The Challenges of Being the Trustee of a Special Needs Trust

The Challenges of Being the Trustee of a Special Needs Trust

9.19.2024

By Anthony J. Enea

Over the last three decades, the use of a Special Needs Trust, also known as a Supplemental Needs Trust, has become the primary planning vehicle for persons with disabilities. If the trust is a First Party Special Needs Trust (one funded with assets belonging to or to be received by the disabled person), it will require a payback provision stipulating that, upon the death of the beneficiary, New York State be reimbursed from the trust for the amount they expended to, for, or on behalf of the beneficiary.[1] A Third Party Special Needs Trust (one funded with assets belonging to a third party, not the disabled person) does not have a payback provision.[2] In either case, it is of great importance that the trustee of a Special Needs Trust be intimately familiar with the physical, emotional and mental needs of the disabled person as well as the federal and state programs and benefits that the disabled individual is receiving or may be entitled to receive.[3]

As if being a trustee of any trust is not sufficiently challenging, the trustee of a Special Needs Trust, in addition to ordinary fiduciary duties, has to avoid making a distribution of income and/or principal that will disqualify the disabled beneficiary from an entitlement program from which the beneficiary receives or may in the future receive benefits.[4] After all, the primary reason for creating the Special Needs Trust is to allow a disabled beneficiary to qualify or preserve their eligibility for a government program, such as Medicaid and Supplemental Security Income.[5]

Prior to discussing matters relevant to the government benefits the Special Needs Trust beneficiary is receiving or is entitled to, it is important to review some of the general issues that the trustee of a Special Needs Trust must be cognizant of regardless of whether the trust is a First Party Special Needs Trust (sometimes also referred to as a Self-Settled Special Needs Trust) or a Third Party Special Needs Trust.

1. Because a trustee is a fiduciary, they cannot engage in any “self-dealing.”[6] They cannot commingle their personal assets with trust assets.[7] Additionally, they should never invest trust assets in a business owned by them or by their friends and family members.[8]
2. The trustees also must not borrow from the trust, purchase goods or services for the trust beneficiary from themselves or sell trust assets to themselves.[9]
3. The trustees are permitted to retain accountants, lawyers, financial advisors and others who will provide services to and for the trust and its beneficiaries.[10]
4. The trustees have the duty to maintain accurate and complete financial records, including records of all deposits, withdrawals and checks issued to or from the Special Needs Trust account.[11] Additionally, if the Special Needs Trust was established as part of a Mental Hygiene Law Article 81 Guardianship proceeding, the trustees must file an annual accounting with the court in May of each year for the prior year.[12] Furthermore, if the Special Needs Trust was approved by the Surrogate’s Court of the applicable county, the Surrogate’s Court decides whether the trustees’ accounting should be filed. The trustees should carefully review the court order permitting the creation of the Special Needs Trust if one exists.
5. The trustees of the Special Needs Trust must comply with the provisions of the Prudent Investor Act (unless the trust provides otherwise) with respect to trust assets.[13] The trust portfolio must be “diversified” across asset classes.[14] For example, it would be imprudent to have all or a majority of the trust assets invested within one type of asset. While this doesn’t mean an investment in individual real property is prohibited, it does mean that trustees should ensure there is a mix of cash, equities, bonds, treasuries, gold (and other metals), oil and petroleum funds in addition to the investment in real estate.
6. The trustees must ensure that all trust assets are titled in the name of the trust and that they have marshaled all the trust assets.[15] They are responsible for the oversight and management of all trust assets, irrespective of their nature.[16]
7. The trustees should obtain a federal Tax Identification Number for the Special Needs Trust and file all annual income tax returns for the preceding year by April 15 of the current year.[17] Again, all trust accounts and assets must be titled in the name of the trust.
8. If the trust is a First Party Special Needs Trust and the beneficiary is a Medicaid recipient, the trustees are also required to do all the following for compliance purposes:

• • Notify the appropriate Social Services District of the creation and/or funding of the Special Needs Trust;[18]
  • If the trust assets are greater than $1,000,000, provide the Social Services District with proof that the trustees have been bonded (unless the court has waived the bonding requirement);[19]
  • Advise the appropriate Social Services District of any trust transactions that are for less than fair market value[20] and that would “substantially deplete” the principal of a trust that is valued at more than $100,000;[21] and
  • Inform the Social Services District of the death of the beneficiary of the trust.[22]

As can be seen from the above, the trustee of a Special Needs Trust has many responsibilities and challenges. These responsibilities are further complicated by the need to develop an adequate understanding of how their actions may impact government benefits that the trust beneficiary is receiving or is entitled to receive – especially since the beneficiary of a Special Needs Trust may be eligible for housing, food and utility benefits in addition to benefits applicable to their disability.

