Virginia State Bar

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Trusts and Estates

A Section of the Virginia State Bar.

Fall 2003 Newsletter

Newsletter - Trusts and Estates

Volume 19, No. 1

PLANNING FOR SPECIAL NEEDS BENEFICIARIES

by Amy G. Pesesky

Professionals working in the estate planning area frequently encounter clients with family members who have special needs. At the initial stages of the planning process it is important for the advisor to get as much information as possible regarding the nature of the special needs beneficiary's disability. In particular, care should be taken to determine what pubic benefits (e.g., SSI, Medicaid, Section 8 housing and food stamps, to name a few), if any, the special needs beneficiary is receiving or may be entitled to receive in the future, so that the special needs beneficiary's share of an estate or trust does not mistakenly cause ineligibility. Similarly, special planning may be necessary to make sure beneficiaries with certain special needs do not have access to funds which enable certain unhealthy lifestyles (e.g., for drug or alcohol addicted beneficiaries).

This article is a general discussion of several options available to the client who wants to make provisions for a special needs beneficiary and the possible effect on public benefits. It is not intended to be a comprehensive study of the eligibility rules which may apply to a special needs beneficiary's qualification for public benefits. Nor will this article address trusts established by disabled individuals with that individual's own funds for that individual's benefit.

A Special Needs Trust can be utilized to provide for the special needs beneficiary in a manner that will not cause ineligibility for public benefits. The Special Needs Trust is a trust established by a grantor for the benefit of another individual who is or may become entitled to public benefits. This type of· trust is designed to supplement public benefits without causing the individual to be disqualified for public benefits. The term Special Needs Trust, as used in this article, refers to a trust which limits the trustee's discretion to make distributions to provide only for the "special needs". of the beneficiary. Special needs generally refer to the requisites for maintaining the beneficiary's happiness, welfare and development when, in the discretion of the trustee, such requisites are not being provided by any public agency, office, or department of any state or local government, or of the United States.

The trust should contain terms defining the trust as a purely discretionary trust and not a basic support trust. That is, the Special Needs Trust should contain prohibitions of distributions for basic food, clothing and shelter. Special Needs Trusts usually contain provisions for the termination (and distribution to beneficiaries other than the special needs beneficiary) of the trust if the beneficiary's interest in the trust causes disqualification for public benefits. The trust may also give the trustee· the discretion to make distributions upon the beneficiary's death to pay some or all of the expenses of the beneficiary's last illness, funeral, burial and estate administration. Consideration should be given to the selection of remainder beneficiaries upon the death of the special needs beneficiary and the impact that might have under state law. For example, although not applicable in Virginia, the Rule in Shelley's Case can be in effect in other jurisdictions and may cause a trust to be treated as a resource of the special needs beneficiary.

Prior to the establishment of a Special Needs Trust, it is important that the grantor be fully advised of the restrictive nature of a Special Needs Trust. If it is the grantor's strong desire that trust assets not be utilized in a manner which may cause disqualification of the beneficiary for public benefits, the Special Needs Trust is the appropriate vehicle to accomplish that goal.

An individually designed Special Needs Trust can be established and funded by the client's will, revocable trust or by an inter vivos irrevocable trust. However, care should be taken if the special needs beneficiary is the spouse of the grantor. For example, establishment of a Special Needs Trust for a spouse other than by a last will and testament may cause ineligibility for Medicaid. The Medicaid Manual is now available at www. dss.state.va.uslbenefit/medicaid manual.html and it is recommended reading for anyone preparing a Special Needs Trust.

The Special Needs Trust can also be established by an individual during lifetime by gift or at death by bequest through any number of "community trust" entities. Many localities have established such trusts and will hold funds in a segregated manner to provide for a specific individual beneficiary. These trusts may be ideal in certain circumstances. For example, in situations where resources are limited and the funds to be held are relatively modest in size, the use of a community trust may be advisable. In addition, community trusts may be advisable when there is no individual known to the grantor or testator who is suitable to serve as the trustee and the fund is not large enough to warrant the appointment of a corporate fiduciary.

Care should be taken to be sure the community trust selected meets all of the client's goals and that the client understands how the funds will be held and expended for the special' needs beneficiary. Some community funds have been established to assist individuals in a specific regional area and/or individuals with specific disabilities. For example, The Norfolk Community Trust was established in 1992 in association with the Norfolk Community Services Board as an instrument through which parents and guardians could ensure that their loved ones with mental illness and mental retardation would' receive funds that enhance their benefits.

Some community trusts have Special Needs Trusts which are designed to meet the needs of any beneficiary with special needs and may serve a broader geographical region. The Commonwealth Community Trust, for example, was established in 1990 by a group of parents with disabled children. It is an I.R.C. Section 501 (c)(3) organization and ,is intended to be available to Virginia residents as an economical way to have trust funds administered for people with disabilities that will supplement the benefits offered by entitlement programs. The Commonwealth Community Trust administers a Special Needs Trust (funded by third parties), as well as a Pooled Disability Trust (self-funded by individuals with disabilities). The Trust Company of Virginia serves as Trustee and the trusts are administered by an Executive Director and a Board of Directors. The Board of Directors is comprised of volunteers, including estate planning professionals and individuals who have disabled children.

