[This article was originally printed in the Straight Word, a publication of the Burlington County Bar Association.]

by Thomas D. Begley, Jr., CELA

There are a number of mistakes that scriveners make in drafting special needs trusts. This article will discuss those that frequently occur.

1. Including a Payback Provision in a Third-Party Special Needs Trust. Payback provisions are a creature of Omnibus Budget Reconciliation Act of 1993 (OBRA-93).[1] This statute relates solely to first-party special needs trusts. There is no federal statute governing third party special needs trusts. These trusts are governed by the Program Operating Manual System of the Social Security Administration (POMS). There is no requirement in the POMS for a payback provision in a third-party special needs trust. Inclusion of such a provision would require the trustee to make such a payback and subject the scrivener to a potentially serious malpractice action.
2. Creating a Self-Settled Special Needs Trust for an Individual Over Age 65. Frequently, there is a personal injury settlement for a beneficiary over age 65. Often, these beneficiaries reside in assisted living facilities or nursing homes. They are receiving Medicaid and, in many instances, SSI. The personal injury attorney is anxious to protect the settlement and preserve public benefits. The trust attorney then drafts a self-settled special needs trust without inquiring as to the age of the beneficiary. Once the beneficiary attains age 65, he or she is no longer eligible for a special needs trust.[2]
3. Requiring Mandatory Distributions of Income. If a trust distributes income to a beneficiary, it is considered unearned income by SSI and Medicaid. If the income distribution is less than the amount of the SSI payment, the SSI payment is reduced dollar-for-dollar so nothing is gained. If the distribution exceeds the SSI payment, then SSI is lost and if the Medicaid is linked to SSI, then Medicaid is lost as well. The key to a special needs trust is that the trustee must have full discretion over distributions. A mandatory distribution provision would mean that the trustee does not have discretion over these distributions.
4. Inclusion of Crummey Powers. Often, an irrevocable life insurance trust (ILIT) is wrapped in a special needs trust. The trust is funded by a life insurance policy. If the special needs trust contains a Crummey Power giving the disabled beneficiary a right of withdrawal, then that right is income to the beneficiary in the month during which the right of withdrawal may be exercised and may disqualify the disabled beneficiary from SSI and Medicaid linked to SSI. The solution is to use a Cristofani Power giving someone other than the beneficiary with disabilities the right to withdraw.
5. HEMS Standard in a Special Needs Trust. Most trusts include a direction to the trustee to make distributions to the beneficiary for the beneficiary’s health, education, maintenance, and support. This is commonly known as a “HEMS” standard. Such a trust is generally done for an individual who is not receiving public benefits. This is called a support trust. However, if a special needs trust contains a HEMS standard it is not a special needs trust, because the essence of the special needs trust is the discretion in the trustee in making distributions.
6. Failing to Make the Trust Irrevocable. In the case of a self-settled special needs trust, the document must provide that the trust is irrevocable. If the trust is revocable, it is an available asset to the beneficiary and public benefits will be lost. In a third-party special needs trust, the document may provide that the third-party grantor may revoke the trust. Typically, the language will give the grantor the right to revoke the trust until the death of the grantor or until the trust is funded by someone other than the grantor.
7. Failing to Adequately Fund a Special Needs Trust. This is perhaps the most common problem with third-party special needs trusts. Parents want to establish a trust for their child with disabilities. They have three children, two of whom are healthy and one whom has a disability. They want the trust assets divided equally among the three children upon death. Good practice dictates that a Life Care Plan be obtained outlining the level of funding that will be required to maintain the child with disabilities in the lifestyle that the parents want for that child. The healthy children can work, so one solution would be to leave them no money or a smaller percentage. The other solution is to fund the third-party special needs trust with a second-to-die life insurance policy on the parents. These two strategies can be used in combination.
8. Selection of a Non-Professional Trustee. This is a very common and serious mistake. A professional trustee knows public benefits law, has investment expertise or hires such expertise, knows tax law, and is familiar with navigating the disability system. The professional trustee has no conflicts of interest and is in a position to say “no” to inappropriate distributions. The reason many individuals want a family member is cost. By the time the family member pays the bonding premium, if they can get a bond, hire someone to manage the money, and hire someone to prepare the tax return, they’ve usually spent far more money than they would in hiring a professional trustee. Family members often have conflicts of interest in that they will be receiving any money not distributed for the benefit of the beneficiary. Family members are often inclined to make a distribution that would be inappropriate. There is often conflict between the family member trustee and the beneficiary that destroys a family relationship.
9. Failure to Appoint a Trust Protector. When a professional trustee is selected, for the most part, the result are satisfactory to all concerned. However, there are occasions when a beneficiary is legitimately dissatisfied with the performance of the trustee. A trust protector is a good check and balance on the professional trustee. The Trust Protector can removed and replace trustee.
10. Failing to Give a Minor with Capacity a Power of Appointment over Trust Assets on Death. In New Jersey, a trustee cannot do estate planning for a minor. The typical self-settled special needs trust states that on death after the Medicaid payback, remaining trust assets go by intestacy. By giving the minor beneficiary a limited power of appointment upon attaining majority, the remainder of the trust assets can be distributed in a more appropriate manner.

