ADVISING THE TRUSTEES OF AN SNT

Transcription

1 ADVISING THE TRUSTEES OF AN SNT MAY 15, 2015 TARA ANNE PLEAT OBLIGATIONS OF THE TRUSTEE Case law is developing on the matter and while not explicit, there is a higher standard of care that is being intimated to the Trustees of a Supplemental Needs Trust due to the perceived incapacity of the Trust beneficiaries. Read the Trust document. While NYS has statutory Supplemental Needs Trust provisions, it is still necessary to read the document to see what affirmative responsibilities the Trustee has agreed to accept. 1

2 COUNSELING THE TRUSTEE ABOUT DISTRIBUTIONS FROM SNTS First Understand the Benefit Structure and the impact of distributions on the benefits. Second Understand that it is a misconception that SNTs can never be used for food, shelter and other supports. Third Counsel Trustees on when court approval would be prudent prior to proceeding with distribution or purchase. Fourth Understand the Difference between Providing Notice and Getting Approval (one is required and one is not) COUNSELING TRUSTEES ABOUT DISTRIBUTIONS FROM SNTS Matter of J.P. Morgan Chase 956 NYS 2 nd 856 (NY Surr Court 2012) Third Party Trust $2,000,000 + Dormant for Years except for legal fees and commissions Matter of Liranzo NY State Sup. Kings Co /1996 June 25, 2013 First Party Trust $400,000 + Expended Funds on services without determining if those services were funded by Medicaid or other government benefit stream 2

3 CHALLENGES IN MANAGEMENT & ADMINISTRATION OF SNTS What does Special Needs Mean? What doesn t Special Needs Mean? What Statutory and Regulatory Guidance is out there? What are the accepted and understood procedures? How does the Trustee exercise discretion? What are the guidelines. THE SPECIAL NEEDS STIGMA The term special needs can be misleading This type of trust can benefit individuals with disabilities across the cognitive functional spectrum Usually the question stems from whether or not an individual is fully functionally independent. 3

4 SOME MISCONCEPTIONS The system provides the necessities, and the trust provides the enhancements With the continuing deterioration of government funded services (and the quality of those services), these trusts are often used like support trusts Many individuals with disabilities have much longer life expectancies than before, challenging the fiduciary to ensure that the trust remains financially viable for decades OTHER MISCONCEPTIONS Special Needs Planning = Welfare Planning Many programs are only available to Medicaideligible beneficiaries, meaning that even families with means must participate The cost of these types of services can exceed the cost of skilled nursing facility services 4

5 OTHER MISCONCEPTIONS Supplemental Needs Trusts can never be used for food, shelter and other supports While this may be true in some states, this is not the case in New York If drafted properly, the Trustee has discretion to use these trusts for both support and supplemental items. CHALLENGES FOR THE PROFESSIONAL FIDUCIARY Communication: If the Beneficiary is non-verbal, suffers from mental illness, has a brain injury, where does the Trustee go to information to make informed decisions? Entitlements Program rules are often in conflict and can be difficult to reconcile with traditional fiduciary practices Compensation: Commission schedules (private and statutory) do not recognize the additional challenges presented by this kind of Trust administration 5

6 CHALLENGES Challenging Trust beneficiaries; Incorrect Expectations Administration Issues Diverse with conflicting opinions and guidance from multiple sources; --Courts --Conflicting Public Benefit Guidelines --Trusts drafted by attorneys who know little about disability and public benefits --Lack of statutory and regulatory guidance WHERE ARE THE RULES? Statutes: NY EPTL and NY SSL 366(2)(b)(iii) 42 USC 1396p(d)(4)(A) makes clear that trusts are to be disregarded in determining financial eligibility for benefits, but it provides little if any guidance on distributions Federal statute provides no guidance 6

7 RULES? Regulations: 18 NYCRR Applies only to First Party Supplemental Needs Trusts Difficult to apply in many scenarios Inconsistently enforced RULES? NYS Department of Social Services (now Department of Health) Administrative Directive 96 ADM -8 Issued three years after the statute was enacted (1996) Directed Primarily at First Party Trusts 7

8 RULES? 96 ADM 8 does introduce two concepts that should be of interest to every fiduciary: Imposes an affirmative obligation on the social services district to inform Trustees of their responsibilities Introduces the concept of primary (versus sole ) benefit when considering distributions RULES? Substantive Body of Case Law on Supplemental Needs Trusts, and some cases involve trust administration issues These cases do not establish an accepted set of rules of general applicability but are often improperly relied on by local districts as mandates. They are not. 8

