requirement, a trustee wishing to keep its beneficiaries informed of trust activity can use whatever form it deems appropriate. Some trustees may send financial statements, others may use a more elaborate format similar to what would be used in an estate accounting.

A proceeding for “judicial settlementa’ involves a petition to a court asking for review and approval of the trustee’s accounting. These proceedings are filed with notice to all interested parties. In New York, the form of the accounting that must accompany the petition is promulgated by the Chief Administrator of the State of New York and is comprehensive.³⁴

Accounting requirements for SNTs vary by state

There is no requirement under the federal or many state supplemental needs trusts statutes that a trustee prepare annual accountings of any type or with any frequency. Such is the case in New York, where there is no statutory, regulatory or administrative requirement that a trustee of an SNT prepare annual accountings.³⁵ As a result, many first party and third party SNTs in New York and elsewhere are administered without ongoing oversight. If the trustee wants to resign during the beneficiary’s life or seeks to have its accounts settled upon the beneficiary’s death, the trustee’s discretionary decisions will be subject to second-guessing inherent in proceedings for judicial settlement of multi-year accountings, a process familiar to trustees of discretionary trusts.

The proactive trustee can mitigate the risk of belated challenge by keeping the beneficiaries regularly informed of trust activity, but the effectiveness of this approach will be determined in part by the accounting format used, the frequency of the disclosure, and the capacity of the beneficiary.

Financial statements alone provide insufficient disclosure

In a traditional trust administration, the trustee provides a beneficiary with monthly, quarterly or annual financial statements. These statements keep the beneficiaries informed and can serve as the basis for an informal settlement of the trustee’s accounts when the trust terminates or when a trustee is otherwise seeking to be released.

This level of informality is inappropriate in the context of SNT administration for at least four reasons:

1. A beneficiary with a cognitive disability may not have the ability to review and understand financial statements and therefore would be unable to provide informed consent to the settlement of a trustee’s account. While a trust could be drafted to allow a third party (like a parent or guardian) to review and approve a trustee’s accounts, courts tend to frown on informal settlements by guardians,³⁶ especially in cases where the guardian has a conflict (such as when the parent-guardian resides in a home owned by and financially supported by the trust).

2. Evidence that a fiduciary has provided all beneficiaries with copies of financial statements, tax returns and other trust activity will not preclude a later challenge in a proceeding for settlement of the fiduciary’s account, especially where a beneficiary has a cognitive disability.³⁷

3. Relying solely on the delivery of financial statements presents even greater risk for the trustee of a first party supplemental needs trust, where the Medicaid program is entitled to be repaid upon the death of the beneficiary and is thus an interested party in any proceeding for settlement of the trustee’s accounts. Financial statements reviewed as part of a Medicaid application or redetermination do not bind the agency and do not preclude a later proceeding to recover incorrectly paid Medicaid.³⁸ Nor do they address the prospect that the trust remainder may not be sufficient to satisfy the Medicaid claim upon the beneficiary’s death to recoup correctly paid Medicaid. Medicaid program representatives insist on formal judicial settlement for a fiduciary to be released when a trust is terminating, payment of the Medicaid recovery is due, and the recovery cannot be fully satisfied by the trust remainder.

4. Information presented on complex financial statements can be confusing and difficult to understand. If the information is not clear and complete, a release based on that information may be unenforceable.³⁹

Traditional accountings do not address the unique responsibilities associated with SNT administration

Some trustees provide informal accountings to their beneficiaries on an annual or other periodic basis. The format and level of detail vary, but these informal accountings rarely identify and address issues that would be the subject of inquiry by the agencies administering the Medicaid or SSI programs. ⁴⁰

Accountings prepared by corporate trustees frequently combine reimbursements for various items into a single “discretionary distribution” rather than separate them by category. Thus, a reimbursement to a family member might include items that would impact SSI (such as groceries) as well as items that would not (such as a cell phone bill). Supplemental needs trust accountings should segregate distributions by the type of expense and use the informational schedules to identify distributions that may impact public benefits.

