Estate Planning: “Special Needs Trusts” Part II (Three-part Series)

PART II:  Pooled Special Needs Trusts

This is the second entry in a three-part series on special needs trusts – trusts able to provide additional or “special” funds for a disabled person who has limited resources and may already be reliant on government assistance.

Trusts, in general, have a grantor (the person giving the funds), a beneficiary (the person receiving the funds), and a trustee (the person controlling and caring for the funds). Special needs trusts, however, have very stringent requirements and rules. It is advisable to seek legal guidance from an experienced attorney when considering this option.  This three-part series is meant as a basic introduction to special needs trust planning and should help you start a dialogue with a professional. If you wish to know more, talk to an attorney and discuss your situation and concerns.

Special needs trust education is for anyone making an estate plan – not just for those who currently know they have a potential beneficiary with special needs.  Things may change and your estate plan may need to be updated down the road. This blog entry (and the last one, Part I: First-Party Special Needs Trusts, and the next one, Part III: Third-Party Special Needs Trusts or Supplemental Needs Trusts) deals with the different species of special needs trusts, each with their own specific set of requirements and rules.

Individuals with special needs, in this case, are people who qualify for governmental benefits as a result of their special needs, meet the Social Security Administration’s (SSA) definition of “disabled,” and have limited resources (income and assets) available to them. A special needs trust is intended to benefit these individuals.

A problem arises when an individual with special needs who is receiving governmental benefits inherits, wins, or otherwise obtains assets. They can be disqualified from public assistance as a result of the assets received because they now exceed the income and/or asset limits. A special needs trust can protect these types of assets, but in very particular ways. The purpose of a special needs trust is to provide funding for expenses not already covered by the public benefits – not replacing or enhancing them.

Here are some of the requirements of a trust to qualify as a “special needs trust”:

• No providing for basic support, like food or shelter;
• Trustee must have complete control over distribution of the assets in the trust;
• No right of beneficiary (or anyone acting on their behalf) to withdraw or distribute from the trust;
• No right of beneficiary to amend or revoke the trust;
• Trustee must make distributions for the benefit of the beneficiary but cannot distribute cash directly to the beneficiary.

In addition to these requirements, the law also cares about whose money is used to fund the trust and how the trust is managed.  This blog entry, Part II, elaborates on Pooled Special Needs Trusts (or “(d)(4)(C)” trusts for short, so nicknamed from the federal law on the subject:  42 USC § 1396(p)(d)(4)(C)).

Pooled Special Needs Trusts are also “first-party special needs trusts” because they are “self-settled” (meaning, funded by the beneficiary’s own assets). But, they are generally meant for smaller-sized assets that don’t make sense to have in a trust on their own. These funds are “pooled” together with other peoples’ assets in a trust managed by a non-profit organization. The pooled trust has a master agreement that outlines the terms of the special needs trust, creating a sub-account for the individual (usually through some sort of joinder agreement). This offers better investment and management opportunities for the smaller assets. Below are the requirements for a pooled trust:

• “Pay-back provision” (same as all first-party special needs trusts);
• Can be established by the individual beneficiary him/herself, in addition to a parent, a grandparent, a guardian or a court (this means, if the parents or grandparents are no longer living, the cost of a court proceeding can be avoided);
• The trustee is pre-determined by the master trust agreement (with the non-profit organization);
• Usually only able to be funded with cash (which may limit the types of assets one can use to fund the trust);
• Most states don’t allow the trust to be funded if the beneficiary is already over the age of 65;
• Administrative costs are generally less than for a first-party special needs trust, and therefore, a pooled trust may be more economically efficient;
• Amount of money used to fund the trust may be relatively small;

If this type of trust seems to fit your situation and your concerns for your family members, talk to an attorney who can assist you in deciding if this is for you.  Next week will provide a look into Third-party Special Needs Trusts (or Supplemental Needs Trusts) in Part III of this three-part series.

ALL READERS:  This blog is not, nor shall it be deemed to be, legal advice or counsel. This blog does not create an attorney-client relationship with any reader.  It is designed to encourage thoughtful consideration of important legal issues with the expectation that readers will seek professional advice from a licensed attorney.