OPTIONS FOR MANAGEMENT OF SPECIAL NEEDS TRUSTS

Special needs trusts are established to support individuals with disabilities by providing for supplemental needs that enhance quality of life. Special needs trusts should reflect the individual needs, likes and desires of the beneficiary, and should focus on enabling the beneficiary to achieve as much independence as possible.

In addition to enhancing quality of life, special needs trusts are an important vehicle by which individuals with disabilities can stay eligible for needs-based government benefits such as SSI or Medicaid, while still having access to funds to supplement their needs.  With a special needs trust, funds are owned by the trust, not the beneficiary. The trust holds title to the property for the benefit of the individual. The trustee then has full discretion to make distributions to improve the individual’s quality of life. Because the beneficiary cannot directly access the funds or convert them to cash, they are not considered a “resource” for the purposes of calculating government benefits eligibility.

There are primarily two types of special needs trusts.  A first party special needs trust and a third party special needs trust. A first party special needs trust is established from funds that “belong” to the beneficiary such as the proceeds of a lawsuit in favor of the beneficiary.  A court order is needed to establish this type of trust and a court could retain jurisdiction over the first party trust for the lifetime of the beneficiary.  A third party special needs trust is established from funds donated by a third party either during his or her life or upon their death. These trusts are typically funded by parents and grandparents and other relatives through their estate plans.

A significant issue in established either of these types of trusts is who will administer the trust? Who will be the trustee?

For many years, corporate trustees were designated as administrators of first party special needs trust as part of the court proceedings.  However, as described in a November 2016 article posted on www.wealthmanagement.com authored by Peter J. Johnson, there is a growing trend among corporate fiduciaries to move away from managing funds in special needs trusts for a variety of reasons which include the longevity of such trusts, inherent risks in managing trust owned holdings including real estate, court oversight and close scrutiny of first person special needs trust and the fact that special needs trust clients are inherently high maintenance given their challenging physical and/or mental disabilities.

Many fiduciaries do not really know how to supplement the support needs of their clients within the boundaries of administrative rules and regulations and without jeopardizing their government benefits.  As a result of the forgoing, and the unique demands of each special needs trust and the beneficiary being served, it is critical that careful attention be given to naming the administrator of a special needs trust.

Here are some options to consider.

Naming Individual Family Member or Friend

One alternative to a corporate fiduciary is to identify a family member or friend who agrees to serve as trustee of a special needs trust after being fully informed of the duties and obligations and time commitment required of him or her. This person should be open to receiving specialized training of the duties and obligations of an administrator of a special needs trust.  This person should also be equipped with a referral list of professionals available to provide support and assistance and advice as needed. Finally, this person should feel committed to getting to know the named beneficiary and be prepared to become an integral part of his or her life.

A Pooled Special Needs Trust

Another option is a pooled special needs trust. A pooled special needs trust is a particular type of special needs trust whereby many different beneficiaries’ assets are pooled together for investment purposes. The Social Security Administration indicates that pooled special needs trusts must meet the following requirements:

• The trust must be established and managed by a nonprofit association.
• The trust must maintain a separate account for each beneficiary of the trust, but, the trust pools these individual accounts for purposes of investment and management of funds.
• Accounts in the trust are established solely for the benefit of the disabled individual by the disabled party or court (first person special needs trusts) or by a parent, grandparent, or legal guardian (third person special needs trusts.
• To the extent that amounts remaining in the beneficiary’s account upon the death of the beneficiary are not retained by the trust, the trust pays to the State from the remaining amounts in the account an amount equal to the total amount of Medicaid assistance paid on behalf of the beneficiary under the State plan under this subchapter.

In addition to the Social Security requirements, pooled trusts require that a Beneficiary Advocate be designated to communicate with the administrator on behalf of or in addition to the beneficiary.

Fees typically include an administrative enrollment fee and then annual fees based on the value of the assets being managed by the pooled trust on behalf of the beneficiary,

In the state of California you can research several special needs pooled trusts by searching www.specialneedsalliance.org/pooled-trust-directory.