Similarly, these informal accountings may not identify transactions that provide a derivative benefit to third parties or may not address those transactions in the explanatory schedules.⁴¹

Consider a trustee who, after consulting with a beneficiary and her guardian, decides to use funds in an SNT to pay rent so that the beneficiary and her guardian can move into a decent apartment. That payment would be reflected on the informal accounting. An accompanying note in the explanatory schedule would confirm that the guardian is paying his portion of the rent, that payment from the trust is being made with the understanding that there will be an offset to the beneficiary’s monthly SSI payment, and that the beneficiary and her guardian have reported the ongoing payment to the SSI program in anticipation of the adjustment. By doing so, the informal accounting will reflect that the trustee has made an informed decision and that the trustee has considered the impact of the distribution on government benefits.

Filing an informal accounting is not the same as petitioning for judicial settlement

When an SNT is funded by court order, the order will often require that an annual accounting be filed with the court for review by an examiner or fiduciary clerk. Accounting format varies, and the review is more of a financial reconciliation to ensure that the accounts balance and that distributions were made in compliance with any restrictions or limitations that may have been imposed by the court.

This administrative review does not formally settle the trustee’s accounting.⁴² As such, these ex parte submissions do not protect a trustee from later challenge by a remainder beneficiary or, in the case of a first party SNT, by the Medicaid program.⁴³ In order for the trustee to be formally released from any further liability for information contained in the accounting it would have to petition for judicial settlement with service on all interested parties.⁴⁴

This lack of a binding determination presents a particular risk for trustees of first party supplemental needs trusts. Eventually these trusts will terminate and the trustee will need to formally account, a process that includes the determination of the Medicaid program’s repayment amount. Increasingly, state Medicaid programs are hiring national for-profit entities known as “Medicaid Recovery Audit Contractors” to pursue their recovery rights.⁴⁵ These companies have their own proprietary procedure for review and interpretation of the responsibilities of the trustee of a supplemental needs trust and would not be bound by informal filings with a state court.

Finally, the scope of a trustee’s responsibility to the Medicaid program upon the death of the beneficiary remains unclear. The Social Security Administration takes the position that the trustee of a trust where the beneficiary is receiving an SSI benefit is responsible to ascertain and resolve repayment obligations to every state in which a beneficiary has ever resided,⁴⁶ although the language of the federal supplemental needs trust statute contains no such affirmative obligation. If a deceased beneficiary lived in a number of states, will service on the Medicaid program representative in the state where the beneficiary last received Medicaid be sufficient to bind the Medicaid program? There are apparently no reported decisions on this issue.⁴⁷

Annual proceedings for advice and direction or judicial settlement would be impractical and cost ineffective

The aspects of SNT administration highlighted here – communication challenges, unfamiliar government benefit programs, and the inability to informally settle accounts – present unique risks for SNT trustees.

Given these risks, a prudent trustee might be inclined to seek judicial approval of its actions on a regular – and perhaps an annual – basis. The trustee could petition for judicial settlement of its accounting or could seek “advice and direction” on a proposed distribution plan. Both proceedings present risks of their own, and neither approach – if undertaken annually – would be cost effective.

A trustee could present a formal accounting for judicial settlement on an annual basis.⁴⁸ Where the beneficiary has a cognitive disability, and regardless of whether a property guardian has been appointed, most courts will appoint a guardian ad litem, especially where a court-appointed guardian resides with the beneficiary and has indirectly benefitted from the use of trust funds. Some guardians ad litem are attorneys with significant experience in special needs planning and disability benefits, but many are not. Inexperienced guardians ad litem can complicate a proceeding for settlement.

Because the Medicaid program is considered to have a remainder interest in a first party supplemental needs trust,⁴⁹ the Medicaid program representative will be a necessary party to the proceeding for judicial settlement. The Medicaid program representative will then have an unfettered opportunity to challenge discretionary distributions appearing on the accounting, focusing on distributions which would have an impact on “benefit eligibility”⁵⁰ or reduce the amount available for post-mortem recovery.

Alternatively, a trustee could seek ”advice and direction” on an annual basis: court approval for a distribution plan developed in conjunction with the beneficiary (or the beneficiary’s guardian), a care manager, or others involved in the beneficiary’s life. By having a distribution plan approved in advance, the trustee would be insulated from challenge so long as a later accounting showed that distributions were made in compliance with the court approved plan.

