Beyond the Statutes: Courts Add Criteria for Supplemental Needs Trusts

by David Goldfarb Goldfarb Abrandt Salzman & Kutzin LLP

[For a more up-to-date article see “Supplemental Needs Trusts and Their Impact On Medicaid and SSI Eligibility“]

A number of courts have fashioned criteria not found in the statutes [1] for Supplemental Needs Trusts (SNT’s) where court approval is required or sought. Court approval may be required or sought for establishing an SNT in a number of circumstances. It usually arises where a compromise order is required for an infant or incompetent,[2] but may also be necessary where an individual takes advantage of the section of the law which allows a guardian or a court to establish an SNT. [3] In the case of a guardian, he or she may seek the approval of the court.

Is an SNT necessary and/or appropriate?

An initial question to be addressed is whether an SNT is necessary and/or appropriate. In Matter of LaBarbara (Donovan) [4]Justice Luciano wrote:

The record does not establish that Christina Donovan’s current expenses are greater than her income from the medical malpractice action. A supplemental needs trust would cause the expenditure of public funds to provide care to Christina Donovan at a time when it appears her income will continue to exceed the expenses of her necessary care. This is unlike a situation in which it is demonstrated that expenses will exhaust an incapacitated person’s funds, thus rendering them impoverished. Here it appears that there are sufficient funds to meet Christina Donovan’s needs and to provide “luxuries” as might be supplied by a supplemental needs trust.

The Guardian, however, shall have leave to apply to this Court for authority to establish a supplemental needs trust upon a showing that expenses for necessary care and services are exceeding income.

For an opposing point of view, see Strauss, Peter, “Law and the Aging: Update: Supplemental Needs Trusts.” [5]

It may be prudent along with an application for a SNT to submit to the court an analysis which shows the following: (1) The disabled person’s life expectancy and a lifetime care plan; (2) the expected growth of the funds under different investment models; (3) how long the funds will last if used to meet the needs of the lifetime care plan both with and without Medicaid and other government benefits.

What type of guardian is necessary?

Although a Guardian ad Litem may prosecute a claim under CPLR 1202, his or her authority is terminated on entry of judgment. A Guardian ad Litem is not authorized to receive the proceeds of a settlement pursuant to CPLR 1206. An Article 81 guardian on behalf of an adult is the appropriate person to receive the proceeds of a settlement.[6] If there is no guardian then proceeds can be deposited in court until the subsequent appointment is made.[7] If the plaintiff is an infant a guardian under Surrogates Court Procedure Act Article 17 or 17-A or Mental Hygiene Law Article 81 may be appropriate, except in Westchester County where the Supreme Court will not permit an Article 81 proceeding for an infant.

Additional criteria a court may add for an SNT.

In DiGennaro v. Community Hospital of Glen Cove, [8] a leading case where a SNT was denied by the Court, the Appellate Division Second Department upheld the disapproval of a trust for three reasons:

  1. there was a conflict of interest because the SNT named the infant’s parents as both co-trustees and beneficiaries of the trust corpus upon the infant’s death;[9]
  2. there was no provision in the SNT for court approval of withdrawals of funds made by the trustees, and
  3. there was no requirement that the trustees account to the court on an annual or biannual basis.

The court upheld disapproval of the SNT “because the terms of the trust were not in the best interests of the infant.” [10]

In Matter of Goldblatt,[11] Surrogate Raymond C. Radigan, expanded on the holding in Digennaro, and approved the establishment of a trust where the Article 17-A guardians sought court approval, but added ten criteria not found in the statute. He reasoned that the statute (and the regulations promulgated thereunder) seek to protect the remainder interest of the State, but that the court can add criteria “to assure the fulfillment of the trustee’s fiduciary obligations.” Whether or not other courts adopt all of Surrogate Radigan’s criteria, it is instructional for SNT drafters to be aware of all the issues raised in this case from investment standards to bonding, as they are issues which must always be considered. Briefly stated Surrogate Radigan’s criteria were as follows:

  1. General language should be included similar to that of EPTL 7-1.12 on how trust funds may be spent, rather than specific suggestions.
  2. Any provision for future amendment of the trust to maintain eligibility for governmental benefits should require that it be made only upon application to the court.
  3. The trust should not provide in advance for retaining legal counsel for disputes with DSS.
  4. There should be no restrictions on reimbursing DSS based on when services were rendered.
  5. The remainder should be payable to the estate of the disabled person rather than named beneficiaries.
  6. There should be no provision insulating the trust from claims of creditors.
  7. The trustees should be authorized to invest in accordance with EPTL 11-2.2 and 11-2.3 (the new prudent investor rule) and be given the powers provided in EPTL 11-1.1. (See also below).
  8. The trust should provide in advance only for statutory compensation for the trustees.
  9. The trust should require either:
    • a full bond and discretion to invest in accordance with EPTL 11-2.2 and 11-2.3;
    • funds deposited jointly with a depository subject to further order of the court, funds cannot be withdrawn without permission of the court, and the only investments are bank deposits, U.S. Savings Bonds, treasury bills, notes and bonds and municipal bonds; or
    • funds deposited with a satisfactory depository, no withdrawals without further order of the court, and investment in securities in accordance with EPTL 11-2.2 and 11-2.3, provided a satisfactory investment advisor acts as delegee of the trustee.
  10. There should be an annual accounting by the trustee to the court with a budget for the ensuing year.
  11. There should be no provision exonerating trustee from liability for failure to exercise reasonable care, diligence and prudence.

In Matter of Morales [12] Justice S. Leone held that the mandatory statutory provisions do not “obviate any additional controls which may be required by the court.” The court adopts provisions similar to the Matter of Goldblatt requirements listed in the items above, but additionally requires the following: a bond; an accounting to the Court in May of each year in the manner provided by Mental Hygiene Law §§81.31-81.32; resignation of a trustee subject to approval of the court; and discharge and release of a trustee with judicial approval. Furthermore, as a “guide to the bar” the court sets out a model SNT that meets its criteria for approval.

Justice Kassoff has issued his own criteria for an SNT in Queens County, including notification of Medicaid, language how funds may be spent, restrictions on amendments, and investment guidelines. Justice Luciano in Suffolk County has listed requirements in In Re Kacer (Osohonsky) [13] and In Re McMullen. [14]

Can the authorizing Court protect the SNT from future challenge by DSS?

One issue that is not fully resolved by the Courts is to what extent a Supplemental Needs Trust that follows all the statutory and Court ordered criteria will be protected from further challenge as a resource (income or asset) by the Department of Social Services. If the motion to establish the SNT is on notice to the state and local Medicaid Agency and if there is a final order of the court which incorporates the SNT, then the quid pro quo should be that the court order should establish that the funds of the trust should not be considered as resources for Medicaid purposes. Unfortunately this has not been the uniform pattern of the courts.

Williamson v. Alleyne [15] dealt primarily with the issue of how a SNT should be established where the beneficiary is neither a minor, under a mental incapacity, nor in need of a guardian. The Court authorized the SNT provided the application mirror the application contemplated by CPLR §1207, §1208 and the rules set forth in 22 NYCRR §202.67 dealing with settlement of an action by an infant or incompetent. The court provided for notice to DSS to resolve any lien dispute. But unlike the courts cited above which approved or disapproved the SNT terms, Justice Floyd stated:

The court need not, however, permit the injured party and the local welfare agency to litigate the validity of the terms of the proposed supplemental needs trust nor should it “approve” the terms of any trust indenture attached to the moving papers in the context of the motion for the establishment of the trust which is interposed at the end of the personal injury action as contemplated above.

This case is distinguishable from the cases cited above where the injured parties were minor or under mental disabilities and the courts said they would approve or disapprove the terms of the SNT. The courts in those instances (where they are passing on the terms of the SNT) should also protect the injured party and establish the validity of the trust for public benefits purposes.

In Matter of McMullen[16] Justice Luciano disallowed the SNT because of an impermissible conflict in having the co-trustees also be potential remaindermen. However, he went on in dicta to discuss the role of the court in assuring the validity of the SNT vis a vis any future governmental benefits. He concluded that the motion to create the SNT must be on notice to both the state and local agency (and in the case at bar the state was not given notice). He also adopted a “prophylactic” procedure to “assure” that proposed SNT’s meet their intended purpose. He would deny creation of an SNT “until the conformity of such with the requirements to render the beneficiaries eligible for Medicaid benefits or other governmental benefits is formally approved by the Suffolk County Department of Social Services and the New York State Department of Social Services or any appropriate reviewing authority.”

