Special Needs Trusts

General Information on Special Needs Trusts.

A “Special Needs Trust” is a trust established by a disabled person with their own money (usually an inheritance, accident settlement or drug or malpractice settlement).  The purpose of this trust is preserve the money to use to supplement the government benefits the disabled person receives without disqualifying the disabled person from eligibility for such governmental benefits.  These trusts are authorized by statute but have important restrictions.  The purpose of this article is to describe some of these restrictions.

Important Restrictions on Special Needs Trusts.

There are important restrictions on Special Needs Trusts and the powers of the Special Needs Trust Trustee.  In general:

• The trust must be irrevocable.  The Trustee cannot just decide to terminate the trust.  It is normally best to spend all the money in the Trust on the beneficiary, rather than try to terminate the Trust.

• The trust assets can only be spent for the sole benefit of the disabled person.  It is not acceptable to make gifts to others or to pay for gifts to others even if that would please the disabled person.  Nor is it acceptable to pay for someone to go somewhere with the disabled person, eat with them etc. unless a doctor certifies that it is medically necessary.  Even then the amount paid must be reasonable.

• Distributions can only be made by the trustee purchasing items or services directly from a third party on behalf of the disabled person.  No cash or cash equivalents can be given to the disabled person, even to reimburse the disabled person for expenditures.

• The money in the trust should not be used to replace or duplicate money that a governmental program would otherwise provide.

A Special Needs Trust Trustee should determine what governmental programs the disabled person is on or could qualify for and what the asset or income rules are that would disqualify the disabled person from that program.  For instance, Supplemental Social Security requires that the person’s assets must be under $2,000, exclusive of tangible personal property and a homestead.

Regular periodic payments from the Trust may count as income under some needs based programs like public housing.  If the person is in public housing, the distributions are not prohibited but will reduce the disabled person’s benefit. Some housing programs count all distributions, not just periodic ones, as income and you may need to be prepared to contest the rent increase.  So, the Trustee needs to make sure that the Trustee does nothing to disqualify the disabled person from any given government program or is at least mindful of the consequences of distributions. 

The Special Needs Trustee needs to ascertain what benefits the disabled person can obtain from the government.  For instance if the disabled person would qualify for a wheel chair through Medical Assistance, the Trustee should not purchase the wheel chair using Trust funds but rather help the disabled person get the wheel chair from the government program.  If the disabled person wants extra features, it is legitimate for the Trust to purchase those features.

A very important limitation on Special Needs Trusts, is that if the disabled person receives Supplemental Social Security, the assets of the Special Needs Trust cannot be used to pay for shelter or food.  If the disabled person has a home or apartment, the Trust can pay for a hotel while the disabled person is traveling.  But the Trust cannot pay for the disabled person to stay in a hotel all the time.  An occasional meal at a restaurant or while traveling can be considered entertainment.  But the trust cannot pay for the person to eat in a restaurant regularly.  It is safest to avoid paying for restaurant meals as much as possible.

The Special Needs Trust restriction that often poses the biggest problem is the prohibition against giving money directly or indirectly to the beneficiary.  All payments from the trust have to go to third party vendors to purchase goods or services.  It is not acceptable for the disabled person to buy a computer and bring the receipt to the Trustee for reimbursement.  The Trust has to buy the computer directly from the store.  This may seem like a silly rule and like it glorifies form over substance but it is an important rule and is strictly enforced.

What is acceptable:

·         Check written from the Trust to the vendor.

·         Trustee putting the purchase on the Trust’s own credit card.

·         Allowing a high functioning disabled person to buy things using the disabled person’s own credit card but submitting the statement and receipts to the Trustee who then pays the Credit Card Company directly (but only for items that the Trust can pay for under the rules of the programs that the disabled person is on).

What is not acceptable:

·         Giving cash to the disabled person.

·         Giving cash to someone other than the disabled person without getting receipts or before an item is purchased.

·         Arranging for the disabled person to have a gift card or unrestricted debit card.

Disclaimer Trusts

General

            You have been named as Trustee for a Disclaimer Trust.  A Disclaimer Trust is a trust that is provided for in a person’s will or revocable trust.  The beneficiary is the decedent’s surviving spouse.  However, whether the trust comes into existence depends on an election that the decedent’s spouse makes after the decedent’s death.  This election is called a “Disclaimer.” If the decedent’s spouse does not execute a Disclaimer, the Disclaimer Trust never gets set up and usually the decedent’s assets go outright to the surviving spouse.

            The reason for providing for the option of a Disclaimer Trust is to minimize estate taxes.  Estate taxes are supposed to be a tax on the rich.  So both the federal estate tax and the Minnesota estate tax laws, provide that if the estate is under a certain amount (the “Exemption Amount”), it is not subject to estate tax. 

            Each person has an Exemption Amount.  Federal estate tax law has a concept called “portability” that allows the surviving spouse to use the decedent’s Exemption Amount as well as the surviving spouse’s when the surviving spouse dies. So Disclaimer Trusts are not needed to avoid federal estate taxes.  However, Minnesota tax law does not have the portability concept.  The Disclaimer Trust is a substitute.

