Guardians/Guardianship

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Governor Andrew Cuomo recently signed legislation which amends New York law to allow mentally-competent disabled individuals under age 65 to establish a first-party Special Needs Trust without court petition.

In the past, when an individual with special needs had assets in his or her name which precluded his or her eligibility for government benefits, a special needs trust could only be created to achieve eligibility for benefits while preserving the assets for a disabled individual’s care by a parent, a grandparent or a legal guardian, or by the disabled individual by way of a lengthy and costly court proceeding.  Now, a disabled individual with mental capacity can establish his or her own special needs trust for assets in his or her own name without the involvement of these other individuals, or the courts, while preserving his or her eligibility for government benefits (for example, Medicaid and SSI).

New York Social Services Law 366(2)(b)(2)(iii) now conforms to the Federal Special Needs Trust Fairness Act signed into law by President Barack Obama on December 13, 2016, and applies to all first-party Special Needs Trusts established in New York on or after August 21, 2017.

President Obama just signed a new law that allows First Party Special Needs Trusts to be established by mentally competent individuals for their own benefit.  This is a major “fix” to the current law which only allows First Party Special Needs Trusts to be set up by a parent, grandparent, guardian or a court.  For those individuals who have no living parent or grandparent (or have no relationship with them) and do not have or need a legal guardian, this law will avoid the time and money spent to have a court create such a Trust.

Under a First-Party Special Needs Trust the trustee can use trust assets to supplement (but not replace) any benefits or governmental assistance such person is or may become entitled to receive.  All assets held in such a Trust will not “count” as assets of the disabled person for purpose of qualifying for government benefits.

A First-Party Special Needs Trust is a trust created to own the assets currently owned in the name of a person with special needs. These assets may be gifts or bequests from well- meaning family or friends that were given to person with special needs either outright or in a trust that does not qualify as a special needs trust.  These may also be assets received by a person with special needs through a lawsuit (such as a medical malpractice action).

A First-Party Trust can only be set up for someone who is deemed disabled under the Social Security Administration definition.  For a minor, a person would be considered disabled if he or she “has a medically determinable physical or mental impairment, which results in marked and severe functional limitations, and which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.”  An individual age 18 and older is “disabled” if he or she has a medically determinable physical or mental impairment which results in (i) the inability to do any substantial gainful activity and can be expected to result in death; or (ii) has lasted or can be expected to last for a continuous period of not less than 12 months.

In a First-Party Trust, at the beneficiary’s death, the remaining trust assets will reimburse Medicaid for any monies expended while the Trust was in existence for medical care, home health care or nursing home care of the person with special needs.  Thereafter, any other public assistance programs which have a valid right of reimbursement under state or federal law will be repaid.

Any remaining trust assets will pass to those persons appointed by the person with special needs in his or her Will to receive the assets.  If a person with special needs is under the age of 18 and/or is incompetent, then the assets will pass to those persons entitled to receive the assets under the intestacy laws of New Jersey.

Although First-Party Trusts are helpful and even critical in certain situations, there are several downsides that should be carefully considered before moving forward with the creation of this type of Trust.  First, there is a reimbursement requirement that is described above.  Second, because the state has an interest in the remaining assets in these Trusts, there is substantial state oversight of investments and distributions from the Trust.  Therefore, a person who is or may receive government benefits who has assets in his or her own name should speak with an attorney to carefully review the best options under the circumstances.

In 1993, Congress enacted Section 1917(d)(4)(A) of the Social Security Act, authorizing the establishment of special needs trusts (also called first-party trusts and self-settled trusts).  First-party special needs trusts enable disabled individuals to set aside their funds to pay for supplemental care while enabling those individuals to remain eligible for government benefits. See 42 U.S.C. § 1396p(d)(4)(A).  Following suit, the New Jersey Supreme Court has long recognized special needs trusts as effective asset protection tools which can be used “to plan for the future of a disabled minor or adult . . .”  See Saccone v. Board of Trustees of Police and Firemen’s Retirement System, 219 N.J. 369, 383 (2014).  First-party special needs trusts are used when individuals with disabilities have assets in their own name, (e.g., due to a lawsuit settlement, direct inheritance, savings or gift), yet want to be eligible to receive government benefits such as Supplemental Security Income (SSI) and Medicaid.

Unfortunately, under the current law, individuals with special needs are not authorized to establish their own special needs trusts even if they have the requisite mental capacity and despite the fact that the trust will be funded by assets belonging to them.  Rather, a First-party special needs trust can only “be established by a parent, grandparent, legal guardian of the individual, or a court.” See 42 U.S.C. § 1396p(d)(4)(A).  Accordingly, if an individual with special needs does not have a parent, grandparent or legal guardian, that individual must petition the Court to establish the first-party special needs trust, even if that individual is competent.  This process can be costly and time consuming. A parent, grandparent, or legal guardian, however, can establish a first-party special needs trust for the disabled individual in a relatively short amount of time and is not beholden to the Court’s schedule.  While likely a drafting oversight, requiring disabled individuals to have a parent, grandparent, legal guardian or a court to establish their first-party special needs trusts implies that all individuals with disabilities lack the requisite mental capacity to enter into a contract and handle their own affairs.  This presumption, however, is unwarranted and offensive.

The Special Needs Trust Fairness Act of 2015 (H.R. 670) introduced in February 2015 by Congressmen Glenn Thompson (R-Pa) and Frank Pallone, Jr. (D-NJ), corrects this problem by adding the individual with special needs to the list of people who can create a first party trust on his or her behalf, giving those individuals the same right to create a trust as a parent, grandparent, guardian, or court.  The Special Needs Trust Fairness Act of 2015 proposes to add the words “the individual” to Section 1917(d)(4)(A) of the Social Security Act, permitting disabled individuals to establish their own special needs trusts without a parent, grandparent, legal guardian, or a court.  If enacted, persons with disabilities who have no close family would no longer be forced to petition a court and undergo unnecessary legal fees and delays.

On September 9, 2015, the United States Senate passed a companion version of the Special Needs Trust Fairness Act of 2015 by unanimous consent. Hopefully, there will also be swift passage in the House of Representatives.