Yet courts regularly refuse to entertain petitions for advice and direction when a matter is considered to be within the discretion of a trustee or guardian.⁵¹ Moreover, this approach would require a return to court whenever a plan needed to be modified based on changes in health, household composition or other factors that are impossible to predict with certainty. And as with a petition for judicial settlement of the trustee’s accounting, the Medicaid agency will be a necessary party to the proceeding and will have standing to dispute the proposed plan of care or the budgeted amount, or otherwise seek to limit distributions and increase the amount available to satisfy the Medicaid program’s recovery upon the beneficiary’s death.⁵²

Recommendation

In order to manage and mitigate risk, the trustee should take the following steps:

1. The trustee should prepare an informal accounting of trust activity on an annual basis, and provide copies of the accounting to the beneficiary with the disability (if competent, or to the court-appointed guardian or agent under power of attorney if not) and to the Medicaid program representative if the trust is a first party SNT.⁵³ If the beneficiary is a minor, the beneficiary’s parents should also receive a copy.

The informal accounting should clearly delineate distributions which would have an impact on benefit eligibility or which provide a derivative benefit to third parties, and should include clarifying information in the explanatory schedules as appropriate.

Finally, the informal accounting should be prepared in the same format that would be required in a proceeding for judicial settlement so that the trustee can move quickly to have its accounts settled if any party receiving a copy raises an issue. This is especially important for first party supplemental needs trusts where the Medicaid program will be a necessary party to any settlement proceeding.

2. On a periodic basis, the trustee’s accounts should be judicially settled. Even if a trustee is providing comprehensive informal accountings on an annual basis to all beneficiaries and none of the beneficiaries raise an issue, the trustee should nonetheless petition for judicial settlement after a number of years in order to wipe the slate clean. Frequency will depend on a number of factors. If a trustee is making regular and significant distributions from a well-funded trust, it might petition for judicial settlement every few years. If the trust is modestly funded and relatively inactive, it might petition less frequently.

This recommendation is not limited to SNT trustees. Circumstances that can complicate the settlement of a trustee’s accounting (whether informally by agreement or by court order) are familiar to attorneys who represent trustees in contested accounting proceedings. Older financial records are lost or unavailable, a common occurrence in an era of bank consolidation. Trust officers retire, taking with them the first-hand knowledge of a beneficiary’s circumstances and the basis for certain discretionary distributions. Relationships with beneficiaries may sour over time, increasing the likelihood of objections.

For trustees of SNTs, there are additional variables and uncertainties. Government benefit program rules change over time, and a distribution that might have had no impact on a particular benefit under a prior policy may now result in a penalty. New programs might emerge that provide funding for services the trustee has been paying for with trust funds for many years. Finally, attorneys who represent the Medicaid program in proceedings for judicial settlement also retire, and their replacements may take a much more adversarial approach in settlement proceedings. Periodically seeking judicial settlement puts all parties on notice – the beneficiary with the disability, the Medicaid program (for first party SNTs), and the remainder beneficiaries – and requires them to present their objections for review by the court.

3. For significant transactions or transactions that would clearly result in a derivative benefit to someone other than the beneficiary, the trustee should seek prior court approval. In New York, this is typically done through a petition for advice and direction.

Acknowledging the deviation from standard practice

This approach – comprehensive informal annual accountings, regular petitions for judicial settlement, and periodic applications for court approval – is antithetical to traditional estate planning, where attorneys try to limit administrative expense and judicial oversight when drafting trusts, and where trustees try to avoid interaction with the courts. Disability advocates may be concerned over the financial impact of this approach on individuals with disabilities who have trusts of more limited amounts. We understand these concerns.

On the other hand, attorneys and other advocates do a disservice to SNT beneficiaries and trustees when they fail to explain the level of exposure faced by the trustee of an SNT (especially a first party SNT), or when they try to draft around the formalities associated with trust administration. If all trust beneficiaries are competent and capable of self-advocacy, estate planners can draft documents to minimize administrative responsibilities and the associated costs. If a trustee cuts corners in keeping records, providing financial statements, or filing tax returns, the beneficiaries may decide to look the other way rather than endure the time and expense of a formal accounting.

But such informal settlement is typically not an option for SNTs, especially first party SNTs where the Medicaid program is one of the interested parties. Medicaid’s priorities are contrary to those of the beneficiary with the disability and the remainder beneficiaries. The less the trustee spends during the beneficiary’s life, the more that this statutory creditor will recover upon the beneficiary’s death.

