SPECIAL NEEDS PLANNING – PART 2
by: Begley Admin
by Thomas D. Begley, Jr., Esquire, CELA
An important tool in Special Needs Planning is a Special Needs Trust. This is the fifth tool in the toolbox mentioned in Part 1.
- Special Needs Trust.
A Special Needs Trust is a trust created for a person who is has special needs, as a way to supplement that person’s public benefits. Those public benefits may include SSI, Medicaid, Section 8 Housing, SNAP, LIHEAP, TANF, Group Homes, and other government-sponsored assistance programs.
- The Special Needs Trust is a document. The document is prepared by a lawyer who specializes in Elder and Disability Law. It is drafted in conjunction with input from the parents of the child with disabilities.
- The grantor of the Special Needs Trust is typically the parent or parents of the child with disabilities who will eventually fund the trust on the death of the parent. The trust could be funded sooner, but usually it is not funded until the parents die.
- The beneficiary of the trust is the child with disabilities. Monies in the trust are used primarily for the benefit of the individual with disabilities.
- The trustee is the entity that manages the money, invests it for income and growth, and makes distributions for the benefit of the beneficiary. It is always wise to designate a professional trustee. Public benefit rules constantly change. If a family member is named as trustee they seldom keep up with the changes, and this often leads to problems. The problems include a loss of public benefits for the individual with disabilities. The family member serving as trustee also has a target on his or her back, because they can be sued for failing to administer the trust properly.
- What is Involved in Selecting a Trustee? Good candidates for trustee include the following:
- Disability Organizations. Most states have non-profit disability organizations that can serve as trustee of a Special Needs Trust. Most of these disability organizations administer Pooled Trusts for small trusts (i.e., $25,000 to $200,000). This means that the funds are pooled for investment purposes, but each beneficiary receives a monthly statement showing the account activity. This would show income earned by the account as well as any deposits made to the account and expenditures from the account together with the account balance. For larger trusts it is usually more practical to establish a standalone Special Needs Trust, but the disability organization can serve as trustee.
- Bank or Brokerage Firm. Many banks and brokerage firms are willing to serve as trustees of Special Needs Trusts. Some are not. However, experience shows that only a handful of banks and brokerage firms are really qualified and do a good job serving as trustees of Special Needs Trusts. Beneficiaries of Special Needs Trusts need a lot of attention and a lot of compassion. Not all financial institutions provide the attention that is needed. Care should be taken in selecting the proper trustee.
Families should be aware that a trustee’s annual fees typically range from 1% to 2% of the trust assets. These annual fees are a very worthwhile investment toward the preservation of security and quality of life for a child with disabilities.
- What are the Advantages of Special Needs Trusts? A Special Needs Trust can:
- Help maintain an individual’s public benefits.
- Help enrich the beneficiary’s life.
- What Requirements Must be Met When Establishing a Special Needs Trust? There are three key requirements:
- The trustee must be given absolute control over the distribution of the funds.
- The person with special needs cannot have the authority to revoke, amend, or terminate the trust.
- The person with special needs cannot have the power to compel a distribution from the trust.
- Trust Protector. When dealing with a professional trustee, it is wise to include in the trust document a trust protector. The trust protector has the right to remove and replace the trustee in the future. What makes trustees good trustees is the people administering the trust. If those people retire or leave, the trustee’s level of service may decline. Having a family member named as trust protector enables the trust to be changed from entity to another, if necessary.
- At the time the trust is funded, a family member should meet with the trustee and establish a budget for the individual with disabilities. The budget would include shelter, transportation, and personal needs. A determination should also be made as to how long the trust should last. To oversimplify, there is a rule of 4%. This means that if money is intended to last for 30 years, the trustee can only distribute approximately 4% per year for the benefit of the beneficiary. For example, if $500,000 is placed into a trust and the trust is intended to last 30 years, the trustee can only distribute $20,000 on behalf of the beneficiary each year. This is a concept that many people do not understand but is it important if the trust is intended to last. There are more sophisticated ways to determine distribution levels such as Monte Carlo simulations, but the 4% rule is a good rule of thumb.