SUPPLEMENTAL NEEDS TRUSTS: The Basics

By: Edward V. Wilcenski, Esq.1 & Tara Anne Pleat, Esq. Wilcenski & Pleat PLLC www.wplawny.com

Introduction

Planning for families who have loved ones with disabilities can be challenging, as it involves techniques which target the caregivers, but which must also contemplate the impact of such planning on the benefit program eligibility of the individual who has the disability. It requires the practitioner to look beyond the immediate needs of the loved one with the disability and to anticipate, to the extent possible, the changing benefit landscape and service delivery which the individual in the community. And in many cases the individual with the disability will be unable to participate in any meaningful way in the decision making process. The legal centerpiece of an estate plan involving and individual with a disability is in most cases the "Special" or "Supplemental" Needs Trust.2 The law and practice involving Supplemental Needs Trusts in planning for individual with disabilities continues to develop and mature. With the enactment of New York Estates Powers and

1 Much of this Article is derived from an article written by Edward V. Wilcenski, Esq. for a New York State Bar Association Elder Law Section program in the fall of 2002, updated for similar programs in 2007, 2013, 2015, and now 2016.

2 The terms "Special Needs Trust" and "Supplemental Needs Trust" have come to be used interchangeably, although some still use the term Supplemental Needs Trust to refer to the third party testamentary trusts originally codified by NY EST. POWERS & TRUSTS LAW § 7-1.12, and Special Needs Trust to refer to the "payback" or "self-settled" trusts approved as part of the Omnibus Budget Reconciliation Act of 1993 ("OBRA 93"). For the sake of simplicity, this article will continue to refer to both as "Supplemental Needs Trusts," and distinguish between the two by using the terms "First Party" (referring to the self-settled payback trust) and "Third Party" (referring to the more traditional estate planning type trusts) to distinguish between the two.

1

Trusts Law [hereinafter EPTL] §7-1.12 which involved trusts funded by parents and other family members, the subsequent expansion of federal Medicaid law to specifically allow the use of these trusts to hold the assets of individuals with disabilities,3 and with the eventual application of the Medicaid program rules to the Supplemental Security Income program as part of the Foster Care Independence Act of 1999 ("FCIA ‘99"),4 the law provides many options for individuals with disabilities and their families to plan for life beyond life beyond the government benefit safety net.5 This is not to say that estate and financial planning for the disabled is necessarily becoming any easier. Quite to the contrary, planning for a client with a disability can be a complicated endeavor involving many different areas of the law, and attorneys regularly find that practice can vary considerably in different regions of the state, across government agency lines, and even before different judges who hear similar matters in the same court. This article is not intended to be a treatise on the history and development of Supplemental Needs Trusts and government benefit eligibility, as there are many comprehensive and well-written materials already in existence on these topics.6 Rather this article is intended to provide an introduction to and commentary about Supplemental Needs Trusts.

3 Pub. L. 103-66 (1993), referred to as the Omnibus Budget Reconciliation Act of 1993 ("OBRA ‛93").

4 Pub. L. 106-169 (1999).

5 It is important to emphasize that notwithstanding the growing body of law on the subject, the various benefit program rules do not always provide for a consistent treatment of such trusts, and the intersection of federal welfare law and state trust law can be a difficult one to navigate. See, Landsman, Ronald M., When Worlds Collide: State Trust Law and Federal Welfare Programs (NAELA Journal Volume 10, No. 1, Spring 2014).

6 See, for example, Special Needs Trusts Handbook, Begley, Thomas and Cannelos, Angela (Wolters/Kluwer Law and Business 2015). Within New York State, New York Elder Law, Goldfarb, David and Rosenberg, Joseph (Matthew Bender & Co., Inc. 2012), includes information on these trusts and their use in planning for individuals with disabilities and their families.

2

First Party or Third Party Trust: Which One Is It?

In New York, all Supplemental Needs Trusts are essentially "discretionary" spendthrift trusts, which by design allow a trustee to make distributions of any type for the benefit of a beneficiary with a disability. However, a Supplemental Needs Trust will circumscribe this general grant of discretion by instructing the trustee not to exercise it in a fashion which would have an adverse impact on a beneficiary's eligibility for publicly or privately funded benefits.7 If drafted properly, the principal and accumulated income of such trusts (both First Party and Third Party, discussed below) are treated as "exempt" by the public agencies providing means tested benefits. While all Supplemental Needs Trusts will meet this general criteria, there are two discrete subsets of Supplemental Needs Trusts: "First Party" Supplemental Needs Trusts and "Third Party" Supplemental Needs Trusts. The line of demarcation between the two is drawn to identify the source of the property used to fund the trust, and not necessarily the name of the settlor or beneficiary of the trust instrument, a fact which in many cases can lead to confusion for the practitioner and client alike. Specifically, Supplemental Needs Trusts which are designed to hold the property of someone other than the person with the disability are most commonly referred to as "Third Party" Supplemental Needs Trusts, and will be referenced as such throughout this article.8 These are to be contrasted with Supplemental Needs Trusts which are designed to hold the property of the person with the disability, which will be referred to throughout this article as a "First Party" Supplemental Needs Trusts.9

7 Distributions from a Supplemental Needs Trust will impact benefit eligibility differently depending on the program, a consequence recognized by New York’s statute. NY EST. POWERS & TRUSTS LAW § 7- 1.12(b)(3).

8 These trusts have also been referred to as "Escher" trusts, named after the New York Court of Appeals case of the same name which is considered to be the watershed decision in New York State for these trusts. Matter of Escher, 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).

9 These trusts are also referred to as "self-settled" trusts, “payback” trusts, "OBRA ‛93" trusts, or "(d)(4)(A)" trusts (the latter two references being the common name and the relevant subsection of the federal legislation that officially authorized their use).

3

Intuitively, this distinction makes sense. A third party (defined in this context as someone other than the beneficiary, as well as someone other than a person who has a legal responsibility to support the beneficiary10) can do with his or her property whatever he or she may want, including disinheriting the individual with the disability altogether. To the extent the third party would like to create a trust which explicitly limits the availability of trust funds so that the beneficiary can continue to receive benefits from the Medicaid program or otherwise, the third party should have the right to do so. By way of contrast, if an individual with a disability already owns assets which would otherwise need to be exhausted before government benefits were available, then there must be some accommodation in the rules of the benefit program itself before those assets can be disregarded in determining ongoing benefit program eligibility. This accommodation is found in the federal Medicaid and Supplemental Security Income ("SSI") statutes themselves.11 Specifically, both of these benefit programs, which otherwise penalize an applicant for divesting himself of assets that could be used for support (SSI) or medical care and services (Medicaid), have provided an exception to these transfer penalty rules for transfers of assets to a First Party Supplemental Needs Trust.12 If the trust is properly drafted, the transfer of property to the trust will not disrupt benefit program eligibility, and the principal and accumulated income of trust itself will

10 Note that both the spouse of a Supplemental Needs Trust beneficiary and the parent of a minor disabled beneficiary are specifically precluded from using his or her resources to fund a third-party Supplemental Needs Trust and claim the statutory protection afforded by NY EST. POWERS & TRUSTS LAW § 7-1.12. See NY EST. POWERS & TRUSTS LAW § 7-1.12(c)(1). The existence of the parent’s and spouse’s support obligation would dictate that the trust include a lien in favor of the state, ie., a First- Party Supplemental Needs Trust, if spousal assets or assets of the parents of a disabled minor are to used to fund the trust. See also, Elder Law and Guardianship in New York, supra, note 6, p. 133. Whether the legally responsible relative can do so if the trust beneficiary is participating in a Medicaid Waiver program – which disregards the income and resources of legally responsible relatives - remains an open question.

11 42 U.S.C. §§ 1396p(d)(4)(A), 1382b(e)(5). Other program rules (Section 8, Food Stamps, etc.) treat property held in First Party Supplemental Needs Trusts in different ways. For trust beneficiaries participating in more than one program, attention should be given to each specific program’s criteria.

12 In fact, in 96 ADM-8, OBRA ‛93 Provisions on Transfers and Trusts, New York State Department of Social Services Transmittal (March 29, 1996), First Party Supplemental Needs Trusts are referred to as "exception" trusts, reflecting the fact that contributions to such trusts do not generate a period of ineligibility for institutional level Medicaid services. It is important to note that not all Mediciad programs impose transfer of asset penalties.

