Ten Things to Consider When Deciding Whether to Make a Third Party Special Needs Trust an Inter Vivos or Testamentary Trust

The purpose of a Third-Party Special Needs Trust (TPSNT) is to protect public benefits such as Supplemental Security Income (SSI)  and Medicaid.  The purpose of the TPSNT is to provide appropriate support for children after their parents are deceased.  During their lifetimes, the parents can provide that support directly. 

1. Inter Vivos Trust.  An Inter Vivos Trust, commonly known as a Living Trust or Standalone Trust, is established during the individual’s lifetime.  The purpose often is to avoid probate.  The grantor of the Trust establishes the Trust during his or her lifetime. 
2. Testamentary Trust.  A Testamentary Trust is established in an individual’s Last Will and Testament.  It does not go into effect until the grantor’s death and the completion of probate.
3. Probate.  Probate is required in the case of a Testamentary Trust be is not required in the case of an Inter Vivos Trust.
4. Revocability/Irrevocability.  An Inter Vivos Trust can be revocable or irrevocable.  Most people elect that the trust be revocable.  In a Testamentary Trust, obviously there can be no revocability.  The grantor is dead when the Trust is established.  An irrevocable TPSNT can be amended or restated from time to time but only to comply with changes in the law.  An Inter Vivos Trust can be revoked at any time for any reason.  A revocable TPSNT is more flexible.
5. Funding.  An Inter Vivos Trust can be funded during lifetime or on death.  A Testamentary Trust can only be funded upon the grantor’s death and completion of probate.
6. Advantages/Disadvantages.  Individuals often want to avoid disclosure of their assets.  Since the Testamentary Trust requires probate, the assets subject to the probate must be disclosed.  By using an Inter Vivos Trust, this can be avoided.  Since the Testamentary Trust does not come into existence until the death of the grantor, it cannot be funded during the grantor’s lifetime.  This can cause a severe problem for a beneficiary with a disability(ies).  With an Inter Vivos Trust, the trust can be funded at any time. 
7. Trustee.  It is always recommended that a professional trustee be retained to administer the TPSNT.  There have been a number of cases where individuals have made well-intentioned but improper distributions from the TPSNT and Medicaid has sued the individual trustee for a return of the distribution.  The defendant in those cases is not the trust, it is the trustee.  The repayment is not from the trust, it is from the trustee’s own pocket.  Once the individual trustee understands that possibility, he or she does not usually want to serve as trustee.
8. Trust Protector.  A family member can serve as trust protector.  The trust protector has the right to remove and replace the trustee for any or no reason.  The trust protector might also be given the right to amend or restate the trust.
9. Discretion.  Once the trust is funded, the trustee has discretion as to whether or not to make distributions, to whom, and in what amount.
10. Spendthrift.  A TPSNT of either type is a Spendthrift Trust that protects the beneficiary from creditors, divorce, or squandering the money.