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Special Needs Trusts August 31, 1998, revised June 2, 2001 WHAT IS A TRUST? Trusts are a legal device by which one person, the trustor, places funds in the hands of a trustee for the benefit of another person, the beneficiary. The word trust covers a great deal of territory. Microsoft is being prosecuted for anti-trust violations. Nursing homes have trust accounts. In bankruptcy the trustee is a major player. In the context of this discussion, the word trust has a more specific meaning, but even when it is clear what sort of trust is being discussed, it is very important to remember that there are many types of trusts, and that trusts of the same type may have great variance. For example, a Special Needs Trust may be a grantor trust or it may be a testamentary trust. A testamentary Special Needs Trust may have a trust committee or not. The nomenclature of trusts is often not exclusive, and can be confusing. A grantor trust may or may not be a Special Needs Trust, but is always a living trust. So, the first rule of knowing what is entailed in the management of any specific trust is read the document. The word trust will mean whatever a specific document says it means. Different situations require different provisions, and the individual preferences of the families, the beneficiary, the attorneys and the judge often affect the precise terms of the trust. Trust provisions tend to vary even more than provisions in guardianships. Special Needs Trusts Virtually all of the trusts under discussion here are Special Needs Trusts. The most important feature of these trusts is that they allow the beneficiary to retain eligibility for Medicaid, SSI and other needs tested government benefits. These trusts go by a variety of names: Craven Trusts, Dussault Trusts, d(4)(A) Trusts. Very briefly, these trusts were created in the early 1960’s by parents of people with mental retardation. Their disabled children were eligible for public benefits while the parents survived, and the parents were able to provide various kinds of help in ways that preserved the benefits. They were looking for a way to continue this arrangement after the death of the parents and came up with the creation of a trust in their will that specified that funds were not to be used in ways that caused ineligibility for benefits. Trusts of this sort were pioneered in Washington State by the founders of the Foundation for the Handicapped (now Lifetime Advocacy Plus), primarily Van Hinkle and Ralph Munro. The first such trust was created by the Craven family. Bill Dussault was a young lawyer interested in disability law at the time, who worked on the concept and went on to make such work a major part of his practice and to help extend the uses of the trust in various creative ways. In 1993 Congress passed a statute that included a new provision codified as follows:
Note that the syntax is a little ambiguous. There is a very important distinction made between trusts created by families and trusts created by courts: the obligation to compensate the state for amounts expended under Medicaid. This is discussed below under the Medicaid lien. The Medicaid lien only applies to court ordered trusts. HOW TRUSTS ARE CREATED? Third Party Trusts A third party trust is one created and funded by a person other than the trustee or the beneficiary. The best example of a third party trust is a trust created in a will, called a testamentary trust. A trust created and funded prior to the death of the trustor is called a living trust, or inter vivos trust. Under 42 USC 1396p (d)(4)(A), third party trusts are not subject to the Medicaid lien. Grantor Trusts, Court Ordered Trusts A grantor trust is one that is created from the funds belonging to the beneficiary. Ordinarily, grantor trusts are created by an act of the beneficiary as trustor. Such trusts can not be validly used as Special Needs Trusts. 42 USC 1396p (d)(4)(A), however, provides a means by which funds belonging to an individual can be converted to a valid Special Needs Trust. Four requirements must be fulfilled:
Note that the law does not specify what kind of a court may enter an order creating a trust, nor does it limit the circumstances under which such an order may be obtained. Medicaid Lien To qualify as a properly drafted trust, there must be a provision that upon the death of the beneficiary, any funds remaining in the trust will be made available to the state up to the amount of Medicaid funding that has been provided. Some trust forms simply provide that such amounts be transferred to the state. It is preferable that the trust provide that the trustee notify the state of its right to make a claim and that the state be given some specified reasonable amount of time to make a claim. This puts the burden on the state, which does occasionally fail to make its claim. Court Orders Guardianship. Under 42 USC 1396p(d)(4)(A) a person under guardianship who is under the age of 65 may have all of his or her assets placed into trust by the court so long as the trust contains the Medicaid lien language. Any professional guardian who has a client under 65 needs to consider this alternative either to acquire assistance immediately or to protect the client against the event that COPES or other Medicaid funding may be appropriate later. Dissolution/Separation The family law court may order a settlement into trust. There is no federal requirement that the beneficiary be determined to be incapacitated or incompetent for the trust to be valid. The judge in a particular case will, of course, want to be shown some basis for such an action. A person seeking a divorce or financial separation from someone who is, in fact, incompetent will