The following are some (not all) of the major benefits the trustee of a Special Needs Trust should know of and make inquiries about, in order to ascertain how these programs impact their ability to make distributions of principal and/or income to the disabled beneficiary:

1. Social Security Disability Income: Disabled persons who have a work history and have paid into the Social Security system may be entitled to Social Security Disability Income.[23] The amount of the monthly benefit is contingent upon the number of quarters per year the disabled individual worked prior to the onset of their disability, and the total paid in by the disabled individual each quarter worked.[24] Notably, the determination of the amount of income per month a disabled person receives is not impacted by how much money such individual has in savings or their home ownership.[25] There are income limits for employment income generated by the disabled person, however, unearned income (e.g., spouse’s income and dividends/interest income) is not counted.[26] Similarly, state Social Security Income supplement payments, Food Stamps and Section 8 Housing Vouchers are not counted.[27]
2. Medicare: Once the disabled person has received Social Security Disability Income for two years, they will be eligible for Medicare irrespective of their age.[28] Medicare provides coverage for hospitalization and physicians under Parts A and B as well as prescription drugs under Part D. Medicare is not “means tested.” Thus, it is not based on one’s income or savings. The distributions of income and/or principal from a Special Needs Trust to a Medicare recipient have no impact on one’s eligibility for Medicare.[29] However, the premiums a Medicare recipient pays will be impacted by the recipient’s income.
3. Supplemental Social Security Income: Both adults and children may be eligible for Social Security Income if they are disabled, blind, age 65 or older and/or have little or no savings and income.[30] Social Security Income is generally available to those who do not earn more than $1,971.00 from employment each month, although the income limit is higher for couples and when a parent is applying for a child.[31] Other sources of income such as disability benefits, unemployment benefits and pensions are considered in determining the amount of SSI one will receive.[32] Perhaps, the most common disqualifying factor for Social Security Income is the amount of resources (savings) a recipient is allowed to maintain. The resource limit is very low: $2,000 for an individual, $3,000 for a couple and an additional $2,000 if one has a child.[33] Cash, bank accounts, stocks, mutual funds, bonds, vacant land and life insurance are all factored into the determination of the amount of resources.[34] However, one’s home (residence) and land it is on, a single automobile, and most household items and personal belongings are exempt.[35] As can be seen from the above, a disabled person with little or no income or savings will be eligible for Social Security Income, however, ensuring that any gift or inheritance they receive does not disqualify them is very important. Thus, for a loved one wanting to leave the Social Security Income recipient a bequest upon their death or to provide for the disabled person during their lifetime, a Third Party Special Needs Trust is the preferred vehicle. The use of a Third Party Special Needs Trust will avoid the disabled person’s disqualification from Social Security Income. A First Party Special Needs Trust, on the other hand, should be utilized if the disabled person has savings, is to receive a recovery from a personal injury or medical malpractice action, or if their inheritance did not go to a Third Party Special Needs Trust but was payable directly to the Social Security Income recipient.[36]
4. Medicaid: Medicaid is also a “means tested” entitlement program; thus, one’s income and resources, subject to specified criteria, will impact one’s eligibility.[37] For most low-income individuals who do not have health insurance through their employer, Medicaid is generally the health insurance benefit they will receive. However, for many seniors and the disabled, Medicaid benefits may be in the form of community Medicaid (which provides home health care aides) or institutional long-term care Medicaid (which provides payment for a nursing home stay). Medicaid receives both state and federal funding.[38] Interestingly, a significant portion of those receiving Obamacare as their health insurance are, in fact, on Medicaid.

In addition to all of the above, and depending on the disabled beneficiary’s circumstances, the Trustee may also need to consider whether the beneficiary is eligible for the Supplemental Nutritional Assistance Program,[39] commonly referred to as “food stamps,” Section 8 (subsidized housing) and any state-specific supplemental Social Security Income payments.

In conclusion, the array of federal and state programs available to a child, disabled individual and/or blind person can be dizzying. The trustee of a Special Needs Trust must be knowledgeable about each program and ensure that any actions taken by them do not disqualify the trust beneficiary from any program they are entitled to receive benefits from or are in fact currently receiving.

