Planning for Disabled Beneficiaries
James N. Zartman - copyright 1990
Chapman and Cutler, Chicago
This
paper focuses on the client who wants to make gifts to or for the benefit of a
family member or other beneficiary who is under disability. The client as donor
to or for a disabled person involves the important subject of the
“supplemental” or “special needs” trust.
The typical client is the parent or
sibling or spouse of the disabled person, or possibly a grandparent; and the
typical case involves testamentary planning for the care of the disabled
person after the client is deceased.
I will take the parent of a child
with serious mental illness (paranoid schizophrenia) as my model because that
is the family situation with which I am most familiar. The retarded child
presents similar problems, in some ways easier and in some ways harder. The
disabled spouse raises special issues for the donor-spouse because of Medicaid
entitlement rules that are designed to prevent one from trusteeing his own
property in order to qualify for Medicaid.1
The parent of the child with serious
mental illness is faced with a number of tough estate planning issues. One
thing the planner will discover is that the parent-client is used to dealing
with well-nigh insoluble problems. Throughout the child’s life the parent has
had to try to match insufficient financial and emotional resources to the
terrible demands of a child with brain disease. It is an almost impossible job
to care for the child, to keep him out of jail and off the streets, always
hoping against hope for some miracle of medical science that may relieve the terrible
suffering that often accompanies this illness.
As in any estate planning endeavor
the parent should first draw up a balance sheet of assets and liabilities. On
the asset side are the family financial resources that can be brought to bear
on the problem. Even more important are the people resources that are
available: whom can the parent count on for the oversight, concern and personal
care the ill or retarded child will need after the parent is gone?
After adding up the people and
property resources on the asset side of the balance sheet, the parent must take
count of her liabilities. How many children are there? How many are well and
how many are ill? As to the ill children, what is the nature of the illness,
the diagnosis, the prognosis, the type and cost of care that may be needed? Is
lifetime care indicated?
As to the well children, how well
are they? Do they have good prospects of their own for a stable life, both
financially and emotionally?
Ideally, the planner will become
fully informed about the medical and family facts so that she can help the
parent think through and be realistic about what lies ahead and what, if
anything, the parent will be able to do about it. The lawyer should be involved
with the doctors, therapists and the institutions providing care. She should
know what services and resources are available from the public, their cost,
what private resources can be brought to bear on the problem and their cost,
and she should be generally conversant with the public entitlements that the
family may be able to call on.
In my experience the parent of a
mentally ill child has been through a great deal and is an excellent source of
information about what sort of programs and services are available and what the
rules are, especially the practicalities of dealing with state agencies. The
parent also knows the specific problems of the ill family member intimately and
is often quite knowledgeable about the state of brain research, the types of
drug therapy available and the efficacy of the various therapies for her child.
The parent also knows that enormous advances are being made every day in brain
research, drug therapy and the general understanding of the doctors as to how
the brain works and what happens when it goes awry.
After the balance sheet is struck, a
very difficult question must be answered. How are the financial resources of
the family to be divided among the children after the parents are gone? This is
not law or taxes. This is a highly personal decision by the parent-donor as to
whether equal shares are indicated, whether most of the estate should be
dedicated to the ill child because the others can get by but he cannot or
whether there is so little property overall that it must be given to the well
children, alone, with the hope that they will do the best they can for their
ill sibling.
The lawyer cannot answer these
questions, but he can help the family think through the issues and try to be
realistic about the extent to which the problems can be solved after the death
of the parent. The parent’s own experience before she comes to the lawyer will
already have prepared her for the fact that there are no real solutions, only
better or worse approximations of what the parent would like to be able to do.
Obviously the size of the estate,
the number of children and the health and prospects of the well children are
all of major importance to the parent in trying to decide what shares should go
to each. If the estate is very large, the wealthy parent can provide the best
private care for the ill child for life, if necessary, without regard to public
funds, and still have equal or adequate shares for the other children.
Conversely, if the estate is quite small the estate planner may be forced to
adopt a very simple plan: give the entire estate outright to the well children
and rely on them to try to help the ill child.
The mid-size estate is the one where
the parent and planner can do some good with a carefully-constructed trust to
handle whatever share the parent decides she should dedicate to the ill child.
