Any trust, in effect, is a written agreement between the grantor and the trustee on how the trustee will manage funds contributed by the grantor on behalf of the beneficiary.
A special needs trust adds complications to this arrangement because the beneficiary often cannot guide the trustee on her needs and the trustee may have to be careful in making distributions so that the beneficiary does not lose eligibility for public benefits, such as Medicaid, Supplemental Security Income and subsidized housing.
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) a “pay-back” or “(d)(4)(A)” trust 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) a pooled disability trust run by a non-profit organization.
Each type of trust has its own benefits and drawbacks, and work in some situations and not others, all of which are beyond the scope of this article to explain in full. Before funding any of these trusts, the grantor needs to consult with attorney whose practice is focused on special needs planning.
That said, one of the benefits of the pooled disability trust is that it comes with a trustee. Probably the most difficult issue in setting up a special needs trust is choosing the trustee. Family members may or may not have the necessary skill, time and lack of self-interest to serve as trustee.
Professional trustees, such as banks, law firms and trust companies, have the necessary skill and experience, but may be impersonal and lack experience in working with individuals with special needs. Professional trustees also, of course, 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. However, most professional trustees have a minimum annual fee which makes them expensive for smaller trust funds.
We find that with smaller trust funds, it 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, and to use the combination of professional and family member co-trustees for larger trust funds.
The task of drafting the specific terms of a special needs trust must fall to an attorney who focuses a large part of her practice in this field. The attorney can discuss with the grantor the choice of type of trust, the terms governing what the trust funds may be used for, the options for choice of trustee and successor trustee, what will happen to the funds upon the death of the primary beneficiary, and what funds should go into the trust.
With these issues decided upon, the trust may be drafted. Depending on the circumstances, it may be funded immediately or may only be funded upon the death of the grantor or grantors. If it is to be funded immediately, the special needs planning attorney will work with the client on creating one or more investment accounts to hold the trust funds and, if necessary, will obtain a tax identification number to use in filing an annual income tax return for the trust.
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 his well being in the years to come.
Harry S. Margolis is the managing partner of Margolis & Bloom, LLC, which has offices in Boston, Framingham and Woburn. He is a co-founder of the Academy of Special Needs Planners. Mr. Margolis is also a member of the LawGuru Attorney Network.