4

be exempt. Thus, an effective way to conceptualize the "First Party" Supplemental Needs Trust is by understanding the instrument to be a receptacle for penalty-free transfers by in individual with a disability.

First Party Supplemental Needs Trusts

First Party Supplemental Needs Trusts are essentially creatures of the federal Medicaid statute, and are premised on a provision of the federal statute which states that transfers of assets to a properly drafted Supplemental Needs Trust will not generate a period of eligibility for certain Medicaid program benefits. These trusts will incorporate language provided by our state Supplemental Needs Trust statute, N.Y. EPTL § 7-1.12 when defining how funds are to be held and administered. The balance of the document (e.g., trustee appointment provisions, trustee powers, and residuary dispositions) is drafted by the practitioner based on the particular client’s needs and local practice. As a preliminary matter, the drafting attorney will need to ensure compliance with the criteria found in the federal statute. Specifically, 42 U.S.C. §1396p(d)(4)(A) provides that:

"[there shall be no transfer penalty for transfers to] a trust containing the assets of an individual under the age of 65 who is disabled (as defined in section 1614(a)(3) [42 U.S.C.S. §1382c(a)(3)]) and which is established for the benefit of such individual by a parent, grandparent, legal guardian of the individual, or a court if the state will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State plan under this title [42 U.S.C.S. §1396 et. seq.]."

The federal Medicaid statute thus sets out four explicit criteria for these trusts:

* The assets being used to fund the trust must come from an individual who is under the age of 65 at the time the assets are transferred to the trust; * The individual must be disabled as that term is defined in the Social Security law;

5

* The trust must be "established" (ie. created by) a parent (of the beneficiary), grandparent (of the beneficiary), legal guardian (of the beneficiary), or court (ie. pursuant to a court order); * There must be a "payback" provision in the trust which provides that upon the beneficiary's death, the State Medicaid program is repaid for any medical assistance provided during the course of the beneficiary's lifetime.

The age requirement needs little explanation, other than to point out that the age of the beneficiary is measured as of the date the assets are transferred to the trust. As long as the funds are transferred to the trust prior to age 65, they will remain exempt even after the beneficiary reaches that age. The second requirement, that the individual be "disabled," is generally satisfied by providing proof of SSI or Social Security Disability Income ("SSDI") eligibility. For first-time applicants for benefits, this standard may cause a delay in the application process, or a denial altogether if the individual's disability is called into question by the local social services agency, which uses the same standard as the Social Security Administration in determining disability. Disputes such as this often arise for individuals with psychiatric disabilities who are controlling their illness through medication, and for high-functioning developmentally disabled individuals who may be able to secure some employment, but who still need significant supervision and assistance in the management of their daily affairs.13 The third requirement can prove to be troublesome in cases where there is no independent need for a guardian or court involvement, but where the individual with the disability lacks a parent or grandparent to "establish" the trust on his behalf. In such a case, the practitioner will need to obtain an independent court order for the sole purpose of establishing the trust, notwithstanding the fact that the beneficiary may be competent and able to establish the trust without assistance. Such an order can be obtained

13 For individuals who need Medicaid funded services but are still able to work, the Medicaid Buy-In program would allow for a disability determination based solely on the existence of a listed impairment for Social Security purposes, while disregarding income under certain generous income thresholds. The program also provides for an increased resources exemption. See Interim Implementation of the Medicaid Buy-In Program for Working People with Disabilities 03 OMM/ADM-4, New York State Department of Health Administrative Directive (June 9, 2003).

6

through a proceeding under Article 81 of New York's Mental Hygiene Law,14 or through a miscellaneous proceeding in Surrogate's Court under SCPA §§ 2101 and 202.15 The fourth requirement, the "payback" to the state, is also a relatively easy requirement to meet. Language as simple as the following will be sufficient:

"The New York State Department of Health, or other appropriate entity, shall be reimbursed for the total amount of medical assistance provided to the beneficiary during his/her lifetime, as consistent with federal and state law. Prior to making any such payment, the trustee shall request from the state agency or other entity requesting reimbursement a Claim Detail Report or other detailed record of expenditures which substantiates the reimbursement claim."

In addition to meeting the specific requirements of the federal statute, New York State Social Services Regulations contain certain additional requirements for First Party Supplemental Needs Trusts, although these do not necessarily need to be drafted into the trust instrument. Instead, they are affirmative obligations of the trustee which govern issues such as reporting the creation and funding of the trust, bonding, etc.16 Nonetheless, on occasion a social services agency will ask that one or more of these regulatory provisions be included in the text of the trust instrument.

14 This is commonly brought as “single transaction” petition, which is specifically recognized under section 81.16 of New York’s Mental Hygiene Law.

15 Emanuelli, Hon. Albert J., Special Needs Trusts: The Role of the Surrogate’s Court, Westchester Bar Journal, Vol. 25, Nos. 3, 4 (Summer/Fall 1998), p. 147. The use of the Surrogate's Court proceeding is, in the author's experience, more common in the upstate counties, whereas downstate practitioners have used actions in Supreme Court for the same purpose. Single transaction guardianship petitions under Article 81 of the Mental Hygiene Law continue to be a viable alternative statewide, but because in all events a Court Evaluator is appointed, even if the beneficiary is fully competent and residing in the community, the proceeding tends to be a more expensive means of obtaining this court order. Of additional note is an federal appellate level court’s interpretation of the “establishment” requirement for individuals participating in the SSI program, wherein the court held that in order to “establish” a trust as that term is used in the Supplemental Security Income program rules, a parent must place some of the parent’s own property into the trust (thus “seeding” the trust with a “res”) before the assets of the person with the disability can be transferred to the trustee. See Draper v. Colvin, Decision No. 13-2757, United States Court of Appeals (8th Circuit), March 3, 2015.

16 18 N.Y.C.R.R. §360-4.5(b)(5)(iii)(a) through (e). 7

Finally, in cases where the First Party Supplemental Needs Trust is being drafted in connection with a court proceeding, a judge may have her own specific requirements governing the trustee's accounting obligations, designation of remainder beneficiaries, etc. And because in most court proceedings the local social services agency will be put on notice and have a right to appear, there may be other, negotiated provisions that will need to be added to the trust instrument in order to have it approved.

Third Party Supplemental Needs Trusts

Third Party Supplemental Needs Trusts are in many ways the cornerstone of an estate plan which is focused on providing fiduciary management and preserving government benefit eligibility for a family member with a disability. They represent a statutory variation on other trusts which are commonly drafted as part of a parent’s estate plan, such as trusts created for minor children or others needing fiduciary management and oversight. Much like First Party Supplemental Needs Trusts, these trusts are drafted as “discretionary” trusts and by and large should be consistent with the guidelines set forth in NY EPTL §7-1.12, discussed in more detail below. Note, however, that while the dispositive language of a Third Party Supplemental Needs Trust which is drafted in conformance with NY EPTL § 7-1.12 will be similar to language found in a Third Party Supplemental Needs Trust, the requirements of 42 USC §1396p(d)(4)(A) are not applicable to “Third Party” Supplemental Needs Trusts. In other words, when drafting Third Party Supplemental Needs Trusts designed to receive assets from parents or other family members, practitioners need not be concerned with the four requirements outlined above for First Party Supplemental Needs Trusts.

Using EPTL 7-1.12 as a Foundation for First and Third Party Trusts

Because most means-tested benefit programs premise eligibility on the "availability" of assets held in trust, the primary obligation of the drafting attorney is to ensure that the terms of the trust do not have the effect of rendering the trust corpus "available" within the context of the particular benefit program in which the beneficiary is 8

participating. With the drafting guidance found in NY EPTL §7-1.12, this task has been made considerably easier. That said, the statute provides some alternative drafting options that need to be considered when structuring the portion of the trust instrument which governs the extent of a trustee’s discretion to make distributions. As a general rule a Supplemental Needs Trust is a discretionary trust drafted in a fashion that restricts the trustee's discretion only in the case where a distribution may impact the beneficiary's government or private benefit eligibility.17 This restriction would otherwise preclude the trustee from making a distribution that might impact eligibility, even if the impact is minimal and the benefit to the beneficiary is significant. Consider, for example, a trustee whose beneficiary is receiving SSI payments (which are designed to pay for food and shelter, and which would be reduced when payments for any one of these items are made on the beneficiary's behalf by any third party, including a trust). If the trustee is inclined to subsidize the beneficiary's rent in order to allow him to move to a better apartment, and even though there may be a limited impact on the SSI payment,18 the terms of the trust would preclude it. There is an option. The statute allows the drafting attorney to decide whether the trustee should nonetheless be provided with authority to make food and shelter distributions if the trustee believes such a distribution, and the impact on the beneficiary's benefits, to be in the beneficiary's best interest.19 In other words, while the trustee of a Supplemental Needs Trust is generally directed to ensure that the trust is managed in a way that the beneficiary's benefits will continue without disruption, the drafting attorney can decide to provide the trustee the flexibility to make distributions that would nonetheless impact government benefits. As long as the trustee accepts that there may be an adverse impact on benefit eligibility, and there is some benefit to the beneficiary notwithstanding the loss of benefits, the trustee may do so.