When planning for the disability of the client, herself, the lawyer will find
many advantages in using durable powers of attorney as compared to trust or
guardianship, if the state has a good statutory structure to validate property
and health care powers and make them work. However, in dealing with planning
for the client as donor to or for the benefit of a disabled child, the
goal is to maximize public and private resources to help care for the child and
to aid recovery; and an agency or guardianship (where the disabled child would
be the principal or ward) cannot serve this purpose. A trust to administer the
client’s gift for the child is the only one of the three types of fiduciary
arrangements that is equal to this task.
For a child with schizophrenia, the
best private care is extremely expensive. The current cost is at least
$10,000 per month, and almost none of that cost is covered by medical insurance
in the typical case. This is a cost that very few families can bear for very
long.
As a result most families must rely
on public services and public entitlements to provide for the basic care,
maintenance and medical treatment of the ill child, supplementing public care
as best they can with provision for special services, entertainment, education,
job training and other “extras” which no public system will pay for. The
quality of public care varies enormously from state to state 2, but
even in the better states the public pays only for basic room and board,
custodial care and drug therapy, with minimal counseling, personal care and
oversight by trained psychiatrists.
Given the outrageous expense of the
best care, the objective of the parent-donor is to maximize the public and
private resources devoted to the child’s needs. This will probably mean that
the child will have to remain entitled for life to all the public services that
can be obtained, with the parent’s resources to be used only to supplement the
public entitlements.
The Social Security, Medicare and
Medicaid systems all have means tests which preclude aid if the recipient’s own
income or capital exceeds certain minimum levels. 3 In addition, the state public aid and mental
health systems are generally required by state law to obtain reimbursement for
services from the ill person if the person has any funds available for that
purpose. 4
Therefore, if an outright gift is
made to the ill child in the parent’s will or if the child is the direct
beneficiary of life insurance or the surviving joint tenant on a bank account
or securities and if the child has received or will receive expensive care
through a state agency, it is likely that most any share of a mid-size estate
will simply be turned over to the state to satisfy its claim. Any supplemental
funds the parent might have been able to devote to the child for special
diagnosis, treatment or therapy will disappear into thin air.
So the planning objective is to try
to structure the parent’s gift for the child in such a way that it will be available
to supplement public resources but will never supplant them or be used to
reimburse the state.
Sometimes the estate planner must
deal with the question as to whether this “supplemental trust” approach is
ethical or moral. It certainly is legal. In Illinois even the living parent of
an adult disabled child has no legal obligation to repay the state for public
services rendered to the child. 5 The disabled child as a citizen of
the state is entitled in his own right to whatever public benefits the state
has made available for his care. If the child, himself, has funds, the public
can take his property to reimburse the taxpayer. But the public cannot charge
the parent for the child’s care.
These rules may vary some from state
to state in their application to the living parent of an adult disabled child.
But no state attempts to force a parent to pay for services rendered to the
child after the parent’s death; and our focus here is on testamentary planning
by the parent for the child’s welfare once the parent is gone.
So in assessing the morality of the
supplemental trust, we start with the proposition that the parent is not
obligated to give the child a dime in her will. The parent has every legal
right to give her property to the other children or to The Salvation Army or to
the Chicago Symphony. As the donor of a gift, the parent can define the gift
and condition its use in any way she desires; and so long as the gift rules she
establishes do not violate some basic public policy (such as the rule against
perpetuities), they ought to be enforced.
It is obvious that unless the
parent’s gift can be protected and limited to the purposes the parent intends,
the parent will make no gifts to or for the child for any purpose; and the
child’s chances of recovery will be substantially reduced, thereby increasing
the burden on the state and the taxpayers. In my opinion those states that
insist on trying to void spendthrift trusts for disabled persons are very
short-sighted. The taxpayer cost of serious mental illness is staggering; 6 and the taxpayers need all the help they can
get from families or anyone else who is willing to bear part of the burden.
