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Should Special Needs Trusts Be Restrictive or Expansive?

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.

Broad vs. Narrow Discretion

On the other side of the debate are those who feel that if the discretion is too broad, that at some point MassHealth, Supplemental Security Income (SSI) or some other program will demand that the funds be spent down before the beneficiary can be eligible for benefits, no matter that this would subvert centuries of trust law that supports third-party spendthrift trusts.  Those drafting to prevent such a possibility restrict the use of the funds to items and services not covered by public benefits programs.

Of course, if the trust is drafted too narrowly it may prove of little use if the restrictions make the funds unavailable to the beneficiary. We’ve seen this happen in trusts that bar distributions that might diminish any receipt of public benefits.  In one case, 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.

So, what is a special needs planner to do when they want to make sure their trusts are both useful to the beneficiaries but also protected from attacks by public benefit agencies?

Two-Trust Solution

One solution is to have two trusts, one restrictive and the other expansive. This would mean that one trust would be available for whatever the beneficiary may need while the other could be held in reserve in case the first trust were attacked. But special needs planning is complicated enough without adding to the proliferation of trusts.

Purpose Language

Another solution — the one we use — is to be expansive in the distribution standards by to provide guidance, known as “precatory” language, regarding the purpose of the trust to supplement but not to supplant other benefits available to the beneficiary.  Further, the trustee is also directed to look only at the interests of the special needs beneficiary, not those of remaindermen. The idea is that if a public agency does challenge the trust, any court will look to the trust’s purpose which is explained directly within the trust.

Discretion Not to Distribute

Some clients have expressed concern about another aspect of the distribution language in special needs trusts, that giving the trustee complete discretion and no obligations to make payments. The absence of a requirement to make distributions is 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 and the trust should pay out all its money before the beneficiary receives public benefits. The beneficiary, however, may fear that the absence of any obligation to make payments may mean that the trust is not used for their benefit, 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.

Permissible Expenditures

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.

Memorandum of Intent

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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