Courts Disqualify Special Needs Trusts

In two recent cases, courts in Alabama and New York have deemed that the assets in Special Needs Trust which they have reviewed are available resources and must be spent down entirely prior to the beneficiaries of same receiving Medicaid or other needs based government benefits.

In  Alabama Medicaid Agency v. Hardy (Ala. Civ. App., No. 2140565, Jan. 29, 2016), an Alabama Appeals Court ruled that a Medicaid applicant’s special needs trust was an available resource because it allowed for distributions to the beneficiary for her “health, support and best interest”, and allowed that same could even be made directly to her for these purposes.  The fact that the trust specifically stated its intent to be a special needs trust and to avoid the disturbance of any entitlement to public benefits was irrelevant.  The Court stated that the mere right to have distributions made directly to the beneficiary made the trust assets available.

A similar decision was made by a New York Appeals Court.  (In the Matter of Frances Flannery v. Zucker (N.Y. Sup. Ct., App. Div., 4th Dept., No. TP 15-01033, Feb. 11, 2016).   In that case, the trust once again asserted the intent to be a special needs trust.  However, the language allowed for payments to the beneficiary for “health, maintenance and welfare.”   Thus, the Court upheld the State’s denial of Medicaid benefits to the trust beneficiary.

It should be stressed that the courts are not invalidating Special Needs Trusts in their entirety.  However, these cases highlight the need for such trusts to be drafted properly by competent counsel.  The language used in the trusts cited in the New York and Alabama cases fall under what is known as the HEMS (health, education, maintenance and support) standard.  The use of HEMS language renders a trust as a support trust.  Stating that a trust is a special needs trust does not negate the effect of this language.   The courts are clearly stating that you can’t have the cake and eat it too – it’s either a support trust or a special needs trust.  It cannot be both.  Moreover, funds cannot be paid directly to a beneficiary for any purpose whatsoever. Trust terms must be clear that payments are for goods and services to third parties.

These cases are part of a line of cases in which special needs trusts are being successfully attacked.  These follow up on other cases which voided the trusts for improper distributions.  Thus, in order to protect beneficiaries with special needs, trusts for their benefit must be carefully drafted and implemented.


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