I believe there is not the slightest
doubt about the morality or ethics of the parent who makes a conditional gift
for the benefit of her child in a form that requires the trustee to use the
funds so that they will never jeopardize or supplant the ill child’s public
entitlements and will never be payable to the state, as a creditor of the
child. In fact, unless the parent has all the money in the world, the question
of ethics is really quite academic. If the cost of the best medical care is
beyond the reach of almost all people, the parent has no choice. If she cares
for her child and hopes for recovery, she has to preserve the private resources
so that they can be added to the public funds to maximize the child’s chances
of regaining a reasonably healthy and productive life.
In drafting the supplemental or
“special needs” trust for the disabled beneficiary, the planner should go to
some lengths to spell out the donor’s intent: the reasons for her gift, the
dimensions of the problem, the trust objectives and the kinds of special
services or uses to which the trust funds are to be devoted. The trust must state
very clearly that no trust funds can ever be paid to or for a public body or be
administered in a manner that would jeopardize public entitlements.
One example of supplemental trust
language that I have used for the share of a mentally-ill child is set forth
below. In this instrument a prior paragraph (paragraph(d)) has first divided
the trust estate into separate, equal trusts, one for each child living at the
death of the last of the parents to die and one for the living descendants of
each deceased child:
(f ) Trust for PETER. Upon the death of the survivor of my
spouse and me the Trustee shall set aside one of the separate trusts provided
for in paragraph (d) for my son, PETER, if then living, and shall administer
the trust for his primary benefit as follows:
(1) Trust purpose. My son, Peter, has from time to time
suffered serious mental illness and related mental and physical disabilities
that require special medical care, treatment and custodial services. Because of
the constant advances being made in brain research and the development of new
therapeutic drugs and procedures, it is my hope that PETER may someday be able
to live an independent, productive and self-fulfilling life; and the purpose of
the trust is to maximize all available resources and apply them so that PETER
may have the best possible chance of becoming self-sufficient. In view of the
enormous expense of providing quality private care for a mentally ill person, I
am unable to meet my objectives from my own resources and still provide fairly
for my other children and dependents. Therefore, PETER must remain able for
life to rely on and to obtain all funds and services available to him from all
governmental sources, federal, state and local [”public funds”], to the
greatest extent possible; and I intend the trust to be used only to supplement
and never to supplant public funds. My intent is that trust resources shall be
made available to or for PETER only to provide the “extras” which cannot be
obtained from public sources in order to enhance the quality of his life and
provide special medical care and treatment that would not otherwise be
available. Without in any way limiting the generality of the foregoing, I
intend the Trustee to be able to use trust assets for anything consistent with
the trust purpose that cannot be provided from public funds at the time of
reference, such as: special education
and therapy; extra medical testing and independent treatment; special diagnosis
and care to assess the nature and progress of PETER’s illness and permit
creative experimentation with new drugs and medical treatments or therapies
that the Trustee, in consultation with the medical personnel, believes may have
a chance of aiding recovery; pocket money, special entertainment, clothes,
travel or education to enhance the quality of
PETER’s life; special job training, vocational education and employment
supports to enable PETER to try to obtain and hold gainful employment; and any
other type of supplemental goods or services, including special housing or
custodial or medical care, which the Trustee is reasonably satisfied cannot be
made available to PETER from public funds at the time of reference but which
the Trustee believes may help PETER to recover and lead a full and productive
life.
(2) Discretionary
powers for the benefit of PETER. So
long as PETER shall live the Trustee may pay to or for the benefit of PETER
such part or all of the net income and principal of the trust as the Trustee,
in the Trustee’s sole and absolute discretion, deems desirable to fulfill the
purposes of the trust specified in subparagraph (f)(1). If and to the extent the Trustee determines
that the net income from the trust is in excess of the amount required for
those purposes from time to time and the trust resources permit, the Trustee
may distribute any part or all of the excess net income to or for the benefit
of such one or more of my other descendants who are living at the time of
reference [in equal or unequal shares
among them or all to one or more of them to the exclusion of the others] as the
Trustee, in the Trustee’s sole and absolute discretion, deems desirable to
provide for their best interests, and the Trustee shall accumulate and add to
the principal of the trust any excess net income not so distributed. In no
event may trust income or principal be paid to or for the benefit of any
governmental body, agency or department or be distributed in such a way as to
make PETER or any other beneficiary ineligible for public funds that would
otherwise be available; and the trust assets shall at all times be free of the
claims of all governmental bodies. The Trustee shall also exercise general
oversight with respect to the care and placement of Peter and endeavor to
provide the best care possible for PETER from time to time, consistent with the
resources and purposes of the trust. In exercising the discretionary powers
referred to in this paragraph (f), the Trustee shall seek the advice of and be
guided by the appropriate medical and social service personnel and by such of
my other children who are able to contribute from time to time to the care and
oversight of the needs of PETER.
