Difficult Issues in Drafting Special Needs Trusts – Boston

By Harry S. Margolis

A common debate among drafters of special needs trusts is how restrictive to make the distribution standards.  On one side of the debate are those who feel that the future needs of the beneficiary cannot be predicted and that the trustee’s discretion should be as broad as possible.  

On the other side of the debate are those who feel that if the discretion is too broad, that at some point MassHealth, SSI or some other program will demand that the funds be spent down before the beneficiary can be eligible for benefits, no matter the number of centuries of trust law that supports third-party spendthrift trusts.  They would restrict the use of the funds to items and services not covered by public benefits programs.  Of course, is this is drafted too narrowly the trust may prove of little use if its use would diminish any receipt of public benefits.  This was the case in one trust I saw recently, which caused a problem for the trustee who wanted to make payments on behalf of the beneficiary, but felt barred by the trust terms because the distributions would cause the beneficiary’s Section 8 rent to increase.

A solution would be to have two trusts, one restrictive and the other expansive, but this planning is complicated enough without adding to the proliferation of trusts.

There seems to be a move these days away from the more restrictive trusts to more expansive ones, with some precatory language regarding the purpose of the trust to supplement but not to supplant benefits available to the beneficiary and that it not be used for basic support and maintenance.  Typically, the trustee is also directed to look only at the interests of the special needs beneficiary, not those of remaindermen.

However, some clients have expressed concern that giving the trustee complete discretion and removing all obligations to make payments – to protect against a state agency making a claim that as a fiduciary the trustee has an obligation to see to the beneficiary’s support – could mean that the trustee doesn’t see to the beneficiary’s welfare, defeating the main purpose of the trust.  This could especially be true if the trustee is a potential remainder beneficiary of the trust.

One solution is to provide for trustee removal powers to protect the beneficiary from this result.  If the trustee is not acting in the beneficiary’s interest, she or someone else appointed to see to her well being can replace the trustee.

Another subject for debate is whether or not to provide in the trust a long list of expenditures the trustee may make.  The “less is more” proponents are concerned about such lists on two counts.  First, they are afraid that the lists may be seen as restrictive – if an item is not on the list, the trustees may feel that they cannot spend money on it.  This could be true despite language in the trust indicating that the list is illustrative only, not meant to prevent payment for other items and services. Second, they are also concerned that if something is on the list, an agency may construe the trust is being obligated to pay for it, no matter the availability of benefits.

Those who prefer to include detailed lists want to make certain that the trustee does not refuse to pay for items that may seem out of the ordinary.  In addition, some trustees – especially corporate trustees – feel more comfortable if their spending expectations are spelled out.

One solution that may satisfy both camps is to leave the trust relatively broad, but for the grantor to write a side letter or memorandum to the trustee to provide guidance. This is sometimes referred to as a “memorandum of intent,” though they can often be much more detailed than what one would write to a trustee, including important medical and social information. Our experience, however, is that clients often don’t get around to writing such letters, whether solely directed to trustees or for a wider audience.  Day-to-day pressures of life are to great, and the thought of what will happen to their child when they’re not around too scary.

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