01. WHAT IS A TRUST’S “DISTRIBUTION STANDARD”?
Did you know that the quality of your child’s life depends on the special needs trust’s “distribution standard?” Special needs trusts vary dramatically in what the trustee is permitted to buy for the beneficiary. It all depends on the trust’s distribution standard.
Let’s break down the two words: Distribution refers to the trustee distributing money for the benefit of the beneficiary (your child). For example, if the trustee pays your child’s dentist bill, that is a distribution from the trust. Standard refers to the language in the trust that informs the trustee what kinds of distributions are permitted. There are strict special needs distribution standards and discretionary special needs distribution standards.
You should avoid strict special needs standards unless state law requires it. Here’s why: A strict special needs distributions standard prohibits the trustee from making certain kinds of distributions. In other words, it limits what the trustee can buy for your child. About half the special needs trusts I review have a strict distribution standard.
Here’s an example of a strict distribution standard:
The trustee shall not make any distribution to the beneficiary that will reduce or eliminate any government benefits including, but not limited to, Supplemental Security Income (SSI) or Medicaid.
That sounds reasonable, doesn’t it? Let’s look deeper to see if such a distribution limits options for your child.
Let’s assume your child is receiving Supplemental Security Income (SSI). After you die, your child has the option of living in a Medicaid-funded residential program. Moving to this program will disrupt your child’s life. Your child has been working at a local grocery for the past 9 years. His friends and family live nearby. The trustee has found an affordable condo on the market a block from the grocery store. The trustee wants to buy the condo. The plan is to have your child live in the condo with a relative or friend. The trustee plans on paying for food and shelter for your child from the trust.
Can the trustee buy the condo and start paying for the mortgage, utilities, and groceries for your child? No. Social Security calls those distributions “in-kind support and maintenance,” reducing the SSI cash benefit by about one-third. In 2018, Social Security would reduce your child’s SSI cash benefit from $750 per month to $480 a month. The strict distribution standard shown above states the trustee cannot make any distribution that will reduce government benefits.
If the special needs trust distribution standard permitted the trustee to make a distribution that would reduce SSI, the trustee could weigh the monthly loss of about $270 in SSI cash benefits versus the value to your child of living comfortably in the community, close to work, family, and friends.
Here’s another example of a strict distribution standard:
The trustee shall never under any circumstances make a distribution for food or shelter for the beneficiary.
As in the prior example, the drafting attorney wants to avoid any distribution that may reduce the beneficiary’s monthly SSI cash benefit. If the trustee pays for food and shelter, it will trigger approximately a one-third reduction in the SSI cash benefit. Have you heard the adage “Don’t throw the baby out with the bathwater?” Out of zeal to avoid reducing the monthly SSI cash benefit, this trust distribution standard undermines the purpose of the special needs trust—to protect the beneficiary’s quality of life no matter what happens.
The irony is that after you die, your child will likely not be receiving SSI. If your child’s disability began before the age of 22, your child would likely receive Social Security Disability Insurance (SSDI) instead, based on your (the parent’s) work record. SSDI is not a means-tested program. The trustee can pay for food and shelter without reducing the SSDI monthly cash-benefit. Carefully review the trust’s distribution standard. I will ask parents after I have reviewed their special needs trust “Do you know the trustee does not have the authority to purchase food and shelter for your child?” Shocked, they will say “No!”
One more example of a strict distribution standard:
In administering the trust, the trustee shall use the income and principal of the trust only to supplement and never to replace government or private benefits, if any, which may be available to the beneficiary.
The above distribution standard is unclear. The language does not address the possibility that the beneficiary is not receiving government benefits. Also, what if the governmental program is inadequate or inappropriate? Can the trustee bypass state-funded care and pay privately?
Why are there so many special needs trusts with an unnecessarily restrictive distribution standard? There are three reasons.