(3) Power
to appoint trust by will. Upon
PETER’s death the then principal of the trust shall be distributed to or held
in trust for the benefit of such one or more of my descendants [other than
PETER], in such shares and proportions and subject to such powers, terms and
conditions, as PETER shall appoint by will.
(4) Disposition of trust at death. Upon PETER’s death any principal of the
trust not appointed effectively by PETER pursuant to subparagraph (f)(3) shall
be distributed to PETER’s descendants then living, per stirpes and not per
capita, or if none, then to my descendants then living, per stirpes and not per
capita; provided, however, that the portion of the principal otherwise
distributable to any descendant for whom a separate trust is then being
administered under this instrument shall be added to and be administered as
part of the principal of the separate trust.
In addition to the above special
rules designed for the disabled child’s share, alone, the trust instrument
should also include a strong, general spendthrift clause, prohibiting voluntary
or involuntary sale or assignment of any beneficiary’s interest and insulating
all beneficial interests from the claims of all creditors of the beneficiaries,
including judgement creditors.
Consideration may also be given to a
“self-destruct” clause (early termination of the trust and distribution to
others) in case the laws on which the draftsman relied should change and the
supplemental trust become vulnerable. The discretionary withhold of excess
income, with power to pay the excess to others than the disabled beneficiary,
in subparagraph (2), above, is intended as a protective device along these
lines. But, in general, I do not favor early termination at the trustee’s
discretion because it is inconsistent with the basic purpose of the trust and
the intent of the settlor to provide for the needs of the disabled child
throughout his lifetime. Furthermore, if the clear, express intent of the donor
as to the use of her gift can be overridden by the legislature or the courts
without any constitutional problem, then there is no reason why a discretionary
power to terminate early just to thwart the state’s claim could not also be
ignored.
Will the supplemental trust work?
Will it be effective to preserve entitlements and to insulate the trust funds
from public creditors? That is the $64
question. If it won’t work it should not
be used.
The answer is one that is peculiarly
dependent upon local state law. In addressing a national group such as AMI on
this sort of issue, I must acknowledge that state laws vary a great deal, 7
that local law is all-important and that
this paper will not even attempt to survey the law of all 50 states concerning
the supplemental trust.
There seem to be judges myopic
enough to believe there is something wrong with discretionary trusts, judges who
will invite the public creditors in to take the trust assets. 8 States with such rules are shooting
themselves in the foot, in my opinion. If a state is successful in drying-up
supplemental trusts by statute or judicial decision, it will simply lose the
extra help in aid of recovery that is desperately needed to move disabled
persons off the state rolls.
There are also states like Illinois
where there are no special statutory provisions (other than general spendthrift
rules) but where the current state of the case law supports the validity of the
well-drafted supplemental trust. 9
Such a state of affairs, based on judicial precedent, can always change,
of course. But I believe the idea behind these decisions is fundamentally
correct: the donor of a gift, who does not have to make the gift in the first
place, can condition the gift any way she wants; those conditions define and
limit the interests she grants to the donee; and the donor’s intent and
limitations should be fully enforceable unless they violate some basic public
policy of the state. The courts, if left to their own devices, should affirm
the enforceability of the supplemental trust over time because the fundamentals
are sound and support of supplemental trusts represents good public policy.
But I also believe the subject is
too important for both the public and the affected families to leave to the
haphazard, uncertain, ad hoc development of case law, where each decision
depends on the peculiar facts of the case and the terms of the specific
instrument that happen to be before the court. I believe the states should lay
down a clear, simple statutory rule that gifts in trust for a disabled
person are to be honored and protected against the claims of public creditors.