The Master Trust Agreement of the Special Needs Trust of the Commonwealth Community Trust and other information regarding the trust can be found at http://www.commonwealthcommunitytrust.org.

One of the drawbacks of the Special Needs Trusts (whether individually designed or established through a community trust) described above is that trust funds may only be used for supplemental or special needs. There may be situations in which the client prefers to provide for the special needs beneficiary in a more significant manner than permitted under the Special Needs Trusts discussed above. For example, a parent who pays the rent, food and clothing expenses for a child with special needs and who considers the child's current living arrangements to be ideal, may want such payments to continue after the parent's death even if the payments cause the beneficiary to be ineligible for certain entitlements. This is often the case with high net worth individuals who are providing significant support for an adult child with a disability. Such individuals may be more concerned that the adult child's lifestyle not be disrupted than they are that the child will not qualify for SSI or Medicaid.

In theory, it is possible for a third-party to establish a discretionary trust for a special needs beneficiary (other than' himself) which is not a' special needs trust as long as the beneficiary does not have the legal right to compel distributions for his or her support and maintenance~ The plain language regarding the treatment of trusts as a resource under the Virginia Medicaid Manual leads one to believe that such trusts should not be treated as a resource. See Sections SI120.200, et. seq., Section MIllO.lOO, et. seq. and Ml120.202, et. seq. of the Virginia Medicaid Manual. However, state court decisions in this area have been less than consistent an 'd the planner must use caution. The planner must consider the fact that (i) the Virginia Department of Social Services may take the position that these trusts are a resource, and (ii) that even if the trust may not cause ineligibility under Virginia Medicaid rules, it may cause disqualification from benefits under another state's law. Clients should be advised of the importance of reviewing their estate plans if they move to another jurisdiction. Some planners recommend adding a provision to the trust which permits the trustee to amend the trust to avoid such disqualification. Trust spendthrift language and provisions stating the grantor's, intention that the Trustee consider other means of support should be considered. For a comprehensive treatment of this topic, see Third Party and Self Created Trusts, A Lawyer's Comprehensive Reference, by Clifton B. Kruse, Jr. and published by the American Bar Association, Section of Real Property, Probate and Trust Law.

The estate planning tools discussed above are not necessarily mutually exclusive. The client may, for example, decide to create two separate trusts for a special needs beneficiary, a Special Needs Trust and a trust which permits the trustee very broad discretion to make decisions regarding distributions and public benefits based upon the facts and circumstances at the time. The rules and regulations pertaining to qualification for public benefits are constantly changing. Therefore, it is imperative that the estate planning advisor review eligibility requirements before proceeding with the establishment of Special Needs Trusts if the intention is to preserve public benefits which the special needs beneficiary is receiving.

Some clients have a special needs beneficiary whose "disability" is the result of certain self destructive behavior. For example, the receipt of any significant amount of money by a beneficiary suffering from the disease of alcoholism and other addictive conditions will often enable the beneficiary to continue abusing alcohol or drugs. Although these are always sensitive issues, it is important to determine your clients' desires with regard to distributions to, or for the benefit of, such beneficiaries. Fortunately, there is unlimited flexibility through the use of trusts to protect and provide for such beneficiaries. Clients should be advised that such trusts may be tailored to fit any situation. Some special provisions to consider are withholding all distributions if drug or alcohol abuse continues, random drug testing, and matching distributions for earned income. Clients may be reluctant to include such provisions in the will or trust. As an alternative, a private conversation with or letter to the trustee discussing the nature of the beneficiary's problems and outlining the client's desires regarding distributions is recommended.

Finally, it is imperative that the advisor obtain complete and accurate information regarding current benefits being received by the special needs beneficiary. After receipt of this information, the estate planner will be able to educate the client about the alternatives available in planning for special needs beneficiaries and the effect of various alternatives on public entitlements. Doing so will facilitate the decision making process an~ result in a well thought out estate plan designed to provide maximum benefit to the special needs beneficiary.

Amy G. Pesesky is a shareholder of the law firm Hofheimer Nusbaum, P. C. Amy received her law degree from Marshall-Wythe School of Law, College of William and Mary in May, 1990. She received her undergraduate degree in Business Management from St. Bonaventure University. Amy is a member of the Virginia State Bar, Virginia Bar Association, Norfolk and Portsmouth Bar Association, and a member of the American Bar Association, Section of Taxation. Amy is also the Vice Chairperson of the Board of Governors of the Trusts and' Estates Section of the Virginia State Bar. Amy lectures for Virginia Continuing Legal Education and is the author of a chapter in the Estate Planning in Virginia Manual published by Virginia Continuing Legal Education. Amy has been practicing law for thirteen years, concentrating primarily in the areas of estate taX planning, estate and trust taxation and administration and elder law.