9 DISPELLING THE MYTHS There is no independent statutory, regulatory or administrative obligation to obtain prior approval from a local DSS or State DOH upon establishment The LDSS role is to review the document to confirm that it meets the minimum criteria for SNTs A Court may order prior review as part of a guardianship or compromise proceeding DISPELLING THE MYTHS There is no independent statutory, regulatory or administrative obligation to account to the local DSS The local DSS is entitled to review a Trustee s actions to confirm compliance with the (very general) fiduciary conduct applicable to SNTs. The review is typically conducted as part of an annual recertification for Medicaid coverage. 9

10 DISPELLING THE MYTHS There is no independent statutory, regulatory or administrative obligation to obtain court approval prior to making distributions Sometimes it is in the Trustee s and Beneficiary s best interest to obtain court approval nonetheless DISPELLING THE MYTHS There is no independent statutory, regulatory or administrative obligation to prepare annual budgets in advance. **Sometimes Budgets are sought out by Trustees 10

11 ADDRESSING THE ISSUES Despite the lack of established rules and procedures there are certain practices that historically we have recommended that Trustees consider: (1) Comprehensive Annual Accountings drafted to accommodate two audiences: courts and agencies (2) Prior Court approval for substantial expenditures or where expenditure may benefit other family members and periodic judicial settlement. (3) Protocol for regular benefit program review (4) Use of private case management to fill in the gaps ONGOING ISSUES Increasingly comprehensive and detailed oversight and audit activity by the Medicaid and SSI programs Increasing involvement of the AG Civil Recoveries Bureau and eventually OMIG Sole Benefit vs. Primary Benefit Burden on Court system and delay Need for advocates to consider a different approach 11

12 PRACTICAL SUGGESTIONS Practical Suggestions Hire a Private Case Manager or Advocate Hire Counsel with Relevant Experience Periodically settle your accounts Don t Dabble Your job is to advocate not acquiesce TAXATION First Party Supplemental Needs Trusts Typically funded with: Lawsuit Settlement Funds Retroactive Disability Benefits Inheritances Third Party Supplemental Needs Trusts Typically created by: one spouse for another A Child for an elderly parent Parent for a child with a disability 12

13 TAXATION OF SUPPLEMENTAL NEEDS TRUSTS Generally a private SNT is going to be classified as either: Grantor Trust Simple Trust Complex Trust Qualified Disability Trust FIRST PARTY SUPPLEMENTAL NEEDS TRUSTS Assets in Trust will be included in estate of beneficiary for estate tax purposes. Generally will be 100% Grantor Trusts for Income Tax filing purposes 675(4)(C) inclusion of a power to substitute property 677 non-adverse trustee (e.g.: non-family) 673(c) discretion deemed fully exercised 13

14 TAXATION OF THIRD PARTY SNTS Someone may still be Grantor Simple? $300 exemption All income must be distributed, no principal Complex? Not Simple $100 exemption Compressed trust rates, and DNI for actual distributions to or for benefit of beneficiary QUALIFIED DISABILITY TRUSTS 642(b)(2)(C)(ii): Reference to sole benefit trust provision in Social Security Act Requires Social Security Commissioner to find all beneficiaries disabled Individual exemption amount ($4,000 for 2015) 14

15 NY EPTL New York Prudent Investor Act - based on and includes all of the major principals of the Modern Portfolio Theory. Requires the Trustee to diversify in most cases; Allows for delegation of investment functions; Imposes a reasonableness standard for incurring costs; Declares that no investment is per se imprudent; Requires that the prudence of an investment be judged as part of the entire portfolio and not in isolation Trustee will be judged on whether the entire trust portfolio is in substantial compliance with the prudent investor rule and if so Trustee will be insulated from liability (as it relates to investments). EPTL Requires a standard of conduct, not outcome or performance Process. The Trustees have to have a documented process for portfolio review. In SNT cases, the Trustees have to have a documented process not only for investment review but for communication with family and beneficiary; for knowing the public benefits that beneficiary is receiving; for putting eyes on the beneficiary; and all distribution decision making. It s all about process, conduct and the method by which that process and conduct is documented. 15

16 THANK YOU FOR COMING. 16