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Wendy Emerson
/ Categories: By George H. Gray

The Basics of Supplemental Needs Trusts

1. Introduction.

A supplemental needs trust (SNT) is a trust established for the benefit of a disabled adult (the "beneficiary") which does not jeopardize the Beneficiary’s eligibility for governmental benefits. The use and purpose of a SNT is to provide funds to the disabled adult for items which supplement but do not supplant, impair or diminish, any benefits, assistance or payment of any governmental entity for which the Beneficiary may otherwise be eligible or which he or she may be receiving. Most importantly, the property and assets in a SNT are disregarded as a resource of the Beneficiary for purposes of determining the beneficiary’s eligibility for Medicaid and Supplemental Security Income Benefits ("SSI"). One of the main benefits of a SNT is to enhance the quality of life for a Beneficiary by providing for the purchase of additional support, services, therapies and other items that are not covered by nor provided adequately for by available government programs.

2. Types of Supplemental Needs Trusts

2.1 "Self-settled" SNT

A self-settled SNT is established by a parent, grandparent or guardian or by a Court (a Grantor) for the benefit of a disabled person under the age of 65. If the Beneficiary does not have a parent, grandparent or guardian, it will be necessary to obtain a Court order, pursuant to Article 81 of the New York Mental Hygiene Law, to establish the SNT. Once the trust is established, it is funded by the disabled person’s own property and assets, such as a personal injury award or an inheritance paid directly to the disabled person. A self-settled SNT must provide that the amount remaining in the SNT at the death of the Beneficiary will be paid to the State up to an amount equal to the total Medicaid paid on behalf of the Beneficiary. It is for this reason that self-settled SNT are also called "pay-back trusts"; because there is a "pay-back" for any Medicaid benefits to the State.

2.2 "Third-party" SNT

Like a self-settled SNT, a third-party SNT is established for the benefit of a person with a disability to provide for the Beneficiary without affecting his/her entitlement to governmental benefits. However; unlike a "self-settled" SNT, the distinction between aninter-vivos SNT and a testamentary SNT is important to determine who may establish a third party SNT. A SNT established during the lifetime of the Grantor is known as an inter-vivos SNT; while a testamentary SNT is created by the Grantor’s Will to be effective at the death of the Grantor.  Both types of "third party" SNT's may be established by: a Court, the parent of an adult beneficiary, a grand parent, or a guardian.  A testamentary SNT can be also established by a spouse of an adult beneficiary or the parent of a minor beneficiary.

Once established, the third party SNT is funded by the property and assets gifted to the SNT by a person other than the Beneficiary, such as a parent, spouse, uncle or grandparent. It is important that the third-party SNT be in force at the time the gift or inheritance is made so the gift or inheritance can be made directly to the Trustee of the SNT and not to the Beneficiary. Unlike the self-settled SNT, a third-party SNT may provide that the assets and property that remain in the SNT at the death of the Beneficiary can pass to anyone the Grantor of the trust chooses. In other words, the remainder in the SNT at the death of the Beneficiary does not pass to the State and there is no requirement for a "pay-back" of Medicaid benefits to the State.

2.3 "Pooled" SNT

A pooled SNT is a trust established and managed by a non-profit organization, such as United Jewish Appeal or NYSARC (NY State Association of Retarded Persons). It benefits persons with a disability whether under or over the age of 65. The provisions of the pooled SNT are set forth in a "master" trust agreement prepared and signed by the non-profit organization. A separate sub-account is established for each Beneficiary, but the property and assets of all the sub-accounts are pooled into one fund for investment and management purposes. The sub-account is established by the signing of a "participation agreement" by a parent, grandparent, guardian or the individual Beneficiary. Thus, one of the distinguishing elements and a distinct advantage of a pooled SNT is that the Beneficiary himself can establish a sub-account and take advantage of the benefits of a pooled SNT in that way. Pooled SNT’s are helpful when there is no family member to act as Trustee of the SNT or where the Beneficiary is over the age of 65 years. In addition, the initial investment to a pooled SNT can be a modest sum and the annual carrying costs of the pooled SNT to the Beneficiary are very low; thereby making it affordable to a wider range of individuals than a self-settled or third-party SNT. Amounts that remain in the pooled SNT at the death of the beneficiary are paid to the State to the extent they are not retained by the pooled SNT itself.