usually be advised to seek appointment of a GAL in the dissolution to protect the integrity of the settlement. This GAL can recommend the creation of the trust. In some situations, the Medicaid lien can be avoided if assets awarded to the non-handicapped spouse are placed by the spouse into trust. If one spouse already has a guardian, or if a guardianship is being sought for other reasons, then a GAL is usually not appointed and the guardian seeks creation of the trust. Settlements When a minor or person with a mental disability recovers damages through civil litigation or an insurance claim, the proceeds of the claim can be ordered by the court into trust. Settlement of such claims usually includes appointment of a GAL to investigate and recommend approval of the settlement to the court. No Pending Action Because of the very broad language of 42 USC 1396p(d)(4)(A), it is possible for a person with no business pending before the court and no other basis than meeting the disability qualification for needs based benefits to approach the court and secure an order directing their assets into trust. This is not commonly done, but is a perfectly acceptable alternative for people who have a disability and have either saved money or acquired assets through inheritance, an L&I claim or some other means. This can be done as a less restrictive alternative to guardianship. WHO ACTS AS TRUSTEE? Most families involved with a beneficiary of a trust prefer to avoid paying professional fees for management of the trust. The choice of trustee proceeds in ways that are mostly similar to the selection of the appropriate guardian. Many, probably most, testamentary trusts and other trusts created by a person for the benefit of a family member name a sibling or close friend as trustee. The funds placed in trust do not belong to the beneficiary and so the beneficiary has no rights to their disposition, other than such as are created in the trust document itself. Thus, the beneficiary does not necessarily have a lot of choice in these situations. Unless the named trustee performs in some way contrary to fiduciary duties, the beneficiary has only those rights granted by the trust document. Many people creating trusts do chose to create a batting order of sorts, setting out who shall serve in the event the first choice is not available. Often, trustors name a professional fiduciary at the end of the batting order. When trusts are ordered by the court, there is often more consideration given to the alternative of naming a professional fiduciary. In Washington, trustees of court ordered trusts have reporting duties to the court. Additionally, the beneficiary has legal rights, and sometimes prefers not to have a family member act. As with selection of a guardian, it is often the case that family members choose not to act as trustee either out of concern that the legal obligations are too difficult for them, or because they elect not to be involved with the beneficiary in a formal way. Alternative Arrangements Trust Committees. Many trusts, particularly settlement trusts, include provisions for trust committees. The motive force is, essentially, a desire for a check and balance against the event that the trustee is thoughtless or lacks diligence in some important way. This is a very reasonable concern. Membership on trust committees may include parents and other family members, professionals who are involved, attorneys whom the family or the beneficiary have come to rely upon, and professionals selected specifically to provide balance to the committee. Trust provisions can include that a trust committee is the final decision maker on all non-investment spending, or can provide that committee directives are advisory only. Some trustees prefer to have fully empowered trust committees, in the belief that this reduces the liability of the trustee. This is most likely not the case, and trustees need to be diligent to assure that the aim of the trust, the interests of the beneficiary and all fiduciary responsibilities are met. The general trend is away from using trust committees. There have been many cases in which the politics of the committee has become a costly and wasteful problem. The professional fees involved are not justified by any identifiable benefit to the estate. Co-Trustees This is comparable to a co-guardianship. A family member or other interested person can be named as co-trustee with a professional fiduciary. The roles of the co-trustees can differ. Generally, the professional is given the last word on investments. Financial Manager Occasionally, a trust is written such that the trustee or co-trustee is bound to use the services of a specific financial manager. Usually this person is a stock broker. The trustee generally has discretion to discharge the financial manager and appoint a new one. The trustee remains liable for the management of the trust, including investment decisions. Empowerment of Third Parties The trust may require that the trustee make regular reports to specific individuals, such as members of the beneficiary’s immediate family. The trust can require the trustee to secure approval for budgets and significant disbursements from specific individuals. The trust can empower specific persons to discharge the trustee and select a qualified successor. TYPICAL TRUST PROVISIONS Although an individual trust may be unlike any other in some respect, there are general provisions that are almost always included in a Special Needs Trust. Purposes. The following is standard language that sets out what the funds in trust are to be used for. This is not an exclusive list. A majority of newly funded trusts make early disbursements for one or both of a trip to Disneyland and a computer.
