Analyzing the Unique Duties and Obligations of Special Needs Trusts
Special Needs Trusts (SNTs) are commonly used in planning for disabled beneficiaries. There are numerous resources addressing the drafting of SNTs, but there is a dearth of information to guide trustees in administering them. This article will focus on the special obligations and duties required of a trustee of an SNT.
Duty to Assess Needs
In a recent decision, Surrogate Judge Kristin Booth Glen chastised two professional trustees, a trust company and a special needs planning attorney, for breaching their fiduciary duty to a disabled beneficiary; she warned of remedies including surcharges on commissions.1
Marie set up an SNT for the benefit of her son, Mark, who was non-verbal.2 The trust provided for distributions for Mark's "care, comfort, support and maintenance" in the trustees' discretion.3
Upon Marie's death, the attorney co-trustee filed for guardianship. At the hearing before Judge Glen, the trustee said he never visited Mark at his placement nor inquired about Mark's care. The trust company told the judge that it had not acted because of a "lack of institutional capacity to ascertain or meet the needs of this severely disabled, institutionalized young man."4
Glen found that both trustees failed their fiduciary duties of diligence, loyalty and prudence by not visiting Mark or taking "steps necessary to keep themselves fully informed of Mark's" needs.5 While the trust empowered the trustees with "absolute discretion," the court held that these words do not insulate the trustees from liability.6 In order to exercise their discretionary powers, at the very least the trustees should have determined Mark's unique needs.
In many cases, family members provide information through a "letter of intent," which is a statement of the beneficiary's condition and needs. In the absence of written guidance, the trustee should gather information orally from parties involved with the beneficiary. In some cases the trustee should retain professional assistance to complete the process. In Marie H., at the urging of Surrogate Glen, the trustees retained a care manager to visit Mark to make recommendations as to what supplemental services should be provided to him and paid for by the trust. Because of the supplemental services, Mark showed vast improvement and was able to move from an institution to a residence.
A trustee also has an obligation to secure and maintain the beneficiary's eligibility for and receipt of public benefits. This obligation was highlighted in a recent decision by Judge Laura L. Jacobson, in a case involving a corporate fiduciary and an individual fiduciary. The SNT was funded with $422,012 in March 2003 but only $3,253 remained in the trust by June 2009 after the trustees spent $60,000 per year on the disabled beneficiary. The corporate fiduciary failed to oversee an application for Medicaid benefits for the beneficiary, and instead relied upon the individual co-trustee to obtain Medicaid benefits and to determine what services were required. Judge Jacobson surcharged the Bank of New York as co-trustee of the SNT and ordered it to return $176,905.99 to the trust for breach of fiduciary duty for "failing to make decisions based on the long term needs of the beneficiary that would extend the life of the Trust for as long as possible."7 The trustee failed to obtain public benefits, and that failure caused trust assets to be depleted.
Many SNTs have a family trustee and an institutional trustee, but each co-trustee has independent duties. In Marie H., Chase relied on the Special Needs Attorney and in Liranzo BNY relied on the mother. They should not have done so. At minimum, the institutional trustee has a duty to investigate the needs and circumstances of the beneficiary. In appropriate circumstances, a care manager should be hired to assess the needs of the beneficiary and make recommendations as to how to meet those needs, such as whether public benefits can or should be pursued. Authority to hire professionals is often specifically included in SNTs (and if the trustee has input on the drafting of the trust, he or she should insist upon it). Even if not specifically included, it is within the trustee's powers.
Is a Supplemental Needs Trust the same as a Special Needs Trust? The terms are often used interchangeably and the term SNT can refer to both. However, a Supplemental Needs Trust, which is a subset of Special Needs Trusts, is designed for a beneficiary who is receiving government benefits.
New York state has a statutory "supplemental needs trust established for persons with severe and chronic or persistent disabilities."8 The language suggested in the statute is not mandatory. Other language can be used and still not adversely affect means-tested government benefits provided that the distributions are discretionary, not mandatory. Additional language in the statute provides that the trustee may make distributions to or for the benefit of the beneficiary if the trustee determines that the beneficiary's needs will be better met, even if the distributions impact the beneficiary's receipt of or eligibility for government benefits.9 This essentially makes distributions discretionary with an obligation on the trustee to determine whether use of trust funds in lieu of government benefits is in the best interests of the beneficiary. It may be advisable for the trustee to obtain a professional opinion as to how to best meet the beneficiary's unique needs.
First Party (Pay-Back) Trusts
There is a particular exemption trust that allows an individual to place his or her assets in a qualified self-settled SNT. The transfer to the trust will not render the beneficiary ineligible for Medicaid, and the income and/or principal of the trust can be used for the benefit of the disabled beneficiary without jeopardizing his or her benefits.10 There is similar legislation that authorizes a "pooled trust" administered by a not-for-profit organization.11
The beneficiary must be disabled as defined in the Social Security Act and under 65 years of age. The principal of these trusts are considered unavailable for the purposes of SSI and Medicaid eligibility, and distributions for the benefit of the disabled beneficiary are not considered income.12