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Key Decisions in Setting Up a Special Needs Trust
Apr 13, 2023
Special needs trusts are an important component of planning for a disabled child, even though the child may be an adult by the time the trust is created or funded. These trusts allow a beneficiary with a disability to receive inheritances, gifts, lawsuit settlements, or other funds and yet not lose her eligibility for certain government programs, such as Medicaid and Supplemental Security Income (SSI).
Types of Trusts
Special needs trusts generally fall into one of three categories: 1) third-party trusts that one person, typically a parent or grandparent, creates for the benefit of a child or grandchild; 2) first-party (or “pay-back” or “(d)(4)(A))” trusts funded with the disabled beneficiary’s own funds; and 3) pooled disability trusts run by a non-profit organization.
As each type of trust has its own benefits and drawbacks, the grantor should consult with our attorneys whose practice is focused on special needs planning. The attorney can discuss with the grantor the type of trust, the terms governing what the trust funds may be used for, what will happen to the funds upon the death of the primary beneficiary, and what funds should go into the trust.
Selecting A Trustee
Probably the most difficult issue for a grantor and her attorney to work through is choosing the trustee. While any trustee has great responsibilities, the trustee of a special needs trust has to be extra careful when making distributions so that the beneficiary does not lose eligibility for public benefits, such as Medicaid, Supplemental Security Income and subsidized housing.
Most grantors’ natural reasoning leads them to appoint a family member as trustee, thinking that a family member will understand the beneficiary’s special needs and work well with other people in a beneficiary’s life. However, family members may or may not have the necessary skill, time and lack of self-interest to serve as trustee. One mistake by a trustee could significantly compromise a disabled person’s benefits for a long time.
A professional trustee could be a viable alternative. The typical professional trustee, usually a bank, attorney, accountant, or trust company, has the necessary skill and experience, but may be impersonal and lack experience in working with individuals with special needs. Professional trustees also charge for their services (family members can also receive trustee’s commission, but frequently waive them). For larger trusts, the fees are comparable given the services provided: investments, accounting, budgeting, and the certainty of having a permanent institution looking after the beneficiary. However, most professional trustees have a minimum annual fee, which makes them expensive for smaller trust funds.
With smaller trust funds, it may make the most sense to use a family member if an appropriate one is available, and to use the combination of professional and family member co-trustees for larger trust funds. If there is no appropriate family member, a pooled disability trust is often a good option. Your special needs attorney can help you select an appropriate trustee based on your family’s situation.
Creating a well-crafted special needs trust will be fundamental to the child’s wellbeing in the years to come. For more information on special needs trusts and special needs planning, consult the attorneys at Kommer Bave & Ciccone LLP.