Wisconsin and California represent
two states that have shown the way. Their statutes 10 are based on the premise that these sorts of
gifts should be encouraged, not discouraged. The California statute says that
its general rules subjecting trusts (even some discretionary trusts) to
liability for public support of the trust beneficiary will not apply to “any
trust that is established for the benefit of an individual who has a disability
that substantially impairs the individual’s ability to provide for his or her
own care or custody and constitutes a substantial handicap.” The Wisconsin
statutory language is almost identical and was put in place some years before
the California provision.
The California and Wisconsin
statutes represent a clear, simple statement of legislative intent that the
parent should be able to rely on. They should protect supplemental trusts as
long as the statutes stand. Of course, a subsequent legislature can change such
a rule. But even if it is changed, it should at least protect all supplemental
trusts that have become irrevocable in reliance on the statute prior to its
amendment. Furthermore, if such a statute is adopted by a state and then later
revoked, the revoking law, itself, would have to make it clear that the
revocation is not intended to affect irrevocable supplemental trusts that have
already been put in place in reliance on the statute, else the revocation might
impair vested property rights and be subject to constitutional challenge.
Only the legislature can grant this
sort of all-inclusive protection for supplemental trusts, protection that is
for the benefit of the state, the public and the taxpayers. I believe family
members, disabled persons and lawyers should work for adoption of such state
laws to help solve a serious problem for families that have to meet the
long-term disability needs of their loved ones.
Families in some states may have
heard of the “Self-Sufficiency Trust” as a device to solve the supplemental
trust problems and to protect the family’s assets from public creditors while
still permitting the family to benefit a disabled child. The model for the
Self-Sufficiency Trust was developed in Illinois and its promoters have been
urging passage of enabling legislation in other states. The Summer, 1989, issue
of the Illinois Self-Sufficiency Trust newsletter, Response, states that
Maine, Kansas and Montana have passed enabling legislation similar to that of
Illinois and that Missouri is considering such action. However, Response notes that the
Illinois SST statute 11 became
law in Illinois in September, 1986, and that only “(F)ive Illinois families
have...established private trusts” during that three-year period.
One reason is that the
Self-Sufficiency Trust cure may appear worse than the disease. The SST
addresses the symptoms of the problem, not the cause. The cause of the problem
for families with seriously disabled children lies in the ambiguity of the law
in many state, the failure of the states to encourage supplemental trusts and
their failure to pass legislation to protect such trusts. The SST legislation
does not attempt to cure the basic uncertainties which the vagaries of state
law have created for families. The SST solution is to leave all the ambiguities
in place and to “launder” the family money by passing it through the hands of
the state Department of Mental Health before it goes to the disabled
beneficiary so that it will look like public money, not private money, and
will, therefore, not jeopardize entitlements or be available to pay the state,
as creditor of the disabled person.
The tradeoff required to use the
Illinois Self-Sufficiency Trust model involves severe limitations on the use
and management of the funds. Only the trust income can be used for the
beneficiary, principal can never be invaded. At the beneficiary’s death at
least half of the principal must go to the SST Charitable Trust to fund state
services for low income disabled persons through the Department of Mental
Health and Developmental Disabilities. The Illinois SST trustees are apparently
limited to government bonds and government-insured securities for their
investments (although I have not been able to verify this fact by examination
of the trust instrument). A serious drawback to the Illinois SST is that its
sponsors will not permit the client’s lawyer to read the trust instrument on
the grounds that the document is “proprietary”.
I believe that all of us, SST
promoters, concerned family members and lawyers practicing in this field,
should attack the problem directly rather than indirectly through devices such
as the SST. We should help sponsor state laws that will give private,
tailor-made trusts the protection they need and deserve so that families faced
with the tragedy of serious mental illness will be encouraged to try to help
solve the problem through use of the supplemental trust.
Footnotes
1. New subsection (k), added to 42
USC 1396a in 1986, defines a “Medicaid qualifying (meaning disqualifying)
trust” as one set up by a person or by
the person’s spouse under which the person is a possible beneficiary of
trust income or principal at the discretion of the trustee. The income and
principal of such a trust will be deemed to belong to the person for Medicaid
eligibility purposes whether the discretion is exercised or not. But such a
discretionary trust set up under the donor-spouse’s will does not affect
the surviving spouse’s Medicaid entitlements after the donor-spouses’s death.