While this approach is satisfactory where agreement can be reached, it does not provide clear guidance where there is an impasse with the state or local agency. The issue will not be ripe for a fair hearing or Article 78 proceeding, therefore who is better qualified as an “appropriate reviewing authority” than the court that establishes the validity of the SNT. In Rosado v Perez,[17] Justice Doyle, while invalidating a Medicaid lien on funds to be deposited into a SNT, found that the court in the context of the personal injury action was not the proper forum to determine the validity of the terms of an SNT. The court stated, that “all such matters should be made the subject of plenary actions or special proceedings commenced by and against the parties interested therein over whom the court has properly acquired in personam jurisdiction.” Whether the court approving the compromise order or another court in a plenary or special proceeding hears the validity of the SNT, it should surely be that same court which rules on how the SNT funds should be treated by the state and local agency.

Placing “Income” Into a Supplemental Needs Trust. It has always been clear that in “income cap” states income could fund a supplemental needs trust. However, only recently did New York State Department of Health issue a release amending 96 ADM-8, clarifying the availability in New York to fund a supplemental Needs Trust with an income stream:

On page 8, under Trust, paragraph b., after the first sentence, add the following: “While most exception trusts are created using the individual’s resources, some may be created using the individual’s income, either solely or in conjunction with resources. Income diverted directly to a trust or income received by an individual and then placed into a trust is not counted as income to the individual for Medicaid eligibility purposes. Verification that the income was placed into the trust is required. In order to eliminate the need to verify this on a monthly basis, it is recommended that you advise the recipient to divert the income directly to the exception trust.[18]

A “so ordered” in Stipulation in Joseph R. K. v. DeBuono [19] states that “in determining eligibility for plaintiff… the Albany County Department of Social Services (ACDSS) will recalculate the excess monthly income required to be spent down for medical expenses. In performing such recalculation… ACDSS will not consider income diverted into the…supplemental needs trust, or income received by the plaintiff and then placed into the trust….”


Footnotes

  1. EPTL 7-1.12; Soc. Serv. Law §366(2)(b); and 42 U.S.C. §1396p(d)(4)
  2. CPLR §1206 §1208.
  3. Soc. Serv. Law §366 subd.2(b)(2)(iii)(A) and 42 U.S.C. §1396p(d)(4)(A)
  4. NYLJ, April 26, 1996, p. 36, col. 6(Sup. Ct. Suffolk Co.)
  5. NYLJ, April 8, 1998, p. 3, col 1.
  6. Tudorov. Collazo, 215 AD 2d 750, 627 NYS 2d 419 (2d Dept. 1995).
  7. DeSantis v. Bruen, 165 Misc.2d 291, 627 NYS2d 534 (Sup.Ct. Suffolk Co. 1995).
  8. 204 AD 2d 259, 611 NYS2d 591 (2d Dept., 1994).
  9. But see Matter of Morales, fn 12, infra, where Justice Leone found there was no prohibition where a family member was a potential distributee of the estate and there was a Medicaid pay-back provision.
  10. DiGennaro, supra, relying on Matter of Mills v Durst, 156 Misc 2d 676; Hughes v Physicians Hosp., 149 Misc 2d 661.
  11. 162 Misc 2d 888, 618 NYS 2d 959 (Surr. Ct. Nassau Cty, 1994).
  12. New York Law Journal, July 28, 1995, p.25. col.1 (Sup.Ct., Kings Cty).
  13. NYLJ, Nov. 1, 1994, p. 33 col 1 (sup. Ct. Suffolk Co.).
  14. 166 Misc 2d 117, 623 NYS2d 401 (Sup. Ct. Suffolk Co. 1995).
  15. New York Law Journal, March 27, 1995, p.32 (Sup. Ct., Suffolk Co.).
  16. New York Law Journal, Oct. 6, 1995 (Sup. Ct., Suffolk Co.).
  17. New York Law Journal, Nov. 3, 1995, p.39 (Sup.Ct., Suffolk Co.).
  18. Letter from Ann Clemency Kohler, Director of Office Medicaid Management
  19. US Dist.Ct. Northern Dist. of NY, 97-CV-0948,February 25, 1998

last revised June 20 1998


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