A primary rule of a first-party supplemental needs trust is that it is used for the sole benefit of the beneficiary. This is often a trap for trustees who use the trust’s assets for the beneficiary, but ultimately to benefit someone else as well. A recent case shows how important this rule is and how confusing it can be.
A first-party special needs trusts is a trust designed to hold a person with disabilities’ personal assets (in contrast to a third-party special needs trust that is designed to hold assets that never belonged to the person with disabilities). First-party special needs trusts have to follow several very specific rules so that the government will not count the trust assets against the beneficiary when the beneficiary applies for means-tested programs like Supplemental Security Income (SSI) and Medicaid. A first-party special needs trust must contain a payback provision that reimburses the government for Medicaid funds provided to the trust beneficiary if there is still money in the trust when the beneficiary dies. In addition, the funds in this type of trust must be used for the “sole benefit” of the beneficiary with special needs.
This sole benefit rule is easy to say but difficult to define because nearly any transaction involving a trust will probably benefit someone else too. For instance, if a trust buys the beneficiary a car, anyone who rides in the vehicle will also benefit from it. Likewise, if a beneficiary needs an air conditioner, the beneficiary’s visitors will benefit from the cooler air. In most cases, authorities have interpreted the sole benefit rule to mean that, on paper, there can only be one beneficiary of the trust, and all of the services provided through the trust must primarily benefit that one beneficiary.
In the recent court case in North Carolina, Cathleen Bass Skinner was the beneficiary of a first-party special needs trust and her husband, Mark Skinner, was the court-appointed trustee. Mr. Skinner used a majority of the trust funds to purchase an accessible house that he lived in with his wife. The trust owned the house, so if Mrs. Skinner passed away, the house would be sold and the funds would be used to repay the government for Medicaid benefits as required. Mr. Skinner also used trust funds to buy appliances for the home.
Shortly after Mr. Skinner bought the house, two of Mrs. Skinner’s siblings asked the court to remove Mr. Skinner as trustee, which the court eventually did, primarily because Mr. Skinner violated the sole benefit rule. The court decided that the trust funds were not being used for Mrs. Skinner’s sole benefit since Mr. Skinner also lived in the house. (It is important to note that the Social Security Administration (SSA) didn’t take issue with Mr. Skinner’s use of the house.)
The North Carolina Court of Appeals reversed the court’s decision, finding that Mr. Skinner clearly didn’t violate the sole benefit rule. The court explained that “[t]he assistant clerk of court’s interpretation of the legal term ‘sole benefits’ would lead to an absurd result . . . Under the [clerk’s] interpretation . . . if a trustee uses the assets of a special needs trust to purchase items such as a handicapped accessible home, specially equipped car, or furniture, then the disabled beneficiary must either live alone or charge ‘rent’ to her husband, who presumably must have his own separate furniture, washer and dryer, etc.”
While the Skinner case shows that the sole benefit rule is flexible, there are still limits. The SSA has consistently scrutinized payments to family members from first-party special needs trusts to ensure they are services rendered to the beneficiary. There are many cases where trustees purchase items that have no benefit for the person with special needs at all or pay for vacations for a beneficiary’s entire family even though the beneficiary doesn’t need their companionship.
If you are administering a first-party special needs trust, it’s always a good idea to speak with your attorney before using the trust funds for anything that even has the appearance of benefiting anyone other than the primary beneficiary to avoid a loss of benefits. If you have any questions about special needs planning we are here to help, call us at 1-866-951-7526. We will help you arrange a free consultation to review your plan and ensure that it will work toward all of your special needs goals.
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Pierro, Connor & Associates, LLC
For more information on how we can help, or to get in touch with Kevin T. Horner, Esq. please contact Adam Jones, MBA, Director of Client Development at Pierro, Connor & Associates, LLC: Tel: 866-951-PLAN Email: [email protected]