A supplemental needs trust (SNT) is a vehicle through which an individual can provide for the needs of a chronically and severely disabled beneficiary by supplementing the beneficiary’s government benefits, rather than diminishing such benefits. Many government benefit programs, including Medicaid, count the assets and income of an individual for purposes of determining eligibility for assistance. With a supplemental needs trust, however, a person such as a parent or relative may establish and fund a trust for a disabled individual without jeopardizing the beneficiary’s eligibility for Medicaid and Supplemental Security Income (SSI).
The trustee of an SNT has all the same duties of any trustee, plus the specific added responsibilities due to the special needs of the beneficiary. All trustees are responsible for the prudent investing of trust property, bookkeeping and accounting of trust activities, communicating with trust beneficiaries, tax reporting for the trust and appropriately distributing trust property to the beneficiary or beneficiaries – taking into account both current and future needs. In addition to these responsibilities, the trustee of an SNT must also inquire into the needs of the trust beneficiary, ensure that the beneficiary maintains their eligibility for public benefit programs, report to the agency or agencies administering these programs and work with the family members, social workers or other individuals providing support for the trust beneficiary.
Due to these demands, many families find that a professional trustee is better equipped to serve as trustee or as co-trustee with a family member. Professional trustees, such as banks, trust companies and some attorneys, are prepared to handle details like establishing accounts for the management of trust assets, handling trust recordkeeping, hiring and overseeing the activities of any service providers, making distribution decisions and investing trust assets.
With respect to the taxation of the trust, the trustee is responsible for notifying the IRS that the SNT has been created and requesting that the IRS issue an employer identification number. This number is necessary for opening any account in the name of the trust and is also used on the trust’s tax returns. The trustee is also required to prepare and file annual federal and state fiduciary income tax returns and reporting any income that the trust earns. It is critical for the trustee to know when potential tax reductions may warrant making distributions to or on behalf of the trust beneficiary.
The trustee also has sole responsibility for distribution decisions. To avoid compromising a beneficiary’s eligibility for public benefits, distributions generally should be made directly to providers of goods or services, rather than to the beneficiary. When a beneficiary receives a distribution that exceeds their allowable monthly limit, it is considered unearned income and SSI benefits are reduced on a dollar for dollar basis. If the trust beneficiary is a recipient of SSI benefits, the trustee must be aware of the income distribution guidelines so as not to jeopardize the beneficiary’s eligibility. Further, the trustee must also adhere to the guidelines posted in the trust by the grantor.
The trustee is required to look at the big picture when it comes to a request by the beneficiary for a trust distribution. A trust often initially appears to hold an excessive sum of money. However, when taking into consideration the life expectancy of the beneficiary and the anticipated use of the funds, the funds in the trust may have to be used sparingly.Accordingly, the trustee may have to deny the beneficiary a distribution if the trustee is concerned about depleting the trust assets. It can often be easier for an independent, professional trustee to deny a beneficiary’s request rather than a family member.
Finally, the trustee has a fiduciary responsibility for the management of trust assets, even if the trustee chooses to hire professional investment managers to make day-to-day investment decisions.
SNTS are a unique and helpful tool in elder law and special needs planning. Consulting with an attorney who specializes in these fields is helpful in determining when the creation of such a trust should be utilized.
Ronald A. Fatoullah, Esq. is the principal of Ronald Fatoullah & Associates, a law firm that concentrates in elder law, estate planning, Medicaid planning, guardianships, estate administration, trusts, wills and VA benefits. The firm has offices in Forest Hills, Great Neck, Manhattan, Brooklyn and Cedarhurst, NY. Mr. Fatoullah has been named a “fellow” of the NationalAcademy of Elder Law Attorneys and is a former member of its Board of Directors. Mr. Fatoullah has been certified as an Elder Law Attorney by the National Elder Law Foundation, and he is a co-founder of Senior Umbrella Network of Queens. We wish to thank Special Needs Answers for their contribution to this article.This article was written with the assistance of Debby Rosenfeld, Esq., a senior staff attorney at the firm. Ronald Fatoullah & Associates can be reached by calling (718) 261-1700, 516-466-4422, or toll free at 1-877-ELDER-LAW or 1-877-ESTATES.