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Social Security’s test as to whether the assets in the special needs trust count as a resource of the beneficiary is not the above definition. The test, according to Social Security’s POMS SI 01120.200D.2, is this:
It should be clear by now that it is preferable to use a discretionary special needs trust distribution standard, if state law permits. A special needs trust with a discretionary distribution standard gives the trustee discretion to buy things for the beneficiary that will reduce or eliminate government benefits if the trustee believes it is in the beneficiary’s best interests. The trustee also has the authority to make distributions for the benefit of the beneficiary if the beneficiary does not receive government benefits. (Important note: The trustee must pay the landlord and the utility companies directly and not give the money to the beneficiary to pay these bills.)
A special needs trust with a discretionary standard still makes clear that the trust is not a support trust (See section 21). The trust states that your general intent is to have the trustee supplement, but not replace, government benefits if your child is receiving benefits, but the trust does not prohibit the trustee from making a distribution that reduces government benefits. The discretionary distribution standard does not prohibit the trustee from paying for food or shelter.
The discretionary distribution standard
With either the discretionary or the strict special needs standard
It is true that some states require a strict special needs standard. Without a strict distribution standard, the assets in the trust are considered a “countable” resource for determining eligibility for Medicaid. However, if your attorney says that state law requires a strict standard, remember what President Reagan said about nuclear disarmament, “Trust but Verify.” Your child’s future is at stake. This is your family’s equivalent of nuclear disarmament.
I recommend that you assume the special needs trust can have a discretionary standard. If your attorney says it cannot, ask the attorney to show you the state law that restricts the distribution standard. I want you to ask your attorney that question for two reasons: (1) the special needs trust may have a strict standard but it doesn’t need to, or (2) if your attorney can point to a state law requiring the strict standard, you need to know that to plan appropriately. For example, if the state law says the special needs trust cannot pay for food and shelter, you might want to leave a smaller percentage of your estate to the special needs trust and a larger percentage to your other children, if any, then your other children would have a moral, but not legal, obligation to use the extra money for your child with a disability, to pay for food and shelter.
Don’t ask your attorney whether the special needs trust has a strict or discretionary distribution standard, because your attorney may not understand the question. After all, the words are vague. Instead, ask your attorney specific questions before hiring. Here are a few possibilities:
- If an individual does not have the legal authority to revoke or terminate the trust or to direct the use of the trust assets for his or her own support and maintenance, the trust principal is not the individual’s resource for SSI purposes.
- Resources means cash or other liquid assets or any real or personal property that an individual owns and could convert to cash to be used for his or her support and maintenance. If the individual has the right, authority, or power to liquidate the property, it is considered a resource. If a property right cannot be liquidated, the property will not be considered a resource of the individual.
It should be clear by now that it is preferable to use a discretionary special needs trust distribution standard, if state law permits. A special needs trust with a discretionary distribution standard gives the trustee discretion to buy things for the beneficiary that will reduce or eliminate government benefits if the trustee believes it is in the beneficiary’s best interests. The trustee also has the authority to make distributions for the benefit of the beneficiary if the beneficiary does not receive government benefits. (Important note: The trustee must pay the landlord and the utility companies directly and not give the money to the beneficiary to pay these bills.)
A special needs trust with a discretionary standard still makes clear that the trust is not a support trust (See section 21). The trust states that your general intent is to have the trustee supplement, but not replace, government benefits if your child is receiving benefits, but the trust does not prohibit the trustee from making a distribution that reduces government benefits. The discretionary distribution standard does not prohibit the trustee from paying for food or shelter.
The discretionary distribution standard
- gives the trustee flexibility to pay for whatever your child may need in the future.
- gives the trustee authority to pay for private care, if necessary. We cannot predict the quality of government benefits for people with disabilities 25 years from now.
- allows the trustee to make distributions that reduce the SSI cash benefit. For example, the trustee can make a once-a-year distribution to the beneficiary to pay off credit card bills, taxes, medical bills, and so forth, and give the beneficiary up to $2,000. The beneficiary will lose one month of SSI, but gain in long-term security.
- gives the trustee the authority to make distributions if your child is not receiving government benefits.
