Key Decisions in Setting Up a Special Needs Trust

Simply defined, a trust is an agreement between two people — a grantor who donates funds to the trust and a trustee who manages those funds according to the grantor’s wishes, which are laid out in a trust document. The funds in the trust are typically used to assist a person or group, called the trust beneficiary. Although it may sound complicated, at heart a special needs trust is merely a trust established for the benefit of someone with special needs.

Special needs trusts generally fall into one of three categories: (1) third-party trusts that one person, typically a parent or grandparent, creates for the benefit of a child or grandchild; (2) “pay-back” or “(d)(4)(A)” trusts funded with the disabled beneficiary’s own funds (though for reasons only known to Congress, still created by a parent, grandparent, court or guardian); and (3) pooled disability trusts run by a non-profit organization. Each type of trust has its own benefits and drawbacks, all of which are beyond the scope of this article to explain in full.

Probably the most difficult issue for a grantor and her attorney to work through is choosing the trustee. Any trustee has great responsibilities, including making proper investments, paying bills, keeping accounts, and preparing tax returns. But the trustee of a special needs trust must also have an understanding of how each distribution he or she makes will affect the beneficiary’s eligibility for public benefits, such as Medicaid, Supplemental Security Income, Section 8 subsidized housing, government services and the like. Very few people have this knowledge, so it is important to choose a trustee who can hire and supervise benefits experts.

Most grantors appoint a family member as trustee, thinking that a family member will understand the beneficiary’s special needs and work well with other people in a beneficiary’s life. However, family members may or may not have the necessary skill, time and lack of self-interest to serve as trustee.

A professional trustee could be a viable alternative. The typical professional trustee, usually a bank, law firm or trust company, has the necessary skill and experience, but may be impersonal and lack experience in working with individuals with special needs. Professional trustees also charge for their services. For larger trusts, the fees are generally quite reasonable given the services provided: investments, accounting, budgeting, and the certainty of having a permanent institution looking after the beneficiary.

For those who are uncomfortable with the idea of an outsider managing a loved one’s trust, it is possible to appoint a family member and an independent trustee as co-trustees. By doing so, you can rest assured that there is a person who is familiar with the beneficiary and has her best interests at heart and that the public benefit programs’ requirements are being met. Another option is to simultaneously appoint a trust “protector,” who has the powers to review accounts and to hire and fire trustees, and a trust “advisor,” who instructs the trustee on the beneficiary’s needs. Many families, recognizing the benefit of a team approach, combine these various roles like pieces of a puzzle to fit together a whole care system for the beneficiary.

Most professional trustees have a minimum annual fee, which makes them expensive for smaller trust funds. With smaller trust funds, it probably makes the most sense to use a family member if an appropriate one is available or a pooled disability trust if there is no appropriate family member.

Whatever of the many options the individual with special needs or his parents or grandparents choose, creating the special needs trust will be fundamental to the child’s wellbeing in the years to come.

Additional information about special needs trusts and special needs planning may be found at the following websites: the Academy of Special Needs Answers | Parents and Families Home and the National Academy of Elder Law Attorneys.