The newsletter of the ISBA’s Section on Elder Law
Every will needs a paragraph allowing for a supplemental needs trust
In your morning mail is a letter from a client that includes an inquiry as to why her 35-year-old bi-polar daughter no longer qualifies for SSI or Medicaid. In addition, the daughter has been given a formal notice to vacate her Section 8 housing.
After some inquiry, you find that she has too much money. Hardly a bad thing. But here, it’s not so good. You are informed that your client’s brother, who recently passed away, left $50,000 to each nephew and niece.
So, now your client’s daughter has $50,000, but no SSI, no Medicaid and no apartment.
You call the attorney who drafted the uncle’s Will. She says that it’s not her fault, since at the time of writing his Will, she obtained an estate planning checklist that was filled out in full. No beneficiary was shown to be disabled. Unfortunately, that was then and this is now.
Imagine now the same scenario but it is your elderly mother, suffering from dementia, who has received the inheritance from her recently deceased brother. The same dire consequences might apply to her.
Any beneficiary can become disabled at any time. A Will speaks as of the future date of death and should protect beneficiaries who may become disabled during the time between the execution of the will and the death of the testator.
As shown in the example above, a gift to a disabled person can result in automatic disqualification from a number of well-known government assistance programs.1 Even immediate reversal of the disqualification can still lead to the person being placed on long waiting lists to resume participation in the programs.2
Every will should include all the protection possible for those who may already be disabled as well as for those who might become disabled by the time of the testator’s death. In all cases, a Will should include a paragraph that allows the Executor to set up Supplemental Needs Trusts, if, at the time of the death of the testator, any beneficiaries qualify under the Social Security Administration’s definition of “disabled.”
This requirement is in addition to the more traditional inquiry into whether any beneficiaries have any then current disabilities, which often results in the need to incorporate a Supplemental Needs Trust in the estate plan. All estate planning client-intake forms should elicit information about existing supplemental needs issues.3
For clients who have beneficiaries with current disabilities, the need for a Supplemental Needs Trust can be addressed in the client’s will4 or in either a testamentary or living trust.5 The key is to assure that, if appropriate, upon the death of the grantor/testator, the share of the estate going to a disabled beneficiary is transferred to a supplemental needs trust.
It is not the goal of this short article to review the many details of drafting a Supplemental Needs Trust. Such considerations as assuring that it is truly “supplemental,” avoiding an “ascertainable standard,” determining whether the trust should be a “third-party trust” or a “self-settled trust” are for the client and the attorney to address.
Adding language to a Will, though, can reduce the risk of a beneficiary becoming disqualified for government assistance. A Will typically contains language that places a minor’s share in trust. The Will should also include a provision addressing disability. Any provision for a particular client would have to be tailored to their particular circumstances. A sample provision follows:
(in the GRANTING CLAUSE)
If any beneficiary hereunder is disabled at the time of my death, as defined below, my Executor shall distribute such disabled beneficiary’s share according to ITEM X herein. The receipt of the trustee to whom such share is distributed shall be a complete discharge of my Executor,”
PROTECTION OF DISABLED BENEFICIARY’S SHARE
Executor Authority Regarding Beneficiaries Receiving Certain Government Assistance. If the Executor reasonably believes that a beneficiary is receiving (or may receive) governmental benefits under the Supplemental Security Income Act (“SSI”), 42 U.S.C. §§1381 et seq., Medicaid, 42 U.S.C. §§1396 et seq., or other federal or state means-tested government benefit programs, then the Executor may, in the Executor’s sole discretion, withhold any distribution due under this Will to or for such beneficiary and retain such distribution amount as a discretionary, non-support, spendthrift trust share for the benefit of such beneficiary. In the alternative, the Executor may establish a separate third-party supplemental needs trust for such beneficiary with such terms as the Executor/Trustee shall deem appropriate and qualify under all applicable rules and regulations in force at the time. It is my intent that any supplemental needs trust provide the maximum benefit to the beneficiary without the principal and/or income of the trust being available to the beneficiary for the determination of the beneficiary’s continued eligibility to receive such governmental assistance programs. If any such trust is created for the life of a beneficiary, then upon the death of such beneficiary, the trust shall be distributed to the beneficiary’s issue, if any, per stirpes, or if there are no such issue, to the Settlor’s issue, per stirpes. If such a trust for the beneficiary cannot be established, then the Trustee may create a first-party supplemental needs trust for the beneficiary pursuant 42 U.S.C. §1396p(d)(4) which, to the extent possible, provides the benefits referenced above for a third party trust. However, in the case of a self-settled trust, the contingent beneficiary shall be as then required by all applicable laws and regulations. No trust created hereunder is to be considered a “Medicaid qualifying trust” as that term is defined at P.L. 99-272, §9506 (42 U.S.C. §1396(a) (k)).
In the best case, this will allow a newly drafted third party Supplemental Needs Trust to receive the share for a disabled beneficiary. If that is not allowed, then, at least, the Executor should be allowed to create a first-party, self-settled, supplemental needs trust for the beneficiary.
This general paragraph is not a substitute for specific estate planning that addresses known needs of a beneficiary who is disabled at the time the document is drafted. It is planned to avoid the dire consequences of a later disability.
Not for everyone? Only a few can say that they are sure they will never need the kind of governmental support referenced in this article. But, even for them, placing funds into a Supplemental Needs Trust should not be expected to have adverse consequences. A proper trustee of a Supplemental Needs Trust should not be unduly restrained in caring for a beneficiary who, it turns out, is never in need of these benefits. ■