Special needs trusts can be established in several ways. For example, trusts can be first- or third-party, revocable (meaning the trust can be amended) or irrevocable (meaning the trust cannot be amended), and they can be set up during your lifetime, or can be created upon your passing. Trusts can also be directed or delegated. Most trusts are delegated, meaning there is a trustee responsible for the trust’s management. Even when there are co-trustees, both trustees share the same responsibilities and risk of liability. Directed trusts break up trust responsibilities so that they can be spilt among individuals serving in different positions.
A special needs trust, depending on the type, can be funded with a variety of assets. Common sources of funding include: life insurance policies, property and real estate, inheritances, court settlements, and child support payments. Friends and family members can also make gifts to a third-party special needs trust, rather than to the individual with special needs, in order to help them maintain their means-tested benefit eligibility. This is a great way for family members to help financially support a loved one with special needs, without inadvertently causing a reduction or loss of benefits for the beneficiary.
Trustee Selection and Responsibility
A trustee is responsible for managing the trust from: investing funds, making distributions, maintaining accounts, reporting, filing and paying taxes, and so many additional responsibilities. Trustees also have a fiduciary duty, meaning that they will manage the trust in the best interest of the beneficiary. Because of the strict qualifications for benefit eligibility, a trustee should have a comprehensive understanding of government benefits, and be aware of how the distributions that they make can impact continued benefit eligibility for the trust’s beneficiary. In addition to requiring specialized knowledge of the beneficiary and their reliance on government benefits to meet their needs and provide support, serving as trustee is a great responsibility that can be time consuming and even overwhelming for some.
While a family member or friend can be named as trustee for a special needs trust, individuals can also opt for a corporate or professional trustee instead. Selecting a corporate trustee that specializes in special needs planning, helps to ensure that the trust will be appropriately managed with great care, in evaluating every decision made regarding the trust, and upholding a fiduciary duty to the beneficiary. Doing so, helps family members and friends to spend more time supporting the trust beneficiary, as an advocate and an ally. Friends and family members can also be appointed as trust protectors, which is more of an oversight or managerial position that monitors the trust, having the authority to appoint or fire a corporate trustee, without creating the workload or risk that is associated with serving as trustee.
Choosing Wisely. : What Type of Trust is Right for Me?
If you or a loved one are considering establishing a special needs trust, you may have heard of first-party and third-party trust classifications. But what exactly are the differences between a first- and third-party special needs trust?
First-Party Trust
A first-party trust is a special needs trust that can be established by an individual with special needs. The trust may also be created by the beneficiary’s parent or legal guardian, grandparent, or a court. In selecting a first-party trust, the individual will serve as both the grantor and the beneficiary, meaning that they are responsible for creating and funding the trust, while also serving as the individual who benefits from the funds within the trust. As such, the money contributed to the trust must be in the name of the individual with special needs, rather than any funds that belong to other individuals.
For this reason, first-party special needs trusts are often used when an individual with special needs inherits money or property directly, or when they receive a court settlement. First-party special needs trusts can also be a good option for individuals with special needs who become disabled later in life, and may already have income and assets in their own name.
There are some restrictions on who can create a first-party trust. For the funds within the trust to not be counted for SSI or Medicaid purposes, the trust beneficiary must be under the age of 65 when the trust is established and funded. The trust is also irrevocable, meaning that the trust provisions cannot be changed once the trust is established. First-party special needs trusts are also subject to a Medicaid payback provision. This means that upon the passing of the trust’s beneficiary, any funds remaining in the trust must first be used to repay Medicaid for the cost of any services provided during the lifetime of the beneficiary, before any remaining funds can be assigned to other remainder beneficiaries. Additionally, first-party trusts are the most restrictive in what types of disbursements are permissible, and can be very complicated to administer while protecting access to government benefits. These restrictions, and perhaps more importantly, the interpretation of the restrictions, can vary state by state, or even county by county. For these reasons, first-party trusts are often avoided, if possible.
Third-Party Trust
Third-party trusts (often called Supplemental Needs Trusts) are established by someone other than the trust beneficiary, typically a parent or legal guardian, grandparent, or other family member. Unlike the funds within a first-party special needs trust, funds contributed to a third-party trust consist of the assets of third-party individuals, or individuals other than the trust beneficiary. Third-party trusts can also be structured to be revocable or irrevocable (depending on the size of the trust and state/federal limits), meaning that the trust may be amendable if needed.
There are two ways to establish a third-party trust: testamentary trusts and standalone third-party trusts.
Testamentary trusts are created from a Will, meaning that the trust is established after the grantor passes away. When using a testamentary trust, the trust does not exist until after the grantor passes. A probate court may also be involved in the creation of a testamentary trust, as a court is responsible for setting up the trust, maintaining oversight, and requiring regular accounting. As part of the estate planning process, a testamentary trust begins with leaving instructions for the trust creation in the grantor’s Will. In theory, the trust will be created with the grantor’s wishes in mind, however, there is a possibility that the trust will not be set up as the grantor intended, and they will not be able to correct it, since the trust will not be officially established until after they pass. Testamentary trusts also tend to be less flexible than standalone trusts that have an appointed trustee; since the probate court has oversight of the trust for as long as it is open. They make decisions as to what is and is not deemed necessary for the beneficiary, including whether to dissolve the trust. Because the trust stems from a Will, it is also designed to only have one contributor, meaning that if other individuals would like to leave money to the trust beneficiary, they cannot make contributions to the testamentary trust, but must first create a separate trust, thus further complicating the trust management process.
