Use a Supplemental Needs Trust to Provide for a Disabled Relative

If you have a child or other dependent relative who currently or in the future will probably require institutional care, your estate planning needs go beyond the usual provisions for outright gifts, or even the usual trust provisions found in most wills.  The reason for this extra measure of planning is that Medicaid regulations require that such a disabled person’s “available resources” must be used for your dependent’s care before the government provides any assistance.  These available resources include both the principal and any income earned from the principal of a trust left for his benefit.

For example, Joanne and John have a son, George who lives with them, but may, at some time in the future, need institutional care because of his functional disabilities.  Unaware of the requirements for George to qualify for Medicaid assistance, their wills provide for tax-oriented trusts for each other, and on the death of the survivor, the combined estates would continue in trust for George’s benefit.  The trust provides that George would receive all of the income generated from the principal.  To “plan” for George’s additional needs, the Trustee had discretion to invade the principal of the trust for George’s benefit should he need additional funds for his medical care.  

Result: If George applies for Medicaid assistance after the death of his parents, all of the principal and income of the trust would be available to pay for his care and George would probably be denied government assistance until all of the trust’s principal and income were exhausted..  

So, what legally can be done to provide for a dependent relative such as George and still permit him to qualify for government assistance.  New York has provided for such a situation, but you must avoid many traps to qualify.  The special kind of trust that is available to benefit a dependent relative under these circumstances is called a “Supplemental Needs Trust.”  What are the basic requirements of a Supplemental Needs Trust or “SNT”?

First, the statute requires that the SNT can be created either by your will or a trust you create during your lifetime.  Second, neither the income from the trust nor its principal can be payable to the disabled beneficiary automatically by the terms of the trust.  Only discretionary payments by the Trustee are permitted.  Third, the provisions must be carefully drawn to provide that the benefits of the trust may be used only to supplement government benefits and not to supplant or substitute for them.  

These are only the broad requirements for a SNT to qualify under New York law.  The biggest problem in drafting these special trusts is to avoid trying to do too much for the disabled relative.  Being too generous, which is a natural tendency, may only result in the trust’s disqualification and the use of the principal and income of the trust to pay for the dependent’s basic institutional needs (in lieu of government assistance) and not to provide for the extra comforts that could make his life more comfortable.  

It’s clear, therefore, that if you are faced with this circumstance, careful planning is absolutely necessary to accomplish your purpose.  The good news is that, working together with an experienced estate planning attorney, your goals can usually be accomplished within the requirements of state and federal law.

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Last modified: December 27, 2007

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