New York Law Journal June 2, 2003, Monday

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New York Law Journal

June 2, 2003, Monday

SECTION: NEWS; Vol. 229; Pg. p. 4, col. 4

LENGTH: 2081 words

HEADLINE: Outside Counsel
Establishment of First-Party Supplemental Needs Trusts

BYLINE: By Jay J. Sangerman; Jay J. Sangerman is a principal at Jay J. Sangerman, PLLC, a boutique law firm specializing in the planning and drafting of supplemental needs trusts in personal injury and medical malpractice matters.

A recent decision by the Broome County surrogate in In re Gillette [n1] is important for its illustration of significant entitlement planning possibilities for the disabled through the use of supplemental needs trusts.

Richard Gillette, through his attorney-in-fact, had sought to establish such a trust for his benefit into which to transfer assets to which he had a right. Mr. Gillette had been a recipient of Supplemental Security Income [SSI], Social Security Disability [SSD] and Medicaid. In order to maintain his SSI eligibility, Mr. Gillette sought to place his retroactive SSI payments into a supplemental needs trust. The problem, as the decision states, is that the execution of the trust did not conform to the requirements of federal and state laws.

A supplemental needs trust is an important estate planning tool that permits the maximization of funds to be made available to a disabled individual [n2] without the funds being counted as income or resources for the determination of Medicaid and SSI eligibility.

Two Types

There are essentially two types of supplemental needs trusts: [i] the third-party supplemental needs trust established for a beneficiary and funded by one other than the beneficiary and [ii] the first-party supplemental needs trust established with the beneficiary's own funds. The later form is discussed in Gillette.

The first-party supplemental needs trust was codified in OBRA '93 [n5] and the conforming state law. [n6] Under the federal and state laws, a first-party supplemental needs trust can be established only by a parent, grandparent, legal guardian, or court of competent jurisdiction at a time that the individual is under age 65.

The property of a properly drafted and properly executed supplemental needs trust is not countable as income and resources for SSI and Medicaid eligibility. This exception for the transfer of property into a supplemental needs trust continues to apply after the individual reaches 65. However, any additions to, or augmentation of, the supplemental needs trust after 65 are not subject to this exception and are, therefore, countable for purposes of SSI and Medicaid eligibility. [n7]

The creator of the supplemental needs trust cannot be the beneficiary him/herself. [n8] In Gillette, because Mr. Gillette had neither a parent, nor a grandparent, the trust had to be established by a court of competent jurisdiction and not by himself or his attorney-in-fact. That was Mr. Gillette's error, through his attorney-in-fact, who acted as the settlor of the trust. Mr. Gillette's application to the court after SSI informed him that the trust was not valid, therefore, was the proper procedure for him to follow for the establishment of the supplemental needs trust.

A valid first-party supplemental needs trust requires that Medicaid receive all amounts remaining in the supplemental needs trust at its termination up to the total amount of all Medical Assistance paid on behalf of the beneficiary. [n9]

The first-party supplemental needs trust is generally used for the placement of the net proceeds from a medical malpractice action or personal injury action. Supplemental needs trusts are also useful for the placement, inter alia, of savings, retirement funds, pension payments and other assets so that the individual may qualify for Medicaid and/or SSI. In New York state, it is also possible under the Medicaid rules to place certain income into the supplemental needs trust. [n10]

Established by a Court

Neither the federal nor state law requires that any particular court, nor even a court of any particular state, be the court establishing the trust. Furthermore, as in Gillette, if the intended beneficiary of the supplemental needs trust is mentally competent, there is no reason that a guardianship proceeding should be required for the establishment of a supplemental needs trust. The beneficiary must be disabled pursuant to federal law, as defined by the Social Security Administration, i.e., unable to engage in gainful employment. There is no requirement for mental incapacity.

Gillette states that, so long as the supplemental needs trust is ordered by a court, the beneficiary may be the creator of the trust. However, contrary to Gillette, the trust must be "established ... by a parent, grandparent, legal guardian, or court of competent jurisdiction" [n12] and not merely by court order. Therefore, the Gillette supplemental needs trust ordered by the surrogate may not comply with the law.

Although the trust can be established by a parent or grandparent, the parent or grandparent cannot, without legal authority, transfer the beneficiary's funds, or prospective funds, into the supplemental needs trust. A competent beneficiary can cause such transfer.

The Social Security Administration has recently stated that it requires clear language in the trust that the beneficiary is competent to transfer assets into the trust and is, in fact, the one causing the transfer, otherwise there must be a showing of legal authority to make the transfer for the beneficiary. [n13]

In Gillette, the intent was to fund the supplemental needs trust with lump sum retroactive SSI payments and, although not stated in the decision, possibly SSD payments. In New York, monthly income can be transferred into a supplemental needs trust and, therefore, not be countable for calculation of income for Medicaid eligibility. [n14]

The Social Security Administration has yet to rule whether monthly income placed into a supplemental needs trust would not reduce SSI benefits. However, SSI payments into a supplemental needs trust are countable as income in New York for a determination of available income under the Medicaid program. [n15]


The following recommendations can help avoid the problems that occurred in Gillette:

The attorney should send a draft copy of the supplemental needs trust to the appropriate Medicaid department for review and approval, thereby avoiding Mr. Gillette's error in the manner in which the trust was executed. Colorado, by statute, appropriately requires approval by Medicaid prior to the trust's execution. [n16] Massachusetts, which will not give a pre-approval letter, will grant a period of time to modify the special needs trust.