Informal accountings prepared and presented on an annual basis create a record of full disclosure that may serve as a basis to defend against objections in a proceeding for judicial settlement,⁵⁴ periodic judicial settlement limits the trustee’s ongoing risk, and petitions for advice and direction protect future distributions from later challenge.

Part III: Revisiting In re J. P. Morgan and In re Liranzo

The next and final installment of this article will review how the courts in two important and highly publicized New York cases involving supplemental needs trust administration approached the standard of review, and will consider whether the implementation of some of the procedural recommendations outlined here might have impacted the decisions.

1. New York Estates Powers & Trusts Law (EPTL) 11-1.1(a)(2).

2. In re Francis, 19 Misc. 3d 536 (Sur. Ct., Westchester Co. 2008).

3. EPTL 11-2.3 (“Prudent Investor Act”).

4. New York Tax Law § 651(a)(2).

5. In re Spacek, 45 Misc. 3d 1210(A) (Sur. Ct., Nassau Co, 2014), aff’d. 155 A.D.3d 747 (2d Dep’t 2017).

6. In re Ralph Manny, 2010 N.Y.L.J. LEXIS 4508 (Sur. Ct., Westchester Co. 2010).

7. In re: Judicial Settlement of the Account of Bank of Am., N.A., 2013 N.Y.L.J. LEXIS 2388 (Sur. Ct., N.Y. Co. 2013).

8. In re Hammerschlag, 2001-3772, N.Y.L.J. 1202597358371 (Sur. Ct., N.Y. Co. 2013).

9. In re Levison’s Will, 29 Misc. 2d 697 (Sur. Ct., Rockland Co. 1961); In re McDonald (Luppino), 100 A.D. 3d 1349 (2012).

10. Estate of T. Harry Glick, 2005 N.Y. Misc. LEXIS 7336 (Sur. Ct., Kings Co. 2005).

11. New York’s statute defines a supplemental needs trust as “a discretionary trust established for the benefit of a person with a severe and chronic or persistent disability.” EPTL 7-1.12(a)(5).

12. In re Goldblatt, 162 Misc. 2d 888 (Sur. Ct., Nassau Co. 1994); Cano v. Shmonie Corp., 2004 N.Y.L.J. LEXIS 3059 (Sup. Ct., Bronx Co. 2004). The decision in Cano is a good illustration of the difficulty that courts have in drawing a line of demarcation between guardianship oversight and discretionary trusteeship.

13. In re Morales, 1995 N.Y. Misc. LEXIS 726 (Sur. Ct., Kings Co. 1995); Cano v. Shmonie Corp., supra n.13.

14. “The rule is so well established that it may be said to be fundamental and elemental that courts will not substitute their judgment for the discretion fairly exercised which is lawfully reposed in officials, courts or tribunals. This rule has long been applied to the office of executor and trustee.” In re Estate of Messer, 34 Misc. 2d 416 (Sur. Ct., Cattaraugus Co. 1962) at p. 8; see also Estate of T. Harry Glick, supra n. 10; In re William M. Kline Revocable Trust, 196 Misc. 2d 66 (Sur. Ct. Fulton Co. 2003); In re: Judicial Settlement of the Account of Bank of Am., N.A., supra n.7.

15. In re Sheppard, 147 A.D.3d 1239 (3d Dep’t 2017).

16. New York Surrogate’s Court Procedure Act (SCPA) 2107.

17. See Cano v. Shmonie Corp, supra n.12. See also Liranzo v. LI Jewish Education /Research (N. Y. Sup. Ct., Kings Co. No. 28863/1996, June 25, 2013). In Liranzo, the court did not specifically articulate a standard of review; rather, the authors read the decision as applying a substituted judgment analysis, as various criteria are cited in the decision. One may also read decisions allowing for the review of counsel fees paid by trustees of SNTs as undermining the trustee’s discretion because of a beneficiary’s disability. See, e.g., In re Examination of the Annual Inventory & Account of Susan Felice & the Bank of N.Y., 2003 N.Y. Misc. LEXIS 990 (Sup. Ct., Suffolk Co. 2003).

18. Some transactions should require court approval, such as the use of funds in a trust for a minor to purchase a home where the minor will live with the family. But in New York, this transaction is contemplated in our advice and direction statute, based on the potential conflict of interest.