17 NY EST. POWERS & TRUSTS LAW §7-1.12(e)(1).

18 The consequence of such a payment would in most cases mean a maximum reduction in SSI benefits of one third of the federal SSI benefit rate plus $20, an amount currently just over $280 in 2015. 20 C.F.R. §416.1130(c). If the beneficiary is receiving well in excess of that amount in monthly SSI income, this relatively modest decrease in monthly income may be a sacrifice the beneficiary is more than willing to make.

19 NY EST. POWERS & TRUSTS LAW §7-1.12(e)(2). 9

It is significant to note that this language is optional and not mandatory. This suggests, in the authors’ opinion, that the drafters of the legislation were not certain how these trusts would be treated by programs that were not solely based on New York law, such as SSI. Along these lines, the statute provides yet another optional clause, an "opt out" provision (for lack of a better term) which states, in effect, that if the trustee is given the broader discretion to make distributions which impact eligibility, and if an agency administering a particular benefit program later decides that this discretion somehow renders the trust corpus "available" in determining ongoing eligibility, then the trustee's discretion to make such distributions will cease. The statute thus allows the drafting attorney to "hedge" on this issue until such time as full discretion becomes an issue before an agency providing benefits to the beneficiary. As a practical matter, and based on the authors’ experience with numerous government benefit programs, the optional language allowing the trustee full discretion to make a distribution even if it adversely impacts benefits has never been found to render trust income and principal available here in New York, as long as the discretion rests with the trustee and in no event can be compelled by the beneficiary. Thus, New York attorneys drafting these trusts for New York beneficiaries should be encouraged to leave this flexibility in the trust document, as there may come a time when the beneficiary no longer participates in a government entitlement program, and the trust would be better used as a simple discretionary trust, available to pay for whatever the beneficiary needs. Note finally that caution must be exercised if there is a possibility that the beneficiary will move across state lines, as different states view discretionary trusts differently in the context of the welfare programs that the state administers, especially when the trust provides the trustee with discretion to make support-type distributions (eg. food, clothing, shelter, etc.).

Court Involvement

One common misconception about Supplemental Needs Trusts is that they must be settled under the order of a court. Quite to the contrary, most Supplemental Needs

10

Trusts are drafted as a private agreement between a settlor and trustee, and are never subject to court review or pre-approval of any state agency. Thus, in the Third Party Supplemental Needs Trust context, practitioners are free to draft the trust as they would with any estate planning client, using the trust in a fashion that may accomplish other, ancillary goals for the third party, including probate avoidance and tax planning. As long as the language in NY EPTL § 7-1.12 is followed for the portion of the trust describing the trustee’s discretion in making distributions for the disabled beneficiary,20 it will be presumed that the creator did not intend for trust assets to supplant government benefits, and the trust will be treated as a Supplemental Needs Trust under New York law. In the First Party Supplemental Needs Trust context, other outside factors may necessitate court involvement (eg. the trust is being created through a guardianship proceeding, or one of the statutory class of individuals required under the federal Medicaid statute is not available (discussed in more detail above, etc.), but there is no requirement that a First Party Supplemental Needs Trust be created under court order.

The Nature of the Disability

It is important that the drafting attorney have some sense of the broad range of disabilities21 that can make a Supplemental Needs Trust a useful planning tool. Many practitioners believe, incorrectly, that a client needs to be cognitively disabled and unable make critical life decisions or otherwise function independently in the community before a Supplemental Needs Trust should be considered as a planning option. While

20 New York continues to have a "common law" Supplemental Needs Trust premised upon the Court of Appeals' decision in the Escher case. Thus, a trust that was drafted prior to the enactment of NY EST. POWERS & TRUSTS LAW § 7-1.12, or drafted by someone without knowledge of NY EST. POWERS & TRUSTS LAW § 7-1.12, will not necessarily jeopardize the beneficiary's ongoing eligibility for benefits. In such a case, the availability of the assets held within the trust will be analyzed in accordance with the case law following Escher, and the trust will simply lose the "guaranteed" protection that is currently available under the statute. NY EST. POWERS & TRUSTS LAW §7-1.12(f).

21 The definition describing the eligible class of disabled beneficiaries for whom a Supplemental Needs Trust may be useful is actually quite broad, and includes developmental disabilities, mental illness, and anyone with any "physical or mental impairment... whose disability is expected to, or does, give rise to a long term need for specialized health, mental health, developmental disabilities, social or other related services... and who may need to rely on government benefits or assistance." NY EST. POWERS & TRUSTS LAW § 7-1.12 (a) (1) - (4).

11 there are certainly many beneficiaries who fit this category, there are many, many more individuals who are "disabled" within the legal definition of that term, but not necessarily "incompetent." A 45 year old man with a spinal cord injury, confined to a wheelchair and requiring extensive home health and personal care assistance, may be fully competent and capable of managing his own affairs. The same might be said for a young woman with muscular dystrophy, or with a psychiatric disability. All of these individuals may need services funded through the Medicaid program or otherwise, but nothing would preclude them from being actively involved in the decisions concerning the drafting and implementation of a Supplemental Needs Trust and future care plan. In addition, the nature of the disability will often dictate the government benefit program or programs that will support the beneficiary, either in an institutional setting or in the community. This in turn will provide the drafting attorney with an idea about how trust assets can be used, which can be communicated to the trustees in the terms of the trust instrument itself, or through a separately prepared memorandum that would be delivered to the trustee and kept as part of the trust records and used when considering certain trust distributions. For example, a beneficiary with a severe developmental disability residing in a group home may have a much more predictable set of needs than an adult suffering from severe depression who is residing in federally subsidized housing and receiving outpatient mental health services. In the case of the former, the beneficiary will most likely be receiving SSI benefits, and distributions for food or shelter may impact SSI coverage.22 In the case of the beneficiary with mental illness, and presuming that the individual is receiving basic community Medicaid without SSI, the trustee may be free to use trust funds to support any reasonable housing arrangement, and provide other necessities that will enhance the ability of the beneficiary to reside safely in the community. 23 Finally, and perhaps most importantly from the beneficiary's perspective, the functional level of the beneficiary will also determine the extent to which the

22 20 C.F.R. §4165.1130(b).

23 In New York, distributions for food and shelter will not have an adverse impact on Medicaid eligibility so long as the distribution is not in compensation for services provided by the beneficiary (i.e. remuneration). See 18 NYCRR 360-4.3(e)(1); 89 ADM-21, Treatment of In Kind Income in the Medical Assistance Program, New York State Department of Social Services Transmittal (June 14, 1984).

12

beneficiary may be able to participate in decisions involving trust expenditures and management, albeit in an "advisory capacity" only.24

Making the Plan Complete: The Life Care Plan or Letter of Intent

As a general rule, attorneys and clients alike appreciate the need to address the legal and financial issues involved when a family member has a disability and relies on government benefits. And in most cases the clients will proceed as far as having the attorney prepare a Supplemental Needs Trust and other traditional estate planning documents (such as a Will or Revocable Living Trust). Most clients will ensure that there is an agent or guardian appointed to make legal decisions when necessary, and many will have purchased life insurance or otherwise taken steps to ensure that there will be assets left to support the family member when the primary caregivers are gone. But after the documents are drafted and executed, after the parents and caregivers themselves become disabled or deceased, and after the assets have been protected within the Supplemental Needs Trust, those family members and advocates who remain behind to administer the trust and implement the future care plan are left asking perhaps the most crucial question of all: “Now what?” How should funds that the family has worked so hard to protect be used by the trustee to truly enhance the life of the person with the disability? To whom should the trustee look for advice and suggestions if the person with the disability cannot speak on his or her own behalf? Encouraging the family to prepare a "Life Care Plan" or "Letter of Intent" will help provide answers to these questions. The Life Care Plan or Letter of Intent is a document designed to ensure, to the extent possible, that as much personal, financial, and other pertinent information concerning the person with the disability is stored in a single place and accessible for future reference. Many advocates use workbooks designed specifically for this

24 Providing the beneficiary with more than an advisory role might cause the beneficiary's right of participation to rise to the level of a general power of appointment, triggering the availability of the underlying trust assets in determining ongoing eligibility for program benefits. Social Security Administration Program Operations Manual System ("POMS") § SI 01110.100(B).