With either the discretionary or the strict special needs standard
- Social Security does not view the assets in the special needs trust as a countable resource of the beneficiary because the beneficiary cannot force the trustee to pay for food and shelter nor liquidate the trust.
- The assets in the special needs trust are protected against creditors. If your child has credit card problems, the creditor has no access to the assets in the trust. If your child is married and then divorced, the assets in the trust are not part of marital property.
It is true that some states require a strict special needs standard. Without a strict distribution standard, the assets in the trust are considered a “countable” resource for determining eligibility for Medicaid. However, if your attorney says that state law requires a strict standard, remember what President Reagan said about nuclear disarmament, “Trust but Verify.” Your child’s future is at stake. This is your family’s equivalent of nuclear disarmament.
I recommend that you assume the special needs trust can have a discretionary standard. If your attorney says it cannot, ask the attorney to show you the state law that restricts the distribution standard. I want you to ask your attorney that question for two reasons: (1) the special needs trust may have a strict standard but it doesn’t need to, or (2) if your attorney can point to a state law requiring the strict standard, you need to know that to plan appropriately. For example, if the state law says the special needs trust cannot pay for food and shelter, you might want to leave a smaller percentage of your estate to the special needs trust and a larger percentage to your other children, if any, then your other children would have a moral, but not legal, obligation to use the extra money for your child with a disability, to pay for food and shelter.
Don’t ask your attorney whether the special needs trust has a strict or discretionary distribution standard, because your attorney may not understand the question. After all, the words are vague. Instead, ask your attorney specific questions before hiring. Here are a few possibilities:
- What types of things can the trustee buy for my child?
- What types of things can’t the trustee buy for my child?
- If the state will allow my child to live in a Medicaid-funded residential program, but my trustee wants instead to buy a condo for my child or pay rent for an apartment for my child, can the trustee do so?
- If my child earns enough money so she is not eligible for or receiving government benefits, can the trustee still give her money or buy things for her?
- If my child has a lot of bills, can the trustee make a large one-time payment to my child to pay off the bills? I understand if my child is on SSI she will lose one month of SSI benefits.
LANGUAGE FOR YOUR LAWYER TO CONSIDER:
Discretionary Payment of Income and Principal. This trust is for the sole and exclusive benefit of [NAME OF BENEFICIARY]. During the life of [NAME OF BENEFICIARY] who has a certain disability that substantially impairs [NAME OF BENEFICIARY]’s ability to provide for [NAME OF BENEFICIARY]’s own care or custody, the trustee may pay to or for the benefit of [NAME OF BENEFICIARY] such part or all of the income and principal of the trust (even though exhausting the trust) as the trustee, in the trustee’s sole and absolute discretion, deems advisable for [NAME OF BENEFICIARY], considering all other income and assets known to the trustee to be available for [NAME OF BENEFICIARY] from any other source (including government benefit programs available to [NAME OF BENEFICIARY]) and all other circumstances and factors the trustee considers pertinent, and the trustee may choose to make no distributions whatsoever…
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Supplement Not Supplant Benefits. In general, this trust is being established to preserve [NAME OF BENEFICIARY]’s qualification for public benefits, including, but not limited to, Medicaid and Supplemental Security Income. I desire that the trustee be guided by my intent that the trust is used to supplement and not supplant government or private benefits, if any, which may be available to [NAME OF BENEFICIARY]. I ask the trustee to strive to avoid making distributions that reduce or displace governmental assistance, medical care, or other services otherwise available to [NAME OF BENEFICIARY] from governmental or private services, or both. Notwithstanding the preceding three sentences, the trustee may distribute income or principal to or for the benefit of [NAME OF BENEFICIARY] even if such distribution causes a reduction or loss of public assistance benefits to [NAME OF BENEFICIARY] if the trustee determines, in the trustee’s sole and absolute discretion, that such distribution is in the best interest of [NAME OF BENEFICIARY].
Note: The first sentence of the first paragraph that states that the trust is for the sole and exclusive benefit of the beneficiary helps qualify the trust as a Qualified Disability Trust for tax purposes.