Special Needs Trust

Special Needs Trust Definition

Many times, there are certain people who should NOT receive outright distributions from a Trust.  Some of these times include:

• When the individual is not able to handle or manage their own affairs,
• When it would cause the individual to lose other non-Trust benefits,
• When the individual is vulnerable to exploitation or abuse,
• When the amount or timing of the distribution would cause harm to the individual.

Although there are exceptions, one or more of these conditions typically apply to most so-called “special needs” individuals.  If they received money, they could not manage it;  they would lose other benefits; it would likely be abused in self destructive behavior;  and, sooner or later someone would take it from them.

One of the most powerful ways to provide for special needs individuals is with a Special Needs Trust (“SNT”).

A Special Needs Trust is a Trust that holds and protects assets for the benefit of a Special Needs individual.  Such a Trust must have a Trustee who is NOT the special needs individual.  Typically, the Trust assets never “vest” in the protected individual, and the Trustee will have discretion to apply the Trust assets for specified purposes.

First Party Trust

A First Party SNT is funded using assets or money that belong to or have vested in the Special Needs individual.  Such a Trust typically enables the funds to be used to provide benefits not covered by governmental subsidy.  Once the Special Needs individual passes, assets remaining in a First Party Trust typically go back to the state.

There are instances where a First Party Trust is mandatory.  However, we have seen times where a First Party Trust is used when not necessary, which has the unintended result of giving more to the state than would otherwise be required.  If a First Party Trust is not required, it is generally better to use a Third Party Trust.

Third Party Trust

A Third Party SNT is funded with the assets of someone other than the Special Needs individual.  As a practical matter, a Third Party SNT functions more or less the same as a First Party SNT with this one significant difference:  When the Special Needs Individual passes, the assets do not go to the state, but rather go to other designated beneficiaries.  For that reason alone, where permitted, a Third Party Trust is more advantageous to the family that the First Party Trust.

Because the assets are generally coming from parents or grandparents, when a SNT is built into an estate planning Revocable Trust or Irrevocable Trust, it will almost always be a Third Party Trust.

Pooled Trust

A third type of SNT is called a “Pooled Trust.”  Such Trusts are typically administered by a non-profit service provider.  This third party Trustee decides how to use the assets for the Special Needs individual.  It also retains whatever is left of such assets when the special needs individual passes.  The incentive to implement a pooled trust is typically when 1) there is a desire to support the charitable mission of the service provider, and 2) other benefits accrue to the special needs individual because of the relationship with the non-profit service provider.

Do I Need a Special Needs Trust?

How may families will be caring for or dealing with a special needs individual?  The numbers are staggering.  One in five households are caring for a Special Needs individual.  Approximately 14% of students need special education and related services.  The overwhelming trend is that the numbers needing care are increasing while the numbers available to provide care are decreasing.  So the macro level societal challenges associated with Special Needs planning are increasing.

Oddly, in spite of the overwhelming and growing needs, most estate planning trusts simply do not deal with Special Needs planning.  They are stunningly silent.  As a result of this omission, supplemental planning becomes necessary.  So families already carrying the extra cost and added strain on resources for a special needs loved one, also have to spend additional money on specialized estate planning documents.

We have found that while the predicting which family in particular is going to be caring for a special needs, we know that one out of five will be.  So it is our practice to routinely include special needs planning in virtually every trust, with rare exceptions.

Why Doesn’t My Trust Have Special Needs Provisions?

Attorneys and others preparing trusts leave special needs provisions out for a variety of reasons, which may include:

• The family does not always have a special needs person at the time the trust is formed, so the need is not obvious.
• The lawyer may not feel comfortable or qualified to put together a trust with special needs provisions.
• The lawyer may feel it over complicates the trust or makes the trust document too long and difficult for the client to understand.
• There is the potential of an “up sale” for additional legal fees if a trust has no special needs provisions and they later become necessary.

When selecting an attorney to prepare a trust, a reasonable and appropriate line of inquiry is whether or not the attorney always includes special needs provisions a trust, or only sometimes, or only at additional costs.

Shouldn’t Every Trust Have Special Needs Built In?

The simple truth is, nearly every estate planning Trust should have special needs provisions.  Sadly, most do not.  As a result, obtaining special needs protection often requires forming a separate SNT.  This adds to both complexity and cost.  In part because the need for such planning is 1) high, and 2) unpredictable, the default for more thorough estate planners will be to simply include special needs provisions in every estate planning trust.  Leaving special needs protection out will be the exception.  When special needs provisions are automatically included in a trust, they can be invoked if needed, and ignored if not.

When reviewing or evaluating one’s trusts, we recommend checking to see if it includes special needs provisions.  If it does not, consider whether an update or upgrade is in order.

The idea of “protective law” or “preventive law” is that measures are taken to avoid issues where possible, and to mitigate the damage from such issues where not possible.  We believe the default should be to include special needs provisions in every trust.

How Do I Protect My Trust From Abuse?

One of the concerns people face when setting up a special needs trust is the risk that someone might divert the money for personal benefits instead of using them for the special needs family member.  There are a number of safe guards that can be implemented to minimize or mitigate such risk

• Select Trustees wisely.  In some instances, non-family independent trustees are best.  If family members are to be used, it helps if they are not also beneficiaries so they have no incentive to deprive the special needs family member of benefits.  Consider how invested in caring for the special needs family member siblings or other family members are before naming them as Trustee.
• Set Aside Specific Amounts or Property.  One of the ways to prevent sabotaging special needs protection is to be very specific about the dollar amount, percentage or property allocated for special needs purposes.  Ambiguity or the absence of clear directives increase the risk of mismanagement even if there is no actual misdirection of special needs funds.
• Use a Trust Protector.  A Trust Protector can have many functions.  For special needs purposes, a Trust Protector can hold a Trustee accountable to carry out the function of providing for the special needs family member.
• Set up the optimal kind of SNT.  As we have reviewed SNT’s over the years, one of the issues we have observed is that many of the difficulties people encounter is a result of having the wrong kind of SNT for their particular situation.  A SNT that is perfectly appropriate in one situation may be detrimental in another.
• Have your Trust Reviewed and Updated.  If you have a SNT, or if you have any other estate planning Trust and wonder if the Special Needs provisions are appropriate or adequate, have it reviewed by an attorney knowledgeable concerning such planning.  Based on such a review, implement appropriate updates and upgrades to meet your family’s needs.