3. Legal Requirements.

3.1 Beneficiary’s Disability

A SNT can be established only for individuals with a "disability". A person is considered "disabled" if he/she is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve months. An individual is determined to be under a "disability" only if his/her physical or mental impairment is of such severity that he/she is not only unable to do his/her previous work but cannot, considering the person’s age, education, and work experience, engage in any other kind of substantial gainful work which exists in the national economy, regardless of whether such work exists in the immediate area in which the individual lives, or whether a specific job vacancy exists for such person, or whether he would be hired if he applied for work.

3.2 Parties to the SNT

The agreement that establishes the SNT must identify the three essential parties to the trust.

  • The Grantor – The Grantor is the parent, grandparent or guardian of the individual with a disability. This person, in essence, creates the trust, who names the Trustee and, within the parameters of the law, sets the terms of the trust. The Grantor signs the SNT agreement as the creator of the trust.

  • The Trustee – This is the person who is named by the Grantor in the trust agreement to hold title to the property and assets of the trust, to manage that property and to make distributions to the Beneficiary. It is the Trustee who exercises discretion to pay out or withhold benefits to the Beneficiary. The Trustee holds title to the property and assets in the trust and the bank and brokerage accounts of the trust are opened in the Trustee’s name. It is the Trustee who must account to the Beneficiary and, in the case of self-settled trusts, to the State, for the management of the assets and property in his/her care, custody and control. The Trustee signs the SNT agreement to indicate that he/she accepts appointment as a Trustee and that he/she will abide by the terms of the SNT agreement.

  • The Beneficiary – This is the individual with a disability for whose benefit the SNT is established and to whom benefits are distributed, at the discretion of the Trustee. While an essential party to the SNT agreement, the Beneficiary typically does not sign the agreement.

3.3 SNT must be Irrevocable

A SNT is an irrevocable trust, that is, it cannot be altered, amended, revoked or terminated by any party, including the creator of the SNT, the Trustee of the SNT or the beneficiary of the SNT. Because the terms of the SNT cannot be amended to meet changing circumstances, it is important that much thought go in advance of creating and funding the trust. In the case of a self-settled SNT, the trust must not only be irrevocable, but it must also be approved by the Department of Social Services ("DSS") in the County where the Beneficiary resides. For this reason, oftentimes a self-settled SNT agreement will provide that its terms areamendable to meet the requirement imposed upon the SNT by the County DSS.

3.4 "Self-settled" and "third party" SNT: Written Trust Agreement

The Agreement establishing either a self-settled or a third party SNT must be in writing and signed by the Grantor and the Trustee(s). Either SNT can be created by an agreement signed during the lifetime of the Grantor to be effective immediately or in the Grantor’s Will to be effective upon the Grantor’s death. A SNT established during the Grantor’s lifetime is called an inter-vivostrust and one established by Will is called a testamentary trust. The trust agreement establishing either a self-settled or a third party SNT typically contains language which:

  • identifies the Grantor, the Beneficiary and the Trustee(s)

  • identifies the trust as a supplemental needs trust intended to supplement and not supplant governmental benefits of the Beneficiary

  • outlines the powers and duties of the Trustee(s) to hold, manage and distribute the assets and property in the trust (such assets and property is called the "principal" or "corpus" of the trust).

