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 known only 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.

Before funding any of these trusts, the grantor needs to consult with an attorney whose practice is focused on special needs planning. The attorney can discuss with the grantor the choice of type of trust, the terms governing what the trust funds may be used for, what will happen to the funds upon the death of the primary beneficiary, and what funds should go into the trust.

Probably the most difficult issue for a grantor and her attorney to work through is choosing the trustee. While any trustee has great responsibilities, the trustee of a special needs trust has to be extra careful when making distributions so that the beneficiary does not lose eligibility for public benefits, such as Medicaid, Supplemental Security Income and subsidized housing.

Most grantors’ natural reasoning leads them to 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. However, 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, and to use the combination of professional and family member co-trustees for larger trust funds.

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 well being in the years to come.