Special Needs Truts: The Wave Of The Future – Part 2
Published in Florida Banking Magazine
By: Stephanie L. Schneider, Esquire – Board Certified Elder Law Attorney
The first part of this article explained the legal basis for creating special needs trusts and addressed the differences between a self-settled and a third-party created Special Needs Trust. The second part of this series focuses on two ways in which financial institutions can successfully compete in today’s marketplace by providing value-added services to their customers when serving as trustee of a revocable or irrevocable trust. First, how corporate trustees can provide value-added service to their existing customers and their families by serving as trustee of a third-party created special needs trust. Second, how corporate trustees can identify those situations where an existing irrevocable trust of a living grantor may require reformation to become a special needs trust for a disabled beneficiary.
Serving As a Trustee of a Special Needs Trust: Value Added Service to the Customer.
Many financial institutions have long-standing relationships with their customers which extends to the customer’s children. It is an opportunity to provide banking and trust services to future generations. Today’s consumer is looking for value-added service when selecting a professional to manage their financial affairs and provide investment and tax planning advice. Taking the time to get to know your customer on a personal level can provide you with important information that will allow you to offer additional services.
A customer may have a child or grandchild that has a disability yet not disclose that in the initial meeting with you. When discussing the importance of proper estate and tax planning with the customer, this issue should be raised. If the customer has had their legal documents prepared by a traditional estate planning attorney, there is a possibility that the attorney did not ask whether there is a disabled beneficiary and/or may not have known how to do proper planning for a disabled beneficiary’s inheritance. In addition, there is a likelihood that the customer may not have disclosed the existence of a disabled family member due to social stigma, embarrassment or other reasons.
Corporate fiduciaries have the ability and resources to provide a management system that can enrich the life of a disabled family member who is unable to handle their financial affairs. The only way to insure that an inheritance the customer leaves will be spent on the disabled child is to leave it in a special needs trust with a reliable and trustworthy trustee. Before we can get to the point of implementing the appropriate estate plan the corporate fiduciary must first identify if a disabled family member exists. This is one of many reasons why it is so important to develop a strong foundation in your relationship with the customer.
Years ago many families with a disabled child would disinherit the child in their estate plan because the parents knew that an outright inheritance would result in loss of the child’s government assistance. Unfortunately, the “plan” that many families implemented provided no measure of protection to the disabled child. Some families requested (not in the legal document) that the beneficiaries of the estate, such as the siblings of the disabled child, utilize some of their inheritance for their disabled family member. Even if the healthy beneficiary agreed, this was a moral promise and was not a legally enforceable obligation. If the healthy beneficiary became divorced, had a drug or alcohol addiction, filed bankruptcy, was personally sued on a judgment, had creditors, or became irresponsible for any reason, that inheritance could be lost. As a result, the resources would no longer be available to provide the disabled family member with a better quality of life.
Today, anyone (not just parents and grandparents) can create a special needs trust in their Last Will & Testament or, Revocable Trust to benefit a disabled person to whom they have no legal obligation of support1. Even if the disabled person is not currently receiving government assistance2 a special needs trust will be appropriate if the disabled person cannot responsibly manage their inheritance or, is prone to being financially exploited due to limited mental capacity, education or intelligence. Parents and grandparents can be assured that the inheritance placed in the special needs trust which is intended for the sole use of the disabled beneficiary will in fact fulfill that purpose.
Moreover, whereas the parents or family members will eventually face mortality, the corporate trustee, the financial institution, will continue to exist and so presents many attractive benefits to administering the special needs trust.
Reformation of an Irrevocable Trust To a Special Needs Trust:
Clients with taxable estates have hopefully implemented an estate plan designed to negate or minimize federal and state estate taxes and generation skipping transfer taxes. One technique with which we are all familiar is the irrevocable life insurance trust (“ILIT”). Each year the grantor gifts the annual gift tax exclusion amount to the trust which is used by the trustee to pay the annual premium on the life insurance policy insuring the life of the grantor. The trust agreement provides the named beneficiaries with “Crummy powers”. What happens in a situation where one of the named beneficiaries is a disabled person receiving government assistance? If you are serving as the trustee of an ILIT the answer to this question may shock you.
The state and federal governments are likely to view the “Crummy power”, regardless of whether it is exercised, as an available resource of the disabled beneficiary. “Available” resources are counted when determining whether a disabled person initially qualifies and continues to thereafter meet eligibility requirements. If the “Crummy power” is not exercised, the government might make the argument that the beneficiary failed to accept a resource to which he/she was entitled and treat that inaction as a transfer of assets. The law provides that a transfer of assets creates a period of time that the beneficiary is ineligible to receive government assistance.
A similar problem can arise if the client’s estate plan leaves an outright inheritance for the disabled beneficiary or, places the inheritance for the disabled beneficiary in an irrevocable trust that does not contain “special needs” language. Since irrevocable trusts by their nature and common law cannot be unilaterally amended by the grantor we must look to either judicial or non-judicial modification3
Florida Statutes Chapter 737.4031 provides for judicial modification of an irrevocable trust when compliance with the terms of the trust would defeat or substantially impair the accomplishment of a material purpose of the trust. The court has authority to amend or change the terms of the trust including terms governing the distribution of the trust income or principal or terms governing administration of the trust.4 A petition would be filed by the grantor of the trust setting forth the reasons why the trust as drafted either jeopardizes the disabled beneficiary’s entitlement to government assistance or, does not provide protection for the disabled beneficiary to inherit and maintain entitlement to government assistance.
The disabled beneficiary must be provided with due process by one of two methods. If there is another beneficiary who does not have a conflict of interest with the disabled beneficiary and who has the same or greater quality of interest, then the latter’s interests can be represented through virtual representation5. Notice of the proceeding is then given to the person who can bind the interest of the disabled beneficiary. Alternatively, the court can appoint a guardian ad litem to represent the interest of the disabled beneficiary.
In the case of an ILIT, the court must completely remove the disabled beneficiary from the trust. In all other situations, the court must create a special needs trust to hold the inheritance of the disabled person.
Corporate fiduciaries should inquire whether a customer has a disabled family member to whom they wish to leave an inheritance, and request copies of the customer’s existing estate planning documents. Corporate fiduciaries can then recommend that the customer consult with an elder law attorney to ensure that any necessary changes be made and problems timely corrected while the grantor is alive.
Stephanie L. Schneider is a Florida and nationally Board Certified Elder Law Attorney. She is Chair of the Florida Bar Elder Law Section. Stephanie can be contacted at 1860 N. Pine Island Rd., Ste. 111, Plantation, FL 33322; 954-382-1997.
1. There is then no “pay-back” requirement to the government agency since the assets that fund the special needs trust are those of a third party and not the disabled person receiving the government assistance. The testator or grantor can designate the residuary beneficiary of the special needs trust should assets remain at the death of the disabled individual.
2. Examples include: Medicaid; Supplemental Security Income; Food Stamps; Section 8 HUD housing.
3. F.S. 737.4032 provides for modification of an irrevocable trust only after the death of the settlor. In cases where the settlor is alive at the time it is discovered that proper planning has not occurred for a disabled beneficiary the appropriate procedure is to use F.S. 737.4031.
4. F.S. 737.4031(1)(a).
5. F.S. 731.303.