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As many of you already know not only am I a Financial Advisor and a Chartered Special Needs Consultant, but I am also a Special Needs Mom. In 2022 we launched our Special Needs Binder and email series. My goal is to continue supporting this community by providing relavent information, guidance and resources. So, this month we are posting a bonus article from guest blogger, Jennifer Crane, Attorney at Law from McClandlish Lillard.
The Nuts and Bolts of Speical Needs Trust Administration
By Jennifer Crane, Attorney at Law
Over the course of an extensive career in special needs, there are certain truths which are more than self-evident. Chief among them? Special needs trusts are among the hardest to administer because the consequences for an erroneous distribution can have a devastating effect on the beneficiaries least equipped to rebound from the error.
1. What Type of Trust Are We Talking About? The two primary types of special needs trusts are: 1) “self-settled” or “first party” trusts and 2) “third party” trusts. A “first party” trust is funded with the special needs beneficiary’s own money, perhaps from a personal injury settlement or an inheritance that was left to the beneficiary outright. A “third party” trust is funded with someone else’s money; most frequently, the parents of the special needs beneficiary who are planning for how to provide for their child after their passing
The primary difference between a first and third party is that the first party trust is subject to a mandatory Medicaid payback provision. Upon the beneficiary’s death, the trustee must reimburse Medicaid in every state where the beneficiary received benefits, pro rata, if necessary, from the remaining corpus. Upon the beneficiary’s death with a third party trust the ultimate beneficiary may be decided by whoever creates the trust.
2. Now that you know which type of special needs trust you are administering, the next question is what is the support standard? For purposes of our discussion today, we will discuss the Purely Discretionary Distribution Standard, which provides that, “the Trustee may, in itssole, absolute and unlimited discretion at any time and from time to time, distribute some, all, or none, of the trust estate to or for the benefit of the beneficiary. The trustee shall be under no duty to distribute any of the trust estate to or for the benefit of the beneficiary, no matter what the circumstances of the beneficiary may be.” For purposes of public benefits eligibility, since the Trustee has total discretion whether to distribute trust assets for the benefit of the beneficiary, the beneficiary cannot compel a distribution from the trust; therefore, a creditor of a beneficiary cannot access the funds. Because the beneficiary cannot compel a distribution from the trust, the trust assets are deemed not to be available to the beneficiary for the purposes of determining whether the beneficiary qualifies for needs-based public assistance programs, such as Medicaid and SSI.
3. Now that the standard has been ascertained, how does the Trustee decide whether to
exercise his or her discretion? The following steps should be considered:
• Read the Trust. No, really. The first step in any trust administration begins with reviewing the trust. Before a trustee can make a distribution, the trustee should have access to the full and current version of the trust, along with any amendments. This is critically important when administering a trust for the benefit of a SNT beneficiary. Remember, just because a beneficiary has special needs, and a trust has been created for their benefit, it does not mean that the trust is a SNT. Recall, the importance of the trustee to determine whether the trust they are administering is a self-settled SNT or a third-party SNT.
• Read the Trust again. If your eyes glazed over or you fell asleep, meet with a special needs attorney to help you understand, without legalese, how the trust works. A trustee’s failure to follow the terms of a trust and instead exercise discretion without proper diligence can render the trust beneficiary ineligible for benefits. As a result, the trustee could be held liable for the mismanaged funds and ordered to reimburse the trust.
• Get a lay of the land and the assets which comprise the Trust corpus. In the normal course of administration, a Trustee should regularly review the trust inventory and records. The trustee will benefit from having familiarity with the inventory of assets, cash on hand, and history of income, expenses and previous distributions. The UTC provides record keeping requirements and requirements to inform and report, which should be regarded as minimum standards for trustees to follow.
* Retain an accountant specializing in fiduciary returns, specifically special
needs trusts, to make sure you are meeting the tax obligations of the Trust.
*Retain a financial advisor who can help you invest the assets according to the Prudent Investor Standard – which says that assets have to be managed in a way that makes sense for what they are needed for. Assets in a special needs trust, for a special needs beneficiary, particularly a young one, need to be conservatively invested so the Trust will be around for a long time.
• Know your beneficiary. This duty requires a trustee to take appropriate steps to keep abreast of the beneficiary’s condition, needs, and quality of life. The next step is to figure out what, if any, public benefits the beneficiary receives or could be entitled to receive. A trustee has a duty to be informed about the needs of a beneficiary. Trustees have an obligation to seek assistance when needed, including the possibility of hiring a private care manager or liaison to provide the trustee with specific information about the beneficiary.
• Make Distributions. When considering whether to make a distribution, it can be helpful to review the history of distributions. A trustee should easily be able to look at the financial records for the trust and see what the distributions have been for, not just that distributions have been made. For instance, if a request comes for new medical equipment, is this equipment that has been covered by Medicaid in the past? If there is a request for payment of an extra-curricular program, has the trust been making distributions to support the beneficiary in an extracurricular activity for many years?
• Manage expectations. When it comes to deciding about a distribution, trustees who carefully manage the expectations of the beneficiary and their family often can minimize conflict when a request for a distribution is denied. Sometimes family members feel entitled to benefit from the trust because they are providing care to the beneficiary, or they have had to adapt their lifestyle because of a beneficiary’s disability. An experienced trustee will be alert to requests coming from friends or family members who may have entitlement issues. Managing expectations early in the process starts by sharing information and discussing the costs and benefits of a distribution request with a beneficiary and a beneficiary’s family. A trustee has a duty to keep accurate records and share information with beneficiaries. Using trust records to show why a distribution cannot be made, or why the trustee may be hesitant to grant a request is useful concrete information that is already available. Inviting a beneficiary’s family to assist with the information gathering process will usually help a beneficiary and their family feel more involved.
Distributions are the tricky part for a trustee. A trustee should consider the distinctions and
applicable law(s) in their state as well as consider the practices of the state’s Medicaid agency, before authorizing a distribution. In addition, there are several actions that a trustee can take to assist in analyzing whether a distribution can or should be made. First, a trustee must start by asking questions to gather essential information. Of course, the first place a trustee should look is within the four corners of the SNT instrument itself. And, as mentioned above, the trustee should review the governing law. In addition to reviewing the SNT document and governing law, the trustee should review the financial account statements and consider the type of assets available and have a discussion with the beneficiary and/or the beneficiary’s family and care providers.
A trustee must know how and when to make a distribution from the trust, while taking into
consideration the beneficiary’s needs and other benefits available. Sometimes, the SNT beneficiary is unable to communicate his or her preferences, needs, or concerns. In some cases, but certainly not all cases, a beneficiary may have a family member who can act as a care manager or liaison to assist with voicing a beneficiary’s need to the trustee. Courts have held trustees liable and declined to excuse a trustee simply because a trustee lacked expertise administering special needs trusts. Additionally, when a trustee fails to seek out public assistance and instead makes distributions for things that could be provided for by SSI or Medicaid, the trustee can be held liable.
In conclusion, administering SNTs as a trustee can be inherently difficult. Serving as such a trustee should be carefully thought out before agreeing to serve as trustee.
Agian we would like to thank Jennifer for sharing this information with us and we hope you find it useful. As always please reach out with any question or if we can be of assistance. We are here to help.
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