The New Jersey Uniform Trust Code – Part 12: Special Needs Trusts
Under the NJ UTC, special needs trusts will not change in any extreme way. However, some direction with regard to rights of creditors and the repayment of government benefits has been provided.
Special needs trusts, also known as OBRA ‘93 Trusts, as defined in Subsection A of Section 3 of P.L. 2000, c.96 (C.3B:11-37), is a trust governed by a written instrument which: (a) grants a trustee full broad discretion to determine whether and when to distribute; (b) limits distributions during the trust term to distributions to benefit one or more protected persons, although others may realize incidental benefits to the trust, shall have at least one protected person as the beneficiary; (c) provides that the trustee does not have any obligation to pay the person’s obligations or fund their support; (d) does not give the protected person any right to require the trustee to distribute at a specific time or for a particular purpose or to assign or encumber interest in the trust; and (e) evidences the grantor’s intent to supplement rather than replace or impair government assistance that the protected person received or for which he otherwise may be eligible.
Perhaps the greatest impact of the NJ UTC upon special needs trusts in existence in New Jersey is the clarification provided by the UTC with regard to the repayment of government benefits. In the past, government claims have almost always been treated as exception creditors, and thus trustees could be compelled to repay from trust assets. The UTC states “…a special needs trust shall not be required to repay government aid provided to a protected person unless the aid was provided on the basis that the special needs trust would repay the aid when the protected person dies, or the special needs trust terminates sooner and the special needs trust instrument expressly calls for such repayment. This provision does not apply to a first-party self-settled OBRA ’93 trust as defined in Subsection A of Section 3 of P.L. 2000, c.96 (C.3B:11-37). What we are essentially concerned with regarding this change are third party special needs trusts, the more common of the special needs trusts that would involve government aid or benefits to a protected person.
Further, the UTC provides that trustees of a special needs trust shall have broad discretion over distributions and shall enjoy “protection” against creditors of a protected person of the trust as creditors will not be able to require a trustee to distribute to satisfy a protected person’s creditors claim. As a result, creditors will have a harder time reaching assets, and they may not attach the beneficiary’s interest.
The governing language of the special needs trust will become more important with regard to the repayment of government aid as repayment will only be required if the aid was provided on the basis that the special needs trust would repay the aid when the protected person died and the special needs trust expressly called for such repayment. Also, a new requirement, the special needs trust shall terminate at such time as provided within the governing trust instrument. Historically, such termination language has not always been common.
The adoption of the NJ UTC does not remove common sense and good faith requirements upon the trustee. Notwithstanding N.J.S.A. § 3B:31-35 and N.J.S.B. § 31-36, trustees of special needs trusts shall exercise their discretion in good faith to further trust purposes and courts may exercise their equitable authority to remedy any trustee abuses of discretion. One would imagine that the court’s equity authority language is necessary to stop abuses of the protections from creditors.
Special needs trusts present an exception to the rules governing spendthrift trusts, even if the trust contains a spendthrift provision.
N.J.S.A. § 3B:31-37(a)(1) defines a “protected person” as anyone who is an aged, blind, or disabled individual; developmentally disabled; or under the age of 18 or over age 18 and a full-time student with serious disabilities that reasonably may prevent that person from being self-sufficient as an adult.
N.J.S.A. § 3B:31-37(a)(2) recognizes two types of trusts that qualify as a “special needs trust.” The first type is an OBRA ’93 trust, as set forth in N.J.S.A. § 3B:11-37. Id. The second variety is a trust governed by a written instrument which does the following:
(1) grants a trustee broad discretion to determine whether and when to distribute;
(2) limits distributions during the trust term to benefit one or more protected persons;
(3) provides that the trustee does not have any obligation to pay the protected person’s obligations or fund his support;
(4) does not give the protected person any right to require the trustee to distribute at a specific time or for a particular purpose, or to assign or encumber interests in the trust; and
(5) evidences the grantor’s intent to supplement rather than replace or impair government assistance that the protected person receives or for which he otherwise may be eligible.
N.J.S.A. § 3B:31-37(a)(2)(a)-(e).
The NJ UTC reiterates that trustees of a special needs trust have broad discretion over distributions, and that a creditor of a protected person cannot reach or attach a protected person’s interest in such a trust or require the trustees to distribute to satisfy a protected person’s creditor’s claim. N.J.S.A. § 3B:31-37(b)(1),(2). Further, a special needs trust terminates according to the terms of its governing instrument. Id. at § 3B:31-37(b)(3).
A special needs trust is not required to repay government aid provided to a protected person, unless the aid was provided on the basis that the trust would repay the aid when the protected person dies, or the trust terminates sooner and the instrument expressly calls for such repayment. § 3B:31-37(c). This statutory provision does not apply to first-party, self-settled OBGRA ’93 trusts, as defined in section 3B:11-37.
The statute also expressly notes the overarching backdrop that trustees of special needs trusts are to exercise their discretion in good faith to further trust purposes, and that courts may exercise their equitable powers to remedy any trustee’s abuse of discretion. N.J.S.A. § 3B:31-37(d).