13

purpose.25 The workbooks will usually request background medical information, financial information, family history, community contacts, and recreational preferences of the person with the disability. The workbooks may also request that the parents and caregivers provide similar information about their own finances and family supports. This information can prove to be especially crucial for those who must step in and assist when the caregiver is seriously injured or dies unexpectedly. It is difficult to overemphasize the importance of this step in the process. Consider asking the client with a severely disabled child the following questions: "If you were to get up and leave town today, right this minute, completely unexpectedly and without advance notice to anyone, including your disabled son or daughter, who would step in to handle your affairs? Does this person know where all of your pertinent financial information is stored? Have you provided her with the legal authority to access your funds and act on your behalf? Who breaks the news to the person with the disability? Who will step in to do what you have been doing all these years? Who stays in contact with the service coordinator or social worker? Who double checks to be sure that medication is being taken as prescribed? Who will make the emergency calls when no one has heard from your son or daughter in days, and who will they call? And if you have someone in mind, have you provided this person with the information he or she needs to carry out your wishes? Does this person know what you know about your son or daughter's needs, preferences and dislikes?" To those people who will step in and assist a family member with a disability when the parents are gone, a well written Letter of Intent will be worth its weight in gold. And as uncomfortable as it is for many parents to face the topic, completing this part of the planning process often provides the greatest amount of satisfaction and relief. Certainly the legal and financial components are equally as important, but in most circumstances, competent counsel will be able to preserve a portion of the family’s funds for the person with the disability, even if no planning whatsoever has been completed prior to the disability or death of the caregiver. This "crisis intervention

25 A simple internet search using the terms “disability” and “letter of intent” will generate hundreds of sample forms that families can use for this purpose.

14 planning" is always more expensive, time consuming, and will be conducted before a court as a matter of public record, but it can be done. Once the parents or primary caregivers are gone, however, the ability to prepare a comprehensive and detailed Life Care Plan becomes quite limited. There may be a case record or Service Plan to use as a reference, a dedicated service coordinator who might have some additional personal information, or some other family member or friend who could assist in compiling pertinent information, but none of these "fallback" references will ever replace a document which is prepared by a parent or caregiver who has taken care of the person with the disability all of his or her life.

15

RECENT NEW YORK STATE COURT DECISION PROVIDES A WAKE-UP CALL FOR CORPORATE AND OTHER PROFESSIONAL TRUSTEES OF SPECIAL NEEDS TRUSTS*

By Edward V. Wilcenski, Esq. and Tara Anne Pleat, Esq.

*This article was originally published in the February 2014 edition of Estate Planning Magazine, under the title State Court Cases Put Trustees on Notice; and was updated for the purposes of this outline.

Many banks and trust companies have expanded their fiduciary offerings to include serving as trustees of Supplemental (Special) Needs Trusts.1 These institutions recognize the growing demand for this service, often from aging clients who are parents and caregivers for adult children with disabilities. A recent decision from the New York County Surrogate’s2 Court highlights some of the risks and challenges in this rapidly growing segment of the fiduciary services market.

Supplemental Needs Trusts are established for the benefit of individuals with disabilities who are supported by various means tested government benefit programs like Medicaid and Supplemental Security Income (SSI).3 While several different types of Supplemental Needs Trusts exist – “first party” Trusts funded with the assets of the person with the disability, “third party” Trusts created as part of parents’ estate plans, and “pooled” Trusts managed by not-for-profit organizations4 - all Supplemental Needs Trusts share certain common characteristics. If properly drafted, they will not adversely impact the beneficiary’s participation in the Medicaid and SSI programs,5 and the beneficiary of the trust will have some form of disability – physical, cognitive, or a combination thereof.

Much has been written about these trusts over the years, and readers looking for an in-depth treatise on the topic have many options from which to choose.6 Yet in the authors’ experience, most

1 Many readers will be more familiar with the term “Special Needs Trust.” In New York (where the authors practice) the governing statute uses the term “Supplemental Needs Trust,” which is the term that will be used in this article. 2 New York’s probate court is referred to as the Surrogates Court. The case referenced and discussed in this article is In the Matter of the Accounting of J.P. Morgan Chase Bank, N.A, and H.J.P. as co-Trustees of the Mark C.H. Discretionary Trust of 1995 v. Marie H. , 956 N.Y.S.2nd 856 (N.Y. Surr. Ct. 2012) (hereinafter referred to as “Matter of J.P. Morgan Chase”). . 3 See 42 U.S.C. § 1396p(d)(4)(A) for the federal provision allowing for “first party” trusts (which are funded with the assets of the person with the disability), and in New York, Social Services Law 366(2)(b)(2)(iii) and Estates Powers and Trusts Law 7-1.12, which cover both “first party” and “third party” trusts (the latter being funded with the assets of persons other than the individual with the disability). 4 See 42 U.S.C. §1396p(d)(4(C). 5 Supplemental Needs Trusts receive varying treatment under the rules of other means-tested programs, such as the federal Section 8 program. The federal Medicaid and Supplemental Security Income statutes specifically recognize Supplemental Needs Trusts and provide preferential treatment. A detailed discussion of the treatment of these trusts for benefit eligibility purposes is beyond the scope of this article. 6 See, for example, Begley, Thomas E. Jr., and Cannelos, Angela E., THE SPECIAL NEEDS TRUST HANDBOOK (Aspen Publishers 2013). In fact, the authors of this article also wrote an article on the treatment of Supplemental Needs Trusts in the context of retirement account benefits for Estate Planning Magazine in 2009. See Edward V. substantive articles and treatises focus on the more technical aspects of these trusts – drafting techniques, benefit program eligibility, tax treatment, etc.. Often lost in the discussion is the fact that these trusts are still discretionary trusts (with some limitations which vary from state to state), and by design these trusts require fiduciaries to exercise that discretion for a beneficiary who is often incapable of self-expression and self-representation. In those cases where there the beneficiary cannot communicate and has no responsible relative, guardian or other advocate, trustees are left to find other methods of obtaining information in order to determine how best to utilize Trust assets for the beneficiary’s benefit.

As this New York case highlights, guidance in this area – the extent to which a fiduciary has an affirmative duty to be proactive in identifying the needs of a beneficiary with a disability, and how that fiduciary actually carries out this duty - is sparse. What many trustees believe to be the protection offered by the grant of “full discretion” (and the notion that a court will not substitute its judgment for that of a discretionary trustee absent a showing of abuse of discretion7) may not serve as adequate protection in the case of Supplemental Needs Trusts being administered for beneficiaries who lack cognitive capacity and have no legal representative or advocate.

The decision, Matter of J.P. Morgan Chase,8 generated significant national attention among trustees and attorneys alike, and was the subject of an extensive article in The Village Voice.9 The case involved a proceeding to settle an interim accounting prepared and filed by the co-trustees of a Supplemental Needs Trust established for a developmentally disabled, autistic man – “Mark” - who was served by a residential program in upstate New York. The trust was established by Mark’s mother, and held well in excess of $2 million. The two co-trustees were an experienced estate planning attorney and a well- known banking institution. From the decision we learn that both of Mark’s parents were deceased, and there were no other involved friends or family members. As a result, Mark had plenty of money (through his trust). What he lacked was an advocate – someone whose could identify his needs and preferences, and then work with the trustees so that the funds in the trust could be used to satisfy them.

