Understanding EPTL 7-1.12: Third-Party and Self-Settled Supplemental Needs Trusts in New York

New York’s Estates, Powers, and Trusts Law (EPTL) § 7-1.12 primarily addresses the establishment and administration of Third-Party Supplemental Needs Trusts (SNTs). However, it also provides provisions for certain Self-Settled (First-Party) SNTs under specific conditions.

Third-Party Supplemental Needs Trusts

Third-Party SNTs are created and funded by individuals other than the beneficiary, such as parents, grandparents, or other relatives. Key aspects include:

• Creator Restrictions: For an inter vivos (living) trust, the creator must be someone other than the beneficiary or the beneficiary’s spouse. 
• Asset Protection: Assets in a Third-Party SNT are not subject to Medicaid payback requirements. Upon the beneficiary’s death, remaining assets can be distributed to other heirs without the obligation to reimburse the state for Medicaid benefits received.

Self-Settled (First-Party) Supplemental Needs Trusts

While EPTL 7-1.12 focuses on Third-Party SNTs, it acknowledges the establishment of Self-Settled SNTs under certain conditions:

• Beneficiary as Creator: The beneficiary can establish an SNT if it complies with Social Services Law § 366(2)(b)(2) and corresponding regulations. 
• Federal Alignment: This aligns with federal provisions under 42 U.S.C. § 1396p(d)(4)(A), which state that:
  • Age Requirement: The beneficiary must be under 65 years old at the time of the trust’s creation.
  • Source of Funds: The trust must be funded with the beneficiary’s own assets, such as those from an inheritance, personal injury settlement, or retroactive Social Security benefits.
  • Medicaid Payback Provision: Upon the beneficiary’s death, any remaining assets in the trust must first be used to reimburse the state for Medicaid benefits provided during the beneficiary’s lifetime.

Key Takeaways

• Primary Focus on Third-Party SNTs: EPTL 7-1.12 is chiefly concerned with Third-Party SNTs, where someone other than the beneficiary establishes and funds the trust.
• Inclusion of Self-Settled SNTs: The statute permits Self-Settled SNTs, provided they adhere to specific state and federal requirements, including the Medicaid payback clause.
• Flexibility of Third-Party SNTs: Third-Party SNTs offer greater flexibility regarding the disposition of remaining assets after the beneficiary’s death, as they are not bound by Medicaid reimbursement obligations.

Understanding the distinctions between Third-Party and Self-Settled SNTs under EPTL 7-1.12 is crucial for effective estate planning and ensuring the protection of benefits for individuals with disabilities.