SUPPLEMENTAL NEEDS TRUSTS OFFER PLANNING OPTIONS FOR THE DISABLED

By Carole C. Lamson

Supplemental needs trusts are useful planning tools for qualified disabled individuals. One type of supplemental needs trust is for disabled individuals under 65 years of age who have assets, including real estate, in excess of the amounts allowed by Medicaid and Supplemental Security Income (SSI). This trust, sometimes called a "first-party" supplemental needs trust, is an agreement under which a disabled individual transfers his or her own property, including cash, stocks and bonds, an apartment, or a house with the intent that it will be administered for his or her sole benefit by a trustee of his or her choice.

A parent, other relative, or friend may also create and fund a supplemental needs trust, sometimes called a "third-party" supplemental needs trust, for the benefit of a disabled individual of any age with any type of assets.

The primary purpose of the supplemental needs trust is for the trustee, as manager of the trust, to use the trust's assets to pay the disabled person's bills, including those for rent, food, clothing, shelter, medical care, or entertainment without jeopardizing that individual's eligibility for the public benefits upon which he or she depends.

Under the trust terms, while the disabled individual is on entitlement programs, no money from the trust should be paid directly to him or her. If money were paid to the individual, eligibility for the programs would be jeopardized. Instead, the income and principal of the trust may be paid directly to the providers of goods and services for the disabled person.

Generally, if the individual is no longer disabled or no longer dependent upon government entitlements, the trustee may pay out the assets of the trust directly to the individual.

Trusts Protect Assets and Eligibility for Medicaid

In the past, the financial resources of disabled individuals may have rendered them ineligible for valuable public benefits including Medicaid and SSI. Such financial resources include savings accounts, stocks and bonds, real estate, royalties, personal injury awards, annuities, and disability contracts. It was not possible to protect these assets with any certitude by transferring them to a trust. Also, if disabled persons received gifts or inheritance, they were frequently disqualified for benefits.

Presently, state and Federal legislation provide a framework for the use of trusts to shelter funds for the future of disabled persons. The purpose of the legislation is to encourage planning by providing assurance that supplemental needs trusts established for or by persons with disabilities who are receiving, or will receive, government benefits will be used to enhance the quality of their lives.

The supplemental needs trust, also called a special needs trust or a luxury trust, provides complete discretion to the trustee to make in-kind distributions of both principal and income to the beneficiary but limits such distributions to needs supplemental to those provided by such programs as Medicaid. In-kind distributions are payments made by the trustee directly to a provider of goods and services on behalf of the disabled individual. Supplemental needs may include food, clothing, shelter, transportation, medical, psychiatric and health care, vacations, recreational or educational programs, and equipment, perhaps even a house equipped to accommodate a disabled person. Such supplemental needs trusts are not intended to supplant, impair, or diminish any benefits or assistance of any Federal, state, county, city, or other governmental entity for which the beneficiary may otherwise be eligible or from which the beneficiary may be receiving benefits.

First-Party Trusts for the Disabled Under Federal Law

A supplemental needs trust is a first-party trust when it is funded with the assets of the disabled individual who is also the beneficiary of the trust. Official encouragement for the creation of this type of trust came under the Omnibus Reconciliation Act of 1993. The language of the law [42 U.S.C. section 1396p(d)(4)(A)] allows for the creation of supplemental needs trusts established with the funds of the disabled beneficiary for his or her own benefit providing he or she is a disabled person under age 65 and the state has the right of recovery against the remaining portion of the trust upon the death of such individual for medical assistance provided. Note that, although the state has the ultimate right of recovery, there are no limits on the amount of income or principal that may be expended on the beneficiary's behalf.

Third-Party Trusts for the Disabled Under New York State Law

In New York State, courts have generally held that a trustee of a third-party trust, that is, one created by someone other than the beneficiary, will not be required to invade a properly drafted supplemental needs trust to pay medical expenses which would otherwise be paid by the government, that is, Medicaid. A third party could create a trust by inter vivos disposition (a gift made during the life of the benefactor on behalf of the disabled person) or by testamentary disposition, that is, by Will. The principal of such a trust was not considered an available asset for purposes of computing the beneficiary's eligibility for Medicaid and SSI as long as the beneficiary did not have the right, authority, or power to liquidate the property or his share of the property.

