Will Too Much Trustee Discretion Invalidate a Special Needs Trust?

HNWPublic Benefits Law for Special Needs and Disabled Persons

disabled young womanHere’s a recent client case I addressed involving a supplemental needs trust.

A disabled daughter had been receiving SSI and Medicaid for about 10 years.  Her deceased parents’ Will provides for their disabled daughter using a trust leaving the trustee with “sole and absolute discretion” to make distributions of income and/or principal for the benefit of the daughter with absolutely no other guidance on how the funds could or could not be used.  The client who was the estate executor and brother of his disabled sister asked the following questions:

  1. Can the trustee (disabled daughter’s brother) establish a supplemental needs trust by amending the father’s testamentary trust to include all the required legal provisions of a supplemental needs trust, or would he have to obtain court approval to establish a completely new supplemental needs trust?
  2. Is the “sole and absolute discretion” language sufficient to keep these monies characterized as “third-party” monies, or because the trust is a discretionary trust, does trust corpus qualify as a resource that converts the trust from a third-party to first-party trust? And yes, the distinction between a third party and first party trust is very, very important.

First off, the client was very confused about disability trust, especially a supplemental needs trust.

A supplemental needs trust (SNT) is not a term of art.  As long as the trust does not contain any income or assets of the beneficiary but were/are the assets of the deceased parent, it is not SSI or Medicaid disqualifying so long as the person with disabilities is the sole trust beneficiary, not trustee.  The trust has no obligation to provide funds to the sister, nor is the trust required to distribute cash or income to the sister, and because the beneficiary sister does not have rights to access the trust to fund her food or shelter, it is exempt from spenddown pursuant to federal law.

To discuss your NJ special needs trust matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com.  Please ask us about our video conferencing or telephone consultations if you are unable to come to our office.

By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold Township, Monmouth County, NJ Special Needs Trust Attorney

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