NY: How SNT Distributions Affect Government Benefit Eligibility

While a Supplemental Needs Trust (SNT) is designed to protect a beneficiary’s eligibility for government benefits, certain trust distributions can still impact those benefits—particularly when they cover basic necessities like food, clothing, shelter, or healthcare.

Why Does This Happen?

Many means-tested government programs, such as Supplemental Security Income (SSI) and Medicaid, determine eligibility based on the recipient’s income and resources. If an SNT directly provides cash to the beneficiary, that payment is treated as income, which can reduce or even disqualify them from benefits. Additionally, if the trust pays for certain expenses—such as housing costs or food—those payments may be considered "in-kind support and maintenance" (ISM), leading to benefit reductions for SSI (but not necessarily for Medicaid).

How Does EPTL 7-1.12 Handle This?

EPTL 7-1.12 attempts to balance the need for flexibility with the need to preserve government benefits:

• Trustee Discretion: The trustee has broad discretion but must avoid distributions that would “supplant, impair, or diminish” government benefits.
• Permissible Distributions: The law allows trustees to pay third parties for the beneficiary’s expenses, but only if:
  • (1) The beneficiary’s basic needs will be better met by making the distribution, and
  • (2) It is in the beneficiary’s best interests to accept a possible reduction in benefits.
• Potential Consequences: If a distribution triggers benefit reductions or disqualification, the trust may lose its status as an SNT, leading to full exposure of trust assets for means-testing.

Example Scenarios

1. Permissible Distribution (No Impact on Benefits):
   • The trust pays directly for medical equipment, therapy, or entertainment expenses that are not covered by Medicaid or SSI.
2. Potentially Problematic Distribution (May Reduce Benefits):
   • The trust pays for rent or buys groceries for the beneficiary, which could be counted as ISM and reduce SSI benefits (but may not affect Medicaid).
   • Clarification: If these expenses reduce SSI benefits, trustees should evaluate whether the trade-off is beneficial.
3. Catastrophic Distribution (Could Disqualify the Beneficiary):
   • The trust gives cash directly to the beneficiary, which is treated as income, potentially eliminating eligibility for SSI or Medicaid.
4. Home Purchase (Complex Considerations):
   • If the SNT purchases a home in the beneficiary’s name, SSI eligibility is not affected, but trustees should consider Medicaid planning.
   • If the SNT purchases a home in the trust’s name, Medicaid estate recovery rules may apply, meaning the home could be subject to state reimbursement claims after the beneficiary’s death.

Best Practices for Trustees

To effectively administer an SNT while preserving government benefits, trustees should follow best practices:

• Pay vendors directly: Instead of reimbursing the beneficiary, trustees should pay service providers directly to avoid issues with benefit eligibility.
• Use vendor-specific credit cards: For fuel or transportation costs, using a gas station credit card can help avoid improper cash disbursements.
• Document all transactions: Keeping clear records of why each distribution was made will help in case of government audits or benefit reviews.
• Consult with professionals: Trustees should regularly consult attorneys or financial advisors who specialize in SNT administration and public benefits.

Key Takeaway for Trustees

Trustees must carefully balance the beneficiary’s needs with the potential impact on government benefits. Understanding when and how to make distributions is critical to maintaining the SNT’s purpose and effectiveness.

Resources

• Administering a Supplemental Needs Trust: Guidelines for the Trustee, Woods Oviatt Gilman LLP.