What distribution standard should be used for a special needs trust?

The ultimate goal of both disability trusts and supplemental needs trusts is to make the trust resources unavailable to the disabled individual while still assuring that the resources will ultimately be used for her benefit.[1] This is a difficult balance to achieve. If the trust assets are too easy to access, then the trust may disqualify the disabled individual from receiving benefits. However, if the trust assets are too unavailable, then the trust may not adequately provide for the disabled individual. Thus, practitioners need to understand when the assets in a special needs trust are counted for Medicaid eligibility purposes.

The trust assets are considered to be a resource for the disabled individual if she can use the trust assets for her support and maintenance or direct that the assets be used for that purpose.[2] This remains true even if the disabled individual never actually chooses to use the asset for that purpose.[3] Indeed, any property that the disabled individual owns and could convert to cash is considered to be a resource.[4] Thus, if the disabled individual has the ability to sell her interest in the trust, then that interest is considered to be a resource.[5] However, if the disabled individual has no right to liquidate the property, it is not considered to be a resource.[6] Simply put, the asset must be “available” to the disabled individual for it to be countable.[7]

Yet even if the trust principal itself is not a resource, disbursements from the trust may be counted as income if those disbursements are received as cash directly by the disabled individual,[8] the disbursements are in the form of non-cash items that are not exempt property,[9] or the disbursements pay for the disabled individual’s support and maintenance.[10] “Support and maintenance” is understood to mean food, shelter, and all health care expenses that may be covered by public assistance benefits.[11] However, a payment to a third party is generally not in and of itself income to the disabled individual.[12] Thus, trust assets can be used to pay third parties for exempt property and services that are not support and maintenance, assuming that all purchases are made for the disabled individual. For example, a computer could potentially be purchased for the disabled individual with no increase in countable income if the computer could be excluded as a household good.[13] Other examples of disbursements that may not result in countable income include recreational purchases, transportation expenses, phone bills, and educational expenses.[14]

Thus, the distribution standard of the trust will have a direct impact on whether trust assets and disbursements are counted as assets for the disabled individual. The distribution standard also directly impacts the usefulness of the trust assets to the disabled individual. Therefore, an understanding of various distribution standards is required for effective drafting.

Mandatory Support Standard

Mandatory support standards require regular disbursements of a certain amount to the beneficiary. Unless these amounts do not exceed the personal needs allowance, the mandatory distribution will very likely be challenged as being an asset for the disabled individual. Even if the distribution is for less than the personal needs allowance, the distribution could still be challenged as being an asset if the trust does not contain a spendthrift clause which disallows the beneficiary from being able to sell her interest in the ongoing mandatory distribution. Thus, because spendthrift clauses are not effective in first-party special needs trusts, the drafter of a first-party trust ought to avoid the use of any mandatory distribution. However, third-party trusts may use a mandatory distribution standard, but that distribution should probably be limited to the personal needs allowance and combined with a spendthrift clause.

Fully Discretionary Support Standard

A fully discretionary support standard permits the trustee to distribute trust income and principal at the trustee’s complete discretion.[15] For example, such a trust may include language stating that the trustee “may make any distributions that the trustee, in his absolute and unfettered discretion, determines is necessary for the wellbeing of the beneficiary.” Because this standard makes no mention of Medicaid or any other government benefits, the trustee is free to make distributions that would disqualify the disabled individual from receiving Medicaid benefits. However, the trustee may also choose to only makes distributions that would not be countable as income for the disabled individual.

The fully discretionary support standard is unwise at best and disastrous at worst for beneficiaries hoping to receive Medicaid benefits. Even if the trust assets are not counted as a resource initially, the trustee is still free to make distributions that disqualify the beneficiary from receiving Medicaid benefits. However, some trusts with fully discretionary support standards may be counted as a resource from the start. When Florida courts construe the language in a trust, a primary goal is to give effect to the settlor’s intent.[16] Thus, if a court infers that the settlor’s intent was for the trust to be used to provide support and maintenance to the beneficiary, then that asset could be counted as a resource.

In Estate of Rosenberg v. Department of Public Welfare, a Pennsylvania court inferred that a discretionary trust was a resource from the fact that the beneficiary was the sole beneficiary and from the fact that trust’s distribution standard contained an ascertainable standard indicating that trust could be used for support and maintenance.[17] Although the standard potentially distinguishes this case from cases involving fully discretionary standards, it opens a door to questioning fully discretionary trusts. For example, if a fully discretionary trust with no ascertainable standard has only one beneficiary, a court could reasonably infer that the sole beneficiary is clearly meant to benefit from all the trust assets and the lack of restrictions on distributions imply that the settlor intended the trust to be potentially used for all the beneficiary’s needs, including support and maintenance. Thus, fully discretionary distribution standards are not advisable for either first- or third-party special needs trusts.

Discretionary Standard With Explicit Authority to Reduce Benefits

 A discretionary standard with explicit authority to reduce benefits is expressly allowed in New York by statute.[18] This standard allows the trustee to turn Medicaid benefits on and off, like the trustee has access to a Medicaid benefits spigot. The trustee may make distributions reducing benefits one month and may choose to have the beneficiary retain benefits the next month. The “spigot” language aims to provide the trustee with the discretion to do what is best for the beneficiary, even if that means sometimes reducing benefits.