Non-availability of funds/spendthrift provisions. All Special Needs Trusts provide that funds held in the trust are not to be placed under the control of the beneficiary, and that funds held in trust will not be available to satisfy debts created by the beneficiary. This protects the trust from claims by, for example, consumer credit companies with outstanding charges. Creation of a trust cannot be done when the effect is to defraud creditors, and this is a consideration when a trust has been newly created using funds of the beneficiary. Generally, however, it is important not to allow the beneficiary to believe that funds held in trust will necessarily be disbursed at the beneficiary’s direction. It is a good idea to document when a request is declined, in order to demonstrate the non-availability of funds. Payments to vendors. Most trusts provide specifically that disbursements from the trust are not to be made to the beneficiary but are to be in the form of payments to vendors. Term/revocability. Many trusts state that they will not terminate until the death of the beneficiary. Most court ordered trusts do provide that the beneficiary has the right, upon obtaining an order from a court that s/he is fully competent, to terminate the trust. Trusts established for unimpaired minors often contain provisions that extend the life of the trust to age 20-35. Generally, when a trust terminates early, the trustee should notify the state if the trust includes Medicaid Lien provisions, even though the validity of a claim before the death of the beneficiary is cloudy. Remainder provisions. The trustor of a third party trust generally states what is to be done with funds remaining after the death of the beneficiary. These provisions are very similar to comparable provisions in a will. Court ordered trusts usually provide that, once the Medicaid lien is satisfied, funds will be transferred according to the provisions for intestate estates. The beneficiary does have the right to make a will and funds remaining in trust will be distributed according to the provisions of any valid will the beneficiary may make. The trustee usually is given authority to distribute funds remaining in trust to the remaindermen, acting like a personal representative. Removal/resignation of trustee. Trustees may, of course give notice and resign. As in guardianships, almost any interested person may seek the removal of a trustee by the court. Trusts are very easily brought under the jurisdiction of the courts. Powers of trustee. Trusts invariably list out in great detail that the trustee has the powers necessary to manage the trust, make investments, retain counsel or other professional assistance, do taxes, borrow and lend money, acquire, exchange, transfer, mortgage, pledge, rent, lease, make advances, borrow money, commence and compromise claims, maintain insurance, and otherwise manage any part of the Trust estate. This recital can be somewhat heady for the trustee and scary to the families or beneficiaries. What is not explicitly stated in many trusts is that the trustee is bound by the requirements of various statutes and case law that set a very high standard for prudence and responsibility. Major Purchases. Many Special Needs Trusts provide that purchase of a house and any spending item that exceeds 25% of the trust is considered an investment. This language is always included when there is a trust committee in order to assure that the trustee has veto power over large expenditures. Annual Statements. Most trusts provide that the trustee is to make an annual statement of the activity of the trust to the beneficiary, the beneficiaries representative and other interested persons. Court ordered trusts in Washington require filing and approval of an annual report with the court; comparable to a guardian’s accounting. WHAT ARE THE DUTIES OF A TRUSTEE? The duties of a trustee are comparable to the duties of a guardian. A trustee has the highest level of fiduciary responsibility possible and must be diligent in conserving funds, investing for a reasonable rate of return, minimizing and balancing investment risks, and assuring that funds are used in the best interests of the beneficiary. See the definition for "fiduciary" in the glossary. The financial issues handled by a practicing trustee tend on average to be comparable to the more complex financial guardianships. A particular duty that a trustee of a Special Needs Trust has is to assure that spending from the trust is done in such a way as to assure that eligibility for public entitlements is preserved. When a trust has been established by a court order, Washington Court Rules require that the trustee file for approval by the court an annual