My Client Is the Trustee of a Supplemental Needs Trust - Now What?
| Publication year | 2021 |
| Pages | 45 |
May 2021
SNT administration
My Client Is the Trustee of a Supplemental Needs Trust -Now What?
By Adam C. Dees
About 24.7% of adults in Kansas, or 550,000 Kansas adults, have some type of disability.[1] Kansas spends about $3.4 billion per year for healthcare to treat those with disabilities. This represents 26% of total healthcare expenditures in Kansas.[2] While the number is unknown, many of these individuals will have a Supplemental Needs Trust (SNT) with a trustee charged with managing the SNT's resources for the individual's benefit. Anecdotally, our practice includes clients living in Olathe, Harper, and Sharon Springs that are, or have, SNTs. There are SNT trustees spread throughout the state. Some corporate trustees oversee SNT management, but many times this falls on a sibling, aunt, uncle, or another of the beneficiary's family members.
SNTs are primarily created through a parent's, caregiver's, or loved one's estate plan. Individuals, or their conservators, can also engage in disability-based public assistance planning that includes creating and SNT. SNTs are also created during divorce proceedings, guardianship and conservatorship proceedings,[3] bankruptcies, personal injury cases,[4] and other legal proceedings. SNT trustees can face unique legal and practical challenges working with SNTs and SNT beneficiaries. Without guidance, the trustees cannot give the beneficiaries the lifestyle hoped for by those creating the SNT. This article is an overview of considerations trustees and their counsel should take when an SNT is created, administered, and terminated.
1. The Birth and Creation of Supplemental Needs Trusts
The United States federal government created programs to provide impoverished individuals who are aged, blind, or disabled with medical benefits and a small amount of income for food and shelter. These programs include Supplemental Security Income, Medicare, Medicaid, and Section 8 Housing, among others. To qualify for these programs, individuals are limited in the amount of resources and income they may possess.
These programs recognize that once a person attains age 18, only a spouse has a legal obligation to provide for that person.[5] The needs of many disabled persons may best be met with resources beyond those available from these programs. Families want their disabled family members to have the opportunity to experience more than subsistence living-to have a higher quality of life-than the needs-based programs may allow.
Fortunately, the programs (specifically Medicaid) exempted SNTs' income and resources from being counted towards determining a beneficiary's eligibility. Without this exception, families would be left with the Hobbesian choice of:
• giving their resources to the disabled person; interrupting sometimes difficult to obtain assistance; seeing the resources consumed by the medical, health, and care expenses of the disabled person; and then watching the disabled individual reapply and be reapproved for public assistance; or,
• choosing not to transfer resources to the disabled person (in the estate planning context disinheriting the disabled person) and hoping the public assistance and moral compasses of other family members or caregivers will be sufficient to meet the disabled person's needs and give that person opportunities.
It was with these issues in mind that the federal government gave disabled individuals and their families the ability to create SNT thereby avoiding the chilling choices above.
1.1. Creating a Supplemental Needs Trust[6]
Like all Kansas trusts, an SNT must meet the requirements of K.S.A. 58a-402(a). The settlor must have capacity to create a trust; indicate an intent to create the trust; must designate a definite beneficiary; allocate duties to the trustee; and differentiate between the trustee and beneficiary.[7] The purposes of the SNT must also be lawful. However, SNTs also must meet additional requirements to allow the resources contained within that SNT to be left uncounted against determining if a person is eligible for public assistance.
