Trust Administration

1. ADMINISTRATION OF SPECIAL NEEDS TRUSTSPresented by Donald D. Vanarelli, Esq. Certified Elder Law AttorneyRegistered GuardianR. 1:40 Approved Mediator

2. Trust Administration A Special Needs Trust (SNT) must not only be properly drafted and funded, but must also be properly administered. Improper distributions from a properly drafted and funded SNT can result in the loss of public benefits for the beneficiary of the trust.

3. Self-Settled, Third Party and Marital SNTs The rules of administration apply to self-settled, third party and marital SNTs.

4. Distributions May Be Income Even if the principal of a SNT is not considered a resource by public benefit providers because the trust was properly drafted, distributions from the trust MAY be considered income to the disabled beneficiary if not properly made.

5. Basic Rules for Trust Administration These basic rules define the types of distributions which may be made from a SNT and the impact of each type of distribution on the public benefits of the trust beneficiary. It is critical that trustees are aware of these rules.

6. Types of Trust Distribution 1. Direct Payments to the Beneficiary. 2. Payments to third party vendors for food, clothing or shelter. 3. Payments to third party vendors for items which are not food, clothing or shelter.

7. Direct Payments to the Beneficiary are NOT Permitted Cash paid directly from a SNT to a disabled beneficiary of needs-based public benefits is considered to be unearned income and will affect eligibility or the amount of any benefit received.

8. Example: Distributions from a SNT Directly to an SSI Beneficiary Jill is the trustee of a special needs trust established by her deceased mother, Paula, for the benefit of Paula’s disabled daughter and Jill’s sister, Anne. Anne’s living expenses, including rent, food, transportation and clothing, total approximately $2,000 per month. Jill sends Anne a check on the first of every month for $2,000 so Anne can pay her expenses. Since Anne is receiving cash income in excess of her monthly SSI benefits, she loses her SSI. Since Anne received Medicaid based on her SSI payment, she also loses Medicaid.

9. SSI - ISM + PMV 1. SSI is intended to pay for a beneficiary’s food, clothing and shelter. 2. Disbursements from a SNT by a trustee to a third party vendor to cover food, clothing or shelter costs result in the receipt of in-kind support and maintenance (ISM) by the beneficiary. 3. ISM is valued under the presumed maximum value (PMV) rule under which the SSI monthly benefit is reduced by one-third (1/3rd) of the federal benefit amount, or the actual value received, whichever is less.

10. Payments to Third Party Vendors for Food, Clothing or Shelter It is often appropriate to make distributions from a SNT which constitute ISM even though the beneficiary will have a reduction in public benefits to the extent of the PMV because the SSI benefit alone is inadequate to provide an appropriate level of food, clothing and shelter for the beneficiary.

11. ISM + Medicaid Eligibility As long as SSI eligibility is maintained, even at a reduced level, Medicaid eligibility is maintained.

12. Example: Distributions from a SNT to Third Party Vendors for Food, Clothing or Shelter Jill is the trustee of a testamentary special needs trust established by Joan under her last will and testament for her adult disabled daughter, Pamela. Pamela receives SSI, Medicaid, food stamps and services from DDD. Pamela lives in an apartment. Jill signed the lease as trustee of the SNT and pays all rent directly to the landlord. The rental payments constitute ISM and reduce Pamela’s SSI by one-third (1/3rd), the PMV.

13. Payments to Third Party Vendors for Items Which Are Not Food, Clothing or Shelter Distributions of this kind do not result in any reduction of benefits so they are the most desirable types of distributions for a trustee to make.

14. Example: Distributions from a SNT to Third Party Vendors for Items Which are Not Food, Clothing or Shelter Jill, a disabled adult, receives SSI. Joan is the trustee of a special needs trust established by Jill’s parents for her benefit. Jill likes to read the New York Times. Joan arranges with the local newspaper distributor to deliver the New York Times to Jill on a daily basis, including Sundays, and pays the bill directly to the newspaper distributor. This is not considered income, and will not affect Jill’s SSI benefits.