            To try to preserve the decedent’s Exemption Amount, the surviving spouse executes a Disclaimer for assets up to decedent’s Exemption Amount.  Those assets then go into the Disclaimer Trust and on the death of the surviving spouse go where the Disclaimer Trust provides that they go.  However, these assets are not taxed because they count for tax purposes as coming from the decedent, not the surviving spouse. What this usually means is that on the death of the surviving spouse all the assets in the Disclaimer Trust plus up to the Exemption Amount in the estate of the surviving spouse go to the family without paying Minnesota estate taxes.

            However, since the surviving spouse is the beneficiary of the Disclaimer Trust during the surviving spouse’s life time, the assets in the Disclaimer Trust are still available to be used to take care of the surviving spouse.  By executing the Disclaimer to fund the Disclaimer Trust, the surviving spouse subjects those assets to control by the Trust but does not absolutely give up having the assets available to take care of the surviving spouse.  

            The following are the normal duties and powers of a Trustee.

General Duties of a Trustee

Duty of Loyalty: A trustee must administer the trust solely in the interest of the beneficiaries, both life time and ultimate beneficiaries (the ultimate beneficiaries are called “Remaindermen”).

Duty to Collect and Protect Trust Property: A trustee has the duty of obtaining possession of the trust property without unnecessary delay.  Once having obtained the trust property, a trustee must act as a prudent person in preserving the trust property. 

Duty to Earmark Trust Property: The trustee must earmark the trust property by properly identifying the property as trust property.

Duty Not to Mingle Trust Funds with Trustee=s Own: The trustee must keep all trust property separate from the trustee=s own property.

Duty Not to Delegate without Care: A trustee may delegate to any person any trust function that a prudent person of comparable skill could properly delegate under the circumstances.  However, the trustee must exercise reasonable care, skill and caution in selecting an agent, establishing the scope and terms of the delegation and must periodically review the agent=s actions. 

Duty of Impartiality: A trustee has a duty to deal with both the life time beneficiary and the Remaindermen impartially.  The trust property must produce a reasonable income while being reserved for the Remaindermen.

Duty to Inform and Account to the Beneficiaries: The trustee is under a duty to the life time and Remaindermen beneficiaries to give them upon their request at reasonable times complete and accurate information as to the nature and amount of the trust property, and to permit them or a person duly authorized by them to inspect the subject matter of the trust and the accounts and vouchers and other documents relating to the trust.

Normally, this will result in the Trust preparing an Inventory of the assets in the Trust at the beginning of the Trust Administration.  Periodic accountings showing where the money is being spent, income being received and assets still on hand may be required depending on how long the trust lasts.  At the end of the Trust Administration, the trustee should prepare and furnish the beneficiaries with a Final Account.

Other Duties:  The Trustee also has the obligation to file any necessary income or estate tax returns.  The Trustee has to pay the bills of the Trust and the trust document may require payment of beneficiary’s bills.

General Powers of a Trustee

Specific Powers:  The specific powers given to a trustee are listed in the trust and in Minn. Stat. ' 501C.0809-0817.

Discretion as Trustee: The trust agreement may give the Trustee discretionary power.  This allows the Trustee to determine whether to distribute income or principal and how principal shall be invested.

Trustee=s Power to Resign: Any trustee may resign at any time by delivering a written resignation to the remaining Trustees, with the resignation becoming effective 30 days following its delivery.

Signing Your Name: In transacting business, it is important to make clear that the Trustee acts as trustee, not as a person. The best way to do this is for the Trustee to sign as follows:

Trust of John Smith

under Agreement dated 1/1/2001

by Jane Smith, Trustee

Alternatively, if the document is already clear that it is the trust that is involved, the Trustee would sign:

Jane Smith, Trustee

Specific Issues for Disclaimer Trustee

            Any time there is a lifetime beneficiary and Remaindermen, there is a conflict of duties for the Trustee.  This is especially true if, as is often true of Disclaimer Trusts, the life time beneficiary is to be paid any income.  Should the assets be invested so as to produce more income or more appreciation?  Should the trustee pay a given bill for the benefit of the life time beneficiary or save the money for the Remaindermen?

            This conflict of duties makes it most important that the Trustee keep good communication going with all beneficiaries and, if at all possible, operate by consensus.  Documenting consent by all is always prudent.  If it is not possible to operate by consensus, it may be worthwhile to ask for court approval of controversial actions.

            Since the point of the Disclaimer Trust is to minimize estate taxes, administering the trust so that the surviving spouse’s assets are kept below the Minnesota Exemption Amount can provide some guidance on how to resolve the conflict of duties.   Often the Remaindermen are also children of the surviving spouse and may help make the conflict of duties more apparent than real.  However, with families that have unresolved issues or a second marriage, the conflict of duties may be very real.

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