Three SNTs are specifically described, and exempted, within the Medicaid statute that allow an individual with a disability to transfer resources to those trusts to meet the income and resources limits. The first is a self-settled or first party SNT also known as a d4A trust.[8] The second is a d4B trust (also called a Miller trust, Medicaid Income-Only trust, or Irrevocable Qualified Income trust (QIT), which only applies in income cap states like Florida (and which Kansas does not have).[9] The third is a pooled asset trust or d4C trust administered by a not for profit association.[10]
A self-settled, first party, or d4A, SNT (first-party SNT), is established by the disabled person, a parent, grandparent, legal conservator, or a court.[11] The disabled person places his or her resources into the first-party SNT. After the transfer, the disabled person can access needs-based benefits. These transfers must happen before the disabled person reaches age 65.[12] The amount remaining in the trust at the death of the individual must be paid to the state up to an amount equal to the total medical assistance paid on behalf of the beneficiary.[13]The disabled individual cannot be the trustee of a d4A trust and cannot have power to make distributions from the trust.[14]
A pooled trust or d4C trust also contains the disabled individual's resources.[15] The difference between a first-party SNT and a pooled trust is that a pooled trust must also be managed by a non-profit association. The association maintains separate accounts for each beneficiary of the trust. For purposes of investing and managing the funds, the trust pools these accounts. Each account is solely for the benefit of one disabled individual. Again, the amounts remaining in that account at the beneficiary's death must be paid to the state.
A fourth type of SNT is described in K.S.A. 39-709(e) (3)(B). It is a third-party SNT, which is created by third parties that do not have a legal obligation to support the beneficiary. Third-party SNTs are specifically appropriate for parents of special needs persons. The third-party SNT must contain the third parties' resources and not the beneficiary's resources. The trustee must have full discretion to pay or withhold principal and income of the trust.[16] In Kansas, the trust must specifically detail the settlor's intent to "supplement but not supplant public assistance, including Medicaid, medical assistance, or Title XIX of the Social Security Act."[17] If a third-party SNT meets these requirements, then the SNT's assets and income will not be counted when determining the disabled person's public assistance eligibility. Additionally, on the beneficiary's death, there is no requirement of a third-party SNT to pay the state for expenses paid by the state during the beneficiary's life.
1.2. What an SNT is not.
An SNT is not a spendthrift or support trust. A spendthrift or support trust allows a trustee to distribute income and principal for the benefit of the beneficiary. These distributions can include payment for food, rent utilities, groceries, and other items that supplant the need for public-assistance programs. A spendthrift trust does not contain the clear guidance that the trustee not supplant public assistance, including Medicaid, medical assistance, or Title XIX of the Social Security Act.[18]
In Miller v. Kansas Dept. of S.R.S, 275 Kan. 349 (Kan. 2003), the Kansas Supreme Court determined that a trust distributing income to a beneficiary and allowing the trustee to distribute principal for the health, education, maintenance, and support of the beneficiary did not meet the federal and state statutory requirements of an SNT, because there was no limit on the extent to which the resources could be used. Only when a trust contains the statutory language limiting distributions so as not to supplant public-assistance programs will the trust qualify as an SNT. A support trust exists when the trustee is required to inquire into the basic support needs of the beneficiary and to provide for those needs.[19] Eligibility for the programs depends on the assets "available" to the applicant, and the support trust is always considered such an available asset.[20] A discretionary trust exists when the beneficiary has no right, as a matter of law, to require the trustee to turn over to him or her the principal of the estate or any part of it.[21] Because the trustee has complete authority to withhold trust assets, a discretionary trust is often not considered an asset/resource available to the beneficiary for determining Medicaid eligibility.[22]
2. Administering the SNT During the Beneficiary's Life
SNTs are usually created to improve an individual's quality of life without disqualifying him or her from receiving public assistance.[23] In this respect, SNTs are like all trusts-they are for the benefit of the beneficiaries and the Kansas Uniform Trust Code applies.[24] Because the individuals SNTs serve have extraordinary health, social, family, and financial concerns, courts can oversee SNT administration and agencies that administer the programs scrutinize SNTs and their administration. Therefore, the duties found in the Kansas Uniform Trust Code quickly expand to require SNT trustees be both more active and judicious during administration. Trustees must balance using the SNT resources for the beneficiary's current and future benefit.
2.1. General Trustee Duties[25]
Like all trusts, a trustees duties for an SNT are first governed by the Kansas Uniform Trust Code, directly by Article 8.[26] These include exercising good faith, a duty of loyalty, being impartial, exercising prudent judgment,
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