Special Needs Trusts

The Biggest Decision for your Special Needs Trust


There are obviously many important considerations to ponder when designing an estate plan for a beneficiary who has special needs. But the most important issue in the planning process is picking the person or persons who will be in charge of managing the special needs trust. This person is known as the "trustee" and he/she has the biggest impact on whether or not the purposes of the trust are actually carried out after you pass away. Pick the wrong person and the whole plan can come crashing down, to the severe detriment of your disabled loved one.

Ideally, you want to have a trustee that is relatively stable and financially savvy since that person may be in charge of investing a great deal of money. The trustee should also have a good relationship with the disabled beneficiary. If the trustee interacts with the beneficiary on a regular basis then he/she will have a better understanding of the beneficiary's disability and therefore better able to make appropriate distributions from the trust funds.

A sibling of the beneficiary is often appointed as the trustee, and this arrangement is usually entirely appropriate. However, you should keep in mind that most special needs trusts will indicate that any remaining trust funds will go to the beneficiary's siblings upon the death of the beneficiary. In other words, less scrupulous trustee-siblings may be motivated to withold neccesary distributions to the beneficiary and avoid watering down their future inheritance. This issue is certainly not unprecedented, so it needs to be considered before a sibling is appointed as the trustee.

Finally, you need to have a trustee that is prudent enough to strictly follow the instructions and limitations outlined in the trust language. If the State catches wind of improper distributions from the trust (such as distributions that pay for things that the State is already covering) then there is a risk that the benefits will be cut off. Although this is a self-serving statement, you need a trustee who is wise enough to seek specialized legal guidance if the propriety of a particular distribution is questionable.

In short, you need to give long and serious thought as to who you will name as trustee of your special needs trust. The decision can make or break all of the careful special needs planning you have done.

Do You Have the Correct Type of Special Needs Trust?


Most of my clients who sit down to discuss estate planning for their special needs child are surprised to hear that there are actually three types of special needs trusts, one of them being much more appealing than the other two. The question of which one you need to use is based on the source of the trust funding.

If the trust is funded by assets that belong to the special needs child (usually by way of a personal injury settlement, or possibly an inheritance from a well-meaning relative) then it's called a "self-settled" or "D4A" trust.  This is not an ideal situation because Federal law requires that the trust include a "pay-back" provision.  Such a provision states that upon the death of the special needs child the remaining trust funds must go to the State, up to the amount that the State has contributed towards the care of your child.  It essentially allows the State to get reimbursed and it's possible that you would not be able to have the money go to family members instead.  It depends on how much the State has assisted your child.

If the money going into the trust comes from a source other than the special needs child (presumably the parents or possibly other relatives), then it's called a "third party" special needs trust.  This type of trust does not require a pay-back provision for the State.  Upon the death of your child, the remaining trust funds can go to family members, charities, churches or anywhere else you would like it to go.

If you have a special needs trust then it's worth taking the time to have your lawyer review it and make sure that it doesn't have that nasty pay-back provision unless it has to.  You'd be surprised by how many special needs trusts I review where the attorney unnecessarily/accidentally included a pay-back provision.

DISCLAIMER: This blog does not offer legal advice, nor does it create an attorney-client relationship.  If you need legal advice, consult with a lawyer instead of a blog.