A Handbook For Trustees (2020 Edition) Administering a Special Needs Trust TABLE OF CONTENTS INTRODUCTION AND DEFINITION OF TERMS ................4 Pre-paid Burial/Funeral Arrangements .............. 11 Grantor .....................................................4 Tuition, Books, Tutoring ................................ 11 Trustee .....................................................4 Travel and Entertainment ............................. 11 Beneficiary .................................................4 Household Furnishings and Furniture ................ 11 Disability ...................................................4 Television, Computers and Electronics .............. 11 Incapacity ..................................................4 Durable Medical Equipment ........................... 12 Revocable Trust ...........................................5 Care Management ...................................... 12 Irrevocable Trust ..........................................5 Therapy, Medications, Alternative Treatments ..... 12 Social Security Disability Insurance ....................5 Taxes ...................................................... 12 Supplemental Security Income .........................5 Legal, Guardianship and Trustee Fees ............... 12 Medicare ...................................................5 Medicaid ....................................................5 LOANS, CREDIT, DEBIT AND GIFT CARDS .................. 12 THE MOST IMPORTANT DISTINCTION .........................5 TRUST ADMINISTRATION AND ACCOUNTING .............. 12 “Self-Settled” Special Needs Trusts ....................5 Trustee’s Duties ......................................... 13 “Third-party” Special Needs Trusts ....................6 No self-dealing ..................................... 13 The “Sole Benefit” Trust .................................6 Impartiality ......................................... 13 Delegation .......................................... 13 THE SECOND MOST IMPORTANT DISTINCTION ..............6 Investment ......................................... 13 SSDI/Medicare Recipients................................6 Bond ...................................................... 13 SSI/Medicaid Recipients .................................7 Titling Assets ............................................ 14 Veterans’ Benefits ........................................7 Accounting Requirements ............................. 14 Subsidized Housing .......................................7 Reporting to Social Security ........................... 14 Federal Subsidized Housing ........................7 Reporting to Medicaid .................................. 15 Section 8 ..............................................8 Reporting to the Court ................................. 15 Temporary Assistance for Needy Families (“TANF”) .8 Modification of Trust ................................... 15 Other Means-Tested Benefits Programs ................8 Wrapping up the Trust .................................. 15 INCOME TAXATION OF SPECIAL NEEDS TRUSTS ........... 15 ELIGIBILITY RULES FOR MEANS-TESTED PROGRAMS .......8 “Grantor” Trusts ........................................ 15 Income ......................................................8 Tax ID numbers .................................... 16 Assets ..................................................... 10 Filing tax returns .................................. 16 Deeming .................................................. 10 Non-Grantor Trusts ..................................... 16 Tax ID numbers .................................... 16 “I WANT TO BUY A (PAY FOR) ...” .......................... 10 Filing tax returns .................................. 16 Home, Upkeep and Utilities ........................... 10 Qualified Disability Trust ............................... 16 Clothing .................................................. 11 Seeking Professional Tax Advice ...................... 16 Phone, Cable, and Internet Services ................. 11 Vehicle, Insurance, Maintenance, Gas ............... 11 FOR FURTHER READING ..................................... 17 © Copyright, Special Needs Alliance Administering a Special Needs Trust: A Handbook for Trustees Introduction and Definition of Terms “Special Needs” trusts are complicated and can be hard inheritance, the minor child (through a guardian) or an to understand and administer. They are like other trusts adult child will be the grantor, even though he or she in many respects—the general rules of trust accounting, did not decide to establish the trust or sign any trust law and taxation apply—but unlike more familiar trusts documents. in other respects. The very notion of “more familiar” types of trusts will, for many, be amusing—most people TRUSTEE—the person who manages trust assets and have no particular experience dealing with formal administers the trust provisions. Once again, there may trust arrangements, and special needs trusts are often be two (or more) trustees acting at the same time. The established for the benefit of individuals who would not grantor(s) may also be the trustee(s) in some cases. otherwise expect to have experience with trust concepts. The trustee may be a professional trustee (such as a bank trust department or a lawyer), or may be a family The essential purpose of a special needs trust is usually member or trusted adviser—though it may be difficult to improve the quality of an individual’s life without to qualify a non-professional to serve as trustee. disqualifying him or her from eligibility for public benefits. Therefore, one of the central duties of the BENEFICIARY—the person for whose benefit the trust trustee of a special needs trust is to understand what is established. The beneficiary of a special needs public benefits programs might be available to the trust will usually (but not always) be disabled. While beneficiary and how receipt of income, or provision of a beneficiary may also act as trustee in some types food or shelter, might affect eligibility. of trusts, a special needs trust Because there are numerous programs, beneficiary will almost never be able competing (and sometimes even to act as trustee. conflicting) eligibility rules, and at least The essential purpose of a two different types of special needs special needs trust is usually DISABILITY—for most purposes trusts to contend with, the entire area to improve the quality of involving special needs trusts, is fraught with opportunities to make “disability” refers to the standard mistakes. Because the stakes are often an individual’s life without used to determine eligibility for so high—the public benefits programs disqualifying him or her Social Security Disability Insurance may well be providing all the necessities or Supplemental Security Income of life to the beneficiary—a good from eligibility to receive public benefits. benefits: the inability to perform any understanding of the rules and programs substantial gainful employment. is critically important. Before delving into a detailed discussion INCAPACITY (sometimes of special needs trust principles, it might be useful to Incompetence)—although “incapacity” and define a few terms: “incompetence” are not interchangeable, for our purposes they may both refer to the inability of a GRANTOR (sometimes “Settlor” or “Trustor”)—the person trustee to manage the trust, usually because of mental who establishes the trust and generally the person whose limitations. Incapacity is usually important when assets fund the trust. There might be more than one applied to the trustee (rather than the beneficiary), grantor for a given trust. The tax agency may define the since the trust will ordinarily provide a mechanism term differently than the public benefits agency. Special for transition of power to a successor trustee if needs trusts can make this term more confusing than the original trustee becomes unable to manage the other types of trusts, since the true grantor for some trust. Incapacity of a beneficiary may sometimes be purposes may not be the same as the person signing the important as well. Not every disability will result trust instrument. If, for example, a parent creates a in a finding of incapacity; it is possible for a special trust for the benefit of a child with a disability, and the needs trust beneficiary to be disabled, but not parent’s own money funds the trust, the parent is the mentally incapacitated. Minors are considered to be grantor. In another case, where a parent has established incapacitated as a matter of law. The age of majority a special needs trust to handle settlement proceeds differs slightly from state to state, though it is 18 in all from a personal injury lawsuit or improperly directed but a handful of states. 4 REVOCABLE TRUST—refers to any trust which is, by its program, its continued availability is often the central own terms, revocable and/or amendable, meaning able focus of special needs trust administration. Because to be undone, or changed. Many trusts in common use Medicare covers such a small portion of long-term care today are revocable, but special needs trusts are usually costs, Medicaid eligibility becomes centrally important for irrevocable, meaning permanent or irreversible. many persons with disabilities. IRREVOCABLE TRUST—means any trust which was established as irrevocable (that is, no one reserved The Most Important Distinction the power to revoke the trust) or which has become Two entirely different types of trusts are usually lumped irrevocable (for example,