19. “Once the trustees were required to make themselves knowledgeable about [the beneficiary’s] condition and his needs, and the availability of services that would enable them to provide for those needs, they began, and continue to use funds from his trust for the purposes [the testator] anticipated and so deeply desired. . .” In re JP Morgan Chase Bank N.A. (Marie H.) (also referred to herein as “In re JP Morgan”), 38 Misc. 3d 363 (Sur. Ct., N.Y. Co. 2012) at 376.

20. If all else fails, a trustee has the authority (in New York) to apply to a court for the appointment of a professional guardian who would have authority to obtain information and provide documentation that a trustee would need to make informed decisions. N.Y. Mental Hygiene Law 8 1.06(a)(4).

21. Whether a family member is “reliable” is also a judgment call.

22. This was the recommendation of the court in In re JP Morgan, supra n.19. It is important to note that the beneficiary resided in a residential program with 24-hour Medicaid-funded staffing. JP Morgan, 38 Misc. 3d at 369. The case illustrates the fact that a trustee’s obligation to remain informed goes beyond simply ensuring that a beneficiary is participating in a Medicaid funded program, and requires independent assessment and review.

23. In re U.S. Bank N.A., 51 Misc. 3d 273 (2015).

24. New York’s statute defines a supplemental needs trust as a discretionary trust which, by its terms prohibits the trustee from expending or distributing trust assets in any way which may supplant, impair or diminish government benefits or assistance for which the beneficiary may otherwise be eligible or which the beneficiary may be receiving; provided, however, that the trustee may be authorized to make such distributions to third parties to meet the beneficiary’s needs for food, clothing, shelter or health care but only if the trustee determines . . .that the beneficiary’s basic needs will be better met if such distribution is made . . . EPTL 7-1.12(a)(5)(ii).

25. In re Levison’s Will, supra n.9. Decisional law in this area focuses on the trust creator’s intentions in determining whether the trustee should consider a beneficiary’s other resources when making a discretionary distribution. There is no ambiguity with an SNT, as the requirement to consider other resources (government benefits) is written into the New York statute and the language of the document.

26. In New York the issue has reached critical proportions. See testimony of Mark Van Voorst, Executive Director of NYSARC, before the New York State Legislature warning of the impending crisis, https://bfair2directcare.com/2019/02/07/the-arc-new-york-executive-director-mark-van-voorst-asks-new-york-state-do-we-need-a-tragedy-to-occur-before-you-will-fund-a-living-wage-for-direct-support-professionals/..

27. Medicaid Waiver programs provide services to people who would otherwise be in an institution, nursing home, or hospital, allowing them to receive Medicaid-funded long-term care in the community, https://www.medicaid.gov/medicaid/hcbs/authorities/1915-c/index.html..

28. 18 N.Y.C.R.R. § 360-4.3(e).

29. POMS SI 01120.200E.1.b; see also The Impact of Special Needs Trusts on Eligibility for Subsidized Housing, The Voice, Volume 5, Issue 4 (March 2011), https://www.specialneedsalliance.org/the-voice/the-impact-of-special-needs-trusts-on-eligibility-for-subsidized-housing-2/..

30. New York’s statute makes clear that “neither principal nor income held in trust shall be deemed an available resource to the beneficiary under any program of government benefits or assistance; however, actual distributions from the trust may be considered to be income or resources of the beneficiary to the extent provided by the terms of any such program.” EPTL 7-1.12(b)(3) (emphasis added).

31. For individuals served by the NYS Office of People With Developmental Disabilities, see Administrative Directive 18 ADM 06, “Transition to People First Care Coordination” (June 26, 2018).

32. A word of caution is warranted here. Those with experience reviewing Life Plans (formerly called “Individualized Service Plans” or “ISPs”) know that these documents often contain outdated and inaccurate information, largely a result of staff having too many reports to prepare and not enough time and experience to prepare them in a thorough and detailed fashion.

33. In 2016, the New York State Bar Association Trusts and Estates Section Subcommittee Reviewing Changes to EPTL 7-1.12 recommended that the statute be modified so as to require the trustee of a supplemental needs trust to investigate the need for a case manager, to retain a case manager where necessary, and to pay the case manager from trust funds. See Memorandum dated March 30, 2016, from Nina P. Silfen, Esq. Stephanie Hamberger, Esq., and Jonathan Byer, Esq. to Michael Schwartz, Esq., Chair of the Trust and Estate Administration Committee of the Trusts and Estates Section of the New York State Bar Association.