15. Types of Distributions Not ConsideredFood, Clothing and Shelter • Home improvements, repairs, and maintenance by outside source • Tools to perform home improvements or repairs • Installation of burglar alarm or monitoring/ response system home • School tuition, books, and supplies • Health and life insurance premiums

16. Types of Distributions Not Considered Food, Clothing and Shelter (Cont’d) • Entertainment, including books, magazines and newspapers; trips, movies, plays, museums and sporting events; audio/video equipment; hobby supplies, etc. • Vacation travel, but not lodging, since that is shelter • Purchase and maintenance of car, or bus passes • Household goods and other items of personal property of reasonable value • Payment for cleaning supplies and paper products

17. Types of Distributions NotConsidered Food, Clothing and Shelter (Cont’d) • Telephone expenses • Dental care, physical therapy, massages, support services, and other medical costs not covered by any public benefit programs • Home care services not covered by another program • Durable medical equipment, such as wheelchairs

18. Examples of Trust Distributions Which Will Reduce SSI Benefit • Shelter-related expenses (mortgage payments, real property taxes, heating and cooling bills, electricity, water, sewage, garbage collection) • Groceries or meals • Items of clothing • Cash for any purpose

19. Other Types of Distributions Which May Effect Public Benefits Eligibility Income and resources of parents are deemed to minor children. Trust distributions to parents may be considered income to them and, therefore, may be deemed to minor children. If the children are public benefit recipients, distributions to parents may effect the eligibility of children.

20. Other Rules Governing Distributions Distributions should be made by the trustee to accomplish the intention of the grantor as set forth in the trust instrument. Distributions should be made to provide for the beneficiary’s needs.

21. Credit Cards In appropriate cases, it makes sense to consider providing the trust beneficiary with a credit card. Credit cards are loans and loans are not income. Even if the credit card is used for food, clothing, and shelter, it is still a loan. The credit card could be in the name of the individual beneficiary or the name of the trust.

22. SNT as Owner of Home • Home is an “exempt” asset. • A beneficiary of public benefits living in a home which he owns or which is owned by a SNT is NOT considered to be receiving ISM in the form of rent-free shelter.

23. SNT as Owner of Home Advantages 1. Many beneficiaries of SNTs do not have the capacity to manage residential real estate. 2. The home is protected from creditors and from the temptation to borrow against the home. 3. If beneficiary is married, trust ownership protects the home in the event of a divorce.

24. SNT as Owner of Home Disadvantages 1. If a self-settled SNT owns a home, the home is likely to be lost upon the death of the beneficiary due to the required pay back provision. 2. Family members or others who occupy the home must pay their pro rata share of the expenses.

25. SNT as Owner of Home • If a self-settled SNT is involved, parents should purchase the home. Will avoid pay back and no pro rata contribution needed. • If the SNT beneficiary is under age 55 and not likely to live to age 55, home should be owned by the beneficiary since NJ only seeks recovery of Medicaid benefits paid after age 55 from the estate of a deceased beneficiary.

26. SNT as Owner of a Home If possible, home should be purchased in cash. Payment of mortgage is ISM to the disabled person, each monthly payment being valued at no more than the PMV.

27. SNT as Owner of a Home Payment of other household expenses by a SNT may also constitute ISM. The following 10 items are the only expenses considered in determining whether the beneficiary has received ISM: Food Gas Mortgage Electricity Real Estate Taxes Water Rent Sewer Heating Fuel Garbage Removal

28. Additional Household Expenses If the trust pays for improvements or renovations to the home, e.g., renovations to the bathroom to make it handicapped accessible or installation of a wheelchair ramp or assistance devices, etc., the individual does not receive income. Disbursements from the trust for improvements increase the value of the resource and, unlike household operating expenses, do not provide ISM.

29. SNT as Owner of a Vehicle 1. Often a handicap-equipped van is required. Who should own the van? 2. Title - held by trust or family member? - liability for accidents - “pay-back” provision 3. Insurance - critical to have adequate insurance - trust may pay insurance costs 4. Document transportation needs of disabled person for Medicaid.

30. SNT as Owner of a Vehicle The difficulty with a SNT owning a van is that it is often impossible to obtain insurance for the trust. A simple solution - have the trust lease the van and pay all expenses, including insurance, gas, maintenance, etc.

31. SNTs and Section 8 Housing The Special Needs Trust should never pay the beneficiary’s rent in Section 8 Housing. Distributions from the trust are considered income to the tenant regardless of whether the distribution is made directly to the beneficiary or to a third party.

32. Recap of Distribution Rules for Special Needs Trusts • Do not pay cash to beneficiary • Do not pay cash to family of beneficiary under 18 years of age • Distribute to third party vendors • Retain public benefits counsel • Retain care manager

33. Recap of Distribution Rules for Special Needs Trusts (Cont’d) • Always pay: • --Income taxes • --Trustee fees • --Attorney fees • --Administrative costs • --All regularly recurring expenses

34. Recap of Distribution Rules for Special Needs Trusts (Cont’d) • Try to avoid payment of : • --Mortgage • --Rent • --Real estate taxes • --Homeowner’s insurance • --Utilities: Gas, Electric, Heat, Water, Sewer • --Garbage removal • --Food • --Clothing

35. First Steps for Trustees Review the document with an attorney familiar with Special Needs Trusts Meet with the beneficiary and assess his or her needs Identify the public benefits which the beneficiary is receiving or for which he/she may be eligible Gather all of the assets subject to the trust Get tax identification number for the trust Meet with any care managers, advisors, or fiduciaries required by the trust agreement Seek assistance and hire advisors

36. How to Identify the Beneficiary’s Needs 1. Trustee should develop a wish list of goods and services to be purchased for the beneficiary. - List should be prepared by the beneficiary and the beneficiary’s friends and family 2. Trustee should obtain information from the beneficiary’s school records or life care plan. 3. Care manager performs an annual evaluation of the beneficiary which will help identify his/her needs.