  • prohibits the Beneficiary access to the principal or income of the trust

  • allows the Trustee discretion to make (or not make) distributions of the income or principal of the trust to the Beneficiary

  • provides for the distribution of the income and principal remaining in the trust at the death of the Beneficiary. It is this last provision of the trust agreement that distinguishes a "self-settled" SNT from a "third party" SNT. A self-settled SNT must provide that the corpus of the trust remaining at the death of the Beneficiary be paid to the State to the extent Medicaid benefits were paid. A third party SNT allows the Grantor to designate anyone he/she wished to receive the corpus of the trust upon the death of the Beneficiary.

3.5 "Pooled" SNT: Adoption Agreement

The non-profit organization is the creator of a pooled SNT and a "master trust agreement" sets out the salient features of the SNT. An individual adopts a pooled SNT by signing a "participation agreement" which binds the individual with a disability to all the terms and conditions contained in the "master trust agreement" which, in turn apply to all the participants of the pooled SNT. The individual who signs on to be a participant in a pooled SNT has no say in the terms of the pooled SNT which are determined and fixed by the non-profit organization sponsoring the pooled SNT.

4. Impact of a SNT on Eligibility for Medicaid and SSI.

4.1 Disregarded Resource

Medicaid and SSI are "needs-based" benefits, which mean that the resources and income of the applicant must be below a certain dollar amount in order for the applicant to be eligible for the benefit. Properly structured, the assets and property contained in a SNT and the income earned by that property are not considered an available resource of the applicant. It is for this reason that SNT’s are so useful and popular.

      For example, if a person on Medicaid receives an inheritance or a personal injury award and if the inheritance or award are large enough he/she will become ineligible for the government program because his resources are too high.

       

    • In order to become eligible again for these government benefits the individual must spend down the inheritance or personal injury award to a level which is below the resource amount for eligibility for Medicaid or SSI.

    • Thus, the individual receives no benefit from the inheritance or award because he is required to spend them on goods and services that might otherwise be paid through the government benefits.

    • If on the other hand, the inheritance is paid to a SNT or the disabled individual funds a self-settled SNT with the personal injury award, the amount of the inheritance or award are disregarded for eligibility purposes and he/she can continue on Medicaid and SSI.

    • Thus, the individual retains his/her government benefits and the person has a fund of money in the SNT that can provide him goods and services that will serve to enhance his/her quality of life.

4.2 Period of Ineligibility

If a person receiving or applying for Medicaid or SSI makes an uncompensated transfer to a trust, he/she becomes ineligible for the government benefit for a number of months. This period of ineligibility is called the "penalty period". However; transfers to a SNT are exempt from this rule and they do not result in the imposition of a penalty period. Thus, a person with a disability may establish a self-settled SNT and fund it with the proceeds of an inheritance or personal injury award and not lose eligibility for Medicaid or SSI. Likewise, the individual with a disability may establish and fund the self-settled SNT and immediately apply for Medicaid and SSI without adverse consequences.

  • While a sub-account may be established in a pooled SNT for a beneficiary over the age of 65, this benefit comes at a cost. There is a penalty period imposed upon gifts to a pooled SNT for a beneficiary over the age of 65 years.

  • This penalty period is calculated by dividing the amount of money contributed to the pooled SNT by the regional rate for nursing home care, which in 2008 in the Rochester area is $8,090/month. The resulting quotient is the number of months the individual over age 65 is ineligible for Medicaid benefits.

5.  Distributions from the SNT

The following is a non-exhaustive list of expenditures that can be made by the SNT. The payments should be made directly to the merchant selling the goods and the company providing the service. Payments must not be made to the Beneficiary. Often, the Trustee will find it convenient to have a credit card in the name of the SNT, to have the credit card bill come to the Trustee and the Trustee pays the credit card company from the corpus of the SNT.

  • Automobile/Van

  • Accounting services

  • Acupuncture/Acupressure

  • Appliances (TV, VCR, stereo, microwave, stove, refrigerator, washer/dryer)

  • Bottled water or water service

  • Bus pass/public transportation costs

  • Cable TV, internet services

  • Camera, film, recorder and tapes, development of film

  • Clubs and club dues (record clubs, book clubs, health clubs, service clubs, zoo, advocacy groups, museums)

  • Computer hardware, software, programs, and Internet service .