It is important to point out that Mark was in a Medicaid funded residential program for individuals with autism, but the program was focused on providing a safe and appropriate residential environment for its residents. The program administrators were not charged with determining how private dollars should

Wilcenski & Tara Anne Pleat, Dealing with Special Needs Trusts and Retirement Benefits, ESTATE PLANNING, Vol. 36/No. 2 (February 2009) 7 See Restatement [Third] of Trusts § 50(1)(b); see, also, In re: Estate of T. Harry Glick, 2005 N.Y. Misc. LEXIS 7336 (N.Y. Sur. Ct. Kings Co. 2005) at page 9, citing Matter of Gilbert, 156 Misc. 2d 379 (N.Y. Sur. Ct. NY Co. 1992) and Leigh v. Estate of Leigh, 55 Misc.2d 294 (N.Y. Sup Ct. NY Co. 1967). 8 In the Matter of J.P. Morgan Chase 956 N.Y.S.2d 856, see supra note 2. 9 Katia Savchuk, The Decision That Could Change Everything for Disabled People with Million Dollar Trusts VILLAGE VOICE, June 10, 2013; available at http://www.villagevoice.com/2013-07-10/news/disabled-inheritance/ (last visited October 23, 2013). be spent to supplement the care and attention that Mark was receiving.10 That was the responsibility of the trustees, and one can reasonably assume that the creator of the trust – Mark’s mother – expected this to be part of the trustees’ responsibility when they accepted the appointment.11

As the Court reviewed the accounts of the co-trustees, it discovered that while they regularly took their commissions and fees, they spent practically nothing on Mark until the Court intervened, and made no effort to determine if they should be doing so.12

In the authors’ experience, this is not an uncommon occurrence. We regularly encounter trusts which have sat “dormant” for years. The trustees – sometimes professional trustees, sometimes family members – do not mishandle or misappropriate trust money. They keep the money segregated and prudently invested. They make sure tax returns are filed. And they take commissions. But in those cases where the beneficiary is unable to communicate and has no one – no guardian, no advocate, no close family member making requests on the beneficiary’s behalf - there is typically little activity.

Indeed, there is a line of thinking which suggests that so long as the trustee is preserving trust principal and otherwise complies with the standard rules of fiduciary conduct, the trustee will not be held liable for the failure to make distributions so long as there was some reasonable basis for the inaction and the governing instrument cannot be interpreted to compel a distribution.13 As reflected in the written decision of this Court, this line of thinking may not serve as sufficient defense in those cases where a disabled beneficiary suffers as a result of the trustee’s lack of proactivity.

Interestingly, in Matter of J.P. Morgan Chase, the corporate co-trustee seemed to admit its lack of familiarity with the system of supports for individuals with disabilities in testimony presented during the

10 In fact, through the decision we learn that the residential program staff were unaware that Mark was the beneficiary of a trust, as the co-trustees never contacted the institution subsequent to the establishment and funding of the trust. 11 While excerpts from the trust document included in the decision reflect that this document was not drafted using New York’s statutory language (N.Y. Estates Powers & Trusts Law 7-1.12), the Court found that the language of the trust document – combined with the fact that it was drafted by the attorney/co-trustee who had met both Mark and his mother - was sufficient to establish testamentary intent. See Matter of J.P. Morgan Chase at 366. 12 The predecessor case which led to the decision In the Matter of J.P. Morgan Chase, was In the Matter of the Guardianship of Mark C.H., 28 Misc. 3d 765 (N.Y. Sur. Ct. New York Co. 2010) (hereinafter referred to as “the Matter of Mark C.H.”). In the Matter of Mark C. H., the individual co-Trustee of the Discretionary Trust for the benefit of Mark C.H. petitioned for guardianship of Mark pursuant to Article 17-A of New York’s Surrogate Court Procedure Act (this is a guardianship proceeding limited to those with a diagnosis of mental retardation or a developmental disability). It was through that guardianship proceeding that the Court became aware of the funds available for Mark C.H. and the fact that no action had been taken by either of the co-Trustees to determine Mark’s specific personal needs. 13 See, for example, In re: Estate of John A. Messer, 34 Misc. 2d 416 (N.Y. Sur. Ct. Cattaraugus Co. 1962) . One could argue that a disabled beneficiary in a residential institution is indeed sufficiently cared for and does not have any needs that are going unmet. While in the authors’ experience this is rarely the case, it is certainly possible, depending on the institutional setting, staffing, programming, etc.. The problem in this case is that the trustees could not make any credible argument to this effect, as there was no evidence that they ever made any inquiry into the beneficiary’s condition. accounting proceeding. As recounted by the judge in her decision, when she asked the representative of the institution serving as corporate co-trustee why Mark’s trust sat dormant for all those years,

“[the Trustee’s] "excuse" for inaction was its lack of institutional capacity to ascertain or meet the needs of this severely disabled, institutionalized young man.”14 (parenthetical in original)

The institutional co-trustee’s statements reflect a common sentiment among those trustees who have no experience with the world of disability. Most trustees are comfortable making investment and distribution decisions when the beneficiary has no disability, as they are reasonably guided by common life experiences. For example, the trustee of a discretionary trust established for a minor child with no disability can reasonably expect that there will likely be some significant future event which will require money: the purchase of a home, college tuition, a first automobile, financing a wedding, starting a business, or an uninsured medical expense. Moreover, as the beneficiary gets older, she will be able to communicate directly with the trustee to express her preferences and intentions on the use of funds in the trust. For this young beneficiary, preservation of principal is an important objective, and the trustee – familiar with these life events – can and should put reasonable limits on distributions while the beneficiary is young so as to ensure that the funds will be there when the child gets older.

The future is different for many individuals with disabilities, and this is unfamiliar territory for many trustees. An individual with a developmental disability will typically be eligible for Medicaid funded programs which are designed to provide housing, transportation, daytime activities, subsidized employment, and comprehensive medical care. On paper, everything looks fine. But service delivery systems – like other medical, educational and social services systems – require attention and advocacy to function at their best. Readers are likely familiar with this concept in other settings. Consider two elderly individuals in a nursing home, one with a dedicated family member who visits every day and actively participates in treatment decisions, and the other without. As a matter of law, both should be receiving the same level of care and attention from the institution. But in practice, we understand that the first resident – the one with an advocate – will get more and better attention from the facility.

This same concept applies in cases involving individuals with disabilities who reside in both community and institutional settings, but in our experience, many trustees fail to recognize the similarity. Without the proactive advocacy of a family member, guardian or advocate to help guide the trustee in making distribution decisions, funds that could be used to pay for goods and services which make the beneficiary’s life better – additional therapy, private case management and advocacy, adaptive equipment, recreational opportunities – often go unused. Well invested perhaps, but unused.

As noted above, there is certainly ample precedent to suggest that so long as the discretionary trustee is fulfilling the traditional obligations of trusteeship, the trustee’s exposure is limited.15 While there is also authority for the proposition that the trustee can be held liable for failure to carry out the terms of a trust (such as when a trustee fails to provide adequate support to a beneficiary or refuses to make a

14 Matter of J.P. Morgan Chase, supra note 2, at page 370. 15 See supra note 13 and accompanying text. distribution16), the authors are unaware of any other cases which address this obligation specifically in the context of a Supplemental Needs Trust.

This may be changing. In Matter of J.P. Morgan Chase, the judge opined that the trustees were not entitled to compensation because they failed to be proactive in trying to identify the beneficiary’s needs. In the words of the Court:

“It was not sufficient for the trustees merely to prudently invest the trust corpus and to safeguard its assets. The trustees here were affirmatively charged with applying trust assets to Mark's benefit and [were] given the discretionary power to apply additional income to Mark's service providers. Both case law and basic principles of trust administration and fiduciary obligation require the trustees to take appropriate steps to keep abreast of Mark's condition, needs, and quality of life, and to utilize trust assets for his actual benefit. While the accounting in this trust is not yet complete, their failure to fulfill their fiduciary obligations should result in denial or reduction of their commissions for the period of their inaction.”17(emphasis added)

Ultimately, the trustees retained a private social worker to help ascertain how Mark’s life could be enhanced through the proactive use of trust funds, and Mark responded wonderfully.

Those of us who work in this area are well aware of what parents and other family members have known for a long time: money alone does not improve quality of life; rather, money plus advocacy improves quality of life. Millions of dollars sitting dormant in a trust account didn’t help Mark one bit. But a small fraction of those dollars, spent under the guidance of a dedicated advocate, made all the difference in the world.