[1] 42 U.S.C. §1396p(d)(4)(A).

[2] 42 U.S.C. §1396p(d)(4)(A).

[This article was originally printed in the Straight Word, a publication of the Burlington County Bar Association.]

by Thomas D. Begley, Jr., CELA

Individuals with disabilities are often able to travel and take vacations. A special needs trust can pay for vacations, but there are different rules that apply to third-party special needs trusts as opposed to first-party special needs trusts with respect to these payments. First-party special needs trusts must adhere to the “sole benefit of” rule with respect to distributions for a trust beneficiary. This means that, generally, distributions can only be made for the benefit of the beneficiary. If others receive an incidental benefit, they must pay their pro rata share. The “sole benefit of” rule does not apply to third-party special needs trusts, so administration of these trusts is much easier.

An issue often arises as to whether the payment for a hotel room and food on a vacation, or for a state room and food on a cruise, constitutes payment for food and shelter and would be considered in-kind support and maintenance (ISM), which would reduce the trust beneficiary’s SSI payment.

POMS Considerations

Under the POMS, ISM the individual receives during a temporary absence is not counted.[1] However, it should be noted that during a temporary absence SSA continues to value ISM as if an individual were physically in his or her permanent living arrangement. So, if the trust were paying a person with a disability’s rent in an apartment, the rent would be considered ISM while the individual was temporarily absent, but the payment for the food and shelter on the cruise would not be considered ISM.

Payment of Travel Costs

One way for a trust to pay incidental vacation expenses is for the trust to pay the provider directly. This works very well where the resort is an all-inclusive arrangement. The other way to pay for incidental expenses is to have a co-traveler pay these expenditures and reimburse them from the trust.

There are a number of issues that arise with respect to trust payments for vacations for the disabled beneficiary.

Other Family Members

It is often difficult, if not impossible, for an individual with disabilities to travel alone. The issue arises as to whether the trust can pay for other family members to join the beneficiary on the vacation. The Social Security Administration (SSA) has taken the position, with respect to self-settled trusts, that the trust can only pay for a skilled health care–trained professional if a travel companion for the beneficiary is necessary.[2] If the trust is a third-party trust, the “sole benefit of” rule does not apply and payment for other family members can more easily be justified regardless of whether they are a “skilled healthcare-trained professional.” Very often, the person with disabilities does not need a skilled health-care trained professional. He simply needs someone to push his wheelchair or perform other non-professional tasks.

If a second travel companion is to be paid for by the self-settled trust, SSA has indicated informally that a letter from the beneficiary’s doctor that the travel companion is necessary may be required.

Appropriate

Another issue that might arise with respect to the distributions for vacation from a first-party special needs trust is whether the vacation is appropriate for the beneficiary’s special needs.

Expense

The trustee must determine whether the vacation is too expensive. Ideally, the assets in the special needs trust will last for the beneficiary’s lifetime. If funds are expended too rapidly for vacations or any other purposes, the funds may be exhausted prematurely. Factors to be considered in determining whether the expenses of a vacation are appropriate would be whether the beneficiary requires first-class air travel because of a need to spread out and proximity to restrooms. Handicap vans are often expensive, but may be an absolute necessity. Expenses can be controlled by avoiding expensive hotels and restaurants.

Spending Money

The trustee should require receipts for all purchases. If possible, credit cards might be considered.

Travel Ticket

The value of a ticket for domestic travel received by an individual (or spouse) is not a resource if the ticket is:

• Received as a gift;
• Not converted to cash; and
• Excluded from income per SI 00830.521.

The value of tickets for non-domestic travel received by an individual are a resource, unless the ticket cannot be sold or converted to cash due to restrictions placed on the ticket. For example, this means the ticket must be non-refundable.[3]

Special Vacations

In some cases, an individual with disabilities is able to take a vacation but they require non-family supervision. There are companies that offer vacations for individuals with developmental disabilities and other special needs. Many of these vacations are supervised tours. Some companies will even design custom travel packages for group travel for organizations or other affinity groups. These tour companies attempt to offer vacations ensuring a safe environment with emphasis on inclusion. The trips promote integration, socialization, friendship and fun for the travelers with disabilities. Many special needs tours are all inclusive, so that the special needs trust simply pays the tour operator and the distributions are not included as income to the beneficiary of the special needs trust.

Generally, the groups tend to be small so that there is a good ratio between chaperones and special needs travelers. The travel escorts usually consist of social workers, teachers, group home and day program counselors, and other caring individuals. The staff is trained to work with individuals with developmental disabilities and special needs travelers. One such organization offering these tours is:

Exceptional Vacations
P.O. Box 970220
Coconut Creek, FL 33097
Phone: (866) 748-8747
Email: info@exceptional-vacations.com
Web site: www.exceptional-vacations.com

[1] POMS SI 00835.040 2.

[2] Medicaid Trust Exceptions & Supplemental Security Income (SSI), Mandy Stokes, SSI Policy Expert, Philadelphia Regional Office, Social Security Administration, 2013 Trustee School, Begley Law Group, Philadelphia, Pennsylvania, October 25, 2013.

