By: William P. Dale and Denise Martin
Estate planning provides many excellent tools for caring for loved ones who have a disability, one of which is the Supplemental Needs Trust. “Supplemental Needs Trusts” (SNTs), also known as “Special Needs Trusts”, may be used to protect and manage assets for persons with disabilities. If properly drafted, an SNT will allow a beneficiary to qualify, or continue to qualify, for means-tested benefits like Social Security Income (SSI) and Medicaid, while also being able to receive the “supplemental” benefits established in the SNT. An SNT may be self-settled or created by a third party, and this will affect the legal rights and obligations associated with the trust. Generally, a self-settled trust will be treated as an available asset which can disqualify the settlor-beneficiary from means-tested benefits. 42 U.S.C. § 1396p(d).
There are various ways to create an SNT. SNTs may be created under the Federal Medicaid Law; these are often referred to as (d)(4)(A) trusts, after the Medicaid provision in which they are found. See 42 U.S.C. 1396p(d)(4)(A)-(C). These trusts must be drafted with the appropriate “payback” provision, providing that upon the death of the disabled individual or termination of the trust, the trustee must deliver any funds remaining in the trust to the state, up to the amount paid in Medicaid benefits on the disabled individual’s behalf. An SNT in Maryland may be created as a (d)(4)(A) trust or, alternatively, under the guidelines of the Maryland Discretionary Trust Act (MDTA), Md. Est. & Trusts Code Ann., §§ 14-401 et seq. A practitioner may choose to draft outside of the MDTA if the settlor intends to benefit more than one protected beneficiary (such that assets will be protected from creditors and not considered an asset of the disabled person in applying for means-tested benefits) or if the terms of the trust would otherwise conflict with the MDTA. See Lawrence Adashek, Imtiaz Jindani, A Most Powerful Tool – Supplemental Needs Trust, Md. B.J., March/April 2008, at 21.
The MDTA provides greater flexibility to practitioners than do the Federal Medicaid (d)(4)(A) trusts. While in a Supplemental Needs Trust, the beneficiary is necessarily disabled, the beneficiary of an MDTA trust may be disabled but does not have to be. See Adashek, supra, at 21-22. The MDTA provides the trustee with title to the trust property and complete discretion over any and all expenditures made from the trust. Md. Est. & Trusts Code Ann. § 14-402(a)(1). Trust property is not considered the property or an available resource of the beneficiary, and thus, the trust assets are protected from creditors (excluding Federal Tax Liens and those debts the State considers duties, like child support). See Adashek, supra, at 21-22 (citing Md. Est. & Trusts Code Ann. § 14-402(a)(2)). The MDTA trust may be used to provide for the needs of the beneficiary not provided for by public or private programs. Md. Est. & Trusts Code Ann. § 14-402(b)(3) (providing, “A trust may be used to assure that trust property is available to provide for the needs of the beneficiary to the extent not provided for by other sources, including public and private benefit programs for which the beneficiary would or might be eligible if the trust did not exist.”). As a result, the disabled person may apply for, or continue to receive, SSI benefits and Medicaid without the State considering the trust assets to be an available resource of the disabled individual.
There are various legal requirements associated with an MDTA trust. An MDTA trust must be created and funded by someone other than the beneficiary, known as the “transferor.” Md. Est. & Trusts Code Ann. § 14-401(m). The beneficiary may not be the trustee. See Adashek, supra, at 21-22. At the time of creation, the transferor, beneficiary, or trustee must be a resident of Maryland or have her principal place of business in Maryland, or the trust property must be located in Maryland. Id. § 14-404(g). The transferor may make the MDTA trust revocable or irrevocable, but if it is left unstated, the trust will be revocable. Id. § 14-402(e). Upon the beneficiary’s death, an MDTA trust terminates, and the distribution of the remainder is paid to the remainder beneficiaries or the default beneficiaries listed in the MDTA. Id. § 14-406(b)(2).
An additional option for setting up an SNT in Maryland is the Common Law Special Needs Trust, which was challenged in the case of First Nat. Bank of Maryland v. Dep’t of Health & Mental Hygiene. 284 Md. 720 (1979). In that case, the court found the trust to be a discretionary trust rather than a support trust, such that the trust principal was not available to pay for the cost of care of the grantor’s child. Following First National, if the principal is not available to pay the cost of care, the trustee cannot be compelled to invade the principal to pay for the cost of care.
If you have a family member with special needs, careful planning should be done to ensure that the needs of that individual will be provided for during their lifetime. We would be happy to meet with you to discuss your particular situation.