The Other Side of the Coin

Before a trustee reading this article opens the coffers and begins making distributions for a disabled beneficiary with reckless abandon, attention should be paid to a less publicized New York Supreme Court18 decision which actually surcharged a corporate fiduciary for paying privately for services that would otherwise have been covered by the Medicaid program.19

In Liranzo, a corporate trustee paid privately for caregivers and other services for the beneficiary of a Supplemental Needs Trust who may otherwise have been eligible to have Medicaid pay for the cost of (much of) that care. In Liranzo, there was an involved parent – the beneficiary’s mother – and the trustee complied with the requests of the mother to pay privately for the beneficiary’s care (and to

16 As explained by the judge in Matter of J.P. Morgan Chase: “It is not sufficient for the trustees to simply safeguard the Mark Trust's assets; instead, the trustees have a duty to Mark to inquire into his condition and to apply trust income to improving it. The trustees abused their discretion by failing to exercise it.” (emphasis added). See supra n. 2 Matter of J.P. Morgan Chase at 29. See also, Matter of Osborn, 252 A.D. 438 (2d Dept 1937); Matter of Kaminester, 16 Misc. 2d 1071 (N.Y. Sur. Ct. Kings Co. 1959). 17 See supra note 2 at 379. 18 In New York, the Supreme Court is the trial level court. 19 Liranzo v. LI Jewish Education /Research (N. Y. Sup. Ct., Kings Co. No. 28863/1996, June 25, 2013) (hereinafter “Liranzo”). make other distributions from the trust at the mother’s request, apparently without any credible inquiry). Over time the funds in the trust were nearly depleted, and the trustee sought to have its accounts settled when the trust became economically impractical to manage.

The Court refused to approve the accounting and release the trustee, and instead directed the trustee to return $176,905.99 to the Trust, to pay the $6,500 fee of the Court Examiner appointed by the Court to review the accounting, and refused to authorize payment of attorney fees. According to the Court, the trustee should have conducted an independent investigation to determine whether some or all of the goods and services purchased by the trustee could have been provided by Medicaid or some other benefit program.

This was clearly a drastic result. As a general rule we disagree with the notion that a Trustee has an independent obligation to interface directly with a government benefit agency to secure benefits for a beneficiary. However, in this case the language of the trust document specifically required that the trustee investigate the availability of government benefits prior to paying privately for services. In our experience, a trustee will be limited in its ability to advocate directly with a public benefit agency when a parent or guardian is not inclined (or equipped) to do so. Yet we do agree with the Court’s suggestion that a professional should have been retained to render an independent decision on whether such benefits were available to the beneficiary, regardless of representations made by the beneficiary’s mother.

On the one hand, this decision appears to run counter to the holding in Matter of J.P.Morgan Chase, which excoriated the fiduciary for failing to use funds in its control for the beneficiary’s benefit. And as the trustee argued in Liranzo, Supplemental Needs Trusts in New York give a trustee the discretion to pay privately for goods and services even if they would otherwise be available through the Medicaid program, so long as the trustee believes that the beneficiary would be in a better position for doing so.20

We believe that the two decisions are entirely consistent. In both decisions, the trustees were criticized for failing to take affirmative steps to become informed about the needs of their beneficiaries.21 In Matter of J.P.Morgan Chase, the result was a trust which sat dormant for years. In Liranzo, the result was a trust whose assets were unnecessarily spent for services that could have been paid for through one or more government benefit programs.

In both cases, the trustees’ actions could have been entirely legitimate. In Matter of J.P.Morgan Chase, the trustees could have concluded that all of Mark’s needs were being fulfilled by his residential program. As we mention above, this would be unlikely in a Medicaid funded environment, but it is

20 New York’s statute specifically contemplates a trustee’s choice to pay privately for benefits that might otherwise be available through a government benefit program. See N.Y. EST. POWERS & TRUSTS §7-1.12(e)(2)(i) 21 In Liranzo, the trustee did apparently raise the issue of Medicaid coverage with the mother and a social worker. For reasons that are not entirely clear from the decision, efforts at securing a Medicaid funded home health aide were not successful. It was the opinion of the Court that the trustee had an obligation to do more than simply raise the issue. If the beneficiary was eligible for Medicaid funded care, and if there was reason to believe that paying privately for aides would dissipate the trust well before the end of the beneficiary’s life, the trustee could (and we think should) have retained an independent professional to investigate. certainly possible. And in Liranzo, the trustee could have concluded that the beneficiary’s needs were so unique that only specialized, privately paid care was appropriate. Yet without any independent investigation or inquiry, the trustees were left without any corroboration for their conduct.

In Defense of the Trustee

Both in the Court decision and especially in her comments to The Village Voice (the judge retired from the bench shortly after the decision), the judge in Matter of J.P.Morgan Chase did not have kind words for corporate trustees of Supplemental Needs Trusts.22 Those of us who practice in New York know this judge to be a particularly vocal and progressive advocate for individuals with disabilities, and it seems to us that she used this trust and these trustees to make a point. We work closely with many excellent and proactive corporate and professional trustees, and we know how difficult these trusts can be to administer. Indeed, the rules governing trust distributions often conflict from one government benefit program to another,23 distribution standards are often ambiguous and difficult to apply in practice,24 and (in the authors’ experience) many of those who review the actions of the trustee in the context of settlement proceedings have very little practical appreciation of how tough it can be to make the right decision about the use of trust money for a beneficiary with a cognitive disability who has no credible advocate. Moreover, in most cases, trustees are utilizing their standard fee schedules, meaning that they will often spend a tremendous amount of time dealing with the “social services” component of these fiduciary appointments without any additional compensation.

That said, a lack of legal authority was not the issue in the Matter of J.P. Morgan Chase. Quite to the contrary, the trustees were not criticized for making the wrong decisions. Rather, they were criticized for making no effort to understand the needs of their beneficiary and for making no (distribution) decisions whatsoever, yet still collected compensation for their efforts (or the lack thereof).

We think this latter point to be an important one. In our experience, a trustee of a Supplemental Needs Trust is not going to be held to an unreasonable standard, so long as the trustee is being proactive in trying to ascertain how funds in its control can be used to enhance the quality of life of the a beneficiary with a disability. This is consistent with the notion that a court will not second guess the discretionary judgment of a trustee which is exercised reasonably and in good faith. But in those cases where the

22 As quoted in THE VILLAGE VOICE article: "They're lazy pieces of shit," says [the judge]. "It's a business. They collect their commissions, and they think their only responsibility is to invest the money and keep the money safe with no regard for the beneficiary." See supra note 9. 23 Much has been written about the terribly inconsistent and often arbitrary treatment of Supplemental Needs Trusts by the Social Security Administration for those individuals participating in the SSI program. See,\ for example, Swartz, Bridget O’Brien and & Angela Cannelos, The Wrongful Disregard of SSI Comparability by Some State Medicaid Agencies as it Relates to SNTs, 5 NAELA J. 139 (2009). 24 For example, there is considerable confusion and disagreement whether the Trustee of a Supplemental Needs Trust in New York must make distribution decisions for the “solely for the benefit of” the beneficiary (following the terminology used in the federal Medicaid transfer of asset rule in 42 U.S.C. §1396p(c)(2)(B)(iv)), for the “primary benefit” of the beneficiary, as the federal rule has been interpreted by New York’s Medicaid agency (“OBRA Provisions on Transfers and Trusts, New York State Department of Social Services (n/k/a Department of Health) Administrative Directive 96 ADM 8, page (March 29 , 1996), or whether there is any substantive difference between the two. beneficiary lacks the cognitive capacity to communicate, and if there is no credible and reliable family member, guardian or other advocate who can communicate on the beneficiary's behalf, then – at least in the eyes of the judge in Matter of J.P. Morgan Chase - it becomes an affirmative obligation of the trustee to locate a professional who can provide this advocacy and assistance. For those trustees who fail to do so and who continue to take compensation, they may find a very unpleasant surprise at the time they seek to have their accounts settled.

Some Practical Suggestions and Recommendations

In Matter of J.P. Morgan Chase, the representative from the institution serving as co-trustee testified that it lacked the “institutional capacity” to deal with the out-of-the-ordinary responsibilities that accompany the administration of Supplemental Needs Trusts. We think the representative missed the point. A trustee is not expected to have a degree in special education or social work, or to have a detailed knowledge of the disability service delivery system. Rather, the trustee is expected to use its discretionary authority (as may be circumscribed by the terms of the trust document) to locate professionals who do. Following are some suggestions for the proactive trustee.

