Appropriate Distributions from Special Needs Trust

The trustee of a Special Needs Trust (“SNT”) may make discretionary distributions for the “Special Needs” of a disabled person. That the trustee has discretion to make distributions and that such distributions are for the beneficiary’s Special Needs are to preserve the SNT’s beneficiary’s eligibility to receive government needs based benefits, e.g., Supplemental Security Income (“SSI”), Medi-Cal and Food Stamps.

The government benefits pay only for the beneficiary’s necessities of life (e.g., rent, utilities and food) and the SNT may pay for additional things not covered by such benefits to make a richer life (e.g., vacations, etc.). This way the SNT assets last longer.

When the SNT Trustee provides required accountings to the government case worker, disagreement can arise over whether the SNT distributions were appropriate under the terms of the SNT and applicable federal and state law. A trustee of an SNT must understand and follow both the SNT’s own distribution standards and the relevant government benefit laws.

In Daniel McGee v. Department of Health Care Services (Super. Ct. No. 12PR7408), the California Third Appellate Court considered what types of distributions for Special Needs a trustee may make from a SNT. The appellate opinion in McGee addressed whether, “… the term “special needs” … refers only to ‘the beneficiary’s special needs as created by the limitations due to her condition,’ … .”

The court examined the terms of the SNT and applicable federal law and ruled that the term “Special Needs” (i.e., that for which distributions may be made) is not limited only to the beneficiary’s Special Needs created by his or her disability. Rather the court found that the SNT, ’… instrument defines special needs broadly. It declares that the phrase “special needs” broadly means “the requisites for maintaining the Beneficiary’s good health, safety, and welfare when, in the discretion of the Trustee, such requisites are not being provided by any public agency.”

Nonetheless, limitations still exist on what purchases and payments a Trustee of a SNT can make. The opinion also says that, “the trust instrument did not vest the trustee with sole or absolute discretion to make distributions. Instead, the instrument requires all distributions to be “reasonably necessary in providing for this Beneficiary’s special needs, as defined herein.” The trustee may make distributions to or for the beneficiary’s benefit in such sums and at such times as the trustee in his discretion determines are “appropriate and reasonably necessary for the Beneficiary’s Special Needs.”

The court also recognized that the SNT instrument allowed the Trustee to make distributions that would reduce or eliminate the beneficiary’s receipt of needs based government benefits if the benefits outweighed the cost. Thus, for example, the SNT could pay the beneficiary’s rent, and so reduce the beneficiary’s SSI income, if doing so was in the beneficiary’s best interest.

The McGee opinion involved a “First Party” SNT, i.e., an SNT established with the assets belonging to a disabled person, required to meet the federal requirements for a First Party SNT, including that all trust distributions be, “for the sole benefit” of the disabled person, and that, at the disabled beneficiary’s death, the SNT “pay back” to all states the cost of Medi-caid services received in any state. These other SNT limitations were not relevant to this opinion but play an important part in the drafting and the administration of a “First Party” SNT.

Nonetheless, the discussion in McGee has relevance to Special Needs distributions from all SNT’s, including third party SNT’s, i.e., trusts established by persons other than the disabled beneficiary using assets not belonging to the disabled person.

The foregoing is a brief discussion of the how the appellate decision in McGee broadly defined “Special Needs” as it relates to SNT distributions. It is not legal advice. For legal guidance in drafting or administering a special needs trust consult a qualified attorney.

Dennis A. Fordham, attorney, is a State Bar-Certified Specialist in estate planning, probate and trust law. His office is at 870 S. Main St., Lakeport, Calif. He can be reached at Dennis@DennisFordhamLaw.com and 707-263-3235.