37. Trustee Duties and Responsibilities 1. Trustees should hold periodic meetings to receive input and make decisions concerning distributions. 2. Expectations should be established. 3. An agenda should be maintained and minutes provided to participants.

38. Trustee Duties and Responsibilities (Cont’d) 4. Self-Settled SNTs - the trustee must balance the long and short-term needs of the beneficiary. 5. Third Party SNTs - trustee must consider the interests of the remainder beneficiaries.

39. Choose a Management System and Team to Carry Out Your Intent • Many SNTs fail because of ill-equipped Trustees. • A system of checks and balances works best in trust administration. • Divide the duties into three categories: • Financial • Personal, including advocacy and care management • Accountability

40. Selection of Management Team Members • Parent, sibling or friends • Attorney • Financial Institution • Nonprofit Organization • Co-Trustees • Social Worker or Care Manager

41. SNT Trustee: Financial Manager The Trustee should be a person with expertise in money management and disability programs. Institutional trustees may provide investment acumen. Although a parent often wants a sibling to act as trustee, there is often an inherent conflict of interest. Since the sibling is usually named as a remainder beneficiary, he/she has an incentive to accumulate rather than distribute trust assets.

42. Investments Prudent Investor Rule - requires trustee to invest and manage trust assets “as a prudent investor would, by considering the purposes, terms, distribution requirements and other circumstances of the trust. N.J.S.A. 3B:20-11.3 Generally, a growth and income investment strategy is appropriate for a SNT.

43. SNT Trustee: Public Benefits Expert In addition to the usual challenges involved in managing a trust (financial acumen, record keeping, etc.), the trustee of a SNT has a more difficult job. He/She must know the rules of the applicable governmental programs, and must make and keep track of payments to third party vendors.

44. Trustee Duties: Surety Bond If there is no corporate trustee, a trust document may include provision requiring a surety bond for the individual. Since the trustee has very broad discretion as to how the trust income and principal are to be used, a surety bond might be considered as a way to safeguard trust assets. The bond should be in an amount equal to the trust assets. The amount the bond should be reviewed annually. The premiums can be paid by the trustee from trust income.

45. Trustee Duties: Accountings The trust document may also provide for annual accountings by the trustee. This enables the trust beneficiary and non-trustee family members to scrutinize the performance of the trustee. Public benefit providers always require accountings from trustees of self-settled SNTs.

46. Trustee Duties: Investments The trustee has an obligation to invest the trust assets in a manner designed to achieve the objectives of the trust. As a general rule, the duties of a trustee cannot be delegated. However, the Prudent Investor Act authorizes the delegation of the investment functions by trustee and relieves the trustee of liability for investment performance under certain circumstances.

47. Trustee Duties: Investments (Cont’d) An analysis must be made of the degree of risk which the beneficiary can tolerate, as well as the cash-flow needs of the beneficiary. Expenses, such as insurance premiums for a home or a van, medical expenses not covered by other sources and necessities not covered by other sources, must be considered in any analysis of the beneficiary’s cash-flow needs. The trustee must educate the beneficiary and his or her family as to what are appropriate investment vehicles and expectations.

48. Trustee Duties: Recordkeeping It is crucial that the trustee maintain accurate records of assets, income and disbursements. SSA reserves the right to review all disbursements made to or on behalf of the beneficiary. The trustee’s records must clearly reflect the payee of each distribution and the purpose for which it is made. If a challenge is made by SSA that a distribution constitutes income to the beneficiary, the trustee must have accurate records to refute the challenge.

49. Trustee Duties: Reporting Requirements SSA requires certain reporting for all SSI recipients. The trustee must complete these reports in a timely manner, so that the beneficiary’s eligibility will continue. Existence of the SNT must be reported to SSA and a copy provided, if requested. Any change in the beneficiary’s address, employment, living arrangements or income must be reported, including distributions which exceed $5,000.

50. Trustee Duties: Appeals If the beneficiary receives notice of an adverse action, the decision must be appealed within ten days in order to maintain benefits during the appeal period. The trustee should request copies of all communications from SSA to the beneficiary.