Upon executing the supplemental needs trust, a copy of the executed trust must be filed with Medicaid. [n17]

In the instance of a personal injury or medical malpractice action, the parties should consider the use of a structured settlement annuity. [n18] The advantages of a structured settlement are, inter alia:

a. If the recovery is related to a physical injury, the income earned within the structure is fully income tax exempt. [n19]

b. The structured settlement is an investment plan which can protect against improvident investments and imprudent discretionary expenditures.

c. The structured settlement proceeds, according to a recent Northern District decision, may be protected from a bankruptcy action. [n20]

Attorneys and courts should consider whether the beneficiary is better protected with the use of a corporate fiduciary or an individual fiduciary.

Draft the supplemental needs trust with flexibility to allow for the beneficiary's move from one jurisdiction to another county or state and changes that may be required to the provisions of the supplemental needs trust. New Jersey, for instance, requires in the trust document, inter alia, the age of the beneficiary; statement of disability; whether the beneficiary is competent; and advance notification to Medicaid of any expense in excess of $5,000. None of these conditions are required in New York.

If funds originate from a personal injury or medical malpractice action, check whether the beneficiary is a recipient of Medicaid and/or Medicare to determine whether there may be a lien. Under the Medicare Secondary Payer [MSP] rule, [n21] any individual involved in the personal injury/medical malpractice matter can be held liable if the Medicare lien is not paid.


[n1]. New York Law Journal, April 4, 2003, page 23, column 3.

[n2]. 42 U.S.C.A. [1382c [a][3] defines disability as one "unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment."

[n3]. See Matter of Escher, 94 Misc. 2d 952 [1978]; 75 A.D.2d 531; 426 N.Y.S.2d 1008 [1980]; aff'd. 52 N.Y.2d 1006; 438 N.Y.S.2d 293 [1981]; N.Y. Est. Powers and Trusts Law [7-1.12.[1981]; N.Y. Est. Powers and Trusts Law [7-1.12.

[n4]. Social Security Income, Procedural Operations Manual at SI 00835.510; SI 01120.200; SI 01120.201, SI 01120.203 and EM-00067.

[n5]. Federal legislation authorizing the first-party SNT is found in the Omnibus Budget Reconciliation Act of 1993. See 42 U.S.C.A. [1396p[d][4] [West Supp. 2002].

[n6]. In 1994, New York State enacted enabling legislation, consistent with the federal law. N.Y. Soc. Serv. Law [366[2][b][iii] [McKinney 1992 & Supp. 2002].

[n7]. Such additions may be income in the month added to the trust, depending on the source of the funds and may be counted as resources in the following months under regular SSI trust rules. Additions or augmentation do not include interest, dividends or other earnings of the trust or portion of the trust meeting the special needs trust exception. See SI 01120.201J.

[n8]. N.Y. Soc. Serv. Law [366[2][b][iii] [McKinney 1992 & Supp. 2002].

[n9]. See 42 U.S.C.A. [1396p[d][4][A]; N.Y. Soc. Serv. Law [366[2][b][iii] [McKinney 1992 & Supp. 2002].

[n10]. State of New York Department of Health, Sept. 23, 1997 clarification to Transmittal No. 96 ADM-8.

[n11]. 42 U.S.C.A. [1382c [a][3].

[n12]. 42 U.S.C.A. [1396p[d][4][A]; N.Y. Soc. Serv. Law [366[2][b][iii] [McKinney 1992 & Supp. 2002].

[n13]. See, e.g., Supplemental Security Income-Processing Medicaid Trust Exceptions to the SSI Trust Provisions, drafted by the Social Security Administration; and SI 01120.200.

[n14]. State of New York Department of Health transmittal, dated Sept. 23, 1997.

[n15]. See In the Matter of the Establishment of a Supplemental Needs Trust for Stephan Ullman, a Disabled Person, 184 Misc. 2d 7; 707 N.Y.S.2d 603, 2000 N.Y. Misc. LEXIS 84,  Surrogate's Court of New York, Onondaga County, March 14, 2000.

[n16]. See C.R.S 8.110.5. No disability trust shall be valid unless the CDHCPF has reviewed the trust and determined that the trust conforms to the requirements of 15-14-412.8, C.R.S.

[n17]. New York State Social Services Law Section 366[2][b][2] and 18 N.Y.C.R.R. 360-4.5[b][5][iii] require that the Trustee notify the appropriate social service district of the creation or funding of the Trust.

[n18]. The author expects to see decisions holding plaintiff's attorney [and any court evaluator or guardian ad litem] liable for not recommending to the client both a structured settlement and a supplemental needs trust, where the plaintiff would otherwise qualify for Medicaid and SSI benefits.

[n19]. See Section 104[a][2] of the Internal Revenue Code.

[n20]. In re Daniel F. Terrance, United States Bankruptcy Court, Northern District of New York.

[n21]. Medicare may bring a subrogation action against any entity that is responsible for payment under the MSP rule, including third-party administrators, or against any provider, physician or supplier that has received a payment from an entity that has primary payer responsibility. The law further provides for subrogation, to the extent Medicare payment has been made for an item or service, to any right to payment for the item or service from the third party having primary payer responsibility. See Soc. Sec. Act [1862[b][2][B]. The recovery may be made from anyone who is responsible for making the primary payment or from anyone who has received the primary payment. See 42 CFR [411.24.

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