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Anthony J. Enea is the managing partner of Enea, Scanlan and Sirignano of White Plains, New York, and Somers, New York. He focuses his practice on wills, trusts, estates and Elder Law. He is certified as an elder law attorney by the National Elder Law Foundation as accredited by the American Bar Association. Enea wishes to acknowledge the assistance of associate Stella King with the research and drafting of this article. This article appears in a forthcoming issue of Trusts & Estates Law Journal, the publication of the Trusts & Estates Law Section. For more information please visit NYSBA.ORG/TRUSTS.

Endnotes

[1] 42 U.S.C. § 1396p(d)(4)(A); Pub. L. No. 103-66, 107 Stat. 312 (1993).

[2] E.P.T.L. § 7-1.12; Estate of Escher, 94 Misc.2d 952 (Sur. Ct., Bronx Co. 1978), decree aff’d sub nom.. In re Escher’s Will, 75 A.D.2d 531 (1st Dep’t 1980), aff’d sub nom;Matter of Gross, 52 N.Y.2d 1006 (1981).

[3] See E.P.T.L. § 7-1.12(b); see also N.Y. State Bar Ass’n, Guidelines for Trustees of First Party Supplemental Needs Trusts 12-22 (2012) (June 2012), https://nysba.org/app/uploads/2020/02/GuidelinesforTrusteesofFirstPartySupplementalNeedsTrusts_brochure-smaller-June-2012.pdf (“Guidelines for Trustees”).

[4] See EPTL§ 7-1.12(a)(5)(ii); see also Guidelines for Trustees, supra, at 12-22.

[5] See id.

[6] The City of New York, Human Res. Admin. / Dep’t of Social Servs., Trustee Guidelines for Administration of a Supplemental Needs Trust 5, 12 (2017), https://www.nyc.gov/assets/hra/downloads/pdf/services/program_integrity/trustee_guidelines_for_administration_of_a_supplemental_needs_trust.pdf (“Trustee Guidelines for Admin.”).

[7] Id.

[8] Id.; see also Guidelines for Trustees, supra, at 7.

[9] Id.

[10] Matter of U.S. Bank N.A., 51 Misc. 3d 273 (Sup. Ct., N.Y. Co. 2015); see also Guidelines for Trustees, supra, at 5, 7.

[11] Trustee Guidelines for Admin., supra, at 4, 6-9, 13-15.

[12] Id. at 8.

[13] E.P.T.L. § 11-2.3; see also Guidelines for Trustees, supra, at 9-10.

[14] Id.

[15] E.P.T.L. § 11-1.1; see also Guidelines for Trustees, supra, at 4, 7-10.

[16] Id. at 12.

[17] N.Y. Tax L. § 651(a)(2).

[18] 18 N.Y.C.R.R. §360-4.5(b)(5)(iii)(a).

[19] Id. § 360-4.5(b)(5)(iii)(e).

[20] Id. § 360-4.5(b)(5)(iii)(d).

[21] Id. § 360-4.5(b)(5)(iii)(c).

[22] Id. § 360-4.5(b)(5)(iii)(b).

[23] 20 C.F.R. § 404.132; see also Guidelines for Trustees, supra, at 13-14.

[24] Id.

[25] Id.

[26] 42 C.F.R. § 416.1124.

[27] Id.

[28] 42 C.F.R. § 406.12.

[29] Guidelines for Trustees, supra, at 14-15.

[30] Soc. Sec. Admin., Publication No. 05-10003 (January 2024), https://www.ssa.gov/pubs/EN-05-10003.pdf; Soc. Sec. Admin., Who Can Get SSI? (last visited Jun. 29, 2024), https://www.ssa.gov/ssi/eligibility.

[31] Soc. Sec. Admin., Who Can Get SSI?, at ¶¶ 1-2.

[32] Soc. Sec. Admin., Understanding Supplemental Security Income SSI Income — 2024 Edition (last visited Jun. 29, 2024), https://www.ssa.gov/ssi/text-income-ussi.htm.

[33] 20 C.F.R. § 416.1205(c).

[34] Id. § 416.1201.

[35] Id. § 416.1210.

[36] Guidelines for Trustees, supra, at 3.

[37] Guidelines for Trustees, supra, at 2, 3, 23.

[38] Id.

[39] 01 I.N.F.-8.