1. Retain a Case Manager or Private Advocate

Most trustees would not hesitate to retain a geriatric care manager for an elderly, home bound beneficiary who does not have family or friends to monitor a plan of care. An experienced geriatric care manager will have professional familiarity with the system of services which supports elderly individuals in community-based and institutional settings, and can serve as the trustee’s “boots on the ground.” In fact, many (and perhaps most) trust documents will specifically provide the trustee with authority to retain professionals to assist the trustee in meeting a beneficiary’s needs. This is a very common provision in Supplemental Needs Trusts.

The service delivery system for younger individuals with disabilities is different from the service delivery system for the elderly, but it does have many similar characteristics. Medicaid funding continues to shrink, which has the effect of increasing the case loads of Medicaid funded “service coordinators” and other direct care staff. And because the not-for-profit agencies are limited in what they can pay their direct care staff, turnover is high. Unless the person with the disability has a tireless advocate, the level of care in a Medicaid funded environment can suffer significantly.

For many individuals with disabilities, parents have provided that advocacy from birth to the age of majority and beyond. But as these parents themselves age, become disabled and pass on, there are rarely other family members who are equipped to fill the parents’ shoes as advocates.25 While siblings and other family members are often willing to help, they simply cannot dedicate the same amount of time and attention that was provided by a parent. As a result, the beneficiary of a Supplemental Needs Trust may be eligible for Medicaid funded services, but there are no “boots on the ground” to make sure that the system is working the way it should (or that the level of care is optimal rather than adequate).

25 The issue of the aging caregiver has received increasing attention in recent years. See, for example, Clare Ansberry, Uneven Care: As Parents Age, Agencies Struggle to Help the Disabled, WALL ST. J. ,Oct. 19, 2004, at A1. Trustees of Supplemental Needs Trusts can retain a case manager or private advocate for a younger beneficiary with a disability, just as they can hire a geriatric care manager for an elderly beneficiary who is no longer able to live independently. A good case manager will have professional experience working with younger individuals with cognitive disabilities, and will be familiar with the different Medicaid funded “waiver” programs which serve these individuals in the community. The case manager can work to maximize Medicaid funded services, and identify supplemental services and supports that can be purchased using funds in the Supplemental Needs Trust.

3. Retain Counsel with Relevant Experience

The law and rules governing the administration of Supplemental Needs Trusts remain difficult to navigate. On the one hand, a trustee may be penalized for failing to utilize funds in a Supplemental Needs Trust in a proactive manner as in Matter of J.P. Morgan Chase . On the other hand, a trustee can be surcharged for paying privately for services that would otherwise have been paid for by the Medicaid programs in Liranzo. There is really no single “playbook” to help trustees identify the dividing line between the two.

Much of this uncertainty is derived from the fact that these trusts are subject to oversight by a number of different entities at any one time. A Supplemental Needs Trust established by court order in the settlement of a personal injury lawsuit may be subject to the continuing jurisdiction of the court which approved the settlement. At the same time, there may be a court appointed guardian for the disabled beneficiary which is reviewing the trustee’s accounts on an annual basis. And the state Medicaid agency – having an interest as a statutory creditor at the end of the beneficiary’s life26- will be reviewing trust distributions on a regular basis for its own purposes. To make matters worse, Supplemental Needs Trust practice can vary significantly from state to state and, here in New York where the day to day administration of the Medicaid program is delegated to each county’s social services office, from county to county. And as explained above, a trustee managing funds for a beneficiary who receives both SSI and Medicaid may be faced with conflicting instructions from the government benefit agencies on how trust funds can be used.27

Attorneys who practice in the area of Supplemental Needs Trusts and government benefits can provide a trustee with guidance on how best to navigate this complicated system of oversight, and can be particularly useful in communicating with representatives from government benefit agencies who are making demands and issuing decisions based on unfamiliar rules and regulations. Again, the terms of most Supplemental Needs Trusts will contemplate that this level of advocacy is outside of a trustee’s expertise, and will specifically allow the trustee to retain professionals to assist.

3. Periodically Settle Your Accounts

26 Supplemental Needs Trusts established with the assets of the person with the disability are referred to as “First Party Supplemental Needs Trusts,” and must provide the state Medicaid program with a right of recovery at the beneficiary’s death for medical assistance paid during the course of the beneficiary’s life. See 42 U.S.C. § 1396p(d)(4)(A). 27 See supra notes 23-24 and accompanying text. Most trustees – and certainly all professional trustees – understand that their accounts will ultimately need to be settled, formally or informally, in order to be fully released from liability. For discretionary trusts which will last for an extended period of time or for a beneficiary’s lifetime, many trustees choose to voluntarily settle their accounts on a periodic basis.

There are many different reasons for doing so. Periodically settling the accounts relieves the trustee from having to permanently maintain financial records. It also frees the trustee from reproducing a running commentary on the bases for various distribution decisions which would have to be recounted at the time of settlement, an event which may occur years – and sometimes decades – down the road.

We believe that periodic settlement takes on even more importance for Supplemental Needs Trusts, as these trusts offer fertile ground for objections: failure to fully utilize government benefit programs, distributions made in contravention of confusing and often conflicting government benefit program rules, and incorrect tax treatment of trust income28, just to name a few. And in those cases where the Supplemental Needs Trust was funded with the beneficiary’s own assets,29 the state Medicaid program will be an interested party in the proceeding. As a priority creditor, the Medicaid program has very tangible interest in maximizing recovery by challenging distribution decisions. Getting these issues to the table and addressing them on a periodic basis helps a trustee stay on course (or limit the damage as a result of its failure to do so).

A Glimpse of the Future

Current demographics – primarily the aging of the population of informal caregivers - suggest that the demand for qualified trustees of Supplemental Needs Trusts will continue to grow. Among the readers of this publication are surely attorneys who have drafted complex estate planning documents for clients of some means who have children with disabilities, and those planning documents likely include Supplemental Needs Trusts to be funded upon the passing of the parents. Other readers are professional fiduciaries who have long standing relationships with these same clients, and who will be faced with the prospect of administering these trusts for vulnerable beneficiaries who will be unable to advocate for themselves. We believe that the decision in Matter of J.P. Morgan Chase will help ensure that professional trustees and their attorneys appreciate the unique responsibilities associated with these appointments.

28 See Ron M. Landsman & Robert Fleming, What is a “qualified disability trust” for federal income tax purposes?, available at http://www.specialneedsalliance.org/taxes.pdf (last visited October 23, 2013). 29 See supra note 3 explaining a “First Party” Supplemental Needs Trust. Considerations for Corporate Trustees When Considering and After Acceptance of Trusteeship of a Supplemental Needs Trust

Tara Anne Pleat, Esq.

Wilcenski & Pleat PLLC

October, 2016

There are a multitude of issues that professional Trustees may wish to consider before accepting the appointment as Trustee of co-Trustee of a Supplemental Needs Trust. The purpose of this outline is to provide guidance to professional Trustees in establishing protocols and review mechanisms for consideration prior to and/or immediately after accepting appointment as Trustee of a Supplemental Needs Trust. For ease of addressing the issues, they are categorized as follows: (1) Administrative & Procedural Issues and (2) Policy Considerations.

I. Administrative and Procedural Issues

1. Intake Process

Issue: What type of diligence does the Corporate Trustee undertake prior to accepting the appointment as Trustee of a Supplemental Needs Trust? These appointments often make their way to financial institutions as a result of a litigation or malpractice settlement and there isn’t often time to perform the level of due diligence that would be considered the ideal in new Trustee situations. Does the Trustee meet with the Beneficiary or hire a Case Manager to meet with the Beneficiary or the Beneficiary’s family? Does the Trustee have a mechanism for obtaining information about any professionals working with the beneficiary? Does the Trustee have a process for development of an annual budget for expenditures? What specific considerations go into this process? Does the Trustee engage in house or external counsel to review the provisions of any proposed Trust prior to acceptance? Does the Trustee collect IEPs, ISPs and other documentation provided by service providers? Possible Suggestions: A Comprehensive Intake Checklist or Questionnaire which requires core items of information to be provided before accepting Trusteeship (or immediately after if the circumstances dictate).