Although the New York courts afforded a substantial measure of protection to discretionary third-party supplemental needs trusts, the extent of the protection was unclear until 1993. First, a substantial portion of the law developed from court cases was based on specific and unique fact patterns. Second, Federal and state eligibility requirements differed from program to program. These requirements were changed periodically in response to increasing concern over abuse of trusts as a mechanism for individuals seeking to avoid responsibility for the cost of their own care or the care of individuals to whom they owed a legal obligation of support. The result was uncertainty for families with regard to the extent to which trusts could be used to provide for the supplemental needs of persons with disabilities without impairing eligibility for government benefits.

In response to this situation, Governor Mario Cuomo, in July 1993, signed into law a bill facilitating the use of supplemental needs trusts by families and friends to meet the future needs of persons with disabilities. The law amends section 43.03 of the Mental Hygiene Law to ensure that a supplemental needs trust will not be subject to claims by the state for the cost of services provided to the beneficiary by the Department of Mental Hygiene. The law also amends section 104 of the Social Services Law to ensure that no action may be brought by a public-welfare official against a supplemental needs trust which conforms to the provisions of the Estates, Powers, and Trusts Law, section 7-1.12, to seek reimbursement for the cost of assistance or care provided to the beneficiary.

In a trust funded by a third-party (friend, parent, or relative), Medicaid has no right to reimbursement at the time the beneficiary dies for services provided during his or her lifetime. *

Carole C. Lamson, Esq. is a partner at Lamson & Petroff, a law firm providing a broad range of legal services for the elderly and disabled. Ms. Lamson serves on the New York State Bar Association's Trusts & Estates Section where she is active on the Committee on Persons Under Disability. She is also a member of the Estate Planning Council of New York City and a Certified Estate Planner.

USING THE INTERNET TO PROMOTE YOUR PRACTICE

By Richard B. Freeman, CPA

Establishing a web site can be an excellent way to promote and publicize your firm. Some 30 million people now have access to the web, and new users join the ranks daily.

Before heading down the information superhighway, it's important to establish the goals of your firm's home page. Most firms hope to catch the attention of visitors, provide a reason for them to return to the site, and turn them into clients. Ideally, visitors will bookmark your site and return regularly. Then, when they need professional assistance, they will think about calling your firm.

Web Site Content

Plan your page with your goals in mind. Many firms have a basic page that is similar to a business card. The page provides a biography of the firm's professionals and a description of the firm's practice areas. However, a standard page is not likely to prompt return visits.

Focus on trying to provide each visitor with a reason to return to the site. Think about what your firm can provide that would interest prospective clients. Visitors will be more likely to return if you offer helpful information that they need.

Some ideas for your web site include--

* a question and answer forum,

* general advice on your specialty area,

* an updated table of key dates or pertinent information, such as filing deadlines and law changes, and

* articles, memos, and newsletters that may be of interest to visitors.

Maintaining Your Site

You can keep visitors interested by updating your site frequently. If you keep your site simple and focus on offering helpful information, updating your site will be easier. Consider adding weekly announcements or recent news items. Provide information about seminars at which firm members will be speaking. Promote interaction by inviting questions from visitors and answering them promptly. A note on upcoming features or changes within your firm will also encourage visitors to return. *

EXHIBIT

SETTING UP A WEB SITE

* Select a web designer.

* Register a domain name.

* Choose a web hosting service.

* Upgrade your computer equipment to access the web.

* Train your staff to maintain your site.

* Make sure your site does not violate professional responsibility and state advertising rules.

Editors:
Milton Miller, CPA
Consultant

William Bregman, CPA/PFS

Contributing Editors:
Alan J. Straus, CPA
Own Account

Alan Fogelman, CPA
Clarfeld & Company PC

David Kahn, CPA
Goldstein, Golub, Kessler, & Company PC