Unfortunately, no such express authorization for this distribution standard exists in Florida. However, given Florida’s standard of following the settlor’s intent, it is likely that Florida courts would respect a distribution standard which clearly stated that the normal operation of the trust was to supplement and not supplant Medicaid benefits, even if discretion was given to occasionally make a distribution that counted as income.[19] However, the trust language should be clear that the purpose of the trust is not to supplant benefits and that normal distributions should only supplement all Medicaid benefits. Additionally, the drafter should be careful to ensure that the beneficiary has no right to demand any benefit-reducing distribution under any circumstances. Otherwise, some trust assets could be counted as a resource.[20]

Discretionary Support Standard with an Ascertainable Standard

A discretionary support standard with an ascertainable standard provides the trustee with the ability to make distributions at his discretion, but settlor also makes clear the settlor’s wishes as a means to guide the trustee. For example, such a trust may include language stating that the trustee “may make any distributions that the trustee, in his discretion, determines is necessary for the beneficiary’s health, education, maintenance and support.” In this example, the trustee has discretion, but the trustee is also given clear guidance as to what the settlor’s general wishes are. Whether such a standard would result in disqualifying the beneficiary from Medicaid benefits is dependent on the language used in the trust.

As noted already, Florida courts attempt to give effect to the settlor’s intent when interpreting trust language.[22] Thus, because an ascertainable standard can inform a court of settlor intent, the standard may guide a court as to whether trust assets should be counted as a resource. In Metz v. Ohio Dept. of Human Servs., an Ohio court determined that a standard indicating the trust was to be used for “health, education, care, maintenance and support” was enough to give the beneficiary the power to demand that the trustee at least provide minimal support.[24] Thus, the trust was a countable resource.[23] Therefore, an ascertainable standard can be enough to make a trust a resource, even if the distribution standard is discretionary. However, if the standard indicated a settlor desire for the trust assets not to be used for support and maintenance, the trust may not be counted as a resource.

Strict Support Standard Prohibiting the Supplanting of Benefits

The strict support standard forbids the trustee from ever making a distribution that supplants benefits. The language typically used is that the trustee must use the trust funds to “supplement public benefits, not supplant them.” This demonstrates a clear settlor intent not to provide support and maintenance for the beneficiary. In Hatcher v. Department of Health & Rehabilitative Services, a trust with funds used “as a supplement to, and not a substitute for, any funds received from any other [public] agency” was determined to disqualify the person seeking Medicaid. [24] However, the reason for disqualification was that the trust was not a third-party trust as the trust represented itself to be; rather, it was a Medicaid qualifying trust (a category of first-party trust no longer available). Indeed, the court stated that had the trust been a third-party trust, it would not have made the Medicaid applicant ineligible.[25] Thus, Florida’s First District Court of Appeal confirmed that this distribution standard is acceptable, as long as the rest of the trust is properly drafted.

The strict distribution standard is the safest option for Florida special needs trusts, but it is also the most restrictive. Under this distribution standard, the trustee may not make any distributions to the beneficiary that would disqualify that beneficiary from receiving benefits, no matter how great the need for support. If this distribution standard is chosen, the practitioner should ensure that all parties involved understand the restrictiveness of the distribution standard before the trust is settled.

[1] 42 USCA § 1396a(a)(17).

[2] 20 C.F.R. § 416.1201(a); SSA POMS SI 01120.200.D.1.a, 01120.200.G.1.a.

[3] ESS Public Assistance Policy Manual § 1640.0308.

[4] 20 C.F.R. § 416.1201(a); Fla. Admin. Code r. 65A-1.701(61).

[5] SSA POMS SI 01120.200.D.1.a

[6] 20 C.F.R. § 416.1201(a)(1).

[7] 42 USCA § 1396a(a)(17).

[8] SSA POMS SI 01120.200.E.1.a, 01120.201.I.1.a.

[9] SSA POMS SI 01120.201.I.1.a.

[10] SSA POMS SI 01120.201.I.1.b.

[11] SSA POMS SI 01120.200.B.12, 01120.200.D.1.a, 01120.200.E.1.a, 01120.200.E.1.c-d, 01120.200.N.2.a.

[12] SSA POMS SI 01120.200.E.1.c.

[13] Id.

[14] Id.

[15] See POMS SI 01120.200.B.1.

[16] Bacardi v. White, 463 So. 2d 218, 221 (Fla.1985) (citing West Coast Hosp. Ass'n v. Fla. Nat'l Bank, 100 So. 2d 807 (Fla. 1958)).

[17] 644 A.2d 215, 217 (1994).

[18] EPTL 7.1.12(e)(2)(i)(5).

[19] Bacardi, 463 So. 2d at 221 (citing West Coast Hosp. Ass'n, 100 So. 2d at 807).

[20] 20 C.F.R. § 416.1201(a); SSA POMS SI 01120.200.D.1.a, 01120.200.G.1.a.

[21] Bacardi, 463 So. 2d at 221 (citing West Coast Hosp. Ass'n, 100 So. 2d at 807).

[22]  762 N.E.2d 1032, 1037 (6th Dist.2001).

[23] Id.

[24] 545 So. 2d 400, 401-02 (Fla. 1st DCA 1989).

[25] 545 So. 2d 400, 402.