2. File Maintenance and Storage Issue: How does the Trustee manage the multiple moving parts of its Trust Administration file once Trusteeship has been accepted? Is there a single place within which all incoming and outgoing correspondence is recorded (both written and electronic)? Is there a running chronology of Trust Activity stored in a single location (ie. correspondence, calls, documents received, etc.)? Without these mechanisms, reproducing a comprehensive chronological history of communications and/or trust activity for the purpose of preparing an accounting, affidavit, or other summary becomes more difficult, especially given the duration of these Trusts. They also can impact how a new Trust Officer may come into and gain history on a file in the event of a staff change or reassignment. Possible Suggestions: Create a single electronic Task folder for each Trust. Within which every transaction – phone calls, letters and email sent/received, documents filed, etc. – is logged in to the Task folder. Any staff member with access to the computer system can then review the file history. Create a correspondence folder on the network for each Trust where every piece of incoming and outgoing correspondence is saved in reverse chronological order.

3. Docketing/Calendaring System Issue: How does the Trustee docket for accounting filings, tax filings, and other required actions to be taken? Possible Suggestions: Create a master ‘file calendar’ for each trust client – centrally stored and accessible to all members of the Trust Department with their hands in the file. This will help ensure continuity for staff transitions and more streamlined oversight by the Primary Trust Officer. Another option would be to use a consolidated spreadsheet (preferably electronic for ease in modification and accessibility) that includes all trusts. One Master spreadsheet would be used per issue (i.e. income tax filing deadlines, accounting deadlines, required minimum distributions in situations where the Trust is a beneficiary of a retirement account).

4. Benefit Eligibility Confirmation Issue: Does the Trustee have a method of obtaining current benefit information for the Beneficiary and Members of the Beneficiary’s household? This is extremely important because distribution decisions must be based on current benefit information. Possible Suggestions: The Trustee should have a checklist that ensures that all current benefits are accounted for and this benefit profile should be updated frequently. These award/confirmation letters/notices of Decision should be requested annually from the beneficiary/guardian/service coordinator and the documents should be saved in a separate folder broken out by year for ease in locating information.

5. Significant Distributions Issue: How does the Trustee ensure that they have met regulatory guidelines for significant distributions as well as ensure that have not violated a fiduciary responsibility when making a distribution decision? Possible Suggestions: The Trustee can identify categories of transactions that require at least three (3) separate proposals/bids/prices. This might apply, for example, to any capital improvement on real estate owned by the trust or owned by the beneficiary, or to automobile purchases.

The Trustee should consult with in-house or outside counsel to ensure, in the context of First Party Supplemental Needs Trust that a particular expenditure does not constitute a substantial depletion of the Trust which would trigger a notice requirement to the Trustee.

6. Accounting for Retirement and Other Deferred Income Assets Issue: Does the Trustee have a mechanism for clear and consistent identification of receipts of principal, especially from tax deferred vehicles like retirement accounts or deferred annuities? Concerns: (1) Failing to identify the tax treatment of an asset upon receipt may result in failing to properly consider whether distributions should be made to carry out income to beneficiary before the close of the tax year (for Third Party Trusts, which are subject to maximum tax rate at substantially lower levels of income). (2) Depending on the amount of income, the Trustee may have to make estimated tax payments during the year of establishment, which would be missed if this issue is not reviewed upon intake. (3) Ensuring that a principal receipt is properly reflected as a distribution from a retirement account or other tax deferred asset will help explain a significant payment later in the accounting period for income taxes paid from trust property. (4) If the receipt is a Required Minimum Distribution, then this will typically need to be repeated each year. Unless there is a calendaring/docketing system for identifying Required Minimum Distributions, this may be missed, resulting in a potential 50% excise tax for failure to take a Required Distribution. Possible Suggestions: Upon acceptance of any new trust, the file should clearly delineate all receipts of principal from tax deferred assets. There should be an immediate review to determine if estimated payments need to be made, a distribution can be made to carry out income, etc. In the case of a First Party Supplemental Needs Trust, which will almost always be considered a “Grantor Trust” for income tax purposes, it will be necessary to determine if a personal estimated income tax payment will need to be made on behalf of the Beneficiary. 7. Tax Status Review and Return Preparation Issue: Does the Trustee have a mechanism to determine the appropriate tax filing status of the Trust (grantor, complex or qualified disability trust) and to ensure that the Trust return and the personal returns of the beneficiary are being filed?

Suggestions: Tax status review should occur upon acceptance, and a determination should be made as to whether there will be estimated tax payments due, or whether other steps to minimize income tax liability can and should be taken. 8. Accounting Practices (All Trusts) Issue: How often are informal accountings prepared and to whom are they provided? How often does the Trustee seek formal judicial settlement of its accounts? Suggestion: Ensure that in the drafting of the Trust it is contemplated that the Trustee is given authority to hire outside counsel or advisors to prepare accountings without a reduction in the Trustees commissions. Ensure use of a schedule of pertinent facts to explain recurring or routine transactions or one-off transactions that are out of the ordinary. Get your accounts settled every 5-7 years for peace of mind and to wipe the slate clean. Ensure that all required parties pursuant to the terms of the Trust document are receiving copies of any accounting that is prepared. 9. Accounting Practices (First Party Trusts) Issue: How is the Trustee handling Increased audit activity by Medicaid (and in some cases SSA) for First Party Trusts? Suggestions: Hire outside advisors to preparing accountings in judicial settlement format each year and filing same with DSS and as noted above, consider filing petitions for judicial settlement on a periodic basis; typically, every 5-7 years.

II. POLICIES FOR CONSIDERATION BY A CORPORATE TRUSTEE 1. Minimum Balances Administration of Supplemental Needs Trusts often require a much greater amount of time and effort than a typical discretionary trust where the beneficiary may not be compromised either physically or cognitively. To that end, and in order to hire the support that the beneficiary may need to live as fruitfully and independently as possible, a minimum funding amount between $250,000-$500,000 should be strongly considered by a Corporate Trustee. Some of the larger financial institutions who have a national scope have much higher 6 and some 7 figure minimums. 2. Judicial Settlement or Receipt, Release and Indemnification Agreement In situations where the Trustee is being asked to take over as a Successor to another Trustee, either by a right an interested party retains in the Trust document or otherwise, if the prior Trustee does not have their accounts settled or is not fully released, then the Corporate Trustee may be on the hook for the acts of the prior fiduciary pursuant to SCPA 1506. In other cases the Supplemental Needs Trust (mainly Third Party Trusts) may be funded by an estate or terminating Trust. * Estate (and terminating Trust) Settlements: In estate and terminating trust settlements there is no prior trustee of the Supplemental Needs Trust whose actions need to be reviewed. Rather, the Corporate Trustee would be reviewing the accounting of an executor or administrator, and the Corporate Trustee would be the initial trustee. Moreover, in many instances the beneficiary of the trust will have a guardian or acknowledged disability, and as a result the court will typically require a formal accounting and/or appoint a guardian ad litem to represent the beneficiary’s interests. The Corporate Trustee may consider retaining outside counsel on a case by case basis to review the proceedings and accounts of an executor and administrator, and in those instances where judicial settlement is not required by the court, counsel could recommend execution of an informal agreement settling the executor’s or administrator’s accounts. * Existing First and Third Party Trusts: A Corporate Trustee should not accept appointment as trustee of a First or Third Party Trust without judicial settlement of the resigning trustee’s accounts other than in very limited circumstances. With First Party Trusts, the Medicaid agency is a necessary party, and counsel for the agency would need to review and consent to a full accounting by the resigning trustee in order for any informal settlement agreement to be effective. Absent a judicial settlement proceeding where the agency is made a necessary party, the agency has no incentive to agree to such a settlement agreement. With Third Party Trusts, there is no Medicaid agency, but there will likely be a beneficiary with a cognitive disability whose signature on any settlement agreement or release could be called into question later on down the road. The only exception to this would be in the event of a Third Party Trust with a physically disabled but mentally competent beneficiary. So long as all interested parties sign off, then in that limited instance the Trustee can limit its exposure without a prior settlement order.

3. Periodic Applications for Judicial Settlement Given the increased scrutiny that trustees (and especially trustees of privately drafted First Party Trusts) are seeing, we believe that periodic applications for judicial settlement of Private Trusts should occur in all instances. Unless there is a proceeding for settlement upon notice to all interested parties, informational reports whether they are provided to an agency or not, are not binding on anyone. See Matter of Salvati, 90 AD3d 406 (First Dep. 2011). Outside counsel should be retained for assistance with these periodic settlements.