report. The duties of a trustee to the court are somewhat different from those of a court appointed guardian. For example, approval of a budget is not required. The trustee has discretion in the matter of spending and investment and does not require advance approval for extraordinary activities. The court in a guardianship is the superior guardian, and all acts of the guardian must be approved in advance by the court. The court is not the superior trustee. In reviewing the actions of a trust the standard to be applied by the court ought to be whether the trustee has abused the discretion conferred in the trust document. Notwithstanding this distinction, the courts properly take a very active interest in trusts it has created and tend not to limit the scope of interest any more in trusts than in guardianships. Courts are particularly interested in rates of return and accountability issues. FINANCIAL MANAGEMENT This presentation will not dwell on financial management and investment practices. These are, however, extremely important to the conduct of a trustee. Rates of return, safety of investments, diversity of portfolios, tax planning, trust accounting (which is like regular accounting in that numbers are used) are all very important and are reviewed by the courts and by interested family. Trustees are specifically bound by the requirements of the Washington Trust Act of 1985, R.C.W.11.98. This has very extensive provisions limiting and defining the actions available to a trustee. The prudent investor rule is also a basic standard with which trustees need to be familiar. A professional planning on seeking appointments as trustee must provide a level of financial expertise comparable to that possessed by banks, trust companies and other trustees. A trustee may use agents, including financial professionals. However, the trustee must have the expertise to closely monitor the behavior of the professional and is responsible for the actions of agents. Most financial professionals are not educated in the duties of a trustee. PUBLIC ENTITLEMENTS For most recipients of various government benefits, the eligibility requirements are fairly straightforward and, once eligibility has been established, not a major difficulty. Because of the mandate to maximize such benefits, however, a trustee of a Special Needs Trust must become very familiar with specific rules and procedures, and be educated in how to maximize advantages of the trust without losing eligibility. The most important principle for the trustee to follow is that the need to comply with the rules should not cause important needs of the client to be unmet. It is the job of the trustee to master the details of income and resource limitations created by needs based government programs and to craft ways to legally and properly take advantage of the loopholes in these rules. Special Needs Provisions Do Not Always Apply Trust provisions do not require that the limitations on income and resources imposed by Medicaid and SSI rules be met unless the beneficiary is actually eligible for those benefits. There are many cases in which a client has resources outside of the trust that exclude eligibility, or the client’s living situation is such that there is no dependence on public programs. Eligibility for Social Security Disability is not affected by other income or resources of the client, and thus the need to avoid in-kind income and other limitations are not present. A client who is not in need of institutional Medicaid or COPES may be able to acquire health coverage through the Washington Basic Health Plan and thus avoid the need to comply with Medicaid rules. Occasionally, a trustee will determine that a particular public benefit is not worth the privation that must be endured to acquire it. If a trust is sufficiently well endowed, some benefits are sometimes purposely lost in order to advance more important interests. For example, while Medicaid does provide dental coverage, the actual services provided are substandard. So, if the best care that can be obtained through public benefits is a temporary crown or if the client will not be eligible for dentures for another year it is acceptable for the trust to pay for adequate care. The trust exists to secure benefits to the client, not the other way around. In some cases SSI or other benefits may simply be given up in order to upgrade the lifestyle of the client. In any such case, the trustee should consult closely with counsel experienced in trust work to determine if the trust should be amended to allow this decision. Medicaid versus SSI The trustee must be alert for differences in requirements between programs. A client who is eligible for Medicaid but does not require