Living (Revocable) Trusts
Estate Taxation - Federal & Vermont
Estate Planning for IRA's/Pensions
Life Insurance Trusts
Grantor Trusts (GRATS & GRUTS)
Qualified Personal Residence Trusts
Charitable Trusts (CRATS & CRUTS)
Special Needs Trusts
SPECIAL NEEDS TRUSTS
What is a Special Needs Trust?
A special needs trust (an "SNT") is an irrevocable trust designed to provide benefits to an individual (the "beneficiary") with a physical and/or emotional handicap. Such trusts are usually established by a caregiver or other family member (the "donor"). Although an SNT can be established during the donor's life, most SNT's are funded at the donor's death. Assets placed in the trust are used by the trustee to provide the special care needed by the beneficiary, thereby enhancing his or her life. Since governmental assistance programs are often available to handicapped persons, many SNT's dovetail with such programs to ensure the beneficiary will not be disqualified.
Key Provisions of a Special Needs Trust
The goal of an SNT is to provide benefits to a handicapped individual; therefore, the most important part of an SNT is the power given to the trustee to achieve this goal. Every situation is slightly different, and therefore the power granted to the trustee should be tailored to fit the beneficiary's needs. The task is to envision the future needs of the beneficiary. For example, the beneficiary may have physical handicaps that require special living and transportation arrangements. Or, because of mental handicaps, the beneficiary might need to live in a group care home or facility. In each case, the trustee should be able to apply trust assets to ensure that these services are provided.
In order to avoid the diversion of the trust assets away from the donor's goal, an SNT should almost always be irrevocable. However, in certain circumstances, the trustee should have the power to terminate the trust and distribute the assets outright. Such circumstances could include the disqualification of the beneficiary for governmental assistance -- for example, resulting from a change in the law (see Planning for Governmental Assistance Programs). In this case, the trustee should be given the power to distribute the assets to individuals other than the handicapped individual (to avoid the disqualification issue).
An SNT should provide for the distribution of the trust assets in the event of the handicapped individual's death. This distribution plan can mirror the donor's overall estate plan, or can provide for a different scheme of distribution.
Picking a Trustee
The selection of a trustee is a critical aspect of an SNT, especially where the trust may continue for many years. Obviously, the trustee should be an individual who can be trusted to honor the terms of the trust. The trustee should also be someone familiar with the beneficiary's disability and his or her special needs. Although it is not necessary for the trustee to have extensive investment experience (the trustee can hire someone to fill that role), it is helpful for the trustee to have the ability to handle the finances of the trust.
What if there is no individual to fill the role of trustee? A professional trustee, such as a bank, can be selected. However, if a bank (or other financial institution) is selected, it is important to review the trust with a bank representative to determine whether the bank is willing to act as trustee, and to understand the fees that would be charged for this service.
Regardless of who is selected as trustee, it is wise to select at least one alternate in case your first choice is unable (or unwilling) to be the trustee.
Planning for Governmental Assistance Programs
Clients often ask how an SNT could affect the trust beneficiary's qualification for governmental benefits. Most, if not all, governmental assistance programs are based in whole or in part on the financial resources of the recipient. If an SNT provides the beneficiary too much access to the trust assets, the trust could result in the beneficiary's disqualification. In this event, the assets set aside by the donor for the beneficiary would have to be used to replace the governmental benefits that were being provided prior to disqualification -- a complete waste of resources.
Properly drafted, an SNT can provide assistance to a disabled individual without jeopardizing governmental assistance being received (or to be received in the future). The agreement creating the SNT should provide that no payments can be made by the trustee which would disqualify the beneficiary from receiving governmental assistance. The agreement should give the trustee the power to resist attempts by governmental agencies to disqualify the beneficiary, and should give the trustee the discretion necessary to terminate the trust if such attempts prove successful.