Logically, this same exception ought to apply to a revocable living trust
of the donor-spouse after the donor’s death, but the statute does not except
anything but a trust under the donor’s will. See discussion of this subject by
Mark B. Edwards, “Long-Term Care for the Elderly: A Primer for the Estate
Planner,” 22 Miami Institute on Estate Planning ¶605.3 (1988).
2.
E. Fuller Torrey, M.D., Sidney M. Wolfe, M.D. and Laurie M. Flynn, Care
of the Seriously Mentally Ill, A rating of State Programs (2d Ed., 1988).
3.
Many authors discuss the entitlement rules. They are a product of both
Federal and state law, change frequently and are extremely complex. See, for
example: Joel C. Dobris, “Medicaid Asset Planning By the Elderly : A Policy
View of Expectations, Entitlement and Inheritance”, 24 Real Property, Probate
and Trust Journal 1 (Spring, 1989); Mark B. Edwards, “Long-Term Care for the
Elderly: A Primer for the Estate Planner”, 22 Miami Institute of Estate
Planning, Ch. 6 (1988); Sterling L. Ross, “The Special Needs Trust and Its Use
in Estate Planning for Families with Disabled Children”, Estate Planning, Trust
and Probate Law Section of the State Bar of California Newsletter, Vol. 7, No.
4 (Spring 1987); Darcy J. Chamberlin, “Estate Planning for Families with
Disabled Children,” 75 Illinois Bar Journal 612 (1987).
4.
For example, the Illinois Mental Health and Developmental Disabilities
Code §5-105 makes the recipient’s “estate” (including any reachable trust
interests, as interpreted by the courts) liable for services rendered to the recipient
and imposes an affirmative duty on the MHDD Department to collect for such
services out of the estate. Ill. Rev. Stat., ch. 91 ½ , ¶5-105 (1989).
5.
See Ill. Rev. Stat., ch. 91 ½, ¶5-105 (1989); Department of Mental
Health v. Phillips, 114 Ill. 2d 85, 500 N.E. 2d 29 (1986).
6.
“Dr. Richard Wyatt, a leading researcher on this disease
(schizophrenia), estimated the annual cost in 1983 at $48.2 billion and
projected to the year 2007 when he said the cost would reach $155 billion a
year . . . . If research discoveries
could reduce the cost of schizophrenia by only 10% by 1998, the savings over
that decade from (1988-98) would total $180 billion.” E. Fuller Torrey, M.D., Surviving
Schizophrenia, pp. 11-12 (1988). In Chicago at the time this is written a
new drug, Clozaril, that has been found effective in the treatment of
drug-resistant schizophrenia has just been made available to the public under a
strict protocol as to its administration. The medicine, alone (including
administration), costs almost $9,000 per year for one patient. Advocacy groups
are seeking to have the cost covered by government so that it will not be
denied to the thousands of families whose need is desperate but who cannot pay
the bill.
7.
Annotations: Eligibility for
Welfare Benefits as Affected by Claimant’s Status as Trust Beneficiary, 21 ALR
4th 729 (1983); Right of Public Authorities to Reach Trust for Benefit of
Incompetent in Satisfaction of Claim for Support and Maintenance in Public
Institutions, 92 ALR 2d 838 (1960).
8.
Constanza v. Verona, 127 A. 2d 614 (N.J.
1958); and In re Emmons’ Will, 59 N.Y.S. 2d 264 (1946).
9.
Department of Mental Health v. Phillips, 114 Ill. 2d 85, 500 N.E. 2d 29
(1986); Zeoli v. Social Services, 425 A. 2d. 553 (Conn. 1979); Estate of
Escher, 407 N.Y.S. 2d 106 (1978). For a
good statement of the principles supporting the validity of the supplemental
trust see Folik, “Discretionary Trusts for a Disabled Beneficiary”, 46 U. Pitt.
L. Rev. 335, 366 (1985).
10.
California Probate Code §15306(b); Wisconsin Statutes Annotated
§701.06(5m).
11.
Ill. Rev. Stat., ch. 91 ½, ¶¶5-118 and 5-119 (1989).