SSI is not impacted by the in kind income rules set out below. For example, having rent paid by the trust will not affect eligibility for Medicaid, but will result in a 1/3 reduction of any SSI grant SSI Eligibility: The Gold Standard The eligibility requirements for SSI benefits are the most restrictive of any generally available government benefit. The things that a trustee is and is not able to pay for seem to many to be paradoxical. While food and clothing cannot be paid for, a non-essential trip to Disneyland can be. The SSI rules are written with the goal of minimizing benefits to disabled and indigent people. Thus, great ingenuity has gone into identifying ways in which some recipients are less truly needy than others and cutting benefits accordingly. Thus if a recipient receives free rent or finds cash in the gutter or receives royalties for a patent the rule makers have made provisions for the appropriate reduction in benefits. SSI rules recognize two different kinds of assets: income and resources. Income is money or certain goods and services received in a particular month. Resources are funds held in one month that were acquired in previous months. The resource limit is $2,000. For the most part it is not difficult to avoid having clients acquire resources. However, because SSI rules consider certain goods and services to be the equivalent of cash income, the trustee must exercise care in how funds are disbursed. The term used in SSI regulations is In-kind Support and Maintenance (ISM). Generally, anything that can be considered food, clothing or shelter is referred to as ISM and treated by SSI the same as if it were cash income. The SSI rules for determining what is income and resources are contained in the Program Operations Manual System (POMS) which are thousands of pages long. In Kind Support and Maintenance (ISM). Generally, anything that can be considered food or shelter is referred to as ISM and treated by SSI the same as if it were cash income. POMS section SI 00835.465 set out what are and are not considered ISM for household expenses. The list includes: Food, mortgage (including property insurance required by the mortgage holder), real property taxes, rent, heating fuel, gas, electricity, water, sewer, garbage removal. Note that the list does not include telephone or cable services, nor home repairs. Clothing is listed elsewhere in the POMS. Mortgages payments are considered household ISM. Condo fees are considered ISM only to the extent that they include garbage removal or other listed expenses. The trustee must avoid spending on any of the above items. Anything not listed above is most likely permissible. The Value of the One Third Reduction (VTR) SI 00835.200; and the Presumed Maximum Value (PMV) SI 00835.300 set out how an SSI recipient’s grant is to be reduced in the event that s/he does receive ISM in the form of food, clothing or shelter. Essentially the effect is the loss of 1/3 of the SSI grant, which is usually about $170. A trustee in certain circumstances may elect to take this hit for the sake of allowing the client to avoid having to live in a place that is affordable to an SSI recipient. The trustee should be sure that an application for Section 8 housing has been filed. The trustee considering this choice should consult with counsel to determine if an amendment to the trust allowing this loss of public benefits is appropriate. Home Ownership. SI 01130.100 provides that an individual's home, defined as property in which he or she has an ownership interest and that serves as his or her principal place of residence, regardless of value, is an excluded resource. This means that the value of the house it does not affect SSI eligibility. SI 01110.515C provides that a beneficiary in a trust may not have legal title to the assets of the trust, but does have "an equitable ownership interest" in the trust. Purchase of trust property. The sections referenced above mean that the purchase of a home or condo for the beneficiary does not create in-kind free income and is not a counted asset. This can be highly beneficial to the client, and is often the first consideration when handling a newly created trust. BEWARE however. It does occur that the purchase of property does not work out. The client may simply not be able to conform to reasonable expectations for use of the property or acceptable behavior. The trustee should always obtain a rental agreement that creates a landlord tenant relationship so that, if necessary, the beneficiary can be evicted. Without such a written agreement, the clients beneficial interest in the property confers rights that can be difficult to overcome.
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