34. SCPA 106; Official Form JA-4, “Trust Accounting With Instructions.”

35. In re Kaidirmouglou, N.Y.L.J., Nov. 5, 2004, p. 28 (Sur. Ct. Suffolk Co. 2004); In re KeyBank, 58 Misc. 3d 235 (Sur. Ct., Saratoga Co. 2017); In re Feuerstein, 147 A.D.3d 688 (1st Dep’t 2017).

36. 7 Warren’s Heaton on Surrogate’s Court Practice § 94.02(2)(a) (2019).

37. In determining whether an informal account by a trustee is adequate, “the court must consider that [the beneficiary] is an adult under no disability.” In re Spacek, supra n.5 at 8.

38. N.Y. Soc. Serv. L. § 366(2)(b)(2)(v); Oxenhorn v. Fleet Trust Co., 94 N.Y.2d 110 (1999).

39. In re Spacek, supra n.5.

40. Lewis, Kristen M., Esq. and Lowder, Janet L., Esq., SNT Beneficiaries on the Move: Issues with SNT Portability, at p. 7 (Stetson University College of Law 2017 National Conference on Special Needs Planning and Special Needs Trusts).

41. See recent revisions to the Social Security Administration’s Program Operations Manual System (POMS) SI 01120.200–203, effective April 30, 2018, which adopted the “primary benefit” test for SNT distributions. New York has utilized the primary benefit test since 1996. See OBRA 93 Provisions on Transfers and Trusts, NYS Department of Social Services Administrative Directive, 96 ADM 8 (March 1996), at (IV)(7)(b)(ii).

42. In some counties the examiner’s approval will be accompanied by an order acknowledging its submission and approving the examiner’s fee, but the informational accounting is still an ex parte submission and will not have the same legal effect as an order obtained in a proceeding for judicial settlement of the trustee’s accounts.

43. In re Salvati, 90 A.D.3d 406 (lst Dep’t 2011).

44. Comm’r. of the NYC Dept of Social Services v. New York Presbyterian Hospital, Chi Young Lee and BNY Mellon, N.A., 47 Misc. 3d 1204(A) (Sup. Ct., N.Y. Co. 2015).

45. Lewis and Lowder, supra n. 41. See also http://hms.com/special-needs-trust-recovery-services/..

46. POMS SI 01120.203(B)(10).

47. The POMS are not statute or regulation, and the agency’s interpretation of this statutory reimbursement requirement should be given limited weight in a state court proceeding for the settlement of a trustee’ s accounts.

48. SCPA 2208(3)(b).

49. N.Y. Soc. Serv. L. § 366(2)(b)(2)(v).

50. See In re Tinsmon (Lasher), 169 A.D.3d 1305 (3d Dep’t 2019), where a representative from New York’s Medicaid program argued against an otherwise permissible distribution from an SNT based on its interpretation of the SSI program rules, a program that the agency had no authority to administer, and no particular expertise to interpret. Both the lower court and the appellate court disposed of the agency’s arguments in short order, but the trustee still had to spend the time and money in litigation.

51. In re Hagadorn, 176 Misc. 233 (Sup. Ct., N.Y. Co. 1941); In re Meenan, 46 N.Y.S.2d 282 (Sur. Ct., Westchester Co. 1944); In re William M. Kline Revocable Trust, 196 Misc. 2d 66 (Sur. Ct., Fulton Co. 2003).

52. In re Tinsmon (Lasher), supra n.50.

53. In our first party supplemental needs trust practice we provide copies of annual accountings to the Medicaid program representatives, and to other remainder beneficiaries when possible and practical.

54. In New York, the failure to object may be considered ‘ratification’ and serve as a basis for a motion to dismiss the objections of an informed remainderman. Rajamin v. Deutsche Bank Nat’l Trust Co., 757 F.3d 79 (2d. Cir. 2014). Would the Medicaid program be similarly bound? One might argue that a government agency cannot be estopped. See Oxenhorn v. Fleet, supra n.38. This position fails to recognize that in New York, the Medicaid program is named as a beneficiary by statute (N.Y. Soc. Serv. L. § 366(2)(b)(2)(v)). In a state court proceeding for settlement of a trustee’s accounts, the Medicaid program’s interest should be no greater and no less than that of any other remainder beneficiary.