Planning for Life

Beware Too Specific Language in Special Needs Trusts - Massachusetts

Posted by Harry S. Margolis on July 3, 2012

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By Harry S. Margolis

There's been a long debate among practitioners of special needs planning about how specific to make trust language governing the distributions to or on behalf of the beneficiary.  New policy from the Social Security Administration (SSA) argues against being two specific.

There have been at least three points of view with regard to special needs trust (SNT) drafting:

  • Restrictive.  This approach is to limit distributions to only those items and purposes approved by the SSA.  The fear is that if more general language is used, such as for the beneficiary's health and maintenance, the SSA may require that the funds be used for such purposes and consider them available to the beneficiary, rendering him ineligible for Supplemental Security Income (SSI), which in many states would mean the loss of Medicaid as well.

  • Discretionary.  This approach states that the trust is for the sole benefit of the disabled beneficiary and contains general language, but leaves actual distributions to the judgement of the trustee.

  • Shopping List.  These trusts often contain discretionary language, but include a list, some longer than other, of items the trustee might pay for on behalf of the beneficiary.  This both provides guidance to the trustee and helps ensure against a too-conservative trustee not using trust funds to pay for items or services the trust grantor would want covered.

The restrictive approach has run into trouble where the SSA has in fact liberalized its rules, the most striking example governing payment for clothing.  At one point, such payments by third parties were treated as "in kind" income.  Then the SSA dropped this interpretation, but some older trusts are still barred from paying for clothing for the beneficiary.

Now, the shopping list approach is coming into question.  The SSA has revised a section of its Program Operations Manual System (POMS) (POMS SI 01120.201.2) to preclude payment of travel expenses for family members to visit the trust beneficiary.  First-party SNTs (I'll explain this distinction in a second) that include this authorization in their shopping lists will now make the beneficiary ineligible for SSI, and must be amended -- which may be difficult for irrevocable trusts.

The SSA also has indicated that it is reviewing language in trusts that permit the payment of caregivers, including family members, and will soon require that the caregivers be “medically certified, medically trained or approved to provide care.”

Practitioners and family members should understand that these restrictions only apply to so-called "first party" or "(d)(4)(A)" trusts created and funded with the disabled individual's own funds.  This is because the SSA has determined that such provisions violate the requirement that these trusts violate the requirement that they be for the "sole benefit" of the disabled beneficiary.  Trusts created and funded by a third party, such as a parent, are not subject to the "sole benefit" rule and thus are also not subject to these new restrictions.

Our firm policy in trust drafting has always been to use discretionary language and to avoid long shopping lists.  We believe that it works better for the grantor to provide the trustee with specific guidance in a side document that is not part of the trust.

Topics: special needs planning, Estate Planning

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