However, there are some reasons why a testamentary trust may be appealing. It can be an easier way to approach establishing a trust – an individual is not actually establishing the trust, but is including instructions in their Will for a creation of a trust that will be made on their behalf in the future. Testamentary trusts are also initially more affordable because an individual is not fully setting up the trust, but probate can be rather expensive. In fact, establishing a trust in probate court can cost up to 3% of your final estate in attorney fees, which means that a testamentary trust is more expensive throughout the life of the trust, even if it seems to be initially less expensive. Because the probate court also requires mandatory reporting, where a trustee will have to appear before the court and report all trust transaction regularly, there are additional filing fees to consider that will also diminish the amount of money being left for the beneficiary’s trust. Due to this long and complicated process, a testamentary trust is not commonly recommended, instead, standalone trusts are viewed as a better fit for most individuals.
A standalone trust is independent of a Will, meaning it can be established during the grantor’s lifetime, and without the need for reliance on a probate court for oversight. This type of trust allows other individuals to make contributions to the same trust, eliminating the need for multiple special needs trusts. Once the trust is created, other individuals can also name the standalone trust in their Wills instead of establishing their own testamentary trusts. In this way, standalone trusts are more streamlined than testamentary trusts and are easier to manage. While creating a standalone trust is more work and costs more in upfront expenses, it is less expensive than a testamentary trust overall. These factors, combined with the fact that standalone trusts provide greater flexibility and more direct control than testamentary trusts, make standalone trusts a more desirable approach to planning for your loved one’s financial future.
Pooled Special Needs Trusts
Beyond first- and third-party trusts, there are also pooled special needs trusts, which combine the assets of multiple smaller special needs trusts for investment and account management purposes. Pooled trusts provide individuals with access to professional trustees who are well versed in special needs planning, benefit rules, and investment opportunities. Pooled trusts are managed by nonprofit organizations, combining the resources of multiple beneficiaries, to optimize investment opportunities and provide more cost-effective trust administration services. For those looking for a professional, or corporate trustee to manage their trust rather than having a family member or friend take on the responsibility, a pooled trust can also be a good option, especially if the trust is smaller, as many corporate trustees have account minimums of $250,000 or more. Each beneficiary to the pooled trust will have their own sub-account within the trust, and they will receive a proportionate share of the pooled trust’s earnings. To participate, some first-party or third-party trust can be used, though most pooled trusts have their own “Master Pooled Trust Agreement” which is generally required.
As with individual first-party trusts, first-party sub-accounts within a pooled trust are subject to Medicaid reimbursement for any services provided during the beneficiary’s life. Depending on the state though, all or part of remaining funds within the first-party sub-account upon the passing of the beneficiary, may be retained by the pooled trust. If the pooled trust does not retain the funds, then the Medicaid payback provision is triggered. If there are any remaining funds after satisfying the Medicaid payback provision, they can be distributed to designated beneficiaries. As for remaining funds in a third-party sub-account after a beneficiary’s passing, there is no Medicaid payback provision, and the nonprofit managing the pooled trust may choose to retain the funds for administrative purposes before the funds are distributed to designated beneficiaries.
Because there are many different nonprofit organizations offering pooled trust services in every state, the restrictions each state requires differ significantly. Not every Pooled Trust program is the same, and in many states, you cannot use a Pooled Trust company that is not approved. Generally Pooled Trusts are more restrictive in nature than other trust options, including restrictions on the ownership of real property. An expert can help you find an appropriate pooled trust company.
Key Takeaways
Special needs trusts can be very complicated, but don’t be overwhelmed. For most families, a revocable, directed, standalone supplemental needs trust will offer the greatest flexibility for planning for a loved one with a disability. However, every situation is unique, and you should discuss what is right for your loved one with an attorney who specializes in this nuanced area of law. A great place to start is with the Academy of Special Needs Planners (https://specialneedsanswers.com), Special Needs Alliance (www.specialneedsalliance.org) attorneys with the CELA designation, or Hope Trust (www.hopetrust.com).
Also, consider the responsibilities and required skills to serve as trustee, and evaluate if a corporate trustee, with a trust protector will help put the right people in the right roles to support your loved one. Often family members can be overwhelmed by the responsibility, and skills required to be trustee of an SNT, and are wary of the risks involved. Talk to your family members, and evaluate corporate trustee options, in advance of creating your trust.
The old days of special needs planning, where a special needs beneficiary was disinherited for a sibling to “take care of them,” are gone thanks to the options that are available in special needs planning. Everyone, regardless of assets, needs to plan.
ABOUT THE AUTHORS:
Joshua Fishkind, J.D., MBA is the CEO and a co-founder of Hope Trust, a full-service care planning company dedicated to helping families plan for their loved one with special needs, provide daily care management and support, and administer special needs trusts.
Steven Rubin, Esq. is a Certified Elder Law Attorney who serves as the managing partner at Drazen Rubin Law, LLC, and focuses his practice on elder law, estate planning, estate administration and probate, Title XIX (Medicaid) planning and eligibility, Life Care Planning, business continuation, disability and special needs planning, trust planning and administration, and related tax matters. He has been a passionate advocate for the special needs community since his mother was diagnosed with ALS while he was in law school, and that passion drives his representation of each client’s unique challenges and concerns.
Julia Vassallo: Julia is a law student at the University of Connecticut School of Law and a Benefits Research assistant at Planning Across the Spectrum. Upon graduation, Julia intends to serve as a legal advocate for members of the disability community, including veterans and the elderly.
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