[3] SI 01120.150.A.

[This article was originally printed in the Straight Word, a publication of the Burlington County Bar Association.]

In administering a special needs trust, it is crucial that the trustee not advance cash to the beneficiary. Historically, beneficiaries have sent their bills to the trustee for payment. An easier way to accomplish this objective is to obtain a credit card for the trust beneficiary. If the beneficiary has good credit, the card can be obtained in the beneficiary’s name. If the beneficiary does not have good credit or is a minor or is incapacitated, a credit card could be obtained in the name of a family member. The process of determining distributions from a special needs trust should begin by a trustee and beneficiary and/or beneficiary’s family developing a budget. The budget would be broken into three main categories.

One would be shelter expenses. The second would be transportation, and the third would be personal items. Generally, trustees should avoid paying for in-kind support and maintenance (ISM). ISM is defined as food and shelter. There are ten items of shelter expense that constitute ISM. Other categories of shelter expense do not count as ISM. The ten items that do constitute ISM are: mortgage payments, property insurance (if required by the mortgage holder), rent, gas, electricity, heating fuel, water, sewer, garbage collection service and real estate taxes. Frequently, the trustee must pay these expenses because the beneficiary simply does not have sufficient income to do it. Payment of these expenses results in a reduction of the SSI payment of one-third or one-third plus $20, depending on living arrangements. Transportation expenses include the purchase of a vehicle and maintenance including gasoline. It is easier for the beneficiary to get a credit card and pay for gas by a credit card than it is to pay cash. There are a whole host of personal items that can be more easily paid for by credit card than by cash or by sending bills to the trustee for payment.

During the last year, the POMS were changed to permit a special needs trust to reimbursement a third party for goods or services purchased on behalf of the trust beneficiary. This makes it easy for a parent to use a credit card to buy items for the beneficiary and have the credit card bills sent to the trustee for payment. However, there are certain rules that must be strictly followed. If it is impossible for the beneficiary or a family member to obtain a credit card due to bad credit, a secured credit card should be considered. Under a secured credit card, a deposit is made with the credit card issuer and an agreement signed so that if the credit card is not paid, the issuer can obtain payment through the funds on deposit to secure the card. The agreement must be carefully drafted to insure that under no circumstances will the beneficiary ever receive the funds on deposit with the credit card issuer. Rather, those funds would be returned to the trustee.

Credit Cards

In appropriate cases, the trust beneficiary, if an adult and competent, should obtain a credit card. The credit card should have a low limit so that it is not abused. Credit cards are loans, and loans are not considered income for SSI purposes.[1] The POMS state, “If a trust pays a credit card bill for the trust beneficiary, whether the individual receives income depends on what was on the bill. If the trust pays for food or shelter items on the bill, the individual generally will be charged with in-kind support and maintenance (ISM) up to the Presumed Maximum Value (PMV). If the bill includes non-food, non-shelter items, the individual usually does not receive income as a result of payment, unless the item would not be a totally or partially excluded non-liquid resource the following month.”[2] The trustee must examine each credit card bill to determine a number of factors:

• Did the beneficiary obtain cash from the credit card? If so, the cash would be income in the month received.

• Did the beneficiary charge any items that constituted ISM?

• Did the beneficiary charge any items that were for the benefit of a third party, rather than the trust beneficiary? If so, there would be a violation of the sole benefit rule and there may be a transfer of asset penalty.

The trustee may refuse to pay an inappropriate credit card bill or the inappropriate portion of a credit card bill.

In some situations, the beneficiary of a trust utilizes a credit card for items that violate the sole benefit rule. The trust may refuse to pay the bill. For certain beneficiaries, the trustee may want to negotiate a payment plan so that the beneficiary can make payments from his or her Social Security income. If negotiations fail, the trustee should petition the court prior to paying for a debt incurred for purchases made in violation of the sole benefit rule. Additionally, the credit card should not be used to pay for items that would be ISM, if this can be avoided.

If there is a third-party special needs trust, distributions for payment of credit card balances where the beneficiary has purchased items for the benefit of others do not violate the sole benefit rule. The trustee may want to seek reimbursement for such charges in appropriate cases.

Gift Cards/Gift Certificates

Trustees love to give trust beneficiaries gift cards or gift certificates. However, gift cards and gift certificates are considered cash equivalents. If a gift card/certificate can be used to buy food or shelter (e.g., restaurant, grocery store or VISA gift card), it is unearned income in the month of receipt. Any unspent balance on the gift card/certificate is a resource beginning the month after the month of receipt. If the store does not sell food or shelter items (e.g., book store or electronic store), but the card does not have a legally enforceable prohibition on the individual selling the card for cash, then it is still unearned income.[3] Best practice dictates the use of credit cards for beneficiaries of special needs trusts rather than gift cards.

[1] 20 C.F.R. 416.1103(f); POMS SI 01120.201 I 1 d.

[2] POMS SI 01120.201.I.1.d.

[3] POMS SI 01120.201 I 1 e.