  • Courses or classes (academic or recreational) including supplies

  • Curtains, blinds, drapes, and the like

  • Dental work not covered by Medicaid, including anesthesia

  • Dry cleaning and/or laundry services

  • Elective surgery

  • Fitness equipment

  • Furniture, home furnishings

  • Gasoline and/or maintenance for automobile

  • Haircuts/salon services

  • Holiday decorations, parties, dinner dances, holiday cards

  • Housecleaning/maid services

  • Insurance (automobile, home, and/or possessions)

  • Legal fees/advocacy

  • Linens and towels.

  • Massage therapy

  • Musical instruments (including lessons and music)

  • Over-the-counter medications (including vitamins and herbs, etc.)

  • Personal assistance services not covered by Medicaid

  • Pet and pet's supplies, veterinary services

  • Physician specialists not covered by Medicaid

  • Private counseling not covered by Medicaid

  • Repair services (appliance, automobile, bicycle, household, fitness equipment)

  • Sporting goods/equipment/uniforms/team pictures.

  • Stationary, stamps, cards, etc.

  • Storage units

  • Taxicab

  • Telephone service and equipment, including cell phone, pager, etc.

  • Therapy (physical, occupational, speech) not covered by Medicaid

  • Tickets to concerts or sporting events (for beneficiary and an accompanying companion)

  • Transportation (automobile, motorcycle, bicycle, moped, gas, bus passes)

  • Vacation (including paying for personal assistance to accompany the beneficiary)

6.  Tax Considerations

6.1 Gift Tax

Because a SNT is an irrevocable trust, amounts paid to the Trustee of the trust will trigger a Gift Tax. Thus, for example, a parent who funds a SNT with $100,000.00 for the benefit of a child with a disability will have the obligation to file an IRS Form 709 "Gift Tax Return" to report the gift to the IRS.

  • However; each person is entitled to a "unified credit amount" equal to $1,000,000.00; which means, a person can gift property up to a cumulative value of $1,000,000.00 without payment of any Gift Tax.

  • In our example, if the cumulative value of all the parent’s gifts, including to the SNT, does not exceed $1,000,000.00, then no Gift Tax will be paid by the parent although the parent will have to file a Gift Tax Return.

6.2 Income Tax

Because a SNT is an irrevocable trust, it is considered a separate tax paying entity.

  • This means that the SNT must file an IRS Form SS-4 to apply for a separate tax identification number, and give that number to the payor of any income to the SNT (i.e., banks and brokerage houses)

  • Generally, the Trustee of a SNT must prepare, sign and file an IRS Form 1041 "Fiduciary Income Tax" Return.

  • Most self-settled SNT’s are "grantor trusts", which means the Beneficiary will pay the income tax liability on income of the self-settled SNT. Being subject to the "grantor trust" rules is generally considered an advantage to the taxpayer.

  • Generally, the Trustee of a SNT that does qualify as a "grantor trust" will file a Fiduciary Income Tax Return, even though the Beneficiary will pay the amount of any annual tax liability.

  • If the SNT does not qualify as a "grantor trust", the Trustee is required to file a Fiduciary Income Tax Return if the SNT has gross income for the year of $600.00 or more (regardless of taxable income).

  • If the SNT does not qualify as a "grantor trust", the SNT is allowed an income distribution deduction for distributions made to the Beneficiary. For this reason, the SNT is sometimes referred to as a "pass-thru" entity.

  • Thus, in most cases and with careful management, the Beneficiary, and not the SNT, pays income tax on his or her share of the distributive share of income.

  • The taxation of trusts is a complex subject, subject to many rules and exceptions to those rules. However; further discussion of the income tax implications of a SNT are best left to a discussion with a tax professional using the facts presented in a concrete example.

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